A report from the Adam Smith Institute (ASI) warns that the Government’s proposal to introduce VAT on private school fees could have far-reaching economic consequences, potentially costing the Treasury as much as £1.8 billion.
The think tank highlights concerns that parents, unable to afford the extra 20% tax on fees, may withdraw their children from private education and reduce their working hours or even retire early, causing a knock-on effect on the economy.
According to the ASI, many of these parents, particularly those in high-earning professions such as doctors and teachers, could decide to work fewer hours or leave the workforce altogether. This shift would not only reduce the tax revenue collected from income but would also impact productivity and economic growth.
The ASI’s report draws parallels between this situation and what happens when individuals experience unexpected financial windfalls, such as lottery winnings or inheritances. Based on this evidence, the institute predicts that around 40% of the income parents currently earn to cover school fees might be converted into leisure time, reducing the UK’s overall tax revenue.
The report estimates that this unintended consequence alone could cost the Treasury anywhere between £360 million and £1.81 billion, depending on how many children transfer to state schools. Moreover, this could add pressure to already overstretched state schools, as parents migrate their children to the public sector.
The think tank is urging the Government to take these findings into consideration before making a final decision on the VAT proposal in the upcoming Autumn Budget, scheduled for October 30th.
Potential Economic Fallout
The ASI’s research builds on a previous report released in March, which suggested that the imposition of VAT on private school fees might ultimately result in no revenue gain—or even a financial loss—for the Treasury. The new report warns that the ripple effect of parents working less could exacerbate the current staffing crisis in critical sectors like healthcare and education.
Maxwell Marlow, Director of Research at the Adam Smith Institute and co-author of the report, said: “There is very little evidence on what will happen if the Government imposes a tax on private education. What we do know from similar scenarios, such as when people receive large inheritances, is that they are likely to reconsider how much they need to work. This could have wide-reaching consequences, particularly in sectors already suffering from staffing shortages.”
Policy Uncertainty
The think tank has expressed concern over the uncertainty surrounding the number of children likely to leave private schools if VAT is introduced. It estimates that if just 5% of private school pupils move to state schools, the Treasury could still raise around £0.84 billion. However, if the figure rises to 10%, the policy could end up raising no money at all, while a 25% migration rate could result in a cost to the Treasury of £2.51 billion.
Former Chancellor Nadhim Zahawi has also weighed in, urging the Government to reconsider the VAT proposal. “The rate at which millionaires are leaving the UK is a vote of no confidence in both our current tax and regulatory regime,” he said, adding that the policy could reduce funds for public services and hamper investment in the economy.
The Adam Smith Institute’s report underscores the complex, unintended consequences of imposing VAT on private school fees. The think tank warns that such a move could drive down productivity, reduce tax revenues, and place additional strain on the state education system. As the Government prepares to announce its Autumn Budget, the ASI is calling on officials to reconsider this controversial policy in light of its potential economic fallout.
For more information, read the full report on the Adam Smith Institute’s website.
This policy particularly affects those children with learning difficulties who the state school system have failed through a lack of availability of assessment for their conditions and a lack of provision to support those children. Parents have, out of sheer desperation, resorted to sending their children to private schools, where the level of needed support can be provided, however the imposition of an extra 20% rise in educational outgoings has been untenable to them as they were already scraping by just to afford the fees in the first place. These children, who are among the most vulnerable, are now propelled into the state school system, often many miles from home as the only available school places involve a significant commute. Their condition makes the mainstream large noisy school environments impossible for them to learn in, so they regress rather than progress. The over stretched state teachers are unable to provide them with the necessary time and individual support that they need to allow them to progress into adults capable of functioning independently in today’s society. How this will affect them in later life can only be speculated at, however it is likely that they will become a long term burden to the state through claiming benefits rather than a long term provider through paying tax on their income.