Risks to tax reliefs for independent schools: could charitable foundations be the answer?

At the 2022 Labour Party Conference, Shadow Education Secretary Bridget Phillipson repeated Labour’s plans to “end the tax breaks private schools enjoy” in order to raise money to deliver its school improvement programme. These announcements from the Labour party will be familiar to leaders at independent schools, as discussed by our colleague Gordon Reid after Sir Keir Starmer’s speech at the 2021 Conference.

However, support for the Labour Party is now growing significantly amongst voters. YouGov’s opinion poll from 9-10 November 2022 suggested that 48% of people would vote Labour in a general election, with Labour maintaining a significant lead over the other political parties. Given the increased likelihood that we may have a Labour government after the next general election, we take another look at Labour’s pledge and what it would mean for independent schools.

The implications of Labour’s proposals

Labour is proposing to change the VAT treatment of school fees so that they become subject to VAT. Some parents would be unable to afford an extra 20% on fees, which would lead to a decline in pupil numbers and corresponding loss of income at many schools.  

In addition to this, many independent schools in England are registered charities, which means that they do not have to pay tax on most of their income and capital gains. They can also benefit from a mandatory 80% discount on business rates, relief from Stamp Duty Land Tax when buying property and an ability to claim Gift Aid on eligible donations.

Removing some or all of these benefits could have a significant financial impact on independent schools. For example, removing the ability to claim Gift Aid could have an impact on the income from donations received by many schools. 

The Scottish Government has already removed the mandatory charitable business rates relief for independent schools, so it is conceivable that steps could be taken to replicate this in England or Wales too. According to the results of a recent Sunday Times Readers’ Poll published on 13 November 2022, 47% of those who responded believed that independent schools should lose their tax advantages. This suggests that there is some support for such policies.

Jeremy Hunt’s Autumn Statement 2022

In his speech of 17 November, Jeremy Hunt refuted claims that charging VAT on independent school fees could be used to increase core funding for schools. He confirmed that he would not adopt this measure because it would result in up to 90,000 children from the independent sector switching to state schools, effectively “giving with one hand and taking away with another”.

Julie Robinson, the chief executive of the Independent Schools Council, also warned earlier this year that making school fees subject to VAT would be counter-productive. Any such move would threaten the survival of the smallest independent schools and result in additional pupils moving into the state education sector, reducing the amount of money available to improve state schools.

Independent schools should therefore be prepared to demonstrate the value of the sector and the public benefit they provide, and set out their case that making school fees subject to VAT and removing other tax reliefs does not make economic sense.

How some schools are addressing this and how Moore Barlow can help

We have and continue to be instructed by schools facing these challenges. One option some schools have instructed us to pursue is to establish a separate foundation, which itself has charitable status and is established to make bursaries or contribute towards capital projects, such as building works, in the future. For some, this structure is primarily focussed on effective fundraising and engagement with alumni and others connected with the school in the locality. Others, however, have made clear that they are doing so as a potential safeguard against the loss of charitable status for the school itself or for loss of certain tax reliefs. The structure is therefore intended to retain Gift Aid, even if the school loses the ability to claim that in the future.

That said, if independent schools come under scrutiny, there is no guarantee that a legislative or regulatory agenda doesn’t seek to treat foundations connected to schools as being effectively part of the same organisation, so careful consideration should be made as to the independence of the new charity to minimise this risk. The Charity Commission would need to be satisfied on this (and on other aspects) when applying for registration.

Similarly, independent schools need to ensure that the value to the sector and in particular the public benefit they provide is not jeopardised by such a structure. Charity law requires all charities, including fee charging charities such as independent schools, to carry out enough activities for the public benefit, from which the public at large or a sufficient portion of it can benefit. Clearly, the provision of bursaries in particular forms a key pillar of this for many schools, so schools should take care to ensure that they are not seen to be outsourcing their public benefit function and invite scrutiny from the Charity Commission, even before legislative or regulatory changes.

Moore Barlow is proud to offer specialist legal advice to independent schools and has strong relationships with associations and other professional advisers in the sector.

Please do not hesitate to contact any member of the team to discuss how we can help you.