Independent Schools: VAT and Business Rates Relief

Damian Hinds Excerpts

Monday 3rd March 2025 Westminster Hall

[Damian Hinds (East Hampshire) (Con)]

As always, it is a great pleasure to see you in the Chair, Mr Vickers.

I thank and commend Mr Beckinsale and the other 114,948 petitioners, including 611 in my constituency of East Hampshire, for bringing this very important subject to Westminster Hall today. After all that we have heard today, we might ask, “Why? Why would the Government do this?” The measure is a revenue-raiser, but in the grand scheme of things it is not the most enormous revenue-raiser. It is already causing all sorts of disruption in children’s education, and there is more disruption ahead. So why are the Government doing it?

I think the answer is fairly straightforward. The Government were genuinely in the market for tax rises, especially tax rises that did not break the rules they had set for themselves on income tax, on VAT and—I say this with a cough—national insurance contributions; and when they looked down the list, this one looked quite popular. It is certainly popular with Labour members and it is very popular with the left wing of the Labour party.

I think the Government thought the measure could be sold quite easily to the British public. They could link it to definable things—to the provision of breakfast clubs, mental health support or recruiting 6,500 teachers. None of those things is new, though. There are already breakfast clubs in thousands of schools supported by state funding. As far as I can tell, this Government’s programme for mental health support continues the previous Government’s programme for mental health support, and recruiting 6,500 teachers to the state sector is a material slowdown compared with the number of teachers recruited in the previous five years.

The Government will have calculated that many schools will absorb the increase; they think that some families might be priced out, but that the number will be relatively minor, and that it will be massively outweighed by the revenue anyway. They also think—we have heard this line so many times from a Government spokesperson—there are so many places that are free and empty in the state sector that pupils can be easily absorbed.

Many Opposition Members think that taxing education is just wrong in principle—we value diversity and believe in the sanctity of parental choice—but from a Labour point of view, given everything I have just listed, it is so far, so good. I think the Government have made five crucial errors. The first is the belief that schools might be able to absorb such a tax increase. Economists know—the one thing we know about the Chancellor is that she is an economist, very definitely; periodically she reminds us—that when we get an increase in an indirect ad valorem tax, that does not get absorbed fully by the producer. It gets shared between the seller and the buyer. With a tax increase of this degree—20% added to the price of a service—that is clearly going to be very difficult for any organisation, but organisations such as schools just do not have those kinds of margins to fall back on to be able to absorb such an increase. To the extent that they can absorb the increase, they can do so only by cutting their service to families, which therefore increases the displacement effect of children from the private sector to the state.

[Alison Taylor]

Does the right hon. Gentleman agree that schools can offset some of the VAT?

[Damian Hinds]

That is what I just said.

[Alison Taylor]

So it is not 20%, then—it is closer, probably, to 15%.

[Damian Hinds]

I am coming to that. I am grateful to the hon. Lady—she can keep teeing me up.

The Government’s second error was to fail to consider the cumulative effect of all the different cost pressures added on to schools; as well as VAT, there are also business rates, which are mentioned in the petition. There is also the increase in the employer contribution for the teachers’ pension scheme—before somebody says it, this was introduced by the previous Government to come in this year—which is material for schools in that scheme. Now, of course, we have employer national insurance contributions as well. The hon. Lady is right that the amount added through VAT would not be quite 20%; it might come down to 15%, but all those other things add cost as well.

The third error the Government made was to ignore the existence of geography. There may well be thousands of places available in the country, but they are utterly worthless from this perspective if they are not in the right places and the right age groups for the children who will be displaced. Overall—this is a great simplification —the effect of the measure in primary schools will be relatively small because there is a lot of capacity in primary schools in not quite all, but almost all, parts of the country. In secondary, though, there are lots of areas—in places like Bristol, Bury, Salford and Surrey—where there just are not enough places to accommodate significant numbers of children being displaced from the private sector.

The Government’s fourth error was to fail to segment the market. By the way, the media do this as well: whenever there is a story about this topic, it is always accompanied by a picture of children in exotic headwear, as though wearing a boater or a top hat represented the only type of private school available. It is true that there is probably plenty of VAT to be had from the parents of boys at Eton, and the elasticity of demand is probably quite low—those famous old schools, by the way, will also benefit disproportionately from being able to reclaim VAT on capital; that is actually a benefit for them—but what the Government have ignored is the existence of another tranche of schools.

For a low-fee faith school, for example, the Exchequer makes somewhere between £500 and £1,000 VAT per child a year, but every one of those children displaced into the state sector will cost £7,000 or more. That figure is higher again when we are talking about children with special educational needs or disabilities, whose parents in many cases have just found a place that can accommodate their child, that can cater to their needs and where their child is happy. In many cases, parents are making huge sacrifices to fund the fees, but they are doing so willingly. For some of them—not all of them—this will push them over the edge; they will not be able to afford it any more. The cost per child for those children in the state sector is that much more.

In extreme cases, parents will be unable to afford to send their children to their school, which might be very expensive, so they will go to the local authority and get an education, health and care plan; and the local authority will deem that they have to go back to the same school, but now the state will be paying, including possibly for their transport.

The fifth error that the Government made was to ignore the effect on specific groups of children and families who we should be seeking to support and encourage, for example through the continuity of education allowance for our armed forces—there has been a partial mitigation on that. There has also been a partial mitigation for the music and dance scheme, which drives forward the talent of tomorrow and our creative industries, but only for families with a household income below £45,000.

As has already been said, this change makes our country an outlier—almost unique in the world in putting a tax on learning. It does not level the field between the state and the private; it makes private schools more exclusive than they were before, and therefore widens the divide. It risks losing teachers from the profession. The biggest effect of all is that it is going to make class sizes in state schools bigger, fill up more state schools and therefore, in the end, make it less likely that parents get their children into the school of their choice.

This has now happened—it happened in January. It is done, but it is not too late for the Minister to say that he will keep an open mind. The Government could review the effects on revenue, the displacement of children, the disruption of education, and the number of extra education, health and care plans after two years of the policy being in place. If it turned out that those effects have not all been as they expected, would they reverse this move?

--- Later in debate ---

[Damian Hinds]

On faith-based education, the Minister is quite right that there are large numbers of faith-based schools in the state sector. However, there are some denominations and particular religious traditions for which there are not large numbers of schools, and whose actually charge fees sometimes considerably below the average cost of a state school place. Does he recognise that there may be a case for an exemption in such cases?

[Torsten Bell]

I recognise the description of the status quo as the right hon. Gentleman describes it, but I reiterate my view and the Government’s view that a state education is suitable for all families of all faiths.

A public petition has decided that we should have today’s debate. On those grounds alone, it is right that we have had it. I recognise many of the points that hon. Members have raised, even if I have attempted to set out why the Government believe that in some cases they are overdone. As we rightly debate the impact of these policies, we must recognise the reason that they have been made: the priority that we must attach to providing extra resources for our state schools—resources that I have not heard a huge number of suggestions for replacing today. These are schools where 94% of our children are educated, and where this Government will deliver an education system fit for all.