Values Added?

Stop seeing private school VAT as an accounting threat. Understand it as a signal that our sector has lost its way, and needs to change.

Well-meaning defenders of independent schools are pushing frenetic arguments against VAT, applauded in a partisan echo chamber. Doom predictions of school closures stand alongside reminders that our schools employ workers, offer bursaries, support charities, develop partnerships, contribute to GDP and boost exports. The sector has become an electoral pawn for both left and right, as they battle for the affections of the universally palatable, but ever elusive “aspirant middle class”. We should know better.

Once we push through the rhetoric, there are two uncomfortable truths here: 

1. Our schools no longer deserve a tax break.
2. Imposition of VAT is unlikely to fix that unhappy situation. 

The independent school market as a whole is, despite its many strengths, failing to deliver a socially optimal outcome. VAT may not be an effective treatment, but VAT chat is a glaring symptom of that failure, which we ought to heed.

Twenty years ago, independent schools educated roughly 560,000 young people, around 7% of UK school pupils. Today, we educate almost exactly the same number, but the price has risen by 55% in real terms. On a macro level, our sector didn’t grow in scale, scope, or relevance. We just got more expensive and more lavish. There is no doubt that our product is excellent, but instead of building capacity, and sharing our success across communities, we chose to keep it exclusive, using the price mechanism to ration off excess demand. We have concentrated on private rather than public benefit, so consumed with serving our students, that we have forgotten our real purpose: to serve society, through our students. 

Real incomes for most professions have remained fairly flat since 2003: very few have enjoyed inflation plus 55% pay rises, and for many in the public sector, real wages have actually fallen. If there are any “aspirant middle class” left in our schools, then they aren’t meeting these fees through salary alone. Instead, they are clinging on through unsustainable property gains, and generous grandparents. Within a few years, there will be no more “middle class” left in our schools. VAT might accelerate their demise, but these families were shown the door a long time ago. The Labour party didn’t do that. We did that. Not in a cruel or calculating way, but rationally, through cumulative decisions that were good for business.

The loss of the professional middle makes little difference to a bursar’s income statement. Helped by slick marketing, heritage branding and a decade of public sector austerity, we have maintained steady demand for our product by pushing into the luxury services industry. Price has driven out those who are most sensitive to future price rises, replacing them with customers of higher “net worth”, in occupations dominated by the financial sector, who reaped huge rewards from the post 2009 monetary stimulus. Statistically, the average school fee in the UK is £15,200 but you will struggle to get change from £21k for a secondary place. Families who buy into the traditional boarding model will spend over £500k per child over 14 years, almost twice the average house value. That price is pushed even higher for the very wealthiest, through bespoke VIP packages of billable extras. For these families, “middle class” may as well be “middle Earth”: the £8k per pupil state funding is as alien as catchment areas or bus routes. 

This would all be absolutely fine, if we were selling cars or holidays. That’s capitalism and it pays my wages. What’s more, the quality of provision is the envy of the world: 20 years of revenue growth has built impressive facilities and hired an army of staff. The resources directed towards each child are immense. For boarding schools, any fall in domestic demand has been quickly filled by a new international elite, happy to buy into this prestige brand. But this is not what we were set up to do and is not the type of strategy that builds a strong education system for this nation. It does precious little for the UK’s long run growth prospects and is hardly a worthy recipient of tax exemption.

Most arguments against VAT topple at the slightest push, once they venture outside the echo chamber. The Institute for Fiscal Studies estimates a Price Elasticity of Demand for private schooling of just -0.3, which is economist-speak for “very unresponsive”. A 10% rise in fees might lead to a 3% fall in demand. This makes sense when you remember that a 55% increase in fees caused a 0% drop in demand. Even if the policy bankrupts every single school, demographics should cause a fall of 700,000 pupils at English state schools by 2030, more than the total number currently in private education. All things considered, the IFS anticipate around £1.5bn in revenue. They could be wrong, but they have more credibility than a Telegraph columnist. 

Ambitions for greater bursaries are noble, and central to some schools’ strategy… but the failure of the sector to grow overall has relegated these brave “needs blind” beacons of social mobility to collateral damage, steamrolled by more affluent competitors. Likewise with partnership activity. While the idea is sound and some schools excellent, it’s a bit like environmental sustainability: unregulated, hard to measure and prime for greenwashing. General claims that employing workers, raising money for charity or generating GDP somehow exempt a firm from their VAT bill are as naïve and insulting as the “aspirant middle class” myth already debunked.

In fact, it is a miracle that VAT exemption has survived this long. Some on the left attribute this to the vested interests of a political elite who were content for the Charities Commission to turn a blind eye, but I don’t share that cynicism. Like our dysfunctional housing market, there probably has been a bit of regulatory capture. Leaders see the problem, but are unwilling to fix it in their backyard (not until they have got their kids through VAT-free schooling), but this doesn’t amount to a deliberate conspiracy. Perhaps lawmakers simply believed that challenging the status quo would alienate voters? It won’t, because our sector has already done that, all by itself. 

Protecting school-tie privilege is not a big vote winner because middle income voters with potent economic and political agency are now locked out of independent education and understandably unsympathetic to its alumni. Instead, this group of doctors, academics, civil servants, scientists, military officers, engineers etc have been quietly directing their resources to challenging private school nepotism in the labour market, demanding more transparency and meritocracy in how opportunities are allocated. Contextual recruitment is in vogue and the lobbying muscle of the private school establishment is on the wane.

No, it’s not conspiracy or electioneering that has kept the tax break in place. There is a more moral and defensible rationale. VAT is a blunt and regressive tool, thus conflicting with the very objective its advocates are trying to achieve, and an uncomfortable option for both left and right. If we want cheaper, more accessible independent schools, which serve more pupils and deliver more positive spillover benefits, VAT is hardly the tool for the job.  

Ironically, the way forward is to embrace and re-define the principle of elitism, away from associations with exclusion, towards high performance, innovation, competitiveness. We don’t have a problem with elite athletes / universities / orchestras / military. Why? Because while access to these opportunities is certainly enhanced by privilege, it is not granted using the price mechanism alone. Other performance metrics are employed. A premiership football contract or place in a national orchestra is certainly elitist, but that doesn’t mean you can buy it. 

In Ireland, where GDP per capita is more than double that of the UK, government support means that even the most exclusive of private schools cost less than £8k a year. Lower prices do not eliminate elitism, but they do weaken that strangling bind between price and access. Across OECD nations, we see leaders emerge from equally elitist, but cheaper schooling than we are used to in Britain. Emmanuel Macron’s alma mater, Lycee Henri IV, is widely regarded as one of the most prestigious in France, with alumni to rival any of the British old firm, but it costs nothing. Meanwhile Mr Sunak’s Winchester College raised fees to £49,152 this year, 50% more than the entire £32k annual disposable income of the median UK household. How on earth can they expect to attract Britain’s brightest young people at that price? It might make good business sense, but on a national level it is an embarrassing waste of human capital. We are behind the curve here - it’s time to wake up. 

The sector needs a strong regulator, and deep down we all know it. Marking our own homework is no more effective for us than it is for our students. A full independent school audit should view these institutions not as fortresses of privilege to pillage and burn, but rather as national assets, an important part of our education infrastructure, evolved over centuries. We might have lost our way a bit, but there is still time for us to take our place in a coordinated national system that caters for all, including our very highest performers. 

VAT exemption should be retained, but only if we meet some clear targets. Frankly, these schools need to educate far more pupils. Independent schools of 800 pupils frequently enjoy facilities that dwarf those of state school neighbours with rolls of 2,000. Partnership ambitions should be clearly defined according to the strategic objectives of local communities, not the marketing whims of the schools themselves. But partnership alone, no matter how good, is not enough. It’s time to pause the capital projects arms race (our facilities are more than adequate) and instead sweat our existing assets by bringing their benefit to more pupils. It does not seem unreasonable that we should educate over 1 million pupils within 10 years. That target alone could deliver some fee restraint, but a price cap, similar to that employed in the university, energy or transport sectors could also have a role.

Public distrust of private school collusion is misguided. Now, more than ever, we need to cooperate and collude, sharing facilities, expertise, pupils and staff. Independence is not serving us well, competition has failed to keep prices down. It is time to embrace interdependence. Federation and collaboration should be part of any regulatory reform. We have unrealised economies of scale and are wasting precious resources in this game theory pit of zero-sum branding and marketing.

The benefits of reintroducing professional diversity to our parental body will be enjoyed by all. There is little point in having Olympic facilities or Steinway pianos if we can only recruit the children of multi-millionaires. That’s not the way to achieve excellence. We need to re-admit those occupations whose reward structures are weakly correlated with profit, but no less valuable. The success of a surgeon, soldier, engineer or scientist is not determined by their quarterly earnings, but on peer reviewed measures of service and performance. Thankfully, we are no longer simply imperial leadership schools for men, but sliding into luxury service provision for global financiers isn’t a good enough alternative. Britain needs our schools to be intellectual hotbeds of innovation and leadership, so we must rebalance what we value in our admissions criteria… and we can’t do that with this price tag. We just can’t.

Ultimately, I’m arguing that this is a valuable opportunity to question the purpose of independent education. If we are simply a mechanism for individuals to invest in competitive advantage for private benefit, then our sector is doing wonderfully well. But we could be more effective at driving long term productivity gains for our society, by enabling young people to access excellence, and leverage the amazing opportunities we provide them to effect positive change in the world.  

Tax exemptions are not our birthright, they must be earned. VAT isn’t the solution, but neither is a blind denial of these challenges.