Independent Schools: VAT Exemption

Baroness Smith of Malvern Excerpts

Thursday 5th September 2024 Lords Chamber

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

My Lords, I thank the noble Lord, Lord Lexden, for opening this debate, and I am grateful for the many contributions. I will do my best to respond to as many as I can in the time available, and I undertake to write to noble Lords on those that I am not able to get to.

I put on record that I share the view of the noble Lord, Lord Lexden, that there are many excellent schools in the private sector, as there are in the public sector. My mother taught at one of them in Malvern. I spent time during my teenage years washing up in the kitchen of another. I know that excellent education is provided in those schools, which is why the department will continue to have, I hope, an important and constructive relationship with the ISC and the ISA in thinking through the whole range of issues that relate to independent schools. But some people listening to this debate might have thought that the intention was to completely do away with the private sector. The noble Lord, Lord Naseby, described how independent education has been with us for centuries. It will be with us for centuries more. People will continue to have a choice of whether they want to educate their child in a state or a private school. I will return to that in a moment.

I was a teacher in one of the excellent state schools which educate more than nine in 10 of our children, and I now discover that I attended the same state school as the noble Lord, Lord Hampton. So I will be crystal clear about the focus and priority for this Government. We are determined in government—on these Benches and in the other place—to drive up standards in those schools for the overwhelming majority of the children in this country, so that they may receive the opportunities that, too often, have been the preserve of the rich and the lucky, as many noble Lords have demonstrated.

There has been an assumption from some contributors that only some parents have aspirations for their children. As the mother of two children, of course I understand the absolute passion of parents to do the best for their children—to find the place that suits their children the best. That is not confined to people who choose to educate their children in private schools and are able to. As my noble friends Lord Davies and Lord Griffiths made clear, it is an aspiration shared by many parents around the country and one that this Government are determined to meet. Private education is not an option—

[Lord Forsyth of Drumlean (Con)]

Will the Minister give way?

[Baroness Smith of Malvern (Lab)]

No—the noble Lord has had the opportunity to have his say, and I want to respond to as many of the points that have been made as possible.

Private education is not an option for most of those people and, unlike the last Government, we will not build public policy around the expectation that public services will fail our children. Most parents need local state-funded schools to support them in meeting these aspirations. It is therefore right for the Government to focus on improving those schools—a public good that will benefit all of us.

Several noble Lords, including the noble Lord, Lord Forsyth, have identified the significance of education and the contribution that investment in that education makes. My noble friend Lady Ramsey identified the gap between that investment provided to our state schools and that provided to private schools: there was a 40% gap in 2010 and there is a 90% gap now. The noble Lord, Lord Bilimoria, said that we should spend more on state schools. The noble Lord, Lord Winston, talked about the deprivation and impact on aspiration of those who do not get the education that they deserve, and argued for more investment. That is precisely what this Government want to do—but we arrived into government to discover a £22 billion black hole and, unlike the previous Government, we are determined to make that investment in our schools but make it on a sustainable basis whereby we can outline where that money is coming from. That is why ending the tax breaks on VAT and business rates for private schools is a tough but necessary decision. It will generate additional funding to help to improve public services, including the Government’s commitments relating to education and young people.

VAT will apply to tuition and boarding fees charged by private schools for terms starting on or after 1 January 2025. I assure noble Lords that the impact of those changes has been assessed and that the Office for Budget Responsibility will certify the Government’s costings for those measures at the Budget.

Several noble Lords have asked what the impact will be of introducing the change on 1 January. We are impatient in this Government to ensure that we can start funding the improvements that so many noble Lords have argued for—that is one reason. It is also worth while, when thinking about the impact of the changes, to recognise that, for many pupils, the change should not mean that parents will automatically face 20% higher fees—nor do we expect pupils to move immediately. Most of the analysis suggests that that will not happen to the extent that pupils move at all—and I shall return to that point.

The Government expect private schools to take steps to minimise fee increases, including through reclaiming the VAT that they incur in supplying education and boarding—so the estimate is that the real VAT impact will be 15%. We think that that will happen, because we have seen what has happened in recent times. There have been above-inflation increases in private school fees for very many years. There has been a 55% increase since 2003 and a 20% increase since 2010, and there has not been a large exodus of pupils from those schools, which of course suggests an inelastic demand for private school places. It is reasonable for the Government to model and think about future impact based on previous experience.

We have provided considerable information around the proposal—both in the technical note and the draft VAT legislation. The technical consultation remains open until 15 September, and I encourage those who are interested to contribute to that as well.

The noble Baroness, Lady Monckton, raised a specific issue about the support to implement the VAT regime. The Government recognise that this will be the first time for many schools that they will need to register for VAT, and HMRC will publish bespoke guidance. It will also contact private schools directly with information about support sessions that will help them to go through this process.

The noble Lord, Lord Lucas, and the noble Baroness, Lady Barran, raised issues about what potential there is to raise revenue here. This will of course be part of the OBR assessment that will be published alongside the Finance Bill at the time of the Budget, which will enable us to consider the broad impact of this—not just the taxation impact but the broader cost impact as well. The IFS estimates that it will raise an extra £1.3 billion to £1.5 billion per year in the medium to long term. As I say, these points will be certified by the Office for Budget Responsibility. The Treasury is doing an economic analysis of the impact of this policy change and the interaction with other behaviours that might come about because of the introduction of VAT.

While there will be more detailed information about the revenue raised by this measure, this seems like a reasonable estimate of the revenue that will be raised. Unlike some other noble Lords, I do not see that amount of money as being inconsiderable. Of course there is more that I would certainly hope that we as a Government will be able to find to invest in education, as previous Labour Governments have, but this is an important contribution to some very important changes that we wish to make.

The noble Baroness, Lady Finlay, asked about the devolution consequences of VAT receipts. I assure her that additional funding provided for schools in England will be matched in the devolved Administrations in line with the Barnett formula.

I move to the issue of special educational needs. Understandably, this has been raised by many noble Lords this afternoon, in particular the noble Lord, Lord Shinkwin, in his contribution about the enormous significance of the independent special school that he identified, and the noble Baroness, Lady Monckton. Once again, I say that there is excellence in the private sector in independent special schools. Such excellence is the reason why, when there is a particular need for a pupil educated in the state sector to benefit from that excellence and its provisions for their education, health and care plan, that place is paid for by the local authority. The local authority will have the ability to reclaim the VAT placed on that fee, so there will be no impact on the parents of those children with the most acute special educational needs. I can also confirm, in answer to questions from the noble Baroness, Lady Barran, that further education institutions will not be affected by these provisions, and non-maintained special schools are exempt as well.

I can understand the concern of parents—given what I said previously about everybody’s aspiration—particularly where their children have special educational needs that have not been met or assessed through an education, health and care plan, in wanting to think about the best place for their children to go, but we cannot organise policy on the basis of the broken state of public provision for children with specific learning needs. This is a government failure long in the making. I share the passion of the noble Lord, Lord Addington, about the way in which the current system is working. In fact, the former Secretary of State for Education, after 13 years of her party’s approach to special educational needs, rightly described this issue as “lose, lose, lose”. One reason for needing the additional investment that this provision will provide is to help begin turning round the special educational needs system, which I wholly agree currently fails too many of our students.

In response to those who have asked for further discussions about the position of independent special schools, we are happy to continue having those conversations. However, I reiterate that, for those children with acute needs who are being educated in independent special schools with an EHCP, there will be no impact on them from this VAT change. We will actively listen to the questions and concerns being raised and will meet with our colleagues.

Several noble Lords, including my noble friend Lord Hacking and the noble Baroness, Lady Barran, raised the impact of these changes on state schools. The Government believe that the number of pupils who may switch schools as a result of these changes represent a very small proportion of overall pupil numbers in the state sector. As I have already outlined, those parents paying to send their children to private schools have already experienced considerably above-inflation increases and have not chosen to move their children, but we will of course monitor local demand to ensure that appropriate measures are taken to increase capacity where required.

I take the noble Baroness’s point about the differential impact, potentially, on different parts of the country, and DfE officials will monitor that very carefully, but children move between the private and state sectors every year and local authorities and schools have processes in place to support their transition. In terms of places, of course we are going through a period of demographic change. Even if the pupil displacement is above the estimate of the independent Institute for Fiscal Studies, which suggested that up to 40,000 might move over a period of time, that is still likely to represent less than 1% of the more than 9 million total UK state school pupils. The latest figures published showed that 83% of primary schools and 77% of secondary schools have one or more unfilled places.

I turn to the issues raised by the noble Baronesses, Lady Fraser and Lady Bull, about the enormously important contribution of Music and Dance Scheme schools. We can all see, in the talent of the noble Baroness, Lady Bull, the significance of those schools. We are continuing to engage with the schools currently within the Music and Dance Scheme project. As has already been outlined by noble Lords—and I wholly agree that, for the good of all of us, we need low-income families to be able to send their children to those schools when they have that talent—the children of parents who cannot afford the fees are funded by the Music and Dance Scheme. We will consider, in the light of the VAT charges, how and whether we can change that scheme to compensate for the VAT issue. We are willing to carry on talking, as we have done, to representatives from the Music and Dance Scheme schools about the impact of this change of policy. The same goes, as the noble Earl, Lord Clancarty, raised, for the dance and drama awards, where we will also continue having discussions that we have already started with the schools in that category.

Noble Lords, including the noble Lord, Lord Kempsell, the noble Baroness, Lady Garden, and the noble Earl, Lord Devon, raised the issue of military families. I reiterate that the Government recognise the enormous sacrifices our military families make; of course, that is why the Ministry of Defence and the Foreign and Commonwealth Office provide the continuity of education allowance to eligible officials and service personnel. It is also worth pointing out that very many military personnel send their children to state schools and want to benefit from the improvements that will happen in those state schools. However, the Government will monitor closely the impact of these policy changes on affected military and diplomatic families. The upcoming spending review is the right time to consider any changes to this scheme, but we will continue to look very carefully at that.

Several noble Lords talked about the contribution of private schools, and the defence was that because they contribute through partnerships with state schools or by providing bursaries, we should not interfere with that. I welcome the contributions private schools make to cross-sector partnerships, as outlined by the noble Lord, Lord Maude, my noble friend Lord Winston and the noble and learned Lord, Lord Etherton; I hope that will continue. Certainly, for schools with charitable status, as charities, and in line with legislation passed by the last Labour Government, they must continue to demonstrate public benefit. I hope they will continue to do that through the provision of a small number of means-tested bursaries and through partnership with local state schools. I think they will continue to demonstrate their broad public benefit through those wider contributions.

On the legal position, raised by the noble Lord, Lord Alton—channelling the noble Lord, Lord Pannick —and my noble friend Lord Hacking, I am not going to speculate on the outcome of the ongoing technical consultation. However, legal considerations have been incorporated into the process, as is standard for all legislative changes, and we are confident that the measures are compatible with the Human Rights Act 1998.

I know I have not managed to cover all of the wide range of issues that have been raised, and I undertake to write to noble Lords, but I assure the House that private schools will remain part of our education system. The choice to send your child there will remain. However, most children are educated in the state sector and that is where we must target our support and resources most. We will work closely with schools and local authorities to make the implementation of the new tax rules as smooth as possible. I thank noble Lords for their contributions this afternoon.

[Lord Hacking (Lab)]

Before my noble friend sits down—

[Baroness Smith of Malvern (Lab)]

I have sat down.

[Lord Hacking (Lab)]

These are therefore imaginary words being used in the House of Lords. My noble friend was kind enough to mention the first protocol of the European Convention on Human Rights, but I would be very grateful if she could send a letter, particularly to myself and the noble Lord, Lord Alton, on the advice the Government are receiving relating to that very important issue. I remind her that it was a Labour Government, in 1998, who brought that provision into our law under the Human Rights Act 1998.

[Baroness Smith of Malvern (Lab)]

My noble friend is right, and I am very proud of that. Our position, as I said, has been tested in the legal advice in the consideration of these changes. Our view is that being charged at the standard rate of VAT paid by millions of businesses across the UK is not discriminatory and is clearly proportionate to the objective of better funding for state schools. To the extent that I am able, I will certainly ensure that I write further about that issue to my noble friend and to others.

[Baroness Butler-Sloss (CB)]

May I ask the Minster, before she sits down, about the children taking GCSEs and A-levels? What are the Government going to do to help them where there will be changes in the programmes they are doing?

--- Later in debate ---

[Baroness Smith of Malvern (Lab)]

I apologise to the noble and learned Baroness: with respect, I was showing my inexperience in this House and asking my Whip about the situation. If the House will allow, could the noble and learned Baroness repeat her question?

[Baroness Butler-Sloss (CB)]

I was asking about children taking GCSEs and A-levels when this starts in January.

[Baroness Smith of Malvern (Lab)]

I think I covered that point in talking about the arguments for introducing this in January, while also making it clear that it is the Government’s view that introducing the VAT liability does not necessarily imply that a sudden increase in bills will arise; nor does it imply that the whole of that increase in VAT will be passed on in fees. In fact, if we look at the behaviour in the private school sector, we see that, despite very large increases in fees—well above inflation—parents have tended, where they have made that choice, to keep their children in the private sector anyway, and I am sure that the vast majority of parents will continue to do that. The analysis, including that carried out by the Institute for Fiscal Studies, suggests that, even if there is going to be a movement of pupils away from the private sector, that will tend to be not immediately in January but over a much longer period, and I imagine that will be the approach that most parents take.

[Lord Forsyth of Drumlean (Con)]

Before the noble Baroness sits down—since she is now giving way—she made a very passionate point about how all parents have aspirations for their children, wherever they are educated. She has not explained why she wants to tax that aspiration.

[Baroness Smith of Malvern (Lab)]

I explained that, to improve state education—where 93% of our pupils are educated—and meet the aspirations of the parents who send their children to those schools, we need to find the funding. Unlike the previous Government, we are not willing to make uncosted commitments or run this country’s fiscal position into the ground. We are not willing to risk our pensions and our reputation as a fiscally prudent country in the way that the last Government were. Therefore, to make and deliver the range of commitments we have set out, we will be clear about where that money is coming from. This is part of the honesty and transparency around fiscal prudence that the last Government so patently failed to deliver.