Labour’s plan to levy 20 per cent VAT on private school fees has already created far more controversy than any other policy the party campaigned on.
Legal challenges are planned, loopholes are being pinpointed, obstacles deliberately created and experts are warning that implementing the tax could be “phenomenally complicated”.
One ex-Treasury and education official i spoke to questioned whether, in the end, the policy will be seen as worth pursuing for a financial gain that in overall budget terms amounts to no more than a “rounding error”.
But Sir Keir Starmer and his Education Secretary Bridget Phillipson have been clear that they will not give in to the protests. And now are they are in Government must deliver. But even Labour insiders – though confident in the final outcome – admit that bringing in the tax will be a “complex thing to navigate”.
Here are nine potential problems the new Government will have to overcome in implementing its flagship education policy, the issues that will shape the way it is introduced, and the impact it will have on both school systems – independent and state.
1. Timing and speed
Labour has pledged to use the tax to fund state education and schools in desperate need of a quick cash injection. State schools are, in the words of one education expert, “looking down the barrel of a [school] funding crisis” and need extra support right now.
But the practicalities of introducing VAT on independent school fees raises big questions about how soon this will happen. Ministers are yet to confirm the timing of the tax, but education and tax experts have concluded it will not be feasible until September 2025.
During the election campaign, Sir Keir said the first steps to the policy would happen “straight away” – but added that the overall implementation was down to the “question of the timetable in Parliament”.
His Chancellor, Rachel Reeves, later confirmed the VAT policy would be in the party’s first Budget. She has previously ruled out a summer Budget, confirming it will take place in the autumn after the Office for Budget Responsibility (OBR) has the required 10 weeks’ notice to compile an independent forecast.
That timeframe would mean the earliest the private schools VAT policy could be officially announced is mid-September 2024. From then, the Treasury would need to pass a finance bill that says VAT will be levied on private school fees from a certain date.
It is unclear when this date will be, but experts have suggested the tax is unlikely to come into force midway through the academic year due to the disruption this would cause schools and parents. Which means everything points to September next year as the earliest date that money from the tax could start coming in.
So, will the shopping list for schools that Labour has said its tax will fund be delayed as well? There’s a lot at stake.
The party’s fiscal plan, outlined in the manifesto, says the VAT policy will pay for 6,500 new expert teachers, more than 3,000 new nurseries, mental health support for every school, increased teacher and headteacher training, early language development in primary schools, Ofsted reform and delivering work experience and careers advice for all young people.
That doesn’t mean the initial steps for these measures will be held up. This week, in one of her first acts as Education Secretary Ms Phillipson wrote to all school staff saying she wanted to “reset the relationship” they had with government, and that her work to start recruiting 6,500 new teachers had begun.
But the poor state of public finances suggests there could be limits to how much can be done before the proceeds from taxing private school fees start to come in.
2. Risk of private schools being forced to close
Critics of Labour’s VAT policy fear it could force some small private schools to close.
The Independent Association of Prep Schools (IAPS) has warned that small junior schools in rural areas would become unviable if landed with the 20 per cent tax. Around 500 prep schools in the UK have just 200 pupils, with many operating at a loss and approximately half feared to be at immediate risk, according to IAPS.
The first casualty came in May when it was announced that Alton School – an £18,000-a-year Catholic day school in Hampshire – will close at the end of the academic year.
A statement on the school’s website said: “This proposal is based on a continued decline in pupil numbers, to the extent that the school has now become unviable. This is due to a combination of adverse political and economic factors.”
If more private school closures follow, children’s education could be disrupted. That is not the intended outcome of the policy for ministers, and it could have a knock-on impact on state schools, if displaced pupils move there instead.
But Sir Keir has insisted that there is “no evidence” private schools will be forced to close due to VAT being charged on their fees, and that they “don’t have to pass the cost on to parents”.
“I think they will adapt,” he told Sky News last month. “They’ve had lots of increases in costs over the last 14 years and they’ve accommodated it.”
3. Can state schools cope?
Even if private schools are not forced to close because of VAT on fees, the tax still has the potential to increase the burden on state schools where resources are already scarce.
If the extra 20 per cent is passed on to parents who decide they can no longer afford to pay private school fees, there could be a sudden influx of pupils into a state sector already looking at staff cuts and bigger classes.
There was alarming news in May in a front-page newspaper story that suggested that 224,000 private school pupils – 42 per cent of the sector – would be “driven out” by Labour’s tax. However the authors of the study behind the story have dismissed the figure as “too high”.
The Institute for Fiscal Studies described it as “incredible”. Luke Sibieta, a research fellow at the think tank who has looked into the impact of the policy, said the evidence available suggested it would lead to a fall in private school rolls of no more than 7 per cent, or 40,000 pupils.
“I’ve seen lots of reports and evidence and articles over the last year and nothing has led me to [move] from my original view that it would likely result in a small reduction in private school attendance, but nothing massive,” Mr Sibieta told i.
However, he added that there was “lots of uncertainty and it would be wise to be cautious and prepare for slightly larger falls”.
Any impact is unlikely to be spread evenly. Some have claimed that local authorities with high concentrations of private schools could see their state sector hit particularly hard. Areas where a selective state grammar system still exists are also expected to be magnets for any private pupils who do leave because of the tax.
4. Labour can’t be certain how much money the tax will raise
Even Labour’s own estimates for how much money taxing private schools will generate have varied.
Last year Ms Phillipson told the House of Commons that charging VAT on independent school fees and imposing business rates would raise £1.7bn.
However, a report from the IFS concluded that removing tax exemptions from private schools would raise about £1.6bn a year in extra tax revenue. And the actual gain would come down further once the extra costs it created for state schools are taken into account.
“Combining estimated tax revenues and extra public spending needs, our view is that it would be reasonable to assume a net gain to the public finances of £1.3-1.5bn per year in the medium to long run as a result of removing tax exemptions from private schools,” the IFS said.
Labour has opted to use the top end of this range – £1.51bn – in the calculations and costings in its election manifesto.
Other research has reached more pessimistic conclusions. Maxwell Marlow, director of research at right-leaning free market Adam Smith Institute (ASI), wrote a report that suggested it “could raise no money at all”.
His analysis of the policy also suggested that “in a less optimistic scenario, it could end up costing £1.6bn” – while prompting a “mass exodus to the already overwhelmed state system”.
This was based on the economic effects of schools closing down, and 25 per cent of pupils leaving private schools and teachers and parents leaving the workforce.
5. Opponents could make the tax difficult to plan for
Some parents of private school pupils are deliberately trying to add to the uncertainty in the hope that the policy can be thwarted.
They are encouraging a strategy known as “swamp the comp” whereby parents register their children for state school – without intending to actually send them – to give the illusion of an overwhelmed state sector.
A screenshot from one parent group went viral after advising members to “register their child for their local state school” to make teaching unions worry that the local authority would not be able to cope.
The post said the intention was to force teachers to “lobby the government”. It added: “It’s important they start panicking about the flood of applications coming in and the reality of the situation – even if you have no intention of moving your child.”
Other parents are writing to local MPs and submitting Freedom of Information requests to local authorities requesting information on the number of state school places available.
One group has begun crowdfunding to finance a group litigation order. There has been suggestion of a demonstration planned for 9 July in London.
6. Risk of a special needs ‘catastrophe’
Independent schools warn that Labour’s plan to tax private school fees risks flooding the state sector with pupils with special educational needs who will come with requests for expensive support.
Census data from the Independent Schools Council (ISC) shows that 111,154 pupils were receiving SEND (special educational needs and disabilities) support in private schools in 2024, an increase of 7.5 per cent from last year and up 67 per cent on a decade ago.
Labour is stressing that its VAT charge on fees will not hit SEND pupils who have their private school places funded by the state through Education Health and Care Plans (EHCPs).
These plans are statutory documents stipulating and guaranteeing the extra support that such children and young people are entitled to. But only 7,646 of the pupils receiving SEND support at private schools have the plans. And the ISC is raising the alarm about the other 103,508.
It believes that many of their parents will have gone private because of their inability to get the support they need in the state sector. And it argues that a 20 per cent increase in fees, caused by Labour’s tax, will lead to some heading back to the state sector where they will need support, with expensive consequences for a SEND system already under strain.
Labour has not offered a ready solution to these pupils other than to say that private schools should shoulder any burden from the tax. Sir Keir angered the head of one private special school when he wrote a letter calling on it to “work to ensure costs are kept affordable” for parents with SEND pupils who will not be exempt from the VAT charge.
7. VAT law is ‘phenomenally complicated’
Tax and policy experts have urged Labour not to rush the policy. In interviews with i they pointed to potential pitfalls such as inadvertently applying VAT to private nurseries or after-school clubs.
Early-years education could present a major obstacle, they warned. “A private nursery is a private school, technically, it’s a place of education where parents pay a fee for an educational service,” said an ex Treasury and Downing Street education official.
“Now, I don’t think Labour wants to add VAT to nursery fees. But if you want to exempt that, you have to define that in law, you have to define that in statutory guidance. And again, defining what that is, is complicated.”
Trying to specify particular categories of goods that should or should not come under a new tax could be the most fraught area for Labour, they say: “VAT law is phenomenally complicated, particularly once you start to get into exemptions. And many governments have come a cropper trying to exempt various categories of things from VAT.”
They point to George Osborne’s infamous 2012 “omnishambles” Budget which unravelled as controversy grew over what became known as “the pasty tax”.
The Coalition government had wanted to introduce 20 per cent VAT on all food sold “above ambient temperature”. The idea was to stop unfair competition for cafes and takeaways – where food was subject to VAT – from products like hot rotisserie chickens which were being sold in supermarkets VAT free. But when it emerged that pasties would also be caught by the tax, there was an outcry that forced the government into an embarrassing and politically difficult U-turn.
“Applying VAT to something is legislatively simple,” says the former Treasury official. “But deciding what things you may want to exempt is not simple because then you have to start writing legislation that says, you know, this isn’t VAT-able, and this is VAT-able.”
Labour sources admit VAT law is “complicated” but reject any suggestion that nurseries or other non-school provision could be inadvertently dragged in. They point out that they have had the policy for years and have rigorously planned and thought about its implementation “incredibly carefully”.
They also think they have a simple solution that would get around the exemption problems that experts have warned about.
i understands the VAT charge will apply to “full-time education provided to children of compulsory school age, in line with the Department of Education’s definition of regulated independent schools”.
Nevertheless, Jonathan Main, an experienced VAT adviser to businesses and charities with leading accountancy firm MHA, stresses that a consultation period is vital to “avoid the self-inflicted wound of getting it wrong”.
8. The need to close loopholes
Another problem Labour must consider is parents trying to avoid the VAT charge by paying years of fees in advance.
Ms Reeves has ruled out “retrospective” legislation, meaning it will not be backdated to apply to school fees paid for the 2024-25 academic year when the tax is announced in the autumn Budget.
But the Government is expected to include “anti-forestalling” measures in the legislation, meaning that it could recoup VAT on school fees paid in advance for any education provided after the VAT comes into force.
However Giles Salmond, tax litigation partner at leading law firm Stewarts, suggested that this means advance payments are likely to be safe before the policy is introduced with the autumn Budget.
“It may be possible for parents paying for school fees in advance to be spared the VAT charge,” he said. “However, the payment would have to be clearly for the relevant supply of education over a specific period, not, for example, an unspecified deposit to be drawn by the school, as the education is provided.”
He added that there was still uncertainty about the specifics of the upcoming changes, which creates risks for both schools and parents. This could cause doubts and potential disputes over the VAT treatment of large advance payments.
Mr Salmond explained: “There is still a risk for both the school and parents for very large payments paid for all future school fees of a particular pupil – as the current law requires VAT to be accounted to HMRC when payment for a service is made, if it occurs before a VAT invoice is issued.
“If there is any doubt as to the extent of the service and the fees applied to this service, this can put the VAT position in some doubt.”
9. The threat of legal challenges
Private schools VAT could be subject to legal challenges in the courts, which could cause delays or potentially halt the policy.
Earlier this year, former Reform leader Richard Tice told The Daily Telegraph that the party would engage a legal team to block Labour’s plans using “every legal avenue”, arguing that they are “discriminatory”.
“All charities, of any form, get business rates relief,” he said. “To target only independent schools on business rates relief and VAT on fees is deeply discriminatory.”
Mr Tice said the party would wait until the finance bill has been passed, then seek an “urgent injunction”. He added that he would escalate the legal challenge to the European Court of Human Rights (ECHR) if necessary, despite his personal view that the UK should leave the court.
The ISC is also understood to be taking legal advice on whether to launch legal action. When contacted by i, the ISC said it was “exploring all options”.
However, tax expert Mr Main said the legal challenges are unlikely to be successful, because of Brexit.
He said: “It’s hard to see that these changes would have succeeded pre-Brexit because EU law does contain specific VAT exemptions for education, and it doesn’t exclude private provision from those exemptions.
“Post-Brexit, the UK is free to rewrite VAT law as it sees fit. It can introduce more zero rates, it can extend the reduced rates, it can extend or restrict VAT exemptions as it wishes to do so because we’re not bound by EU law anymore.
“I personally don’t see that these legal challenges to the imposition of VAT can succeed. Because it’s open to the government to raise or reduce rates of taxes as it sees fit.”