The future of independent schools and their taxes

As Labour maintains a strong position in the polls and the party’s plans for independent schools continue to make headlines, there's a growing sense significant change may be coming. What are the possible implications and what, if anything should independent schools be doing in preparation?

It should be said that it's not 100% clear at this stage what Labour’s policies will actually be, and we envisage a lengthy period of detailed consultation following any Labour election win. However, it seems very likely that a new Labour government will seek to either restrict access to some charitable tax reliefs for independent schools, or potentially even alter their charitable status.

Some of the potential tax changes could impact on any schools which enter into property transactions, or which have significant real estate holdings:

  • Business rates relief – arguably the most valuable relief available to the sector, which allows charities to claim a mandatory 80% relief (as well as an additional discretionary 20% relief) on non-domestic rates when a property is used for charitable purposes. Labour could choose to follow Scotland’s example and take away this relief for all independent schools. 
  • Corporation tax and income tax - both regimes could be extended to encompass both primary purpose trading (ie activity that also furthers the charitable aim to advance education) and investment income/gains. It's assumed that properly advised independent schools would take steps to avoid property trading activities already, but a change in the tax treatment of property investment income or gains would be a significant widening of the tax net.
  • VAT - an imposition of VAT on school fees or special “levy” could be introduced, and the impact on VAT incurred in respect of property transactions or holdings would need to be considered in detail (for example, would the imposition of VAT on fees actually lead to improved input tax recovery for the sector?).
  • Stamp taxes - liabilities could be created for the acquisition of property if changes are made to the charitable relief for stamp duty land tax (SDLT), or the LTT / LBTT equivalents in Wales and Scotland respectively.

What should potentially impacted independent schools be doing at this stage? In broad terms, the policy intention appears to be to increase the tax burden on independent schools (and indirectly, those paying school fees) by withdrawing tax relief and then using the surplus generated (estimated at £1.7 billion) to invest in state education. Whilst this goal could be achieved by making a change to either the tax rules or criteria for charitable status, it seems likely that any measures introduced to give effect to the broad policy intention would be replete with anti-avoidance and anti-forestalling measures. There may be little that independent schools can do to escape the impact.

In any event, at this stage Labour’s policy is still too unclear in terms of its scope and application to be able to make any confident predictions or provide meaningful analysis. It's therefore a case of having to wait and see what happens next. Even if Labour wins the next election, it would be surprising to see a policy change of this complexity introduced immediately. A reasonably lengthy period of consultation would be likely to precede implementation.

In due course (when plans/proposals become clearer), it may be appropriate for some schools to consider restructuring. Property and assets could, for example, be held in a separate charity (preserving some of the tax relief), with the delivery of the education being provided by a non-charitable subsidiary. It would be crucial to demonstrate independence between the two entities (with independent boards and appropriate agreements for shared resource) to avoid a perceived connection that may threaten the charitable status of the charity.

For now, concerned schools can take the following steps:

  1. Keep a “watching brief” – as matters develop and more details are revealed, a clearer picture should emerge as to the direction this is taking, what the implications might be and what action may be required.
  2. Make financial plans – consider what impact a loss of tax relief would have and what could be done to steady the ship in the short and long term (building reserves may provide some initial resilience but options for a change in operation to meet the shortfall may also need to be explored).
  3. Prepare for the potential public benefit challenge– review how public benefit is currently delivered (providing a response if charitable credentials come under scrutiny) and think about whether more could be done perhaps in the form of an increase in shared resource or available bursaries (as may be required if Labour raise the bar). It may be that a workable solution can be found through wider collaboration with (and support for) the state education sector. Giving some early thought to how that might be achieved may therefore be worthwhile.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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