The UK’s biggest and richest private schools are in line for substantial financial windfalls as a consequence of the government’s plan to impose VAT on their fees, according to official new guidance issued by tax authorities.
A document issued by HMRC on Thursday made clear that, once registered for VAT, independent schools will be able to claim back the tax they have paid on capital projects such as buildings and land acquisition completed over the past 10 years.
The money would be paid back progressively over the next decade, with the timing and amounts dependent on when the project was finished.
The fact that institutions such as Eton College and other elite private schools will be able to attain a net benefit from the change is causing tension within the independent sector, with those running smaller private schools saying it will widen the gap between them and the richest.
They say this is because the less wealthy, smaller schools, whose pupils’ parents may not be so affluent, will generally have to use any money they recoup to keep fees down, while the elite schools will simply use it to boost their balance sheets.
One senior figure in the independent sector told the Observer that the richer schools would benefit and the smaller ones would suffer.
“The higher echelons of the independent school sector are staying very quiet – they will be rubbing their hands [in the hope that] this is put in place as soon as possible. It is very public that Eton will be passing through the full 20% of VAT to parents, as will many of its peers.
“They will also be able to now claim VAT back on operating costs and are developing significant capital projects on which they will also be able to claim the VAT back. In short, the taxpayer will now be funding 20% of their running costs and capital projects. It is a windfall gain to the privileged independent schools at the expense of the taxpayer.”
The source added: “The smaller schools, with the parents who are going to struggle with affordability, will likely have to use any VAT reclaim to offset against school fees to help the parents. But the top-tier schools [whose parent cohort can pay the 20% VAT] will still reclaim the VAT but just keep it themselves.”
Despite intense pressure from teaching unions, accountants and the private sector to delay the plan in order to give schools more time to adapt, ministers intend to impose the 20% VAT on private school fees from 1 January next year.
They say the money raised will help to pay for 6,500 new teachers in the state sector as well as free breakfast clubs in all primary schools.
When approached for comment, Eton College replied by sending a copy of a letter it issued to parents and guardians in August explaining that the 20% VAT charge would be handed on to parents. It also said that “from January 2025 we will be able to recover VAT on certain costs and services that we purchase”.
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Rudolf Eliott Lockhart, head of the Independent Schools Association, which represents mainly smaller independent schools, said: “This is a policy that will be felt very differently across the diverse range of independent schools. Most independent schools aren’t currently oversubscribed, so a drop in demand caused by VAT will mean fewer pupils, which could push them into closure. Nor will most independent schools be able to take advantage of VAT rules that would mean they could reclaim significant sums back if only they had undertaken sizeable capital spending over the previous decade. The irony is that the small number of independent schools that will be able to do this are the ones which have been used to stereotype the whole sector.
“I’m worried about the small, local independent schools that are going to be pushed into closure by this policy. These are often schools using their independence to do things differently: offering specialist SEN [special educational needs] provision, or bilingual teaching, or a performing arts focus, or meeting the needs of smaller religious communities. These are the schools that I think the secretary of state would rather like if she actually visited them. Yet these are the schools this policy is going to harm the most. There’s still time for a more nuanced policy that recognises that the independent sector is complex and diverse, just like the state sector.”
Mairéad Warren de Búrca, managing director in charge of indirect taxes at the global professional services firm Alvarez & Marsal Tax LLP, said: “In simple terms if a school incurred capital expenditure last year of £10m plus £2m VAT, they are unlikely to have recovered much of the £2m VAT. They can now seek to recover up to £200,000 each year for the next nine years as their standard rated supplies increase.”
David Woodgate, chief executive of the Independent Schools’ Bursars Association said the complexities of introducing the new system meant more time was needed before it came into effect: “A short delay until September makes sense for all parties concerned, including HMRC. Our schools want to ensure they are fully compliant with the law but need clarity and support – and a reasonable timescale – from the tax authorities. The implementation window is just not long enough for all interested parties to get everything in place.”
