How to fight back against Labour’s attack on private school fees

For parents of children at fee paying schools, this is a worrying time. Labour is now in power and it seems only a matter of time until it introduces its commitment to apply VAT on private school fees.

The vast majority of parents make major sacrifices to give their children the advantages of a private education and an additional 20pc on fees will be too much for some. In my past live Q&A sessions, Telegraph readers have been asking what, if anything, can be done to reduce the impact of the fee increases.

One possibility is that the VAT charge may not apply to all fees. For example, if it is only applied to the educational content then boarding fees, school trips and other extracurricular activities may remain VAT free. In addition, some school expenditure may be on items that carry VAT, such as construction works.

If fees become VAT standard rated, the school should be able to recover that VAT element involved. In addition, a few schools may be able to absorb some of the additional costs or possibly phase in fee increases by stages.

However, the main question that readers are asking is whether VAT could be saved by paying fees in advance of the next election.

The key here is the application of the VAT “tax point” rules. That is the point at which businesses have to enter the transaction in its VAT records and on which they account to HMRC for any tax due. With goods, the tax point is the earlier of the date of the transfer of the goods or the date of payment, although this can be up to 14 days later if an invoice is then issued.

The rule for services is more complicated because the provision of services can apply over a long period of time. In the case of education, this is typically over a complete academic year. Nevertheless, the tax point is again the earlier of the supply of the services and the date of payment. This is the way the legislation is phrased for continuous services and it is supported by the HMRC guidance here and here.

The issue is how to define the service being provided. This will come down to the specific terms of the agreement between the parents and the school. In theory, this could apply to more than one academic year but that is likely to be complicated by changes in the curriculum and perhaps choices made by the children or parents over this period. The school would have to agree to this arrangement and legal advice would be essential.

There is also the risk of falling foul of “anti-forestalling” legislation, which Labour has said it would introduce. This would backdate the application of the VAT charge to the time of the announcement rather than the time the policy comes into effect, much as George Osborne did in 2010 when he announced an increase in the VAT rate.

Also possible – but far less likely I suspect, given Rachel Reeves has said the tax would not apply retrospectively – would be the use of legislation to apply the change to an earlier date. I say this notwithstanding the use of such retrospective legislation over the so-called loan charge.

It may, therefore, be possible to reach a formal agreement with the school to pay fees in advance and thereby avoid the VAT charge in part. This is not without complications. The school should have unfettered use of the money. Many schools will suffer financially and could fail. In these circumstances the parents would be at risk of losing the benefit of the payments made.

There is also the question of how parents raise the additional money. If bank loans are required, the cost will offset some of the planned benefits. But schools may decide to agree a discount on the fees for the early payment. As with any complicated issue like this, it is best to have a discussion with the school and plan well in advance.

The Labour party says that the measure will raise £1.51bn a year that they can spend on improving standards in the state school system, but this can only be a very broad estimate.

Schools will do what they can to absorb the additional costs but there will be limits and they will also be concerned that pupil numbers will fall.

I know that parents will do all they can to avoid disrupting their children’s education but many will move them to the state system. This will put additional costs on the public sector education budget. Some studies have played down the impact of this, but nobody really knows. I also question whether there will be the additional places available in the state system to absorb this additional demand.

My guess is that it will not be so much a sudden drop in pupil numbers but of parents deciding not to enter the private system at all. There may also be a drop off when pupils would otherwise be moving into the sixth form. It is possible that nobody will benefit from this essentially political move.