Private Schools and VAT – a missed opportunity?

helenhall5
Apr 11
6 min read

Dr Richard Watkins, Senior Lecturer at NLS https://www.ntu.ac.uk/staff-profiles/law/richard-watkins

Fulfilling a manifesto pledge from the 2024 general election, the government now levies value added tax (VAT) on private school fees. VAT is an indirect tax, where the provider of goods or services pays the tax, but the final consumer bears the economic burden as part of the purchase cost. Private school fees had previously been exempt from VAT, pursuant to Value Added Tax Act 1994 section 31 and Schedule 9. However, Finance Act 2025 section 47 amends the 1994 Act by inserting a new list of exceptions that abolishes the VAT exemption for private school fees. It defines a private school as “a school (i) at which full-time education is provided for pupils of compulsory school age …, (ii) where fees or other consideration are payable …, and (iii) which is not a nursery school”. The government’s policy objective is improving standards in the state education, pledging inter alia to use the revenue generated to recruit 6,500 new teachers.

Charging VAT on private school fees is a popular move – in the sense that many people favour it, and that it challenges elites. The government say the wealthiest in society should pay their way. And against the wider backdrop of persistently low economic growth, squeezed living standards, and growing wealth inequality, it might be impolitic to launch a defence of private schools. But it should be considered whether abolishing the VAT exemption was the best approach to achieving the policy objective, or whether a more detailed review of the legal complexities was warranted.

Many private schools are charitable organisations. Accordingly, they enjoy exemption from taxation on trading income, profits from fund-raising events, income from investments (Corporation Tax Act 2010 sections 478, 483, and 486 respectively), capital gains tax (Taxation of Chargeable Gains Act 1992 section 256), and relief on local government business rates (Local Government Finance Act 1988 Schedule 4ZA). The change to VAT law does not affect schools’ charitable status, or the fiscal privileges afforded to charities. However, this change in the law prompts the question of whether private schools should be charitable, and whether a wider-reaching review of charities and their fiscal privilege is overdue.

A charity is any organisation that is established for a charitable purpose, and that is for public benefit (Charities Act 2011 sections 1-2). Advancement of education is such a charitable purpose (Charities Act 2011 section 3(1)(b)), and includes inter alia provision of mainstream and specialist education. Public benefit has two elements:

1. The purpose must produce some tangible benefit; and

2. The purpose must benefit the public or a sufficient section thereof.

There is no presumption that any purpose is for public benefit (Charities Act 2011 section 4(2)). Many private schools have charitable status, despite charging for their services. The Upper Tribunal has determined that an organisation can still be a charity if they charge for their services, when the cost is affordable to the poor (R (Independent Schools Council) v Charity Commission). Charities cannot exclude the poor from their services; therefore, if the fees charged are unaffordable for the poor, the organisation must not unreasonably restrict their services to fee-payers. For private schools, the whole student community is the class of potential beneficiaries. Fee-payers constitute a small sub-section of that whole community; educating those fee-payers is a charitable purpose, provided the service is not limited to that sub-section and the school also provides education for those who cannot pay.

The origins of private schools’ charitable status predates the state education system. Charitable endowments provided for education of young people, but the endowment only paid for the cost of tuition. Fees were charged to cover other costs, such as lodging, clothing, and pupils’ general welfare. Gradually the facilities were extended to fee-payers who received no benefit from the endowment. Fee-payers came to represent the majority of the schools’ pupils, especially after the creation of the state education system. Is private schools’ charitable status thus an anachronism that needs to be reviewed? Where most of their pupils pay fees, private schools’ main provision is for those who are not “poor” (in the sense intended by the Upper Tribunal, of those who cannot afford the fees). The government has stated it has no intention to change the law relating to private schools’ charitable status or the attendant tax exemptions, but simply abolishing VAT on fees seems like a missed opportunity to reflect more carefully on the proper approach to taxing private schools.

In order to retain their charitable status, private schools undertake a range of outreach activities, such as scholarships for pupils who cannot afford to pay, sharing facilities or other partnerships with state schools, or opening sporting or other facilities to state schools or the general public. Eton College is a good example – a famous private school that counts the Prince of Wales, George Orwell, Bear Grylls and no fewer than 20 British Prime Ministers among its alumni. Charity Commission filings for the year to August 2023 (the most recent data available) report an impressive programme of public benefit activities. In particular, in that year 21% of pupils had received some means-tested concession on their fees, with 8% paying no fees at all. Such financial aid accounted for £10m, or 10% of the school’s expenditure for the same time period, with the school spending significant sums on other public benefit activities. It may therefore be justified that such schools retain tax exemption, given their public benefit activities.

However, charitable private schools’ fiscal privileges mean they keep more of their income than non-charitable organisations. If they lost a portion of their income to tax, those schools would need to charge higher fees in order to make up for it. Charitable status thus amounts to a taxpayer subsidy on private school fees. Perhaps abolishing the VAT exemption of fees redresses the balance? But for some private schools, fees represent only part of their income, with some benefiting from endowments that generate considerable annual returns. For example, in the year to August 2023 Eton College’s income totalled over £90m, of which 20% derived from investments and trading activities; a further 16% came from donations and legacies. Retaining charitable status means this enormous income is untaxed.

The VAT exemption on private school fees was, itself, somewhat anomalous. Consumers pay VAT on goods and services provided by other charities. For example, when you buy goods from a charity shop, you pay VAT. But a distinction can be drawn between this and private school fees. The charity shop will apply the proceeds of your purchase to its charitable purposes, but the sale of the goods is not, in itself, charitable – so the retail contract is ancillary to the charitable purpose. In contrast, provision of education to fee-payers is a charitable purpose, so the payment of fees directly procures that charitable purpose. This is a fine distinction, and perhaps a hair that cannot (should not?) be split.

The change in the law prompts an important question of whether charitable status will remain “affordable”. If fee-payers now have to pay VAT, will they start demanding better value for money? And if so, provision of education to those who cannot afford to pay may be an unexpected casualty of the government’s policy, especially as VAT is charged with the stated aim of improving standards in state schools. Providing services to the wider community increases costs for fee-payers, whose fees contribute to that provision. Withdrawing public benefit activities (and accordingly losing charitable status) would result in private schools becoming more insular and elitist – an odd and arguably unintended consequence of the change in the law. Whether charitable status remains affordable and desirable will depend upon each school’s individual financial circumstances.

The Administrative Division has recently heard an application for judicial review of the policy (R (PA and Others) v Chancellor of the Exchequer). They claim that charging VAT on private school fees unfairly impacts students with special educational needs and disabilities, and those who attend faith schools, whose needs cannot be met in the state sector. They assert that the policy represents an infringement of the right to an education as guaranteed by Article 2 of the First Protocol of the European Convention on Human Rights, and discrimination contrary to Article 14. The government contends that the wealthiest in society must pay their fair share. But this seems somewhat inconsistent with the government’s own decision not to review private schools’ charitable status or fiscal privileges. The preferred legal approach of abolishing the VAT exemption has highlighted the inconsistency and complexity of the law regarding charities, taxation, and fee-charging. This may have been a popular move, and an easy win for the new government (it was certainly achieved quickly), but it leaves bigger questions unanswered, including whether private schools should be capable of being charitable at all. A more considered, principled review of charitable status might have had a better outcome, despite the cost of taking more time to accomplish.

Private Schools and VAT – a missed opportunity?

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