The proposed VAT imposition on private schools in the UK poses challenges for schools, children’s, and the jobs their parents do. Parents who take their children out of private school may decide to work fewer hours, retire early, or leave the labour force altogether. This doesn’t just mean that many of these higher earners will pay less in tax. They’ll also be reducing their economic output, making businesses less productive, and which in turn will pay less business tax and VAT. This will be a drag on growth for years to come.

In order to pay the average annual £17k of school fees for two children over 10 years, a family will need to make a total of £340,000 of disposable income. If this family cannot afford to pay the extra VAT on their school fees, they experience a big wealth gain- enough to buy them a house. 

Author Maxwell Marlow has looked at the evidence on what happens when people experience a similar wealth gain, for example when they inherit money, or win the lottery. This backs up the ASI’s concern that parents experiencing a similar ‘windfall gain’ will reconsider how much they need to work.

Based on evidence, the ASI looked at what would happen if 40% of the money that parents earn, or the hours they worked, specifically to pay for the school fees was taken as leisure. It found that this unintended consequence alone could cost the Treasury between £360 million and £1.81 billion, depending on how many children migrate to state school.

The ASI has built on its original report on the consequences of charging VAT on private schools, which found that the policy could make no money at all, or even cost money, overwhelm state schools, and harm underprivileged children. 

If parents decide to work fewer hours then, combined with the other unintended consequences outlined in the ASI’s original report, this could mean that, in the IFS’ highly optimistic scenario in which 5% of children leave their private schools, it could raise a net £0.84 billion. If 10% leave, it could raise no money at all. If 25% leave, then it could cost as much as £2.51 billion.

Maxwell Marlow, Director of Research at the Adam Smith Institute and report author said:

“There is very little evidence on what will happen if the Government imposes a tax on private education, because most countries have never tried it. The only exception has been Greece, which had to reverse it because it was such a disaster.

So the truth is we just don’t know what will happen when VAT is charged on school fees. It is not possible to exactly predict how many children will leave, how many parents will reduce their working hours and to what extent, and what kind of impact it will have on state schools. That is exactly why it’s so risky.

What evidence on people who have experienced other types of wealth gains tells us is that it is likely that parents will reconsider how much they want, and need, to work. That has a wider impact on society as well as the economy. Every Doctor who works fewer hours, for example, will perform fewer medical operations.

At a time of low productivity growth, a staffing crisis in sectors such as teaching and medicine, and a skills gap, it is vital we don’t create further disincentives to work. We urge the Government and the OBR to take these unintended consequences into account ahead of the Autumn Statement in October.”