Trusts paying for school fees –...

This post has been contributed by Amanda Taylor, University of London Teaching Fellow for Equity and Trusts.

It has been traditional in many better-off families to send their children to fee paying schools. The cost of the schooling has never been cheap but those who chose to educate their children privately obviously believe the cost is justified.

Again, traditionally trust funds are often set up within the family to pay for the fees. Perhaps grandparents have contributed to the fund as well as the parents and the trust is managed to cover the annual costs as and when they are invoiced. These trusts are often started when the baby is first born, so giving a good lead in time to allow accumulation and growth of the funds over the years.

As is well understood, the concept of a trust fund is to hypothecate monies for a specific fund and that this has been usually tax efficient.

Many private and independent schools have a charitable status. When studying charities, one of the heads of charity is known to be advancement of education. To many, the concept that seemingly well-to-do and well-known schools have a charitable status seemed to be contrary to the idea of being charitable. You may well have come across the case of Independent Schools Council v Charity Commission for England [2011] UKUT 421 (TCC). Here it was decided that the trustees had to decide how the school demonstrated public benefit and so fitted into the requirements of the Charities Act 2011.

With the above as background information, I would then direct your attention to the newly elected Government’s directive that VAT (value added tax) is to be added to independent school fees. This has come as somewhat of a blow to not only to the fee payers, but also the schools themselves.

In the UK the VAT percentage is currently 20%.

Think of the impact on the trust fund that had been carefully managed to see the young child through their education up until the age of 18. Anyone can quickly see that adding 20% to the cost each year would leave a massive gap in the fund.

Then, for the schools themselves the fact that they have to collect in and pay over the VAT it means that they have no say in the matter. What they could do, perhaps, is to chose to pay for lesser quality products with which to educate the children.

So many questions lead on from this move;

1. The Government says it is not taking away the charitable status of the schools, but if that is so then how can they charge VAT on the services provided when VAT for charities is normally 0% rated?
2. If the schools try to reduce their costs to absorb some of the impact rather than passing on the full cost to the fee-payer, then will the service be diminished?
3. What happens if the fee-payer decides they can no longer afford to pay and decide to put their child into the state funded schools that are available to all? How will the state-run schools cope with the now higher demand?
4. What happens to those children whose trust funds cannot now fully fund the fees? Some of those children will be at crucial parts of their education and the child will have no knowledge of any other educational system. How will they be impacted mentally and educationally?

I think that this is one of those topics that probably divide the country but one that certainly has many unknowns when thinking about its impact.