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Better advice is available for private schools dodging VAT

Labour has announced that it will levy VAT on school fees. I imagine few of my readers are directly affected – either as worried parents, or as worried heads or teachers. But heh, it is nice to look over the fence once in a while, especially when you can have a chuckle at a sector we are all too often envious of. 

A car costing three times as much as a Ford or Vauxhall is a luxury car. Private schools often cost three times a state school’s funding level; they too meet the common-sense definition of a luxury good.

VAT on private schools is perfectly defensible – even if part of me dislikes the idea of taxing any form of education. (“First they came for the private schools, and I did nothing, because I did not work in one. Then they came for hardback books, and I did nothing because I always bought paperbacks. Then they came for school lunches, and I did nothing because I always made a packed lunch at home…” and so on.)

Private schools, however, are not waiting around for the arguments to be made. Many are already offering ‘pay-in-advance deals’ because the law says if you pay now, today’s VAT rate applies. This looks like a winner and a poke in the eye to HMRC and the Labour Party.

But not so fast. The government can (and surely will) say that this general principle doesn’t apply this time. It is called ‘anti-forestalling’ and is well-established. At that point parents – or the school – will have to find the VAT. 

Even if the government does not do this, HMRC can take a school to court, arguing that it has created an artificial arrangement to avoid VAT. That seems plausible, particularly as the ‘pay now’ schemes look more like a loan than a purchase.

The price of schooling in three years’ time is not set now, for example, whereas it would be under a proper purchase agreement. Many schools are pushing ‘pay now’ this year and specifically mentioning the VAT saving, making it look like tax avoidance. 

If HMRC pursue this, schools immediately have to pay HMRC the full VAT owed. They will get it back if HMRC loses, but a court case could take years. 

That is democracy and we have to live with the decisions our politicians make

And HMRC have years to decide what to do. Imagine they decide to take action in five years’ time. If every parent had paid in advance, VAT at 20 per cent would mean an accumulated VAT liability equal to an entire year’s fees.

Of course not all parents will do this, but the liability could be large – enough, one would have thought, to worry an accountant in the intervening years about whether the school is a going concern. 

There are times in our lives when bad stuff happens. State schools did not want the Theresa May cuts in real-terms funding. Indeed, they didn’t want austerity at all. But you know what? That is democracy and we have to live with the decisions our politicians make.

State schools, starting from much lower levels of funding, managed to make ends meet. Good, valuable things were scrapped. Quite remarkably (at least until Covid) our schools and our children coped. Outcomes remained strong, measured by GCSE results, PISA and comparison with other parts of the UK. Our state schools can be proud of what they have achieved in tough times.

It is time for private schools to show the same resilience. Fees have risen a lot in recent years. If parents won’t pay 20 per cent more, private schools need to make austerity work. No more fancy new buildings. Hire out that swimming pool in the evenings. Maybe – whisper it quietly – close the pool altogether. 

And if they struggle to do that, perhaps they should approach their local state schools to ask how to cut costs without cutting standards. I am sure for the right fee our state school leaders, many of whom really are outstanding, would be willing to impart their wisdom.

No doubt they’d find a lot of savings to make. In fact, I’d bet a bottle of luxury sparkling wine on it.

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