The Labour Party is proposing to impose VAT on private school fees. Here are a few notes on the technicalities of such a policy.
- Education, including private tuition, is exempt from VAT. This is enshrined in the European Directive on VAT so couldn’t be changed until Brexit. However, once we have left the EU, the UK would be free to impose VAT at whatever rate it pleased, as long as our exit agreement allows us to. That Labour is suggesting a policy that contravenes EU law is, if nothing else, crossing a Rubicon of sorts.
- The difference between exemption from VAT and zero-rating is important. Generally, where a taxpayer makes exempt supplies, like education, it has to pay VAT in full on things it buys. Where it makes zero-rated supplies, like food, it can claim back the VAT in incurs on its purchases. Thus imposing VAT on school fees is likely to mean private schools can reclaim the VAT they suf6fer on their purchases, reducing the net amount of VAT that the change will raise.
- Many pupils at private schools are from abroad, some 200,000 by some accounts. University and school education of foreign students is treated as an export (as it is foreigners paying us for something we supply). Exports are outside the scope of VAT, since this is supposed to be a tax on domestic consumption. If we impose VAT on private education, we would also need to decide whether to charge VAT to foreign students as well. If we did, it would damage an important and growing export industry. If we didn’t, the yield from the tax would be lower and we would open a divide between UK and non-UK students.
- It is unlikely that many parents will turn to the state system as a result of the VAT rise as private school usage appears to be quite inelastic on price. However, some parents will send their children to state schools, which will both increase the cost of providing state education and reduce the amount of VAT raised from private schools.
In summary, whatever the tax yield that Labour expect from imposing VAT on private school fees, the reality is likely to be a lot less.