Reeves ‘vastly underestimated' scale of private school parents' VAT rebellion

Telegraph

2 hours ago

Rachel Reeves 'massively underestimated' the scale of parents paying private school fees upfront to avoid VAT, internal Treasury forecasts suggest.
Experts who reviewed documents obtained by The Telegraph said that Whitehall was not expecting the hundreds of millions of pounds of school fees that were paid in advance last year, ahead of the tax raid coming into force on Jan 1 2025.
A total of £515m flooded into the advance fee schemes of the top 50 independent schools alone, allowing parents to avoid paying the 20 per cent levy imposed by ministers. This money is used to pay school costs one or more years before they fall due.
Internal Treasury forecasts obtained by The Telegraph suggest this vastly eclipsed government predictions.
Ms Reeves, the Chancellor, announced last year that all fee prepayments from July 29 would be subject to VAT, as the Government tried to clamp down on the potential tax loophole.
Treasury calculations shared with ministers last summer show they expected to raise £90m in VAT from fees in advance schemes made beyond that date.
This would equate to tax on around £450m in upfront school fees after July 29 last year, since VAT is charged at 20 per cent.
The documents obtained by The Telegraph reveal that the Government also considered trying to capture fee prepayments made from May 22 2024 – the date Rishi Sunak called a general election – but ultimately rejected this option.
The internal Treasury advice said it expected doing so would raise an additional £30m in VAT, bringing the total forecast for money raised by charging the 20 per cent levy on fee prepayments to £120m.
This would equate to parents handing over around £600m in fee prepayments across all 2,600 private schools in the UK.
However, private schools' annual accounts suggest the total is likely to be significantly higher.
Eton College alone received as much as £52.7m in upfront fees from parents ahead of the July 29 deadline. This would have handed the Treasury an extra £10.5m in VAT if the tax were applied to Eton's prepaid fees alone.
Treasury officials said in the documents: 'As demonstrated by the small differences in the costings, not legislating back to an earlier date in time does not mean that we expect to lose significant amounts of revenue.'
They added that it would be 'difficult to justify' trying to retrospectively tax fee prepayments 'given the legislation would be giving effect to the policy before the details… were known'.
Tom Clougherty, executive director at the Institute of Economic Affairs, said: 'It does appear that the Government massively underestimated the behavioural effect of introducing VAT on private school fees.
'Prepayment has clearly been far more significant than the Treasury anticipated when preparing the policy, but I suspect that is just one part of a wider picture. More children have been withdrawn from the independent sector, and more schools have closed, too.'
Mairéad Warren de Búrca, managing director at Alvarez and Marsal Tax, said: 'I think they've just done what a lot of people have done, which is underestimate how much cash is available and also the lengths to which parents would go to to fund private education in the most cost-effective way possible.'
The internal Government communications obtained by The Telegraph do not include forecasts about the potential use of prepayment schemes prior to May 2024.
They instead show the Treasury drew up its own internal forecasts for expected revenue gain from both VAT and prepayment schemes, and that these were later analysed by the Office for Budget Responsibility.
The documents reveal Treasury officials defended targeting parents who paid fees upfront, saying: 'It is unfair that those who are financially able to pre-pay should benefit over those who cannot.'
A Whitehall source said the Government had always predicted a huge rise in the use of fees in advance schemes by the richest parents trying to avoid VAT, and that ministers were confident they could recoup most of the money.
HMRC has said it will now 'carefully scrutinise' prepayments amid concerns that some schools may have abused the financial mechanisms to avoid VAT.
The Government is expected to target schools that set up fees in advance schemes in a hurry ahead of the VAT start date, or those that used them more like 'deposits'.
For prepayments to be treated as genuine, they must contractually apply to a specific service at a specific price – rather than a vague lump sum to be sorted out at a future date.
It is expected to spark lengthy legal battles between both HMRC and private schools, and potentially between parents and private schools over who is liable for unpaid VAT.
Tax experts said it could lead to parents suddenly being told they are on the hook for tens of thousands of pounds in tax several years down the line.
A government spokesman said: 'The Office for Budget Responsibility has already factored in the increased use of pre-payment schemes in its revenue forecasts.
'Removing tax breaks for private schools is expected to raise £1.8bn a year by 2029-30.
'This funding will help us recruit 6,500 new teachers and improve standards in state schools, which educate 94 per cent of children.'