Debate on contribution of independent schools and the potential effects of removal of VAT exemption on their school fees, House of Lords, 5 September 2024

As of 1 January 2025, all education services supplied by a private school for a charge will be subject to VAT at the standard rate of 20 per cent. Boarding services will also be subject to VAT at 20 per cent. Any fees paid from 29 July 2024 pertaining to the term starting in January 2025 onwards will be subject to VAT.

Nurseries will remain exempt; VAT will be payable from the first year of primary school in a private school upwards. Education and vocational training provided either at sixth forms attached to private schools or standalone private sixth form colleges will also be subject to VAT. However, education and vocational training provided by further education colleges, which are classified as public sector institutions, will not be subject to VAT. Education and boarding provided by state schools (including academies) are not affected by this policy change, meaning they will continue to be exempt from VAT.

Where a pupil’s place in a private school is funded by a local authority (LA) because the pupil’s needs cannot be fully met in the state sector, or are best met elsewhere (for example, for pupils with special educational needs and disabilities), LAs will be able to reclaim the VAT they are charged on the fees of these pupils. LAs will be able to recover any VAT they are charged on education and boarding fees of pupils in private schools, regardless of why the LA is funding that place. For instance, if an LA is funding a child’s place in a private boarding school as an alternative to foster care, they will be able to reclaim the VAT incurred on those fees too.

However, pupils who have an EHCP (in England) whose needs could be met in the state sector, but whose parents have placed them in a private school out of choice; and their EHCP (if they have one in place) does not say placement at a private school is necessary to, or would be the best way to meet the pupil’s needs, will have VAT applied to their fees.

With the application of VAT some private schools may raise their fees, making them prohibitive for some existing pupils. The Government’s impact analysis states that the number of pupils who may switch schools as a result of these changes are a small proportion of overall pupil numbers in the state sector. Therefore, Government expects that the state sector will be able to accommodate any additional pupils and that there will not be a significant impact on the state education system as a whole.

In 2023, the IFS conducted modelling which estimated that 3-7 per cent of private school pupils would move into the state sector if the VAT exemption were removed. Local modelling based on these assumptions, carried out by one local authority, found that this number of pupils could be comfortably accommodated within existing PAN (pupil admission number). In areas with falling school rolls, such as inner London Boroughs, an increased number of pupils moving into the state sector could be beneficial for schools which are becoming financially unviable due to low pupil numbers.

There are particular concerns about the impact of the VAT change on pupils with SEND. If parents have to move their children from the private to the state sector this of course risks disruption to affected children’s education, particularly if they have additional support needs. There are also funding implications for local authorities:

• Pupils may require LA-funded education, health and care plans (EHCPs), where their support needs were previously being met in the private sector.
• In instances where a former private school pupils’ SEND needs cannot be met in the state sector, councils would be required to meet both the private school fees and the pupil's home to school transport costs.

Some councils report that the announcement on the VAT change has resulted in them receiving a small number of new requests for education, health and care plans (EHCPs) for pupils who are currently educated in the private sector. DfE should monitor the increase in EHCP applications as a result of the VAT change and any funding implications for local authorities.

There are circumstances where the government contributes to the private school fees of children of UK military service personnel and UK diplomatic officials through the Continuity of Education Allowance (CEA). The Government have committed to monitor the impact of these changes on affected military families and review the Continuity of Education Allowance at the upcoming spending review. It is important that the allowance is appropriately set at a rate that enable military personnel and their families to financially continue existing educational arrangements, and not undermine its purpose of securing continuity of a child’s education.

The SEND system is currently under significant pressure, which is already preventing councils from providing all children with SEND and their families with the support they need. At the same time, high needs deficits are becoming an existential threat to some councils’ financial viability. As the National SEND Review identified, ‘the SEND system in England is ‘failing to deliver for children, young people and their families’ and ‘despite the continuing and unprecedented investment, the system is not financially sustainable.’

The national high needs block for SEND rose from £5.3 billion in 2014-15 to £9.4 billion in 2024-25. On top of national funding, councils have spent an additional £950 million on SEND support in 2023/24 alone. We estimate that nationally local government’s cumulative high needs deficit now stands at £3.15 billion.

The SEND system requires urgent and fundamental reform. Our recent joint report with the County Councils Network,‘Towards an effective and financially sustainable approach to SEND (special educational needs and disabilities) in England’ sets out 8 implementable proposals to transform support and outcomes for children and young people with SEND, while putting the system on a sustainable footing. Our proposals are built on the core principle of putting inclusion at the heart of every aspect of our education system. Central to this ambition is building capacity within the mainstream state system so that all children can access the targeted support they need, at the right time, alongside reforms to empower local partners to deliver integrated specialist support for those with higher needs.

All partners are clear that the choice of reform is when, not if. Fundamental reform will be vital to ensure that all children, whether in the state or private sector, have access to the support they need to thrive.

• Following the Budget, the Ministry of Housing, Communities and Local Government will bring forward primary legislation to amend the Local Government Finance Act 1988 to end relief eligibility for private schools intended to take effect from April 2025, subject to Parliamentary process.
• Private schools that are currently charities will therefore no longer be eligible to claim charitable rates relief and will be required to pay their full business rates liability.
• The increased rates liability will vary from school to school; however, the government expects increased rates liabilities to have a limited impact on average school fees per pupil. The note says that the government has considered the impact that these policy changes will have on LAs and does not expect this to be significant. As is usual, the government will undertake a New Burden’s assessment and fund any additional administrative costs to local government associated with this policy.

Megan Edwards, Public Affairs Adviser,[email protected]