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Labour will likely backdate VAT on private school fees to ensure parents cannot avoid the tax if the party wins the next general election, Bridget Phillipson has confirmed.
The shadow Education Secretary reiterated on Tuesday that Labour will end the tax breaks enjoyed by private schools immediately if the party comes to power.
It means private school fees will be hit with 20 per cent VAT as soon as the first academic year after the general election if Sir Keir Starmer becomes prime minister.
“We will end the tax breaks for private schools to deliver those changes our children need,” Ms Phillipson said during a speech at the Centre for Social Justice announcing plans to tackle absenteeism in schools.
“It isn’t Winchester, is it, where more than half of children fail to turn up at least one day a fortnight. It isn’t Charterhouse, it isn’t Eton, it isn’t Rugby. For the Tories, the attendance crisis is always and invariably about other people’s children.”
Asked by i whether Labour would introduce retrospective legislation to ensure the wealthiest parents avoid VAT on private school fees by paying them upfront now, Ms Phillipson said the party would “make sure that the legislation is drawn in such a way to ensure that avoidance can’t take place”.
She said there was “precedent for that”, adding that “back in 2010 George Osborne when he made VAT changes did something very similar”.
Mr Osborne, the former chancellor, introduced anti-forestalling legislation in 2010 to ensure businesses could not avoid tax hikes after he raised the standard rate of VAT from 17.5 per cent to 20 per cent in that year’s Budget.
The retrospective legislation meant the increased VAT rate still applied to supplies of goods or services that were provided from 2011 onwards, even if invoices or prepayments were received before that date.
It means parents who pay school fees in advance of a potential Labour government will likely still have to pay VAT on tuition that is supplied after the party comes to power.
“We’re clear there is precedent, we’re clear the legislation will be drawn in such a way that it is effective in raising the money that we need to invest in our state schools,” Ms Phillipson said.
It comes after i revealed earlier this year that some schools have already encouraged parents to “pay now, save later” on their children’s school fees.
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 institutions could save hundreds of thousands of pounds if the 20 per cent VAT charge comes into force.
Labour sources told i they would crack down on the loophole and make sure schools pay the VAT charge in full.
i understands the party is working closely with lawyers to identify whether attempts to dodge the VAT charge on private schools could veer into tax avoidance.
Merchant Taylors’ School, a leading private boys’ school near Watford which charges £25,000 a year, sent a newsletter to parents in June urging them to use the prepayment scheme.
It said: “Efforts will continue so that the school is prepared for the political and economic changes that are now emerging, whilst maintaining the high standard of education and facilities that you expect from Merchant Taylors’.
“Our fees in advance scheme may provide parents with a degree of long term assurance in the current climate.”
Top institutions including Eton College and Rishi Sunak’s £49,000-a-year alma mater Winchester College also offer parents fees in advance schemes, although there is no suggestion that they have encouraged their use to avoid VAT under a potential Labour government.
Labour sources told i the party will also crack down on attempts to avoid the VAT charge on private school fees through other mechanisms.
Lawyers suggested that some top boarding schools are considering splitting boarding costs from tuition fees to slim down the overall VAT charge.
Goods and services that are closely related to education are currently exempt from VAT, such as catering, transport, school trips and boarding accommodation. However, this exemption is expected to be removed if Labour comes to power.
Legal advisers told i boarding schools could mimic the VAT structure for hotels and similar accommodation, where VAT drops from 20 per cent to 4 per cent if a guest stays for more than 28 days.
But i understands Labour will ensure schools are not able to split off boarding costs from overall boarding fees, meaning these will be eligible for the same VAT charge as tuition costs.
The party hopes the 20 per cent levy will create an extra £1.7bn, with Sir Keir promising to spend it on efforts to raise education standards across the state school sector.
This includes plans to recruit 6,500 new teachers into the sector and offer new starters a £2,400 bonus to stop them from leaving the profession.
Labour also wants to create a new national “oracy” programme to raise language standards, and to ensure all schools in England have access to mental health counselling.
A report by the Institute for Fiscal Studies (IFS) published in July found that Labour’s estimates were broadly accurate, though it warned that there was the “the potential for tax avoidance behaviour on the behalf of parents or schools”.