This paper reviews the proposal to apply VAT of 20% to private school fees in order to raise significant revenue.
We build on a paper from the Institute of Fiscal Studies (IFS) which concludes that levying an effective 15% of VAT on school fees would lead to a 3-7% reduction in private school attendance and raise a net £1.3-1.5 billion;
As the IFS noted, the evidence they drew on was “old” and “thin”. We raise several further concerns about the relevance of historical small price increases to a much larger price increase in a changed macro environment. We question the IFS’ confidence that higher migration scenarios, including up to 25% can be excluded from consideration;
The IFS paper mentions some unintended consequences and risks; it would be prudent to consider many more, including school closures and cost-cutting; labour supply withdrawal, and human costs;
This paper focuses on 3 key areas:
The justification for the existing VAT exemption:
The UK exempts VAT across the education sector, including but not limited to universities, tutors and commercial language tuition, recognising education is a merit good;
Applying VAT only to part of the private sector would distort competition, favouring suppliers of near-identical services (tutoring, pastoral care, music lessons) in different settings;
A static analysis, noting that school fees motivate marginal families’ labour supply, which can be withdrawn at any time, shows that independent schools are strongly favourable to the public finances and the broader economy.
2. The effect on the public purse:
We used the IFS’ data inputs and assessments as a baseline for our own analysis, and explored further quantified variables;
In a highly optimistic migration scenario of 5%, we indicate a net fiscal impact of £1.02 billion, a reduction of £0.38bn from the IFS’ estimate;
Between 10-15% migration, we indicate that the tax would generate no net revenue;
In a 25% migration scenario, we indicate that the tax could generate a loss to the Exchequer of £1.58 billion;
We outline several further downside risks that apply in each scenario.
3. The impact on state schools:
The geographical distribution of migration and school closures is impossible to predict;
We have significant concerns about the ability of local authorities and schools to plan, adapt for and respond to unpredictable demand swings; there is a risk of children stranded without a place
We doubt that putting private school children into the state system delivers benefit to the latter
There may be even greater competition for preferred state schools, driving talented children from poorer backgrounds from high-performing state schools and grammar schools.