Preparing for Change: VAT on Independent School fees and the Implications on the Development Sector
Background
After much speculation, chancellor Rachel Reeves finally confirmed Labour’s plans to charge VAT on private school fees from the 1st of January 2025. This decision has, unsurprisingly, sparked debate across the country and caused significant concern amongst private schools, parents and students alike, as the additional cost is expected to have a noticeable impact on the sector.
All of this made the IDPE Corporate Partner Forum, ‘VAT on fees and what this means for development’, very timely.
The Impact on Schools
Before exploring the impact this will have on development, it’s important to understand the impact it is having on independent schools and parents. One of the biggest questions on parents’ minds is just how much of this will translate into a fee uplift for them? Whilst this will vary from school to school, what is becoming clear is that most schools are passing on 11-15%[1], absorbing some of the costs themselves and trying to be supportive of their parents through this uplift. It’s important to note that the majority of schools are also adding a planned annual fee increase, to reflect inflation.
So there is increasing financial pressure on schools, and on parents/prospective parents. The sector-wide response to this is focussed on the continued need for investment in social mobility. It will be important for independent schools to keep demonstrating their public benefit and embodying their charitable objectives through bursary and scholarships provision, for example.
Diversifying Income
Crucially, there is a need (as we have seen in our Higher Education sector) for schools to focus on diversifying income. Schools will need to decrease their dependency on fees. Whilst it’s not always helpful to compare the United Kingdom with the United States of America due to tax, social, and cultural differences, it is worth noting that in the UK independent schools are 98% dependent on fees[2], whereas their counterparts in the US are only 65% dependent on fees.
Whilst there is more to this picture than philanthropy, we do know that this is part of the long-term solution, and we are seeing schools who haven’t yet considered philanthropy, beginning to invest in this space.
What does this mean for Development?
So far, there are a few things that we know:
This will impact various areas of independent school’s work
Donations will remain outside the scope of VAT
Schools are retaining their charitable status, so can continue to fundraise, claim Gift Aid, and reap all the other benefits associated with charitable status
There is an opportunity to reclaim some VAT under the Capital Goods Scheme[3]
Schools are awaiting guidance from HMRC on named individual bursaries
When a school provides bursaries which are part funded by philanthropy, the philanthropic portion of this will be VAT-exempt.
Looking to the future…
As with any new external effects on the sector, and we have seen many over the past few years (COVID, the cost-of-living crisis etc.), this is a good point to pause and reflect.
Now is a good time to review… your cases for support, collateral and messaging. This might mean an adjustment to the length of a campaign, or the audience of the campaign due to sensitivities around costs. Review, to better understand how to move forward.
Top Takeaways for Schools
1) The urgent need for philanthropy
There is an urgent and increasing need for philanthropy - from an increased need for bursaries and hardship funds, to the general need to diversify income as schools take some of the hit from the VAT introduction. Schools have retained charitable status; they must continue to maximise this.
2) Be creative
Now is the time to consider what Schools can do differently. Don’t be afraid to try new strategies/stop activities that aren’t working for you. For example, we already know that legacies are an area that schools are exploring more and more, especially with the inheritance tax implications, there is now even more incentive to encourage more donors to give in this way.
3) Your USP is important
There is a need to strengthen your USP, now more than ever. With the rise in costs, there will be many parents considering why they pay so much. It will be more important than ever to showcase the unique things your school has to offer; from careers support, mentoring to extracurricular activities, lifelong support and a sense of community… make sure your brand and collateral demonstrate this.
4) Diversify the ask
There are many schools who focus solely on bursaries. Bursaries do have a really important role to play, especially now. However, there is a trend for donors wanting to co-create their giving experience, meaning there needs to be a strong element of being donor-led and a good amount of flexibility.
If we look at the UK independent school philanthropic landscape 10 years ago, it was much more focussed on buildings, whereas in recent years this has shifted to a focus on bursaries. It is likely that (and indeed we might hope that) in future it will be much more holistic and include bursaries, facilities, posts and other ‘business as usual’ funds.
5) Ensure your scaffolding is in place
Whilst there is absolutely a need to invest in philanthropy and engagement in schools, it is important to remember that there is no point in increasing your team ten-fold overnight if you don’t have the scaffolding in place to support this. It is important to plan, get to know alumni, parents and potential donor audiences and what they need. There is no money if there is no engagement, and this cannot happen overnight.
6) It starts at the top
We know that leadership taking an active role in fundraising is a big determinant of success. The 2022 IDPE benchmarking report evidenced this – successful fundraising needs active leadership. Among schools that are raising more than £500,000 per year, 87% of them have a head that is involved or very involved in development. Development (alongside other key areas of External Relations) must sit at the hear of the school strategy.[4]
Finally, it is crucial to point out (in a bid to move away from the doom and gloom…) that there is always a challenge to come up against. In the past few years alone, we have seen the cost-of-living crisis and COVID-19, and we know from experience that communities continue to give during times of economic crisis. In fact, in many instances, there is an uptick in donations in these times.
“The UK is a fundamentally generous, charitable country. That is never more evident than in times of crisis.” Neil Heslop, OBE, Chief Executive, Charities Aid Foundation[5]
We know there is real sympathy and some of our donors and alumni are able and willing to give more.
You can read about some of the work we do with schools here. If it would be helpful to have a chat with one of the team about how we can help you, please get in touch via email.
[1] IDPE
[2] IDPE
[3] The Capital Goods Scheme for VAT - GOV.UK