Labour’s plan to remove the current exemption from VAT for charitable independent schools is wrong. It fails to deal adequately with the unintended consequences of a policy which owes more to red meat tokenism than an attempt to confront the public benefit issue which is fundamental to an understanding of reform of private schools. It fails to appreciate the unintended consequences of this tax change.
Firstly, a little history. The 2006 Charities Act laid a duty on charities to demonstrate public benefit. This included charitable independent and public schools. The Act, however, failed to provide a robust definition of this benefit. This could have happened but the prime minister, Tony Blair, gave way to lobbying by the Independent Schools Council (ISC) and the definitional problems provided a hospital pass to the Charity Commission. The ISC further challenged the Commission in the Upper Tribunal arguing that education was of demonstrable benefit and no other proof was necessary, ie that education provided at any price passed the test. That view did not prevail but the test was set with a very low bar of public benefit compliance.
Nothing substantive was done in the intervening period. The Commission updated its guidance that charities must demonstrate public benefit, but it still doesn’t define this satisfactorily and certainly doesn't in relation to schools. Nor does the Commission actively inspect against this criteria.
Unintended consequences
Enter Labour with its policy to impose VAT on independent schools. This is a populist policy which might have unintended consequences. What might some of these be? First, the withdrawal of pupils from independent schools may place pressure on the state system. The level of this is difficult to establish. The Institute for Fiscal Studies (IFS) estimates that the imposition of a 15% tax would lead to a 3-7% reduction in public school attendance and additional pressure on state schools. However, the IFS recognises that this is educated guesswork.
Perhaps the more important risk is that the smaller schools may close while the richer, household-name independent schools will not only survive but thrive with higher concentrations of the children of the very rich. The proposed tax increases are focused on VAT as well as charging business rates. There are no plans to remove gift aid, inheritance tax or stamp duty land tax reliefs so rich benefactors will still be able to give tax-efficiently, from which the richest schools will benefit.
It is very difficult to address gift aid and other tax reliefs without addressing the charitable status of the schools, but Labour has placed this in the “too difficult” box. The net result will be a concentration of benefit for the very rich in very well-provided-for independent schools – surely the opposite of a policy which should be designed to increase social mobility? It may even result in some schools weakening the low level of charitable public benefit that they are required to provide, particularly as this goes virtually unpoliced by the regulator.
Any effective policy needs to recognise that independent schools should have to demonstrate higher levels of public benefit in return for charitable tax breaks. Now that it has been established that schools do have to provide public benefit, the bar should be higher than that which follows from the Tribunal decision.
Guidance on public benefit
This may ultimately require legislative change, but in the first instance I would try a different tack. The independent schools regulator (ISC) which is appointed by the education secretary could be charged with drawing up a code of practice to provide more detailed guidance on public benefit in schools.
This could be done in consultation both with the Commission and the ISC. It should require approval by the secretary of state who could ensure that the bar was set high enough. Once established, this code could form part of the overall inspection regime. Failure to meet the standard on, say, three occasions would result in the removal of charitable status and the loss of tax reliefs including gift aid. This would need to be coupled with the legal right for the school to opt out of independent status and join the state sector.
Rather than the crude imposition of removal of a particular tax break, these proposals would preserve choice whilst ensuring that independent schools are required to provide greater levels of public benefit to justify their remaining and wide-ranging charitable tax advantages. Depending on how enhanced public benefit was defined, it could also lead to greater social mobility than either the current situation or Labour’s proposed plans.
Sir Stuart Etherington writes in a personal capacity
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