The future of independent schools

Labour’s policy

In broad terms the intention appears to be to increase the tax burden on independent schools (and indirectly, those paying school fees) by withdrawing tax relief and then using the surplus generated (estimated at £1.7 billion) to invest in state education. This goal could be achieved by making a change to either the tax rules or criteria for charitable status. 

Restricting tax relief

Funds could be raised from independent schools through any of the following:

• Business rates relief - the most valuable relief available to the sector, which allows Charities to claim a mandatory 80% relief (as well as an additional discretionary 20% relief) on non-domestic rates when a property is used for charitable purposes. Labour could choose to follow Scotland’s example and take away this relief for all independent schools. 
• Corporation Tax and Income Tax - both regimes could be extended to encompass both primary purpose trading (ie activity that also furthers the charitable aim to advance education) and investment income/gains.
• VAT - an imposition of VAT on school fees or special “levy” could be introduced
• Stamp taxes - liabilities could be created for the acquisition of property or equities

Restricting tax relief may seem the simple option. The fact that much of the relief is so closely entwined with charitable status, however, would make it a difficult knot to untangle.

Allowing independent schools to retain charitable status but then restricting what they can benefit from would not only increase complexity, it would also potentially allow arbitrary unfairness to creep in to what is currently a unified system of relief.

Restricting Charitable Status

Withdrawing charity status for independent schools altogether would avoid the complication of having a two tier tax regime.

Complication would instead lie in the drafting of the legislation designed to do the extracting. Care would be needed to effectively catch the “target” schools without inadvertently sweeping up others (such as special need schools) in the same net.

Instead of defining the type of independent school that may be considered charitable, Labour could seek to restrict those able to achieve and maintain charity status by raising the bar when it comes to satisfying the “public benefit requirement” (all charities must be able to show they benefit the general public or a sufficient section of it).

Again, this would not be without challenges:

1. It would increase pressure on the Charity Commission (the “CC”) as the regulator responsible for policing public benefit, making it difficult to manage consistently and fairly
2. The last time this was tried in 2011 (when an attempt was made to impose requirements on schools for demonstrating public benefit) the Independent Schools Council took the CC to court and won the argument, giving schools greater freedom to decide how to deliver public benefit in each individual case.

What next for independent schools?

Adjusting the tax treatment of independent schools may be the least complicated way for Labour to fulfill its pledge, which suggests it would be the most likely outcome (depending on the outcome of the next election).   

At this stage, however, Labour’s policy is currently too unclear in terms of its scope and application to be able to make any confident predictions or provide meaningful analysis.

It is therefore a case of having to wait and see what happens next and there may yet be some time to wait. Even if Labour wins the next election, it would be surprising to see a policy change of this complexity introduced immediately. A reasonably lengthy period of consultation would be likely to precede implementation.

Assuming any new legislation, once introduced, would also be replete with anti-avoidance and anti-forestalling legislation to prevent the main policy aims being frustrated, there may be little that that can be done in advance to prevent or minimise the impact it will have on independent school operation.

In due course (when plans/proposals become clearer), however, it may be appropriate for some schools to consider restructuring. Property and assets could, for example, be held in a separate charity (preserving some of the tax relief), with the delivery of the education being provided by a non-charitable subsidiary. It would be crucial to demonstrate independence between the 2 entities (with independent boards and appropriate agreements for shared resource) to avoid a perceived connection that may threaten the charitable status of the charity.

For now, concerned schools can take the following steps:

• Keep a “watching brief” – as matters develop and more details are revealed, a clearer picture should emerge as to the direction this is taking, what the implications might be and what action may be required.
• Make financial plans – consider what impact a loss of tax relief would have and what could be done to steady the ship in the short and long term (building reserves may provide some initial resilience but options for a change in operation to meet the shortfall may also need to be explored).
• Prepare for the potential public benefit challenge – review how public benefit is currently delivered (providing a response if charitable credentials come under scrutiny) and think about whether more could be done perhaps in the form of an increase in shared resource or available bursaries (as may be required if Labour raise the bar).  It may be that a workable solution can be found through wider collaboration with (and support for) the state education sector. Giving some early thought to how that might be achieved may therefore be worthwhile.
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