Independent schools in Scotland are facing significant cost pressures. There could be more to come. Depending on which political party succeeds in the next General Election, their charitable status may be removed, meaning an extra 20% VAT charge would be payable on school fees. With some schools already having to increase fees more than planned, consider redundancies and even close, the impact could be considerable and planning by schools and parents is essential.
Last year saw an important tax relief on business rates for schools with charitable status removed (except for specialist schools for vulnerable children and others with special needs). In England and Wales, these schools still receive at least 80% relief on business rates.
Recently, independent schools, like many other organisations, have had to keep up with wage increases to remain competitive, while facing higher energy and infrastructure prices. With the cost of living impacting the extent to which parents can afford school fees, drop-off in pupils enrolled poses a risk. If the Labour party’s plans to remove charitable status for independent schools come to fruition, costs for independent schools could soar, which could significantly affect the sector which employs over 3,549 teaching staff in Scotland. Unlike state schools, there is no commitment to protect the number of teachers.
State schools may also need to plan for this policy change. They could receive extra money from the VAT on school fees, however, if independent school fees become prohibitive for some, the number in state education could increase.
Many schools are already making difficult decisions about how much of these costs to absorb themselves and how much to pass on to parents. There are various options. Schools may raise fees further, sell off buildings, offer fewer bursaries or end boarding provision. Some schools have already consulted about possible redundancies despite raising their fees.
Restructuring the school’s model and assets may safeguard against the loss of charitable status or for loss of certain tax reliefs. For instance, a separate charity, with the school operating as a subsidiary company, or having fees in advance schemes allowing parents to pre-pay school fees.
Merging with other schools, outsourcing services and sharing resources might save costs, but must be handled carefully to avoid breaches of employees’ rights during a relevant transfer. There are important considerations for all involved and the relevant responsibilities should be thought through from the outset with appropriate advice taken. Both the outgoing employer and the new employer may need to inform and (if appropriate) consult with representatives relating to any of their employees who may be affected by the transfer or risk having to pay a sum up to 13 weeks’ gross pay for each affected employee.
To avoid more drastic action, negotiation of reduced pay and reduced hours remains possible. Settlement agreements may be used as these are one of the few means to legally prevent an employee from pursuing certain claims like unfair dismissal and discrimination. If other options are not enough, then compulsory redundancies may be required. This is not unique to independent schools. This month, Acas published the results of a new survey on redundancies finding that 30% of employers are likely to make redundancies in the next year. Here, process, consultation and fair non-discriminatory selection will be important – especially where there are 20+ individuals involved. A common misconception is that redundancies mean the employer is performing poorly or the entire role is unnecessary. Ultimately, redundancies may be appropriate to operate effectively and to safeguard the school’s long-term future.
Parents are also putting plans in place. Some may consider paying school fees when the time is right from income. However, this can be challenging with unforeseen risks, high inflation, and increased school fees. Structuring family savings could not only benefit their children/grandchildren, but also bring individual tax benefits by reducing the potential liability to inheritance tax. Through careful tax and financial planning, a grandparent can use “surplus income” to fund school fees without inheritance tax implications and gifting capital into a trust for the grandchildren might be worthwhile in the long run.
It is hard to say what might happen. It is crucial that schools and parents consider contingency plans to quickly adapt to the challenges ahead.
If you have questions on any of the points raised in this article, please get in touch with Robin Turnbull or your regular Anderson Strathern contact.
A version of this article was included in The Scotsman.
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