The introduction of VAT on private schools in the UK has sent shockwaves through the education sector, posing significant financial and strategic challenges for both independent and state-run institutions. For many private schools, this policy shift has sparked a re-evaluation of budgets, operations, and priorities, as they seek to balance affordability for families with maintaining the high standards that define independent education.
Historically, private schools were exempt from charging VAT on fees. Recent policy changes have removed this exemption, mandating that schools apply VAT—currently at 20%—to their tuition fees. The policy aims to align the tax treatment of private schools with other sectors and to generate additional funding for state education. This is in addition to schools, as employers, facing a 1.25 percentage point increase in National Insurance contributions for both employees and employers from April 2025 onwards.
It has been estimated that the VAT imposition could result in a closure rate of between 10% and 20% of private schools over the next three years. This projection translates to approximately 260 to 520 schools facing potential closure, given the UK’s total of around 2,600 private schools.
To gain insight into how private schools are addressing this pressing issue, we sat down with Robin Southwell, the Chairman of Governors at a private primary school in Surrey, to explore the challenges, adaptations, and opportunities that arise from one of the most significant policies shifts the sector has faced in recent years.
General Impact
1. Has the introduction of VAT on school fees affected your school’s financial planning and operations? If so, what have the greatest challenges been?
I would like to say the introduction of VAT on school fees has affected our financial planning and operations very little, in as much as the underlying operation of the school should, and are, already operating efficiently with the correct balance between providing a premium product to the pupils whilst delivering a sound auditable balance sheet. We run as a charity and, as such, do not seek to accrue ‘profits’ but simply manage our cash for medium term stability.
However, the imposition of effectively a 20% ‘price rise’ creates instability and volatility which needs careful and direct managing.
The biggest challenge has been to ensure that our customers (parents / guardians) are working with us to meet the impact of this exogenous fee hike such that we are able to bring them on the journey with us, assist the most-impacted where we can and ensure minimal effect to the most important stakeholders – namely the pupils.
Financial Strategies
2. Have you had to increase school fees to account for the added VAT? If so, how have parents reacted?
I think it is important to note that we have not increased school fees (other than in accordance with normal yearly operational and inflationary increases). Rather, we have simply passed on the VAT imposition to parents / guardians, whilst mitigating additional increases where possible. For example, limited elements of pastoral care are exempt from VAT as a qualifying criterion.
Regarding the reaction of the parents / guardians, at every stage we have been open and transparent with them and as such – at least to date – we have received understanding and support from the fee payers regarding the current context we find ourselves.
By way of support to parents / guardians, we have adopted two strategies. Firstly, we have partially subsidised the VAT increase such that the net payment to parents in ‘year one’, taking in to account all remedial factors, will represent a gross increase of ‘only’ c.12%
Secondly, we have established a ’Transition Fund’ whereby parents / guardians struggling with this charge can apply, on a means tested basis, for a one-off grant support as we feel that its important to understand that these policy changes will affect people disproportionately given individual circumstances will differ.
Operational Adjustments
3. Has the school taken any cost-cutting measures in response to the tax changes? If so, what areas have been prioritized?
We have of course looked at where we can cut cost, but in an environment where we have already addressed inefficiencies to meet the challenges of increased employment contributions, pension contributions and the imposition of higher business rates, the school is already at heightened efficiency without impairing the provision of high-quality academic, pastoral and extracurricular activities.
One area we have found of significant cost reduction can be realised through adopting a local defined contributions pension arrangement. This requires employees to ‘opt-out’ of the national pension scheme which now requires employers to fund a 30% top-up on salaries to meet an ongoing legacy shortfall.
We may also see schools, which are located close to one other, progressively sharing back-office services such as payroll and management accounts by way of reducing overheads. This will likely also extend to sharing of facilities where beneficial to both entities.
4. Are there new revenue-generating initiatives in place to help offset the financial impact?
We will continue to explore third party revenue opportunities such as third-party use of our facilities (so long as this has little impact on our core offering). I am of the opinion that it is vital that assets are ‘sweated’ in such a way that they are being by all stakeholders, including the local community.
Additionally, we will be working closely with parents to undertake events and money raising activities as a collective to the benefit of all stakeholders. However, I believe that schools are and should already prioritising these types of initiatives irrespective if the latest challenges.
Enrolment and Accessibility
5. Have you observed any significant changes in enrolment trends since the VAT was introduced?
I must say that the initial response has been encouraging, though, it is perhaps too early to come to any wider conclusions regarding future trends. Although, we will of course be closely monitoring this moving forward.
I believe that Prep Schools will find the market increasingly challenging as parents, where necessary and driven by affordability, may well delay putting their children into the private sector until age 11 and then place them directly into the senior schools’ sector.
Personal Perspective
6. What lessons have you learned as a governor about navigating significant policy changes like this and what advice would you give to other schools or governors facing similar challenges?
The main message I take from this is that schools must be well run and be fundamentally sound financially, if not these economic challenges will be perhaps a burden too heavy for some schools. My advice would be to take a holistic view as to the operational requirements of the school and reduce underlying overhead costs where possible, focusing expenditure on securing talented teachers with first class facilities as I considered these to be most important aspects of fee-paying schools.
Secondly, and perhaps most importantly, you must openly and clearly engage with all stakeholders, namely the parents / guardians (who will be most affected) such that these challenges become those of school communities in the round working collectively.
The article is produced by the Team at Buchler Phillips in January 2025, UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.