The Impact of VAT and Fee Increases on Schools and the Special Education Needs Market

The introduction of a 20% VAT charge on private schools in the UK, which is set to commence in January 2025, represents a significant shift in the financial landscape of private education. This policy, originating from the Labour Party's pledge to level the playing field between state and private schools, is expected to generate substantial revenue for the Government, potentially as much as £1.5 billion, which is earmarked for enhancing state education and recruiting 6,500 new teachers.

The implications of this change are multifaceted. Some schools might discount fees to offset the increase in VAT instead of parents with children attending private schools receiving the full 20% increase, it could be a hypothetical muted increase of 8-10%. However, some parents may still not be able to afford the increase, which could lead to a decrease in enrolment as families reassess their financial plans for education. This could particularly impact smaller, less financially secure institutions, threatening their viability. However, schools are likely to engage in strategic planning to remain competitive, exploring ways to mitigate these costs through increased fundraising efforts or cost-cutting measures.

For parents, the financial burden of private education could become more pronounced, necessitating a careful consideration of the value proposition offered by these schools. The policy may also drive innovation within the sector as schools seek to offer distinctive educational experiences that justify the increased costs.

The demand for SEN services continues to rise at pace. In 2023, 84,428 new EHC plans were initiated, marking a 27% rise from 2022. This brought the total number of EHC plans in England to 575,963 by January 2024. Among these, 434,354 young people with EHC plans are pupils in schools across England. Additionally, initial requests for an EHC plan in 2023 increased by 21% to 138,242. (GOV.UK)

Considering the above, it is encouraging to note that funding for children and young people with complex needs has significantly increased from £8.1 billion to £10.54 billion over the financial years 2022 to 2025. But with the increase in pupils with special education needs and pupils with EHC plans, this funding may still not be enough especially when Local Authorities’ budgets are tightening. This goes further when you consider that schools are required to cover the first £6,000 of the cost of an EHC plan before additional government funding is provided.

What are the potential impacts of these VAT changes?

1. Surge in EHC Plan Queries and Increased Pressure on Local Authorities
   • Independent School Fees: Parents with children who have Special Educational Needs and Disabilities (SEND) but do not have an EHC plan might be significantly affected by this policy. If these parents are paying for their child’s education in an independent school, they could face a hike in fees due to the VAT changes. Consequently, there may be an influx of parents seeking EHC plans for their children in independent schools, which would increase the pressure on Local Authorities.
   • Mainstream State Schools: For children with SEN in mainstream state schools, the situation could become even more challenging. Children with Special Educational Needs and Disabilities (SEND) in these schools are increasingly being refused additional funding from councils in England unless they have an approved EHC plan creating a cycle between parents and councils over who gets support. This funding crisis, coupled with the VAT changes, could further escalate the pressure on Local Authorities.
2. Pressure on State Schools to Accommodate a Possible Increase in Pupils
   • Shift to Public Education: The potential rise in students moving to public education may prompt state schools to reconsider their admission policies. They might need to balance the decision of accepting more mainstream students versus a smaller number of students with SEN.
   • Staffing Issues: The increased pressure on state schools to accommodate more children could further exacerbate the staffing issues that Labour is attempting to resolve through this policy in the short term.

        3. Increased Costs for Local Authorities

• Independent schools, with their smaller class sizes and additional SEND support, are often perceived by parents as better equipped to meet the needs of pupils with SEND compared to mainstream state schools. Consequently, some parents choose to educate their children privately. These parents may argue that their child’s needs are more effectively met by independent schools and may request that their child remain in the same school after receiving an EHC plan. This shift could lead to higher costs for the Local Authority, as maintaining the child’s placement in the independent school under the EHC plan could be more expensive than the fees previously paid directly by the parents.

The Government has clarified that the VAT measure will not affect pupils with EHC plans where their needs can only be met in private schools. However, local authorities will be able to claim that VAT back. This aims to ensure that the most vulnerable students are not disadvantaged by the new tax policy. Nevertheless, the broader implications of the VAT charge on private education could impact Independent Special Schools due to the downstream consequences that are likely to emerge over time, such as a larger need for more staff, impacts on operations and financial stability.

The topic continues to generate significant debate, with concerns about access to education and the potential for increased exclusivity within the independent school sector. With the 2024 Autumn Budget confirming the implementation of this VAT charge, all stakeholders, including private schools, parents, and the rest of the Government, are waiting to hear whether the effects of these changes produce the desired outcomes without compromising the quality and accessibility of education. The full impact of this policy will unfold over time, making it essential to monitor its impact on the UK’s educational landscape.

For further discussion about the impact of these changes on the schools and SEN market, contact ibitoye.ibikunle@christie.com.