Labour to impose VAT on boarding as well as private school fees

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Labour will impose VAT on boarding fees as well as private education in England if it wins the next election, according to party insiders briefed on the plans, in a move set to disappoint some parents and their tax advisers.

Labour leader Sir Keir Starmer said in 2021 that if he won power, he would end a long-standing VAT exemption for private schools — adding 20 per cent to the cost of education, which the main opposition party estimated would raise up to £1.5bn to fund state schools.

Several tax advisers have been advising their clients that extra fees for boarding could be exempt from the VAT charge. This is because they could be defined as “welfare services” under VAT law, and therefore distinct from the taxable product — in this case the education itself. 

But two Labour insiders told the Financial Times that boarding would incur VAT under the party’s new regulations, with one saying this was because it was “connected to the principal supply of education”.

The party has used potential VAT earnings from boarding fees to calculate the revenue impact of its policy proposal, which it plans to use to fund free breakfast clubs and mental health support across schools. 

Private schools have been hunting for ways to mitigate the impact of the potential VAT hit, including seeking to attract more price-elastic overseas students, looking at bursaries and scholarship offerings that could be cut back, and encouraging parents to pay several years of fees in advance before the proposed policy kicks in.

Labour has been clear it will try to block any attempts by schools and parents to avoid paying the tax on fees, and at least one overseas school is now looking to capitalise on parents’ anxieties about a looming rise in the costs of private education in England by offering reduced rates to UK parents.

Epsom College in Malaysia, a boarding school that is a sister institution to Epsom College in Surrey, is giving UK parents the chance to pay a frozen rate of £28,000 a year for the duration of a British student’s education between Year 9 and Year 13 — or roughly the ages of 13 to 18.

The package, which is being offered for the 2024-25 academic year, also includes three return flights between London and Kuala Lumpur during the holidays. 

Mark Lankester, chief executive of Epsom College in Malaysia, said: “Our research suggests that if the VAT policy is implemented, many British parents would have to look at other types of schools and many would have to consider overseas schools as well.”

“If there are parents that are really affected by this [policy] we do want to offer this opportunity,” he added.

Dan Neidle, a tax expert at think-tank Tax Policy Associates, has previously cast doubt over decoupling private education from boarding fees, noting that the courts have in the past argued in cases relating to higher education provision that a single economic transaction should not be “artificially split”.

He noted that “any ‘unbundling’ faces the significant challenge that it will clearly have been arranged in response to the VAT change”, and therefore could be subject to challenge on the grounds of tax evasion.

Although he said it could be “prudent” for a Labour government to introduce specific unbundling anti-avoidance rules, party insiders suggested they did not believe any new rules would be needed, saying fees for boarding and education were clearly part of the same transaction.

This article has been amended after publication to correct Epsom College’s fees

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