Kristine Scott and Stephen Cole from law firm HCR outline the obstacles that Labour would face in the fallout from its focus on tax exemptions

The possibility of a future Labour government and specifically its plan to end tax exemptions for independent schools that have charitable status, has generated a fair amount of debate and press interest recently. It has also generated queries and concerns from schools that are concerned as to what any change could mean for them. Although the detail of the proposal is as yet unclear, the proposed change may well include the removal of charitable status enjoyed by many independent schools and includes the VAT exemption on private school fees, allegedly generating an estimated £1.7 billion to the Exchequer.

As of today, the proposal is just that, and it is likely there will be hurdles to enact such a change. There is heartfelt concern within the sector as to the impact of any such change, including rising school fees, loss of pupils due to affordability, and potential closure of some independent schools which will no longer be sustainable. There is also the suggestion that any removal will fuel faster growth and consolidation in the independent school market and drive school groups to expand and form at a faster rate. Here we examine what any change would mean for the independent sector.

What would removal of charitable status mean for schools?

If there were to be a full removal of independent schools’ charitable status and no new regulatory arrangements put in place, schools would need to consider and address the following issues.

Regulation

• As charities, schools are required exclusively to pursue their charitable objects. With the removal of charitable status, schools would become like any other commercial business (subject to the regulation applicable to the education sector). They would no longer be required to act in the public benefit and, subject to relevant constitutional changes, could engage in a wider range of activities.
• Schools would no longer be registered with, or regulated by, the Charity Commission. For those schools which are companies limited by guarantee (which is often the norm in the sector), its directors would still be subject to company law requirements, but would be released from their obligations as charity trustees.
• Any school which is a charitable incorporated organisation (CIO) would no longer be able to continue in that form because CIOs are by definition charities. Any such school would need to convert to another legal status, such as a company, in order to continue to operate.
• Any change would include the ability to pay their governors or trustees for acting in that capacity, which is presently subject to strict rules and guidance enforceable by the Charity Commission.

Financial

• In addition to the requirement for VAT to be paid on school fees, the tax benefits that come with charitable status would disappear.
• Schools would no longer be in a position to claim Gift Aid in relation to the profits made by their trading subsidiaries.
• Schools would no longer be subject to the restrictions that charities face on trading. There would no longer be a need for trading which is not in pursuance of the objects to be conducted through a trading subsidy.
• Schools would have the ability to withdraw bursaries which is likely to affect access for some families to an independent school education.
• The suggestion of VAT on school fees may, in the words of some current heads, make the option for families of independent schooling unaffordable to many who currently choose an independent school.

Governing document and structure

• A school’s governing document will contain provisions and references which are likely to be inappropriate or irrelevant if it is no longer a charity.
• Faced with VAT on school fees and the potential loss of pupils, some schools may consider becoming an academy.

Land

• Schools would be free of the restrictions placed on charities with regard to the disposal of land.
• It would remain to be seen what the position would be with regard to any land held on behalf of schools by the Official Custodian of Where a charity is unincorporated, property can be vested in the Official Custodian on behalf of the charity rather than in the names of individual trustees.

Permanent endowment

• A gift received on the terms that the assets or funds may not be disposed of constitutes permanent endowment of a charity. Generally, permanent endowment cannot be spent or disposed of without the consent of the Charity Commission. While it would remain to be seen if any legislative measures were put in place on the point, in principle, schools no longer subject to restrictions placed on charities would not require the Commission’s consent with regard to the use of their permanent endowment.

Summary

The implications of any legislative change to remove the charitable status of independent schools would, of course, depend on the way and the terms in which this is achieved. As mentioned at the outset, it is a matter which has attracted much media and public debate and, no doubt, will continue to do so. We are unable to speculate as to whether other parts of the education sector such as nurseries or indeed a different sector such as healthcare might be impacted; to the best of our knowledge neither has been mentioned to date so we would expect any change to be limited to independent schools.

However, it seems far more likely that any incoming government might instead stop short of a full removal of charity status and instead restrict its advantages specifically in respect of independent schools. This could mean that, while they remain subject to all of the restrictions which accompany being a charity, they lose the tax advantages. Independent schools may therefore wish to take advice at an early stage about how best to manage their assets and consider hiving off certain activities such as grant-making into a stand-alone charity which is more likely to be authentically able to obtain – and retain – charity status and its full tax advantages. Labour’s proposal is, even at this stage, forcing governors of schools that currently have charitable status to contemplate and consider the prospect of a change as part of their risk management and strategy.

Kristine Scott is partner and head of the education and charities team, and Stephen Cole is a senior associate, education and charities team, at HCR.