This article looks at the impact on the estate of Labour’s proposals to change the rules around permanent endowment fees and VAT charges on private school income

The Labour Party’s controversial plans to charge VAT on private school fees if it wins the next general election will put pressure on estates managers to use their assets more efficiently, according to Molly Skinner, an associate at property consultancy, Fisher German.

The party’s manifesto outlines its intention to remove the current VAT exception for education provided by private schools in an effort to raise tax revenue and improve standards in state schools.

But, while many schools warn this could lead to closures, Skinner believes the threat could be countered if they make better use of their estate.

She said: “The party’s announcement to charge 20% VAT on private school fees and clamp down on any possible avoidance by parents leaves schools with a stark choice.

“Schools could choose to absorb the cost, heavily impacting their cash flow; pass the costs onto parents, inevitably reducing pupil numbers; or reduce the number of bursary and scholarship places, which reduces opportunities for less-well-off children.

Utilising assets

“None of these options are ideal, and most private schools will have to make some very difficult decisions should Labour be elected and follow through on its pledge.

“But, in my experience working with the education sector at Fisher German, schools don’t always utilise their property assets to generate the most income and save money, and some are paying far too much for certain outgoings.”

She adds: “In terms of best utilising assets, many schools do not realise just how valuable their property can be.

“As part of an asset review, we undertook for Moulton College in Northamptonshire, we identified four buildings on the edge of the campus, no longer suitable for educational purposes which we have since let.

“This has, in turn, generated additional income to be invested back into the college.

“Other ways schools may be overspending is by using old-fashioned methods of powering their buildings.

Carbon reduction

“We have recommended certain schools install discreet solar panels to save on electricity bills, and to generate an extra source of income with carbon credits.

“The installation of other infrastructure such as telecom masts in a quieter area of the school’s property is another way of bolstering income.”

She advises speaking to consultants to identify opportunities for savings and improved utilisation of buildings.

“Many decision-makers may not know where to start when it comes to identifying these opportunities on top of running a busy school, but this is where having external experts come in can help,” she said.

“We are already helping many education clients save money and find new streams of income, and with Labour’s announcement in mind, it is more important than ever that private schools make the best use of what they have.”

Charitable status

Also potentially problematic for independent schools will be proposals to remove the 80% business rates reduction many independent schools currently benefit from through their charitable status and potentially removing charitable status from private educational establishments altogether.

Rachel Spruce, an associate at Penningtons Law, said: “Charitable status is a legal construct, conferring tax benefits in return for benefits widely believed to be for the public good.

“This does not mean that every organisation with charitable aims or activities can legally be registered as a charity. However, it does (or is intended to) mean that every registered charity is a charitable organisation that meets a certain threshold of public benefit.

“At their foundation, many fee-paying schools were institutions set up to provide education to those who would otherwise be denied it, often those deemed to be ‘poor’ or ‘impoverished’.

“Fast forward to today and those roots can seem far away, especially when school fees can be upward of £30,000 per year, even for those who do not board.

Changing the rules

“Going back, however, to the foundations of such fee-paying schools, their land, assets, and financial backing can take the form of ‘permanent endowment’; that is to say, capital in the form of property, cash or other assets that are either functional, and can be used by the charity (in the case of land and other tangible assets), or invested (usually cash, securities etc, although sometimes land that is rented out) to provide an income.

“Some of the rules surrounding permanent endowment assets have changed under the Charities Act 2022, however, the basic premise remains the same: significant permanent endowment can only be sold, or otherwise parted from, with the permission of the Charity Commission.

“It is intended to permanently form part of the assets of the charity to which it was given.

“Weakening the safeguards around permanent endowment assets risks alienating donors, and even possibly the reputation of the charitable sector as a whole.

“The changes brought in by the Charities Act 2022 are starting to ripple through into the transactional work of charities, such as where now-obsolete land may need to be sold, or where investments are sold or used as security for a loan.

“However, the removal of charitable status for a whole swathe of the sector would remove the permanent endowment safeguards entirely for those organisations.”

Stalling reform

In the case of fee-paying schools, she said it was common for the physical buildings and land used by the school to be permanent endowment.

“Some may be held by the schools themselves, others through related charitable trusts,” she adds.

“Over the years, the uses of the land may have changed, with parts redeveloped, sold off, or compulsorily purchased in support of maintaining the financial security of the registered charity school in question. This will all (hopefully) have been carried out in accordance with the regulatory requirements of the time.

“The specific origins of how these permanent endowment assets came to be the property of the charity can be complex, many dating back to original grants of land that are decades, if not hundreds of years, old.

“Unravelling all of that, for example to allow the sale of a specific parcel of land, such as one now cut off from the school’s main centre of activities, can be quite the undertaking, even when only dealing with one specific organisation.

“Attempting to legislate to cover all such potential eventualities would be incredibly complex and time consuming. It is a legal maze that could tie things up for years, creating delay and even potentially preventing any reform at all.

“The rationale for the Labour Party confining its proposed changes to these specific tax benefits perhaps finds its roots in (among other things) the complexities of permanent endowment.

“Removing charitable status altogether would cause tremendous difficulties in dealing with permanent endowment, as well as other issues, stalling or even frustrating potential reform entirely.”