Following the recent local election results and in light of its current lead in the polls, the Labour Party looks yet more likely to threaten the Government at the next general election.
One of Labour’s most discussed current policies is, as we’ve mentioned here before, to remove some or all of the beneficial treatment currently enjoyed by charitable independent schools. This is a potentially very serious issue for these schools and in this article, we run briefly through some of the possible outcomes, and the options that may be available to schools.
Many of the topics we touch on are complex and would merit an article in themselves (see for example our previous article on legal options here) but we hope it is helpful to draw together various strands in a high-level way, to help frame the thinking of independent schools, their governors and leadership teams. We would obviously be very pleased to advise in more depth on any of the topics we discuss.
Possible policy positions
Labour might conceivably:
- Remove charitable status altogether or make it difficult or impossible for independent schools to pass an enhanced public benefit test (again, see our previous article). This might mean:
- corporation tax being levied on profits and gains
- loss of Gift Aid (affecting, say, alumni fundraising programmes)
- loss of business rates relief
- loss of stamp duty relief on property acquisitions
- loss of the charity ‘wrapper’ that schools currently enjoy, and its associated goodwill
- Add VAT to fees. Our sense is that this is the most likely of the various possible options to be implemented, but it’s possible that it would not be implemented in isolation.
- Withdraw business rates relief in isolation from other changes, as has been the case in Scotland
- Withdraw other specific tax concessions / treatments in isolation
Potential options for schools
If charitable status is not withdrawn altogether, with just (say) the VAT exemption being removed or rates relief withdrawn, it may be possible for many schools to continue operating on the current model. This would clearly require careful financial management and close analysis of the circumstances and any mitigation that may be put in place, for example in respect of recovery of input VAT.
If on the other hand, charitable status is withdrawn for independent schools, schools may need to consider whether they can continue operating without significant structural change. It may, for example, be possible for the school business itself to be run by a new for-profit entity, with the charitable element continuing in a reduced form (perhaps as a grant-making charity). This and other options might be as follows:
- The new entity would be a non-charitable trading subsidiary (or a sibling company) of the ongoing charity, with the existing charity assets remaining ring-fenced within the charity.
- There may be aspects of the school business that the charitable funds could be applied to by way of grant (for example, bursaries). The scope of support that may be provided might depend on the scope of changes made by a Labour government but in principle there may be quite broad opportunity to provide funding.
- The school’s land and buildings might be owned by the charity, on the basis that it would be an arm’s length landlord vis-à-vis the school company (this could not be provided free or at reduced rent as a charitable supply).
- It is less likely but in theory possible that some charity assets could be ring-fenced in another jurisdiction. An overseas charity or non-profit might more readily be able to make grants into an independent school that did not itself have charitable status. This is an area that would require close analysis in the particular circumstances of the school, and may involve reputational risk.
- Whether or not charitable status is withdrawn, there would continue to be various options for raising funds apart from through school fees, such as:
- Letting out facilities
- Engaging in international projects, such as opening co-branded schools in other jurisdictions, with potentially significant licence fees being payable to the school and/or charity (depending on who owns the brand and other relevant materials)
- Raising capital by long term borrowing (such as through issuing bonds – though currently high interest rates obviously affect the attractiveness of this)
- Raising funds from individual donors (obviously this is more attractive to donors if there remains a charitable element that is able to benefit from Gift Aid)
It would also be possible to increase the fees, though this is generally not appealing given that school fees have already increased considerably over the last two decades, squeezing the existing customer base.
If the school cannot continue
If a given independent school is finding it hard to continue to operate on a standalone basis, whether as a charity (perhaps suffering loss of rates relief and having to charge VAT) or otherwise, options for the future might include:
- Collaborating with others
- Perhaps entering into a contractual joint venture for given projects or for procurement, to deliver economies of scale
- Joining an existing group, perhaps as a subsidiary, which might mean shared resources and other efficiencies
- Merging with another school
- Closure, if the school is not financially sustainable and collaboration is not possible or not an adequate solution. This would obviously be a grave situation and one where the governors would need to take particular care given the potential impact on students’ education, especially those in exam years. The governors would also need to be careful if there seemed no reasonable prospect of the school continuing to operate on a solvent basis, likely needing advice from a specialist insolvency practitioner.
- Converting to an academy. This may be a possibility for schools that would otherwise close, potentially being achievable with minimal impact on students, parents and others. As a first step, interested schools would need to register their interest with the Department for Education, who would then likely appoint an officer to take the discussion forward. Conversion itself would involve transferring the school undertaking into a new academy trust (which is a company limited by guarantee, and a charity that is exempt from registration with the Charity Commission). Funding would be provided through a funding agreement with the Secretary of State for Education. It may be possible for existing charity assets (perhaps including land and buildings) to be ring-fenced within the existing charity.
Final thoughts
We have obviously covered a lot of ground here, but this article is not exhaustive. What will be appropriate for a given school – if indeed Labour is elected and pursues the policies we’ve described above – will depend on the school’s own particular circumstances.
We will keep a close watch on developments and will continue to comment.
For further information, please contact:
Philip Reed, Partner, Withersworldwide
philip.reed@withersworldwide.com
