Labour have committed to remove tax exemptions from private
schools, including exemptions from VAT and relief on business
rates. We estimate that this would raise tax revenues by about
£1.6 billion. With a small movement of pupils into the state
sector, costing perhaps £100–300 million a year, this would lead
to a net gain to the public finances of £1.3–1.5 billion.
The evidence suggests that putting VAT on private school fees
would have a relatively limited effect on numbers attending
private schools – perhaps a reduction of 3–7% in private school
attendance. Even that reduction would have limited impact on tax
revenues as money not spent on school fees would likely be spent
on other goods and services on which VAT would be payable. If
some pupils do move to the state sector, extra school spending of
about £100–300 million per year is likely to be required in the
medium to long run. But it should be remembered that pupil
numbers in the state sector are expected to fall dramatically
over the next decade and state schools might therefore welcome
extra pupils moving from the private sector.
Combining these estimates, we estimate that Labour’s proposals
will raise an extra £1.3–1.5 billion per year in the medium to
long run. This would allow for about a 2% increase in spending on
schools in England, which Labour have proposed would be targeted
at disadvantaged students.
These are some of the key findings of a new report, ‘Tax, private
school fees and state school spending’, published today by the
Institute for Fiscal Studies and funded by the Nuffield
Foundation.
Other key findings include:
-
The share of pupils in private schools has
been constant at about 6–7% for at least the
last 20 years despite a 20% real-terms increase in average
private school fees since 2010 and a 55% rise since
2003.
-
The gap between average private school fees and state
school spending per pupil has more than doubled since
2010. In 2022–23, average private school fees across
the UK were £15,200 in today’s prices (net of bursaries and
scholarships). This is 90% higher than state school spending
per pupil, which was £8,000 in 2022–23. In 2009–10, the gap was
about 40% or £3,500.
-
Removing tax exemptions is likely to raise £1.6 billion
in extra tax revenues. This results
from an effective VAT rate of 15% after allowing for input
deductions, likely VAT on boarding fees, exemptions for fees
paid by local authorities for pupils with special educational
needs and reduced VAT revenues from spending on other goods and
services as parents cut back in order to finance increases in
fees. It also includes extra revenues from business rates.
-
Falls in private school numbers are likely to be
small. The (limited) evidence on the
determinants of the demand for private schooling suggests that
the effects of fee rises are quite weak. In the short run, the
effect might be especially small as few parents might opt to
take their children out of a school part-way through primary or
secondary school and many may be reluctant not to give younger
children the same education as their older siblings. The
effects might be larger over the medium to long run. Our best
judgement is that it would be reasonable to assume that an
effective VAT rate of 15% would lead to a 3–7% reduction in
private school attendance. This would likely generate a need
for about £100–300 million in extra state school spending per
year in the medium to long run
-
Tax revenues are in any case unlikely to be affected by
any reductions in private school demand. If there is a
fall in demand for private schooling, VAT revenues on private
school fees would drop. However, this would likely be largely
made up for by higher VAT revenues from increased spending on
other goods and services.
- 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 £1.3–1.5
billion per year in the medium to long run as a result
of removing tax exemptions from private schools.
Luke Sibieta, IFS Research Fellow and author of the
report, said: ‘Labour’s proposals to remove tax
exemptions are likely to raise an extra £1.3–1.5 billion after
allowing for exemptions, deductions and extra school spending to
cater for any pupils moving to the state sector. The evidence
suggests higher fees are likely to have a weak effect on demand.
‘As it is, we expect that the change in private school attendance
levels will be small. This leads to surer increases in tax
revenues and less need for additional public spending on state
schools. If the main aim of removing tax exemptions from private
schools is to raise revenue, then this is likely to be
achievable. If the aim is to encourage more pupils into the state
sector and reduce inequalities by school attended, then this
policy package is likely to have only minor impacts.’
Josh Hillman, Director of Education at the Nuffield
Foundation, said: ‘This timely analysis shows that the
combination of levying VAT on fees and the tax exemptions
associated with removing charitable status from private schools
would raise a small but potentially worthwhile sum of money for
use in state education. However, to make a significant
contribution to reversing the widening gap in achievement between
advantaged and disadvantaged pupils, a wealth of other research
suggests it would need to be spent carefully on well-targeted
funding streams and evidence-based programmes and practices.’
ENDS
Notes to Editor
1. ‘Tax, private school fees and state school spending’
is a report written by Luke Sibieta embargoed to 0001 Tuesday
11th July.
