Key tax policy from Keir Starmer could have massive consequence he didn't predict
A flagship Labour Party policy that was confirmed in the King's Speech could have the opposite effect to that feared by some opposing the tax.
Sir Keir Starmer's decision to slap VAT onto private school fees has conjured an image of punishing elite institutions and their patrons.
But the flagship Labour Government tax policy, which was confirmed in the King's Speech, could actually result in a reality that few criticising the policy considered.
Financial experts say that the decidely left-wing move could actually end up benefiting not just HMRC, but some of the elite schools targeted, by increasing their wealth even more.
David Gage, head of VAT at Old Mill, told Headline Money that the 20 percent levy will change the schools' status and will mean they are now able to recover costs.
Mr Gage said: “Currently, private schools are unable to recover VAT on their costs because the provision of education is VAT exempt. However, when the government removes this exemption and makes the provision of private school education taxable (VAT at 20 percent), schools will be able to recover VAT on their costs.”
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The finance expert says this means that schools will be able to delay capital expenditure (CapEx) or any other significant spending that is subject to VAT until the tax becomes chargeable on school fees.
It also means they can claw back VAT on historical expenditure going as far back as 10 years and opens up the door for schools to become corporates that pay shareholders.
He said: “If schools defer any large CapEx or other VATable expenditure - for example, property projects or large IT projects – until after the rules come into effect, they will be able to benefit from full - or near full - VAT recovery, which, assuming inflation doesn’t rise significantly, could mean savings of up to 20 percent."
“Furthermore, if private schools have incurred any historical VATable expenditure on any large property projects including refurbishments or computer hardware, once the rules come into effect, they should be able to recover a proportion of the VAT incurred under the Capital Goods Scheme, which could mean recovering VAT from as far back as 10 years.”
So, though these possible paths for private schools don't solve the problem for parents paying the fees, they could represent opportunities that end up boosting institutions already at the elite end of education.
