‘Entirely foreseeable’: Experts on court upholding UK private school VAT policy

This article was originally published in International Tax Review and is reproduced with permission from the publisher.

 

Winning the case against the 20% VAT imposition was always going to be an uphill challenge for the claimants, UK tax advisers argue

A High Court decision earlier this month on the UK government’s private school VAT policy was “entirely foreseeable” and concerns politics rather than technical issues, according to UK advisers.

The UK government decided to impose a 20% VAT rate on private school fees from January this year. It expects the policy to raise fees by around 10% on average.

ITR last month reported on legal challenges being made against the government’s policy, including one case being led by UK law firm Kingsley Napley.

The government denied claims that the policy breaches the right not to be denied education as per the European Convention on Human Rights (ECHR).

It was also alleged that the policy contravened human rights related to religious freedom, parental choice and special educational needs. On June 13, the claims were dismissed by Dame Victoria Sharp, Lord Justice Newey and Justice Chamberlain of the High Court of Justice. They held that the ECHR didn’t protect a right to pay school fees at a particular level.

“Private school fees are set independently of government and are inherently subject to market forces. Parents always have the option of not paying any school fees at all – and therefore no VAT – by sending their children to a state school or educating them at home,” the judgment said.

The court added that the UK government could impose VAT as it had a “broad margin of discretion in deciding how to balance the interests of those adversely affected by the policy”.

 

Doomed from the start

Richard Woolich, a partner at DLA Piper and head of the firm’s UK VAT and indirect practice, tells ITR the case was always going to be an uphill battle for the claimants.

This was because the policy had been a flagship Labour Party manifesto commitment, debated in Parliament and enacted into law.

The imposition of VAT on education represents a divergence from mandatory EU law and would not have been possible before Brexit, Woolich also notes.

“An appeal is perhaps unlikely, but we must wait to see,” he says.

The case is a reminder that schools charging VAT must appreciate the strain on parents, according to Woolich.

He argues that, considering the schools’ new entitlement to reclaim input tax, they should be charging “rather less” than the full 20% VAT on top of the previous fees.

Parents could look to question schools on their implementation of VAT, he argues.

“Finally, HM Revenue and Customs (HMRC) might now look to test the prepayment of fees arrangements, put in place by some schools, and test their implementation,” says Woolich.

The case saw claims made under a legal process known as judicial review.

Judicial review challenges concern public law issues and must be initiated in the High Court, Jack Prytherch, UK-based head of tax disputes at Osborne Clarke explains.

Prytherch argues judicial reviews can be “highly effective” in some cases. He highlights where HMRC fails to honour clear statements it has made to a taxpayer as an example.

However, they can be difficult to win because the High Court tends not to want to interfere with HMRC's management of the tax system – according to Prytherch.

He echoes Woolich’s view that it was always going to be an uphill challenge for the claimants.

“[In this case] the court emphasised that the imposition of VAT on private school fees stemmed from a Labour manifesto commitment and was heavily debated in Parliament.

The difficulties raised by the claimants had already been weighed against the wider impact of the additional revenue that could be reinvested into public revenues and state education,” says Prytherch.

The High Court did not have the power to strike out the VAT legislation in any case, and the most that the claimants could have hoped for was a declaration of incompatibility with the ECHR, he says.

Prytherch adds that the imposition of VAT on private school fees represents a political issue, and not a technical one.

“Barring a reversal of the High Court's decision on any appeal, claimants will need a dramatic change in government policy, which might ultimately only come through the ballot box,” he states.

Prytherch tells ITR that private schools may attempt to shelter parents from some of the cost of the additional VAT by reducing fees. Schools will be helped to some extent by the ability to reclaim VAT on their associated purchases for the first time, he argues.

“However, private schools are already facing overall higher costs with the removal of business rates charitable relief affecting around half of all private schools and the recent rise in employer national insurance,” Prytherch also says.

 

No relief

Bernardo Almeida, a tax partner at accountancy firm Hazlewoods in the UK, agrees that the topic is fundamentally a political one and suggests that the Court shared his view.

The legal position of the claimants with respect to the ECHR was “weak at the best of times”, he argues.

Almeida tells ITR the court’s decision did not surprise him and was “entirely foreseeable”.

Unless a policy crosses a very clear threshold of legality, domestic courts will not intervene in social and economic legislation – he says.

“Judicial review is also a narrowly focused remedy as it scrutinises process and legality, not matters of policy.

“As such, the decision follows a well-established path, upholding the sovereignty of Parliament and confirming that arguments about fairness and practicality must ultimately be made in the political arena, not the courtroom.”

Meanwhile, Almeida also expresses concern regarding the UK government’s consultation process, claiming it appeared to be more of a “box-ticking, pro-forma exercise” than a genuine attempt to explore targeted reliefs or exemptions.

This was particularly the case when it came to reliefs or exemptions concerning children with special educational needs, he argues.

Special educational provision is generally paid for by local authorities, which can claim back the VAT under VAT legislation, according to Almeida.

“However, some local authorities challenge [education, health and care plans] as much as possible, and this often impacts lower-income parents the most, due to the lack of resources and knowledge about their rights,” he says.