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How should independent schools prepare for Labour’s VAT plans?

Friday July 5, 2024

Schools’ options in the face of cost pressures

One of the incoming Labour government’s most headline-grabbing policies has seen significant changes to the rates and tax regime for independent schools.

The party has committed to ending private schools’ 20% VAT exemption and removing the 80% business rate relief received by around half of England’s independent schools that are also charities. With the election decided, school leadership teams will now need to be preparing for the measures to be applied.

Cost pressures

At its simplest, Labour’s policy, if it goes ahead, will be mean an increased cost burden for schools.  It is unlikely that the entire 20% VAT charge will need to be passed onto parents as VAT on goods and services supplied to schools will become recoverable.  However, an increase in fees of 15-17% is still likely.

Many school leaders’ first step will be to look at whether this can be offset by increasing fees. However, in most cases, they’ll only be able to do this by so much.

For many institutions, particularly the very smallest, this means there will be significant additional pressure on their bottom lines.

In preparation, and to shape their response, we would advise that school leadership teams ensure they have all the data they need to fully assess their current financial position and forecast future scenarios.

Governors, trustees and directors should review their financial controls to pinpoint where more up-to-date data is required. Core management information, such as pupil numbers and fee income for the next school year – and beyond, if possible – should be revised and updated on a weekly basis across the summer. Where there’s a risk of financial pressure, the importance of good financial insight becomes even more important.

From there, those who anticipate cost pressures can look at what steps they can take to balance the books.

Reducing costs can be particularly difficult for schools given that so many of their fundamental requirements are fixed. But where reductions can be made, they will give valuable additional headroom.

Schools might also explore additional revenue streams. For example, many schools have attractive, historic buildings, and large grounds with excellent sporting facilities. We’ve seen schools successfully generate extra income by leveraging these and diversifying to host summer camps, weddings and sporting events

Recovery options

Even after cutting costs and creating additional revenue, some schools may still find that costs have risen too much to be sustainable. Leadership teams need to start exploring alternative plans for their institutions the moment this risk is identified.

Possible paths forward could mean merging with another school to create a more resilient organisation in terms of size, asset value and market share. Indeed, we expect to see a rise in consolidation over the coming months, as schools review their options in this new landscape.

Another option could be a private sale. However, school leaders will need to bear in mind that a sale may not necessarily ensure the school’s ongoing legacy as an educational establishment. The independent school market is highly fragmented, and it may be that the school’s assets have more value to a property developer, for example, than another educational provider.

If none of the above are possible or desired – and the financial pressures facing the school are deemed to be insurmountable – the final step is likely to be a solvent closure.

While this is something that is avoided, it means closing the school in a matter that takes into consideration the best interests of the pupils, parents, teachers and other staff. Wherever possible, efforts would be taken to ensure that the school remains open and operational until the end of the current term or academic year, with all staff properly remunerated.

Next steps

Labour has said that it won’t implement its VAT policy until 2025 at the earliest.

While the ‘buffer’ of a few months is unlikely to mean that schools avoid any potential challenges entirely, it does give additional time for them to explore their options.

As always, we’ll need to see more detail from the new government on exactly how any new plans will operate.

Until then, it’s critical that school leadership teams are reviewing their operations and developing plans for all potential scenarios – and proactively seeking help at the first signs of distress.

Related team

Matt Whitchurch

Matt Whitchurch

Matt Whitchurch

  • Partner
  • Financial Advisory
  • Bristol