A leading think-tank has warned that applying VAT to independent school fees could actually cost, rather than raise, money, and harm underprivileged children.

A new report by the Adam Smith Institute finds that applying VAT to independent school fees could raise no money at all. In a less optimistic scenario, it could end up costing £1.6 billion.

The report also finds that the policy could counter-intuitively harm other children by creating a mass exodus to the already overwhelmed state system, intensifying competition for the country’s best state and grammar schools. It could also reduce bursary and scholarship opportunities for talented youngsters.

A new report by the Adam Smith Institute (ASI) highlights that the IFS’ findings that applying VAT to independent school fees will raise £1.3-£1.5 billion is based on evidence they themselves acknowledge to be ‘thin’ and ‘sparse.’ Under the IFS’ optimistic scenario, only a limited number of parents will no longer be able to afford fees, and will move their children to the state sector.

But the ASI’s research shows that there’s a reasonable chance that many more children will have to migrate to state school.

The report’s author, Maxwell Marlow, has calculated that every parent who earns money, pays tax at a 40% rate, and sends their child to an independent school, generates £28,000 every year for the Exchequer.

On the other hand, if VAT were to be applied, it could actually end up costing money. The ASI’s report looked at many different economic effects that the tax could have, including schools closing down, and teachers and parents leaving the workforce. It found that, in the IFS’ highly optimistic scenario in which 3-7% of children left for the state sector, it could raise a net £1.02 billion. Somewhere between 10-15%, it could raise no money at all. In a 25% migration scenario, which other research has shown may be a possible outcome, it could actually cost the Exchequer £1.6 billion.

The Adam Smith Institute outlines a number of other damaging consequences levying VAT on school fees could have for society and the economy including:

1. State schools could be even more overwhelmed.

We do not know, and cannot know, where exactly in the country children will be leaving for the state sector. There are significant concerns about the ability of local authorities and schools to plan for these unpredictable outcomes.

2. Teachers and support staff could lose their jobs.

71% of school fees are spent on staff costs- if schools have to make cuts, they will most likely have to make staff redundant or cut their pay. Under the IFS’ optimistic scenario where 5% of children migrate to the state sector, we could (for example) see 5,150 teachers made redundant.

3. It could counterintuitively have a negative effect on social mobility.

If lots of children are financially pushed out of their independent schools, this could intensify competition for the country’s best state and grammar schools, reducing opportunities for talented and less-well off pupils, and driving up local house prices near these schools. If independent schools have to cut costs, this could mean that they reduce bursary and scholarship opportunities.

The ASI further notes that, in 2015, Greece applied a 23% VAT charge on independent school fees. Many of the things the ASI warns about in its paper actually happened- schools closed, teachers were made redundant, and the state sector was overwhelmed and faced huge teacher shortages.

Maxwell Marlow, Director of Research at the Adam Smith Institute, and report author, said:

“Britain's independent schools are good for the economy- taxpaying parents who send their children to one are removing extra costs and burdens from the state sector, and are contributing to public finances.

But applying VAT to school fees puts all this at risk, and counter-intuitively may not raise any money at all. In fact, this might actually cost taxpayers.

Our new report shows that, not only is there a chance it won’t raise money for state schools, it could harm underprivileged children by further overwhelming the already struggling state sector, reducing bursary and scholarship opportunities for talented youngsters, and pushing others out of popular state and grammar schools. And we risk staff redundancies and the closure of small, local independent schools who cannot absorb the costs.

Greece is already suffering the numerous economic and social consequences of applying VAT to school fees we warn about in this paper. We urge policymakers to exercise caution."

For further comments or to arrange an interview, contact emily@adamsmith.org | 0758 477 8207.

The paper is available here: www.adamsmith.org/research/short-term-thinking-analysing-the-effect-of-applying-vat-to-school-fees.

Maxwell Marlow is the Director of Research at the Adam Smith Institute.

The Adam Smith Institute is a free market think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

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