Labour’s plan to abolish charitable status: can or should it be done?

We take a closer look at Labour’s pledge to remove charitable status from independent schools to raise money for state education, and what it would mean for the education system.

A familiar cry rang out at the Brighton Centre when Labour Party leader Sir Keir Starmer delivered his first in-person conference speech.

Citing the education gap between the children of wealthy and poor families and the pandemic’s role in further exposing it, Sir Keir set out a plan that would increase the tax burden on private schools.

He pledged to abolish the charitable status of independent schools and divert the tax revenue this generated to state education, raising an estimated £1.6bn in VAT on fees and around £100m in business rates each year.

The announcement shouldn’t have come as too much of a shock to private school leaders across the country, with Starmer’s predecessor Jeremy Corbyn including similar proposals in his manifesto plans two years ago.

There are about 2,300 independent schools in England, with the 1,300 registered as charities not able to operate for profit and therefore exempt from paying tax on most types of income, including VAT.

Stripping their charitable status would have significant financial implications, especially for many smaller independent schools that would almost certainly be forced to close with parents unable or unwilling to afford the extra 20% on fees as a result of VAT.

Considering this, can, or even should, such radical proposals be achieved?

Legal landscape

Independent schools which are registered as charities have as their purpose the advancement of education. That has been a legitimate charitable purpose for hundreds of years. Since the Charities Act 2006, all charities, including schools, have had to demonstrate that they exist for the public benefit.

Independent schools have done this by setting up partnership arrangements with schools in the state sector and making facilities available to the wider community. Many have also increased the sums they make available by way of bursaries.

The Labour leader was silent on how his proposals would be implemented but it is almost certain that primary legislation would be required. That would have implications for the whole charity sector.

In addition, there is the question of assets. Charitable assets have to be used for charitable purposes – and if schools lose their charitable status, they would not be doing that. What happens then? The headline-grabbing proposal is the easy bit: the implications are harder to deal with.

Added pressure on the state

The additional tax burden would likely be too heavy for many smaller independent schools, with closures displacing thousands of pupils. Many of them would need to move into the state system, putting extra strain on resources and eating into the extra income the policy plans to raise in the first place. Indeed, research suggests that the policy would end up costing the taxpayer significant sums as schools would then be able to recover VAT on expenditure, which currently they cannot.

It seems certain that this will be a central pillar of Labour’s education policy and its manifest for the next election. Only time will tell if Labour has the opportunity to implement this policy. In the meantime, independent schools will want, and need, to defend the sector and make their case as to why these proposals make no economic sense.

How Moore Barlow can help

We consider it an enormous privilege to work in the sector and we greatly value the relationships we have with schools, the associations and other professional advisers in the sector. 

We have offices in LondonRichmondSouthamptonGuildfordLymington and Woking. Please do not hesitate to contact any member of the team to discuss how we can help you.