1,800-pupil fall forecast at Scottish private schools as parents to foot two-thirds of VAT

Parents have been warned they are likely to be asked to pick-up about two-thirds of the new VAT bill for private school fees, with the higher costs expected to lead to 1,800 more pupils in Scottish state schools.

The analysis by the Office for Budget Responsibility (OBR), the independent financial watchdog, came after Chancellor Rachel Reeves confirmed the VAT exemption on private school fees would end in January.

In her first Budget on Wednesday, the Labour MP said “94 per cent of children in the UK attend state schools”.

Rachel Reeves poses with the red Budget Box as she leaves 11 Downing Street to present the government's annual Autumn budget to Parliament (Photo: JUSTIN TALLIS/AFP via Getty Images) | AFP via Getty Images

She said: “To provide the highest quality of support and teaching that they deserve, we will introduce VAT on private school fees from January 2025.”

The announcement dashed any hopes among private school bosses the Labour government would delay the implementation, as several had requested.

In its newly-published analysis, the OBR said the impact of the policy on state schools was the “main uncertainty”.

However, it based its modelling on a 6 per cent drop in enrolments, which is significantly below the 20 per cent suggested by the sector, and in line with the estimate put forward by the Institute of Fiscal Studies, which forecast a decline of between 3 per cent and 7 per cent.

In Scotland, a 6 per cent decrease would equate to about 1,800 pupils, although the Scottish Council of Independent Schools (SCIS) has highlighted the impact could be more severe north of the Border because of lower income levels compared to parts of England.

The OBR also confirmed the policy would be likely to raise an average of £1.6 billion a year. However, it also said there could be an increase in costs of about £300 million associated with the higher number of pupils in the state sector.

And while the VAT rate is 20 per cent, the OBR said the effective VAT rate applied would be 15.4 per cent, because schools would be able to recover some costs.

“Overall, we estimate that around two-thirds of the cost is passed on through higher fees, just less than a quarter is reflected in reduced service provision, and the remainder is absorbed through cost efficiencies and from profits,” the body said.

“The main uncertainty in the costing is the impact of the measure on the number of students attending private schools.”

The OBR suggested the bulk of the reduction in enrolments would not come from current students, because “parents will be more reluctant to disrupt their education”, but more likely to be “prospective future new students” who will not now attend private schools.

“Overall, the costing estimates that as a result of the policy in the steady state there will be around 35,000 (6 per cent) fewer private school pupils, reflecting both leavers and, primarily, fewer new joiners,” the report said.

Lorraine Davidson, chief executive of SCIS, said: "VAT on school fees will harm Scottish education, disrupt the learning of children, and put jobs at risk.

“Our plea to exempt bursary students, pupils with additional support needs, and those who can't get a place at their local school or study the same curriculum has been ignored. 

“The policy fails to respect the many differences in the Scottish sector. The January timescale does not give schools or parents the time to prepare which was promised during the election. Our schools will do everything they can to support their pupils, and to work with state schools for the benefit of all, despite the deeply damaging impact of this rushed policy."