If you have kids in private education, what is your school planning to do re VAT?

[Ladychaise]

I have two kids at a London independent school and currently just about scrape the cost of fees. Labour’s intention to add 20percent on the fees would make it impossible to keep them there, if all that cost goes to us - it is a worrying time.

The school’s bursar is being lovely but it’s very much a ‘let’s cross that bridge when we come to it’ take on it! I get that we don’t know for certain if Labour will get in or how fast they will implement this - but surely schools should be planning for this and working out how much of the VAT, if any, will be ‘covered’ by the school?

Aware there is a lot of uncertainty but does anyone else’s school have a plan in place? Thanks so much

I'm not saying that the tax on private schools is at the top of my list either.
I know, but it's what Labour are making top of their list.

They could spend time coming up with a meaningful policy that's well thought through and would tackle some of the issues from the top such as wealth taxes.

What they choose to do is play politics of envy in the run up to an election, rely on people thinking private school is full of super elite toffs and draw up policy that hits people in the middle. Now people are pointing out the problems, they having to backtrack and make some concessions but probably won't be politically able to say they got it wrong without looking weak and chaotic.

It’s interesting that many agree on levelling up for poorer areas but Labour wants to bring down educational excellence. If they start applying that to every organisation that is at the top of its game, we will all be worse off. A better policy would be to leave vat alone and put more effort into levelling up poor schools as academies haven’t worked in some areas.

Labour always has to have a “bring the toffs down” type of policy. So making private education difficult for some appears to be the latest divisive policy. None of these parents or DC are directly harming others. Poor schools do that.

@LolaSmiles Your argument depends on the definition of wealth. The wealth taxes are CGT and IHT. If we go after everyone who has wealth and is a wealth creator we are all worse off. We need entrepreneurs and we need employers. We need the people who generate the employment opportunities in order for employees to pay tax. Driving everyone away doesn’t work and Blair understood this. Most of us were better off under Blair as he understood business. We have nothing if we don’t have productive business and wealth creators. We certainly won’t have levelling up other than via state employment and who is paying for that? Not the poor that’s for sure.

I have been speaking to an economist and their view is as follows:

It's all speculative. For a long read, both the IFS paper (which I think is rubbish) and Adam Smith Institute paper (which I strongly agree with).

Short version: nobody knows.

My main original observation is that this can affect parents' labour supply and it takes very few higher-earners to quit/reduce hours/retire earlier before the impact on tax revenue dwarfs the supposed revenue generation. Adam Smith paper picks this up.

TizerorFizz
I take your point.We do need businesses and wealth creators but we also need fair taxation and taxpayer money being spent responsibly. On a fundamental level for me I think that if there's two people gaining £30k income then the tax should be similar. At the moment people who earn £30k by working get more taken from them than people who earn £30k by having money sitting there making money.

I think Labour's strategy here is wrong. Both labour and conservatives are spending a lot of effort turning lower income and middle income families against each other to avoid looking at who is making a fortune at the expense of normal people.

There's a lot of the electorate who fall for it though. The "why should someone else have something nice" mentality doesn't help average people, but we see it ok lots of threads. There was a thread recently with posters arguing against some financial support for people with mortgages because "why should you get an asset paid for you. Renters only get their rent paid". It turns out there's a lot of people who will resent a small amount of assistance for normal families, whilst ignoring that lots of landlords and property companies are having their property empires funded by the taxpayers.

This policy proposal falls into a similar camp to me. My DC's secondary offer isn't poor because some families a better off than me use our local day schools. They're poor because the very top have deliberately defunded services and left schools to pick up the pieces. The very top aren't affected by this policy and disrupting the education of middle income families isn't going to make my local offer better.

Thank you for highlighting the Adam Smith paper, I hadn't seen that
https://www.adamsmith.org/research/short-term-thinking-analysing-the-effect-of-applying-vat-to-school-fees for anyone else who is interested.

It just backs up common sense that many of us have been talking about. Labour won't even discuss it which says a lot about them. I actually feel some candidates may be having second thoughts but are being bullied into supporting it by the leadership who won't listen to anything that critiques their initial intention.

Thanks for mentioning the Adam Smith paper. I haven't read it fully yet, but one thing that struck me as somewhat implausible (early in the article) is them considering a 'migration rate' of 15% (15% students leaving)

That's very high. Assuming 15% fees rise (schools absorbing 5%), that would mean an elasticity of one : every one percentage fees rise, lowering demand by one percent.

demand for private education in UK is not so elastic though. Anecdotally, DC's school raised fees last year close to 7% and no one left [but I am not claiming elasticity of 0], this year again it's close to 6% and there is no murmur among parents. I don't think anyone would leave this year either.

Most private schools regularly raise fees above inflation without any fall in demand. So clearly the elasticity is not one, (but it's not zero either - especially when faced with a sudden 15% or so price shock)

Second thing that appeared a bit hypocritical was that they dissed IFS for using a study based on fees rise in US catholic schools because that has little resemblance to UK situation.

Maybe so, and fair enough!

But then they go on to use Greek government's 23% VAT on nurseries, tuition centres, private schools in 2015 to use as a cautionary example. And uses just one article from Economist immediately after the change to extrapolate what might happen here.

I felt if one already opposes the policy, they would like the Adam Smith Institute paper. It seems more like a rebuttal to the IFS paper than an independent enquiry. Every few lines mentioning various sections of the IFS paper makes it hard to read without having both open side by side.

But will read it fully.

Thanks again for sharing.

one thing that struck me as somewhat implausible (early in the article) is them considering a 'migration rate' of 15% (15% students leaving) I've only skim read it too but didn't see this in the paper, would you mind pointing me to it? They do assume a 15% effective VAT rate (i.e. after reclaiming input VAT) but I thought that mirrored the IFS assumption.

They do talk about the uncertainty around migration but I read them as modelling different migration rates rather than making a prediction as to what the migration rate would be. The main point seems to be that they are sceptical of the IFS conclusion that migration rates would be relatively low (3-7%), consider that the evidence base for that is very weak and that higher migration rates should be modelled too.

To be fair to the author of the IFS report he was very careful to point out there is a lot of uncertainty and that there is very limited evidence to work with on the migration rate (he calls it limited and thin). He does point out the limitations of the Catholic US paper but it was just the only published research that was directly on point and he is careful to point out the limitations.

I thought the Adam Smith report was more realistic in likely parent behaviour - the assumption that parents who left would spend the money saved on VATable goods seemed pretty implausible.

The truth is that no-one really knows what will happen and at this point it's all speculation!

A recent Telegraph poll of 750 private parents resulted in 25% they will definitely leave/are in the process of withdrawing.
Now we have no idea if that is true but it woukd make a massive difference to the amount Labour are hoping to get and if the 25% was true it could actually mean a negative contribution.

Our school now offers a choice of termly or annual payment. with a 4% discount for paying annually.

So if I pay for a year in September 24, that will see me through to Sept 25 at a discount.

Then if Labour win the election and if they add the 20% VAT without a legal challenge over whether it must apply to all education- university fees, nursery fees etc - then I will only have ds' A-level year to pay.

The thing is, it is likely that people will say that they will switch to state if VAT is applied to private school fees because they are still hoping the policy won't go ahead - it is absolutely in their interests to make this case. Whether or not they will actually withdraw their children remains to be seen.

I suspect it's rather like all the people who said that they would leave the country if Boris got in/if we Brexited etc. More talk than action.

Interestingly, our school has just set up a new system that invoices food, sports clubs, revision club (prep) and other incidentals separately.

I guess they are putting as much as possible out of reach of the VAT man.

Hi @Mia85
I've only skim read it too but didn't see this in the paper, would you mind pointing me to it? They do assume a 15% effective VAT rate (i.e. after reclaiming input VAT) but I thought that mirrored the IFS assumption.

It's in part 2 of the paper, under 'Migration scenarios: PED and YED'

They say -

The IFS considers that there will be a very inelastic demand response in independent schools – they anticipate that an effective 15% VAT will only generate migration of 3-7% of children. They acknowledge that the evidence they provide is “quite thin” and “relatively old” and that there is a “sparse amount of causal evidence”. Based solely on that acknowledgment, it seems incautious to model a relatively small migration at the 3-7% level, taking the elasticity estimates largely as-given. It would be reasonable and cautious to analyse a 10-15% migration level as a less optimistic scenario.

sounds a bit too high IMHO.

The largest estimate I have seen (before this) was from a report commissioned by the Independent School Council that expected a drop off rate of 17%, made up of about 11% immediate drop off and 6% within four years. That report was also based on surveying parents.

As someone else said previously, we don't really know the impact until it happens. At this point it's all guess.

Thank you! I find it difficult to judge how plausible that is as a reasonable and cautious scenario - I suppose part of the problem is that there isn't a solid evidence base to predict.

Completely annecdotally but in the past few weeks quite a few friends/people at work have mentioned that they are either moving children to state or not taking private places. All of them have been at transition points rather than forced moves and it's not solely VAT but all have mentioned VAT as part of the mix. One point that has come up is the combintation of this and high marginal tax rates. Combined with student loans and increased pension contributions (especially for those who are Drs) they say they take so little home from increased salary that earning the VAT in inceased net take home pay is implausible. For some (again esp the Drs!) it seems to be partly a life balance decision to cut hours and use state, the prospect of VAT has been the catalyst for deciding that the finanical and personal reasons align. I imagine it's quite difficult to quantify the causal effect of the policy but in my purely annecdotal experience I can imagine the sector contracting quite a bit as people come to transition points rather than in a dramatic sudden drop.

It’s not just the percentage of children leaving private school which needs to be considered. There are lots more who would have otherwise chosen private, but are starting off in the state system instead. Anecdotally, I know of families at ages of 4 and 11 who have chosen state this year, whereas they were going private before the threat of VAT.

A small percentage will move immediately or preemptively (I know a couple of families that have already done so), but a larger percentage will not start at all, will delay entry, or hold on until an easier transition point (finish up private for GCSEs but state for sixth form, for example).

it isn’t just about how many move in year 1 or 2 of the policy, but how numbers are affected on a long term basis.

@justanotherdaduser if you are in London (especially at certain schools) you might be seeing greater inelasticity than is present in other parts of the country. At our rural non-selective indie there are far more parents that are stretching to accommodate fees, and also a lot more social pressure to send kids to state schools (vs. London friends where there is more of an expectation that you would go private if you can). Total anec-data, but 10% of dc class have left or given notice already due to financial concerns, and another couple of families are making noises about looking at options, so wouldn’t be surprised if we do see some additional losses if Labour get in and this is implemented. We are in primary, though, where probably more elasticity than GCSE years.

@Labraradabrador
if you are in London (especially at certain schools) you might be seeing greater inelasticity than is present in other parts of the country.

Yes, entirely possible that parents' response to the tax is location specific to some extent. Also depends on local state school options available I guess.

To my mind the policy would be a failure if it kills off the sector altogether or makes it so small in the long run that tax gain is negligible.

Our fee increase this year is 8%, and the school have said this about VAT:

"we have been planning for a range of scenarios for some time. This change will provide a significant financial challenge for the school and for parents, but our commitment through this period will be to mitigate the extra cost to you as much as we can. Through the reclaim of tax where possible and continued management of other costs, without reducing the quality of our provision, we will seek to avoid passing the full VAT percentage on to parents."

Our fees went up 8% this academic year, and they’ve announced another 7% rise for September 😱

EDSK is an independent non-partisan ‘think tank’

EDSK report :

"As stated at the outset, this research note did not aim to produce a final answer to the question of how much money would be raised by adding VAT on private school fees. Even so, the analysis in this note suggests that previous claims about how much new revenue could be unlocked by this policy seem very optimistic, particularly if any more than a small number of pupils end up leaving independent schools and moving to the state sector instead."

https://www.edsk.org/wp-content/uploads/2023/06/EDSK-VAT-on-private-school-fees.pdf

To be honest, if schools loose their charity status this would make sense.

And all the people gleefully supporting this Labour promise because « the rich can pay » will realise that actually it affects modest hardworking pupils.

Labour aren't removing charitable status though, they u-turned on this because once they actually looked into it they realised it would be too complicated. You would have thought that they would have looked into it prior to announcing it as policy though!

https://www.telegraph.co.uk/money/tax/greece-labour-style-attack-private-schools-backfired/?fbclid=IwAR1ycAT4qcD_Y_7J7fWL6LH4gFVQh8tN3PhtXVUDUUXoqNp7IEHsyt7wN3M

Greece's attempt to add VAT to school fees didn't end well!