Independent Schools: VAT

Baroness Smith of Malvern Excerpts

Thursday 17th October 2024 Lords Chamber

[The Minister of State, Department for Education (Baroness Smith of Malvern) (Lab)]

I thank the noble Lord, Lord Lexden, for securing this debate and providing another opportunity for noble Lords to discuss the implications of tax changes affecting private schools. I welcome the speed with which those contributing to the debate have rattled through their questions and I will do my best to respond to the points that have been raised. Where I am not able to do that, I will write to noble Lords with those responses, although given that we had three and a half hours on this topic relatively recently I am not sure that any new issues were raised in this debate. That does not mean that I do not recognise the strong feelings that have been expressed.

For the Government, the key implications are to secure the funding necessary to improve the state-funded schools that educate 93% of our children. Our state-funded school system includes more than 20,000 schools in England educating almost 8.5 million pupils. It is to this system that most parents and children must turn to meet their high aspirations—they do not have a choice. It is to this system that any parent can turn if they need a school place for their child—this includes parents of children who have previously attended a private school or may do so in the future. It is this system which already supports the vast majority of children with special educational needs. Most children with education, health and care plans are already educated in mainstream state-funded schools. It is these schools that provide a safe, supportive and nurturing environment, and high-quality education, for most children. It is for all the parents who have no choice that we must focus our efforts on these state-funded schools—this is where our priorities lie.

Ending the tax breaks on VAT and business rates for private schools is a tough but necessary decision. It will generate additional funding—I am afraid I disagree with the noble Lord, Lord Bilimoria—to help improve services, including the Government’s commitments to improve state-funded schools, which includes expanding early years childcare for all, opening 3,000 new nurseries, rolling out breakfast clubs to all primary schools, recruiting 6,500 new teachers, and improving teacher and head teacher training as part of restoring teaching to the career of choice for our best graduates.

It is strange to argue that “£1.5 billion is not that much money and therefore we should not pursue this particular route”. It perhaps explains how we ended up in the fiscal mess that we have done that so many noble Lords opposite are so flip about £1.5 billion.

Many noble Lords expressed concern about the timing of this provision. It was, of course, included in the plans of this Government when in opposition, and was for some time. It was in our manifesto. We have had a consultation on the issue. I and my colleagues in the DfE and the Treasury have held many meetings with concerned groups to listen to concerns and respond to them.

VAT will apply to tuition and boarding fees charged by private schools. I should say to my noble friend Lord Campbell-Savours that VAT will not apply to boarding fees in a state boarding school for terms starting on or after 1 January 2025. It is right that we end tax breaks as soon as possible to raise the funding needed to deliver our education priorities.

HMRC will be providing support to schools. Schools will be able to register for VAT following the Budget on 30 October. The Government recognise that, for many private schools, this will be the first time they have needed to register for VAT, which is why there is already bespoke guidance for schools. There will be online support sessions over the coming months to support schools to ensure that the registration process is as smooth as possible for them. That will help schools to be ready to charge VAT correctly and to remit it to HMRC.

I was clear the last time we spoke that the Treasury is assessing the impact of these changes in advance of the Budget. It will publish a tax information and impact assessment, including an equality assessment. The noble Lord, Lord Shinkwin, wanted an assurance that that would include special educational needs, and it will. On the impact, it is worth pointing out this change does not necessarily mean that parents will automatically face 20% higher fees. The Government expect private schools, as all businesses have to when taxes change, to take steps to minimise fee increases, including through their ability to reclaim VAT that they incur in supplying education and boarding, and, like state schools—which have seen considerably smaller increases in the resources available to them than the increases in fees for private schools—to make savings where necessary.

I know noble Lords feel very passionately about special educational needs, and so do the Government. That is why my right honourable friend the Secretary of State has made improvements in special educational needs provision fundamental in our department. We are not willing to accept that the only way we can deal with special educational needs is by providing an opt-out for a small number of pupils. We have sought to ensure that these changes do not disadvantage pupils who genuinely need provision unavailable in the state sector. Pupils who need a local authority-funded place in a private school, including those with local authority-funded education, health and care plans, will not be impacted by the changes because local authorities are able to reclaim the VAT that will be charged.

Most children with special educational needs attend mainstream state-funded schools. Most parents do not have the option to secure support within a private school. It is right that, where parents have the resource to choose a private school place for their child, for any reason—I understand why parents might choose to do that, given the parlous state that special educational needs provision in our schools was left in by the previous Government—they should pay their fair share to support a good state-funded education for every child. Any child with SEN who needs a state-funded place can apply to their local authority. All state-funded schools are used to supporting the needs of children with SEN. With the actions of this Government, I hope they will be even better at doing that in years to come. Parents of children with needs that cannot be met by their current school can request an education, health and care assessment, which can lead to an education, health and care plan. As I have already pointed out, if it identifies that a place in a private school is necessary, that will not cost the parents.

Once again, noble Lords have rightly identified the considerable contribution made to our education and creative sectors by music and dance schools, and choral schools. The Government have been engaged in discussions with schools providing that service. It is because we recognise the enormous contribution made by the eight schools in the music and dance scheme that we already provide access to that provision for talented young people on a means-tested basis. This allows low-income families to access that specialist education, where they have the enormous talent needed to do that.

The right way to manage this is to consider the support that the department provides through our music and dance scheme, rather than through any tax exemption, given the simplification in this system that the Treasury has rightly set as a principle. I know that the department will consider these issues following the upcoming spending review, as will the Ministry of Defence and the Foreign, Commonwealth and Development Office when looking at the continuity of education allowances provided to eligible officials and service personnel.

Once again noble Lords raised the extent to which pupils will transfer out of private schools. There are always some pupils who move between the private and state-funded school sectors. Approximately 50 mainstream private schools close every year, for a range of reasons. Where schools close, pupils may transfer to another private school or move into the state sector. I am sorry, but I fundamentally disagree with the analysis of my noble friend Lord Hacking; all the evidence appears to suggest that the number of pupils who might switch schools following these changes represents a very small proportion of overall pupil numbers in the state sector, and any displacement is likely to take place over several years. The IFS, by the way, is sticking with its figure that there will be a small impact in pupils moving.

Given that private schools have increased their fees— I made this point in a previous debate—by 20% in real terms over recent years, yet we have seen few students moving, it is not unreasonable to suggest that there is an inelastic demand for private schools, and that we will not see the scare stories about pupils having to move which have been part of this debate. All children of compulsory school age are entitled to a state-funded school place if they need one. I know that moving schools can be challenging but, where that happens, local authorities and schools already have well-established processes in place to support pupils moving between them.

I can tell the noble Baroness, Lady Fraser, that Scotland will be covered by the impact assessment.

Private schools will remain a part of our education system. Most pupils who are currently privately educated will continue to be privately educated. For the small number of parents who choose to move their children from the private to the state sector, we will make sure that there is a place for them. However, most children are already educated in the state sector, and that is where we must target our support and focus our efforts and resources. That is what we will do.