Axing tax breaks would have small effect on private school pupil numbers – IFS

The Labour Party has said it would end the tax exemptions enjoyed by private schools and use the revenue raised to help state schools.

The effect of Labour’s plan to add VAT to private school fees is being debated (David Jones/PA) (PA Wire)

Removing tax exemptions from private schools is likely to have a limited effect on the number of pupils attending fee-paying schools, experts have said.

The Institute for Fiscal Studies (IFS) has suggested that the number of pupils leaving the private sector to attend state schools would be “small” if VAT is imposed on school fees.

The Labour Party has said it would end the tax breaks enjoyed by private schools and use the revenue raised to help state schools.

Private schools in England can currently benefit from an 80% discount on business rates, and they also do not have to pay VAT on school fees.

The IFS report estimates that removing tax breaks from private schools – including exemptions from VAT and relief on business rates – would raise around £1.6 billion a year in extra tax revenue.

We expect that the change in private school attendance levels will be small

Luke Sibieta, author of IFS report

With a small movement of pupils into the state sector, costing around £100 million to £300 million a year, this would lead to a net gain to the public finances of £1.3 billion to £1.5 billion a year, the IFS said.

The research, funded by the Nuffield Foundation, predicts that there could be between a 3% and 7% fall in private school attendance (or around 20,000 to 40,000 pupils) as a result of a 15% effective VAT rate.

It concludes: “If private school attendance drops, state schools will require extra funding to accommodate them.

“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 extremely small as few parents might opt to take their children out of a school part-way through primary or secondary school. The effect might be larger over the medium to long run.”

In a speech last week, Labour leader Sir Keir Starmer said money raised from removing tax breaks on private schools would be used to give primary schools cash for “world-class early language innovation”.

The party has previously said the funds raised from ending tax breaks for private schools would also be used to help recruit more than 6,500 new teachers into the state sector.

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

Josh Hillman, director of education at the Nuffield Foundation

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.”

Last month, a report by the EDSK think tank suggested that adding VAT to private school fees could raise “very little” new revenue if a quarter of pupils leave the independent school sector.

Julie Robinson, chief executive of the Independent Schools Council (ISC), said: “This is the second report in less than a month to confirm what we have consistently said – Labour’s policy will not raise the money it claims it would.

“Even an over-optimistic estimate – which this most certainly is – leaves Labour significantly short of funding the education policies they claim a tax on parents would pay for.

“The IFS itself admits its calculations on pupil movement are uncertain and based on limited evidence – we believe the number moving from independent schools will be much higher in practice.

“However, we are glad to see the IFS recommend that nursery and bursary pupils are exempt from any punitive tax, and we seek urgent clarification on whether Labour will accept these recommendations.”

Bridget Phillipson, Labour’s shadow education secretary, said: “This analysis reinforces the fact that all of Labour’s policies are fully-costed and fully-funded, because we take fiscal responsibility seriously.

“The Conservatives have crashed the economy and have no plan for growth which will mean we face tough choices in government.

“Labour will fund our fully-costed plans to drive high and rising standards in our state schools by ending private schools’ unjustifiable tax breaks.”