Independent schools tax changes

Laurence Field, Partner, Corporate Tax
There has been a lot of speculation about the tax changes that could happen in the event of a change in government, particularly the charitable status of independent schools. Recent public statements suggest that under the Labour Party, VAT may become payable on school fees and the business rates exemption could be removed.

One of the key causes of concern for independent schools is the possibility of corporation tax being charged on any surpluses made from education, which is one of the largest charitable reliefs for primary purpose trading as things stand. Currently, the primary purpose of independent schools stated in the governing document, means they do not pay tax on profits made from trading that:

“is part of your charity’s primary purpose, for example, an independent school charging students tuition fees for their education or a trade that helps your charity’s primary purpose, such as college selling students text books.”

This raises an interesting issue, are independent schools teaching activities inherently profitable? Parents expect the money they pay in fees to be spent on their child’s education, cover the associated costs and provide a small amount for the maintenance and improvement of the facilities. When all the costs of providing the services both direct and indirect, are considered, does the finance team know if a significant profit for tax purposes is actually being made and how this would be impacted by potential future tax changes?

Corporation tax reliefs

It is also worth remembering that corporation tax reliefs are available for capital expenditure and in some cases for fixtures and fittings in a building used in the trade. These reliefs will not be familiar to many independent schools, because they have had no reason to spend much time thinking about them.

Understanding the true value

When considering a response to possible future changes to the taxation of independent schools, some have focused on the loss of the relief without necessarily understanding its true value. Whilst each independent school is different it is worth understanding the profitability of your activities and the amount of tax payable on them. Attempts to reorganise activities into a more ‘tax efficient’ structure may be both costly and disruptive. It is important that the benefit of such changes is clear in advance.

Planning ahead

Although this may only be one part of the tax jigsaw it can help to build a picture of the costs and potential impacts. Some key things to consider include:

  • Has your finance team carved out the trading activities that could be subject to tax if the relief is removed?
  • Do you know how much tax is at stake?
  • Do you know what additional reliefs (such as capital allowances) might be available if your activities became fully taxable?

Corporation tax could also be payable on certain sources of investment income.

It might only be one part of the tax jigsaw, but it can help build up a picture of the costs and benefits of taking action now.

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Tina Allison
Tina Allison
Head of Education - Non Profits