Labour’s tax raid on private schools isn’t the money spinner it thinks

Would Labour’s plan to impose VAT on private school fees really raise £1.6 billion, as the party claims? Not according to a research paper by the education think tank EDSK. The £1.6 billion figure is often attributed to the Resolution Foundation, yet the original source, says EDSK, is a paper by the Fabian Society in 2011 – a paper which it says got its figures wrong in several different respects. It started with the assumption that there were, in that year, 628,000 pupils enrolled in independent schools. Yet this government figure did not just include pupils at fee-paying schools, but also children enrolled at academies and city technology schools. These were described as ‘independent’ because they were outside the control of local authorities. Moreover, it included children enrolled in pre-school education. Labour’s plan does not stretch to charging VAT on nursery provision.

A correct, updated figure for the number of pupils currently enrolled at private schools is 525,786. If you assume that pupils numbers would fall away by five per cent as a result of the imposition of VAT on fees – a figure assumed by the Labour party – that would come down to just under 500,000. But some believe that pupil numbers would fall away by 25 per cent, bringing pupil numbers down to 394,000.     

The trouble is that every pupil who switches from the independent to the state sector hits Labour’s expected revenue figure with a double whammy: firstly from the lost VAT income and secondly from the extra money the government has to spend on educating the child in the state sector. Put these two effects together, assume a drop-off in pupil numbers of 25 per cent, and the initiative raises £926 million in extra VAT revenue – almost entirely cancelled out by the extra £907 million which the government would have to spend in providing extra places at state schools. If the drop-off rate exceeded 25 per cent, the fiscal effect would move rapidly into the negative.

The EDSK does not claim that a 25 per cent drop-off in pupil numbers at private schools is the most likely outcome. Instead, it presents a ‘best-case’ scenario where Labour’s policy raises £1 billion and a ‘worst-case’ scenario where it raises virtually nothing at all. But even in the best case, the tax-take would be a lot less than the £1.6 billion claimed by Labour. 

Charging VAT on private school fees may be a totemic policy for many in the party, who see private schools as driving social division. Whatever the merits of that argument, the inescapable truth is that the more such a policy succeeds in driving pupils into the state sector, the less successful it will be at raising revenue. If Labour wants to raise more income for its social programmes it may have to look elsewhere.