Keir Starmer could be forced to give millions back to private schools under VAT ‘loophole’

Private schools face paying VAT on fees – but headteachers already exploring ways to cut their bills in blow to Labour’s plan

Sir Keir Starmer could be forced to give private schools millions of pounds in a VAT refund if his new plans to scrap the tax break go ahead.

Potentially tens of millions of pounds would be diverted to Rishi Sunak’s school Winchester and other public schools as the VAT would allow them a loophole to get tax returns from bills dating back ten years.

The policy was held up as one major way that Labour would fund its investments in the crippled state school system, but tax experts warned a series of loopholes threatens to undermine its goal and reward public schools at taxpayers’ expense.

School leaders have told The Independent they are exploring the legitimate avenues which could exempt them from VAT as they bid to reduce the burden on parents and keep their organisations afloat. They include:

• Reclaiming VAT from large building and maintenance projects up to 10 years old
• Making breakfast and after-school clubs exempt under HM Revenue and Customs (HMRC) “welfare service” criteria
• Reduced VAT on full-time boarders by classifying the service as accommodation under HMRC exemptions

Under the current system, fees at the country’s 2,600 fee-paying schools are exempt from VAT. But Labour wants to remove the “unfair tax breaks”, including ending business rates relief, to raise money for state schools.

The party leans on a report by the Institute for Fiscal Studies (IFS), published in July, which estimates £1.7bn could be raised from imposing VAT and ending rates relief.

But there could be loopholes in the policy yet to be drawn up, including private schools being able to reclaim the tax on building and refurbishment projects costing more than £250,000 up to 10 years old.

This is because once the 20 per cent VAT is applied to fees at a school it could claim back the tax on large projects under the capital goods scheme, like any other business, said Kevin Hall, tax specialist at Wright Hassall.

If the policy came into force in 2025, and a school paid £10m plus VAT for a new campus in 2020, it should be able to recover five years of VAT from 2025 to 2029; up to £1m, in £200,000 annual instalments.

“This isn’t tax evasion, no-one is going to break the law – people will think creatively about what they offer,” said Christine Cunniffe, principal of LVS Ascot independent school in Berkshire, managed by the Licensed Trade Charity.

The school has spent a significant amount on maintenance projects in the past 10 years and is looking to see if it could reclaim the VAT.

Magdalen College School has spent around £8m on projects in recent years – schemes it could claim VAT back on (Magdalen College School)

She added: “The more we can claim back on VAT the more it will reduce the impact it [the VAT charges] will have on the school and lower impact we will have to pass on to parents.”

At Magdalen College School in Oxford, leaders have spent around £8m on recent projects, including a new sixth form centre and a refurbishment of the site kitchen.

Master Helen Pike told The Independent the school would claim back on the projects if it could, but said the amount would still not cover many of her 960 students’ school fees, and it was still unclear what it could qualify for.

She said: “There is no impact assessment on this policy – it’s a headline.”

She added: “I have a big problem with VAT because it is a regressive tax. This is going to hit the people who can afford it the least the hardest – the majority of schools don’t have the capacity to absorb the increase.”

Other schools that might be able to claim back on VAT are Harrow School, which is restoring its Grade II-listed Speech Room, and recently raised £3.5m to redevelop a boarding house called the Druries.

And at Winchester College, leaders have invested in a new sports centre set to open on its southern campus this year.

Rachel Reeves reiterated the party’s commitment for VAT at private schools at the Labour Party conference (Getty Images)

However, the “loopholes” may only be applicable for larger private schools which provide boarding, spend money on large building projects and provide activites outside classroom hours, said the Independent Schools Council.

Spokesperson Sarah Cunnane said: “A full impact assessment of the policy is needed, to look at the potential consequences for all schools, but particularly for smaller independent schools who will be hit hardest.”

The private school sector has previously warned that the VAT charge will mean school fees will have to be increased, and it could lead to the closure of some smaller schools with parents unable to afford the cost and instead sending their child to state school.

Independent Schools’ Bursars Association chief executive David Woodgate said: “Schools will be doing everything they can to plan for Labour’s tax on children’s education. Without policy detail, it is difficult for them to do so fully – and impossible to know the full implications for their budgets.”

At the Labour Party conference, shadow chancellor Rachel Reeves reiterated the party’s commitment to force VAT on private schools.

The party has, however, backed down on its initial pledge to strip private schools of their charitable status, which means they can claim gift aid on donations and avoid tax on annual projects if reinvested in education.

The Independent has approached the Labour Party for comment.