Private schools Budget VAT raid 'will send 35,000 to state schools'

Rachel Reeves' VAT raid on private schools will send an additional 35,000 children into state education, the government's own economic watchdog said today. 

The chancellor confirmed today she is removing the exemption enjoyed by posh schools like Eton, Winchester and Charterhouse, as well as countless smaller institutions, from January.

They will also lose their business rate relief from April as Labour uses the schools to fund 6,5000 new teaching jobs in the state sector. 

And the Office for Budget Responsibility (OBR) today suggested they well be needed quickly. 

In its Budget outlook today the OBR  forecast the number of students at fee-paying schools would fall by 35,000, driven mainly by fewer pupils enrolling rather than current students being pulled out by struggling parents.

It said the cost of these children joining state schools was £300million. It forecast that the raid on VAT would add £1.7billion per year to Treasury coffers by the end of the Parliament. 

Critics of the plan have argued that the change is coming in too fast and could force some schools to close as parents pull their children out due to higher fees. 

But supporters of the change say it is a long-overdue closure of a loophole that allows wealthy schools to avoid tax. 

The Treasury estimates that 1,040 of the 1,140 private schools registered as charities to obtain VAT relief will lose it. In total there are around 2,440 private schools in England. 

It said it expected many to 'absorb a significant portion of their new VAT liability through various means', but the OBR said it expects two-thirds to be passed on to  parents, with the rest absorbed by cuts to services. 

There are also fears of the impact on special needs schools, military children, and the effect of extra pupils entering the state system in the middle of the academic year.

However the MoD and Foreign and Commonwealth Office will increase the amount it gives out in the Continuation of Education Allowance (CEA) to cover the expected cost increase. 

Currently, independent schools do not have to charge 20 per cent VAT on their fees because there is an exemption for the supply of education.

The French and German ambassadors to the UK have also called for international pupils to be excluded from the plans. 

Ms Reeves told the Commons: '94 per cent of children in the UK attend state schools. To provide the highest quality of support and teaching that they deserve, we will introduce VAT on private school fees from January 2025 and we will shortly introduce legislation to remove their business rates relief from April 2025, too.

'We said in our manifesto that these changes, alongside our measures to tackle tax avoidance, would bring in £8.5billion by the final year of the forecast.

'I can confirm today that they will in fact raise over £9billion to support our public services and restore our public finances.

'That is a promise made and a promise fulfilled.'

But the OBR noted: 'We assume that the elasticity will be lower for existing students, as parents will be more reluctant to disrupt their education, than for prospective future new students.

'Overall, the costing estimates that as a result of the policy in the steady state there will be around 35,000 (6 per cent) fewer private school pupils, reflecting both leavers and, primarily, fewer new joiners.

'The costing of this measure does not directly include any additional government spending for the cost of educating pupils who move to the state sector. Such costs would be included in spending allocations made by the government at spending reviews. 

'However, the cost of 35,000 additional state sector pupils would be around £0.3 billion, based on a £7,690 per pupil cost in England.

'The actual additional cost to the Government would depend on a wider set of factors. These include overall trends in total pupil numbers and the ability of state schools to absorb additional pupils from the private sector, which is likely to vary across regions. 

'The changes could also affect costs to local authorities related to the provision of education for pupils with Education, Health and Care Plans.'

At the weekend it was revealed more than 100,000 children with special needs will be hit by the VAT change. 

Education secretary Bridget Phillipson said Labour was determined to press ahead to fund additional teachers in state schools.

She said that only the small minority of special needs children with a formal education health and care plan (EHCP) statement would be spared the hike.

But the designation, handed out by local authorities, covers fewer than 8,000 of the estimated 111,000 children with special needs taught in private schools, whose parents face a potential 20 per cent rise in fees from January. 

Health Secretary Wes Streeting yesterday said private schools have the means to mitigate against the risk of children with special educational needs being priced out by tax rises.

In response to concerns about how raising tax on private schools will affect their provision to pupils with special educational needs, Wes Streeting told LBC: 'Children with statements of special educational needs and disabilities will be exempt.'

Pushed on how this will work for children who do not have that statement, Mr Streeting said independent schools have the means to deal with those situations.

'Firstly, I'd say the statement is available to children and young people and their parents in that situation,' he commented.

'I'd also say to independent schools, they have the means. They have hyped up their fees with inflation-busting increases for well over a decade and I'm sure they can take steps to mitigate against children being forced to drop out.'