The UK Government has been warned that increased VAT for independent schools is unlikely to achieve its stated goals in Scotland, with the promised benefits to state schools also called into question.

The Scottish Council for Independent Schools (SCIS) has outlined a series of concerns over the UK Government decision to remove longstanding exemption and impose 20% VAT on independent school tuition. 

In a response to a government consultation, SCIS argues that the policy does not adequately take account of the differences between the structures, finances and relationship to local authorities of Scottish and English independent schools and that Scottish families - in both the state and private sector - could be disproportionately affected.

The stated goals of the VAT policy are to correct a perceived unfair exemption for independent schools and to bring more revenue to the state sector, where local authorities in Scotland are already making harsh cuts to education in the face of budget constraints. 

But there are concerns that Scotland's share of the new VAT pot will be much lower than originally advertised.

What does Scotland stand to gain?

Labour's general election manifesto claimed Scotland could receive as much as £150m from the projected £1.7b total raised from the VAT hike, a claim repeated by Scottish Labour representatives during the rollout of the new policy.

Scottish Labour leader Anas Sarwar, who attended a private school and now sends his children to one, said that the removal of the VAT exemption was "perfectly rational and fair" given the potential injection into state schools.

But an analysis by BiGGAR Economics, commissioned by SCIS, estimated that Scotland may only receive £51m from the new VAT policy, based on average rates of £13,800 and £15,700 for primary and secondary schools, respectively.

And regardless of how much Scotland receives, the government will be under no obligation to spend it on education, even though ringfencing the extra funding for state schools has been a key aspect of the UK Government policy.

Scottish Labour Leader Anas Sarwar has defended the VAT policy as beneficial to the overall state of education.Scottish Labour leader Anas Sarwar has defended the VAT policy as beneficial to the overall state of education. (Image: PA)

The BiGGAR Economics report also raised concerns over more potential unintended consequences of the government’s VAT policy, suggesting that if schools choose to pass the added costs of VAT on to parents by raising tuition fees, not all families will want – or be able – to pay the added cost.

SCIS Chief Executive Officer Lorraine Davidson has told the UK Government that the makeup of independent schools in Scotland could mean more Scottish families will opt out and choose state schools compared to their English counterparts.

How are independent schools in Scotland different?

In Scotland, 20 of the 69 independent schools are specialist schools for children with additional support needs; 98 percent of Scottish independent schools are charities, compared to roughly half in England; and Scottish households average less disposable income than in England.

These and other factors contribute to the SCIS’s concerns that more families might be driven away from the independent sector than the Labour policy originally expected.

The BiGGAR Economics report estimated that if 13% (3,190) of independent school pupils leave for the state sector, it would lead lower revenue from VAT and other taxes and add enough new public costs to effectively wipe out any gains from the VAT policy and result in a net loss for the public sector.

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More than 20 of Scotland’s independent schools are specialist schools for children with additional support needs (ASN), and ASN pupils also attend mainstream private schools. A UK Government publication from July makes it clear that “pupils who are placed in a private school because their needs cannot be fully met in the state sector will not be impacted by this policy change,” largely because local authorities who fund those placements will be compensated for the VAT they incur.

Cedars School in Greenock was the first private school in Scotland to announce it was closing because parents could not afford added costs of VAT on tuition.Cedars School in Greenock was the first private school in Scotland to announce it was closing because parents could not afford added costs of VAT on tuition. (Image: Google Maps)

For pupils whose needs “could be met in the state sector, but whose parents have placed them in a private school out of choice” the VAT will apply.

But Ms Davidson said that there are some irregularities in Scotland meaning some pupils are funded by the Scottish Government, which is not entitled to the same VAT compensation.

Ongoing concerns about the ability for mainstream public schools to identify and care for pupils with ASN are also a factor which may be limiting the choice of parents who opt for private education.

Ultimately, the SCIS has said that more direct attention needs to be paid to Scotland in order to roll out the VAT policy effectively.

Ms Davidson has called on the UK Government to come to the table with Scottish representatives to discuss how to maximise the benefits for the state and private sectors.

“The [VAT] policy will not only not have the intended outcomes in Scotland, but will adversely affect the state sector.

“We are therefore concerned that the policy intent has been designed without taking into account the distinctive nature of the sector in Scotland. It is vital this is now given serious consideration to avoid negative consequences for the whole Scottish education system and the children being educated within it.”

The UK Government has not yet responded to SCIS’s  message, although officials expect a new impact assessment ahead of the budget announcement at the end of the month which could address some of the concerns.

How have schools responded this year?

The impacts have not yet been so severe, but schools across the country have already demonstrated that they are taking note of the VAT changes and willing to respond proactively.

Although the VAT changes do not official come into play until January 2025, two Scottish independent schools closed their doors at the start of this year: Cedars School in Greenock and Kilgraston School in Bridge of Earn.

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Both are faith schools, and both were already facing their own challenges, either in terms of financial strain or declining enrolment. But each clearly cited the pending VAT change as a major contributing factor in their closure, and the SCIS estimates that these closures and other family decisions have sent 300 pupils out of the sector since the start of term.

Dr Dougie Marks’s children attended Cedars before it closed. He said that they initially struggled to find places in local state schools due to capacity issues, but have now settled.

“Most of the kids from the school have dispersed across Inverclyde and Renfrewshire. The ones that were like ours, who didn’t have particular additional learning needs are missing their friends and school but they were able to find places.”

But Dr Marks said that not all families have been so lucky. His wife sat on the Cedars board, and he said that families of children with additional support needs – a significant proportion of Cedars’s former roll –  have had a harder time finding a good fit.

Although Cedars and Kilgraston illustrate the concerns that Ms Davidson and SCIS have raised about the disproportionate impact the VAT policy will have on smaller faith schools, some larger independent schools in Edinburgh have also taken action.

When announcing the planned merger of Stewart’s Melville College and The Mary Erskine School, leaders of the new combined Erskine Stewart Melville said that the decision was made as part of an overall attempt to cope with financial pressures, VAT increases among them.

Does the Government have any answers?

One remaining concern about the payout of raised funding is how it could be spent: the UK Government has identified education as a priority, and made promises during the general election about hiring more teachers and supporting state schools. 

Because education is devolved, however, the Scottish Government would not be restricted to that ringfencing and would have no requirement to spend it on education.

When asked about the conflicting estimates of how much Scotland can gain financially from the new VAT policy, a spokesperson for the Scottish Government said it is up to the UK Government to decide how much of the revenue comes north.

HM Treasury has not responded to requests for comment.