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Private schools, the permanent endowment ‘problem’, and VAT on fees

Posted: 12/04/2024

Changing social attitudes around private schools and their charitable status seem to have contributed to the Labour Party’s proposal to add VAT to private school fees (as well as remove the 80% business rates reduction they currently benefit from as charities).

This article considers why this policy has changed, from the initial proposal of removing charitable status from private schools altogether, to a focus on these specific taxes.

Charitable status is a legal construct, conferring tax benefits in return for benefits widely believed to be for the public good. This does not mean that every organisation with charitable aims or activities can legally be registered as a charity. However, it does (or is intended to) mean that every registered charity is a charitable organisation that meets a certain threshold of public benefit. Not all days of the week are Mondays, but all Mondays are days of the week.

That threshold of public benefit is being looked at again, this time through the lens of fee-paying schools. At their foundation, many such schools were institutions set up to provide education to those who would otherwise be denied it, often those deemed to be ‘poor’ or ‘impoverished’. Fast forward to today and those roots can seem far away, especially when school fees can be upward of £30,000 per year (for example, for Westminster School), even for those who do not board. In a world where the 2023 median annual salary was just under £35,000, the bald numbers do provide something of an open goal for political arguments.

Going back, however, to the foundations of such fee-paying schools, their land, assets, and financial backing can take the form of ‘permanent endowment’; that is to say, capital in the form of property, cash or other assets that are either functional, and can be used by the charity (in the case of land and other tangible assets), or invested (usually cash, securities etc, although sometimes land that is rented out) to provide an income.

Some of the rules surrounding permanent endowment assets have changed under the Charities Act 2022, however, the basic premise remains the same: significant permanent endowment can only be sold, or otherwise parted from, with the permission of the Charity Commission. It is intended to permanently form part of the assets of the charity to which it was given.  

Weakening the safeguards around permanent endowment assets risks alienating donors and even possibly the reputation of the charitable sector as a whole. The changes brought in by the Charities Act 2022 are starting to ripple through into the transactional work of charities, such as where now-obsolete land may need to be sold, or where investments are sold or used as security for a loan. However, the removal of charitable status for a whole swathe of the sector would remove the permanent endowment safeguards entirely for those organisations.

In the case of fee-paying schools, it is common for the physical buildings and land used by the school to be permanent endowment. Some may be held by the schools themselves, others through related charitable trusts. Over the years, the uses of the land may have changed, with parts redeveloped, sold off, or compulsorily purchased in support of maintaining the financial security of the registered charity school in question. This will all (hopefully!) have been carried out in accordance with the regulatory requirements of the time.

The specific origins of how these permanent endowment assets came to be the property of the charity can be complex, many dating back to original grants of land that are decades, if not hundreds of years, old. Unravelling all of that, eg to allow the sale of a specific parcel of land, such as one now cut-off from the school’s main centre of activities, can be quite the undertaking, even when only dealing with one specific organisation. Attempting to legislate to cover all such potential eventualities would be incredibly complex and time-consuming. It is a legal maze that could tie things up for years, creating delay and even potentially preventing any reform at all.

The rationale for the Labour Party confining its proposed changes to these specific tax benefits perhaps finds its roots in (amongst other things) the complexities of permanent endowment. Removing charitable status altogether would cause tremendous difficulties in dealing with permanent endowment (as well as other issues), stalling or even frustrating potential reform entirely. Tackling individual taxes without reference to charitable status in itself is perhaps seen as easing the progress of these proposed changes, as well as making them more likely to happen at all.

If you have any queries around how the rules around permanent endowment affect your charity, or indeed, about planning for potential changes ahead, please contact a member of our charities group, or your usual Penningtons Manches Cooper contact.

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Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

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