Britain’s biggest and wealthiest private schools face significant financial windfalls as a result of the government’s plan to impose VAT on their fees, according to official new guidance published by tax authorities.
A document published by HMRC on Thursday made clear that once independent schools register for VAT they can claim back the tax they have paid on capital projects such as buildings and land acquisition completed in the last 10 years.
The money will be repaid gradually over the next decade, with timing and amounts depending on the completion of the project.
The fact that institutions such as Eton College and other elite private schools could gain a net benefit from the change is causing tension in the independent sector; Those who run smaller private schools say this will widen the gap between them and the wealthiest.
This, they say, is because less affluent, smaller schools whose students’ parents are not as wealthy will often have to use the money they make to keep fees low, while elite schools will simply use it to bolster their bottom lines.
A senior figure from the independent sector said: Observer that wealthier schools will benefit and smaller ones will suffer.
“The upper echelons of the independent school sector remain very quiet; they will rub their hands [in the hope that] This is accomplished as quickly as possible. It is publicly clear that Eton, like many of its peers, will pass on 20% of VAT to parents.
“They are now developing significant capital projects where they can claim back VAT on operating costs and can also claim back VAT. In short, taxpayers will now fund 20% of operating costs and capital projects. “This is a windfall for privileged independent schools at the expense of taxpayers.”
The source added: “Smaller schools where parents have affordability issues will likely have to use any VAT refunds to offset school fees to help parents. But top-tier schools [whose parent cohort can pay the 20% VAT] “They will still claim the VAT back, but they should keep that to themselves.”
Ministers plan to impose 20% VAT on private school fees from January 1 next year, despite intense pressure from teachers’ unions, accountants and the private sector to delay the plan to give schools more time to adapt.
They say the money raised will help pay for 6,500 new teachers in the state sector, as well as free breakfast clubs in all primary schools.
When approached for comment, Eton College responded by sending a copy of a letter to parents and guardians in August explaining that the 20% VAT charge would be passed on to parents. It was also stated that “starting from January 2025, we will be able to reclaim VAT on certain costs and services we purchase.”
Rudolf Eliott Lockhart, chief executive of the Independent Schools Association, which represents mostly smaller independent schools, said: “This is a policy that will be felt very differently across the spectrum of independent schools. “As most independent schools are currently undersubscribed, the fall in demand from VAT is less students, which could lead to school closures. Ironically, most independent schools will also not benefit from VAT rules, which mean they can claim back significant sums if they have made large capital expenditures in the previous decade. This is because there are schools used to stereotype.
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“I am concerned about the small, local independent schools that will be pushed to close because of this policy. These are often schools that use their independence to do things differently: offering specialist tutoring [special educational needs] provision of services, bilingual instruction or a performing arts focus, or meeting the needs of smaller religious communities. These are schools that I think the Secretary of State would like if he actually visited. However, these are the schools that this policy will harm the most. “There is still time for more nuanced policy that recognizes that the independent sector, like the state sector, is complex and diverse.”
Mairéad Warren de Búrca, managing director of indirect taxes at global professional services firm Alvarez & Marsal Tax LLP, said: “Simply put, if a school had capital expenditure of £10 million plus £2 million VAT last year, it is unlikely to do so .They have recovered most of the £2m VAT. They can now seek to recover up to £200,000 each year for the next nine years as their standard nominal supply increases.”
David Woodgate, chief executive of the Association of Independent Schools Scholars, said the complexity of introducing the new system meant more time was needed before it came into force: “A short delay until September makes sense for all parties involved, including HMRC. Our schools want to make sure they fully comply with the law, but tax authorities need clarity, support and a reasonable amount of time. The implementation window is not long enough for all parties involved to get everything in place.”