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Private schools have been warned against using Gift Aid as a loophole to avoid Labour’s VAT charge if the party wins the general election, amid concerns that it could verge into tax evasion.
i revealed earlier this week that Labour will no longer strip private schools of their charitable status if Sir Keir Starmer becomes prime minister, but the party will still apply 20 per cent VAT on school fees.
Labour sources told i Sir Keir will also make changes to ensure private schools can no longer claim business rates relief on their buildings if the party enters No 10, but it is unclear whether they will still benefit from other tax breaks.
Private schools are granted many tax advantages directly related to charitable status, including relief on income tax and inheritance tax, mandatory 80 per cent business rates relief on premises, relief on stamp duty land tax and Gift Aid on donations.
Experts told i that some private schools have already discussed trying to use Gift Aid on donations as a means of getting around Labour’s VAT charge, but warned it could land them in trouble with Her Majesty’s Revenue & Customs (HMRC).
Both private schools and parents can claim 25 per cent Gift Aid on donations, meaning a £1,000 donation would cost £750 to a parent but become £1,250 to a school.
It means private schools could artificially reduce their fees if Labour wins the general election while urging parents to make higher donations, in a move that would effectively wipe out the VAT charge.
However, leading figures in the sector told i the move would almost certainly raise the attention of tax authorities and could count as tax evasion, which is illegal and carries serious consequences including penalties and imprisonment.
“I think it would be a risky thing to do. Anything that looks like a quid pro quo – [such as] organised amounts – will be easily identified by HMRC. And getting done for tax evasion comes with serious consequences,” one expert told i.
Dan Neidle, a tax expert and founder of non-profit Tax Policy Associates, told i: “Keeping charitable status will create an incentive for schools to rely less on fees and more on donations – for which they and the parents get Gift Aid – although it may be only the wealthier schools will be able to do this in practice”.
However, he warned: “If a school says ‘make a donation and we cut your fees’, then absolutely HMRC will be interested. It doesn’t work and could even be fraud.
“But if it’s just a general trend to higher donations and lower fees, with people able to pay lower fees and make no donation, then it can’t be challenged by HMRC in my opinion. Of course, spotting the difference between these two scenarios will not be easy.”
Labour leader Sir Keir refused to say whether his party would clamp down on private schools seeking out loopholes to avoid the VAT charge when asked by i on Friday.
Speaking to journalists during a campaign trip to Scotland ahead of next week’s by-election in Rutherglen and Hamilton West, he said: “What I want is a situation where it doesn’t matter whether you go to a state school or a private school, because you get the same quality of education, the same opportunities.
“That’s what I’m driving at and I actually think that when that is spelt out, most people will say I think that’s the right way to go forward.”
It comes after i revealed on Thursday that several schools have urged parents to use a pre-payment loophole to avoid paying VAT on school fees under a potential Labour government.
Most private schools offer pre-payment schemes to parents, which allow them to pay fees in advance and at a discount, and schools invest the money on their behalf.
Half of schools have charitable status, which allows them to earn interest tax-free that they then pass back to parents through higher returns.
Parents are able to pay up to five years of school fees in advance through the schemes, meaning families with multiple children at the most expensive private schools could save hundreds of thousands of pounds if the 20 per cent VAT charge came into force.
HMRC was approached for comment.