Will the VAT change lead to more insolvencies in the private schools’ sector?

What is the role of Insolvency Practitioners in private schools’ insolvencies?

The Government’s plan to levy VAT at the full 20% rate on all c.2,600 private schools in the UK came into force on 1^st January 2025. There has been much debate across the political and educational spectrum as to the likely outcomes for this policy. This article focuses only on whether the policy will lead to an increase in the number of insolvencies in the private schools’ sector and what the role of Insolvency Practitioners is in private schools’ insolvencies. In particular, are there any different or unusual features of a liquidation of a private school? We highlight this area by looking briefly at some key points that arose from the closure of a private school in Hampshire in 2022 where we were the liquidators.

The jury is out on whether the policy will lead to increased insolvencies

Depending on who you listen to, the answer is yes, no, or maybe! And, of course, it is very early days. For example:

• On Monday 6^th January, Loughborough Amherst School announced it was proposing to permanently close in July, with the Chair of Governors, Roger Harrison, stating that “We face a situation now in which operating costs continue to rise, further exacerbated by the recent Autumn Budget announcements.” The operating costs he mentioned included the introduction of VAT for private schools, the national minimum wage rise and changes to business rate exemptions.

This announcement gained a great deal of media coverage, with the implication that it was the first of many to come.

• By contrast, an article in the Guardian on 26^th October 2024 quoted data from the Government Register of Private Schools, which showed that more than 80 private schools closed every year in England over the last decade, with no apparent increase in the trend since Labour announced it planned to impose VAT on fees. The data for 2024, up to 6^th October, shows that 46 private schools closed, which was slightly below the trend, whilst 77 opened.

The key point this article makes is that insolvencies have always happened in the private schools’ sector, a point we will pick up on later in this article.

• The International Accounting Bulletin, on September 6^th 2024, reported that the measure could lead to between 10% and 20% of private schools closing within 3 years. That equates to between 260 and 520 closures. The former figure is roughly on trend for private school closures, the latter is more than double the trend figure, so would represent a significant increase.

Clearly time will tell whether the VAT levy will increase the number of insolvencies, and if so, by how much.

The Likely impact of VAT on Private Schools

Private schools are often not thought of as businesses…. but they are. Whilst they might not be structured as traditional businesses are – many are run as charities, for example, or as companies limited by guarantee – they still need to run profitably, and in order to be going concerns income needs to match or exceed expenditure over the long term, as well as providing capital to be invested into the business in order to maintain existing standards.

Many businesses in the UK have struggled over the last few years for a variety of reasons, and private schools are no different. They have had to face familiar problems: higher energy and infrastructure prices, inflation driving up salaries and falling demand for single-sex education and boarding, whilst the cost-of-living crisis has had a negative impact on the ability of parents to afford the fees.

The VAT charge will mean a further additional cost on private schools, which they must absorb or pass onto the parents as increased fees, fully or partially.

Headteachers of smaller, specialist private schools (those most likely to be at risk) say they have little room in already-squeezed budgets to make cuts, leaving few alternatives but to hike fees by the increased cost of VAT – and parents are likely to turn down places as a result.

This may result in a fall in the number of fee-paying pupils at private schools, their main source of income, which against the backdrop of existing difficult trading conditions, may increase the likelihood of further insolvencies.

An estimate by the Institute for Fiscal Studies (IFS) suggested that between 20,000 to 40,000 pupils are set to drop out of private schools as a result of the imposition of VAT.

School CFOs and Bursars will have been working with their finance teams internally and with their accountants to mitigate the effects of the imposition of VAT, but, as Diarmid McKenzie, the chair of Governors at Sands School in Devon has said:

“If children withdraw, then schools would have to further increase fees or reduce staffing levels, as they still need to pay VAT – so there’s a risk of schools going into a negative spiral, where the overall proposition of the school ceases to be viable.”

The role of Insolvency Practitioners

For schools that are pushed onto the cusp of insolvency by the impact of the imposition of VAT, the sooner the advice of Insolvency Practitioners is sought the better. Schools can very quickly start losing money if they drop below the critical level of break-even numbers.

Insolvency practitioners can play a crucial role in helping private schools facing insolvency over VAT by providing professional advice and support. Here are some ways they can assist:

1. Assessment and Advice: Insolvency Practitioners can assess the school’s financial situation and provide advice on the best course of action. This may include restructuring, negotiating with creditors, or considering closure if necessary. In addition, early professional advice can make sure the school’s directors/governors are not liable for wrongful trading, and avoid personal liability and misfeasance,
2. VAT Compliance: They can help ensure that the school complies with VAT regulations, including submitting returns and dealing with any outstanding VAT liabilities.
3. Negotiation with HMRC: Insolvency Practitioners can negotiate with HMRC on behalf of the school to potentially reduce VAT liabilities or arrange for payment plans.
4. Finding a buyer: This can be achieved pre-insolvency or post-insolvency via an Administration.
5. Liquidation: If the school cannot be saved, Insolvency Practitioners can guide the school through the process of liquidation, ensuring that all legal requirements are met and creditors are paid as much as possible. Liquidation also allows the Government Redundancy Payment Service to pay redundancy pay and any arrears in wages, holiday pay and notice pay.
6. Governance Support: They can provide support to the school’s governors, helping them make informed decisions to avoid personal liability and ensure the school’s financial health.
7. Redundancy Payments: In the event of closure, Insolvency Practitioners can help manage redundancy payments and ensure that staff are treated fairly.

A case study – Liquidation of St John’s College, Southsea

There are a number of areas which are very specific to private schools when it comes to financial problems and liquidation, so experience of the sector is key in order to navigate the best way through the problems.

Some of these are highlighted in the following case study where we were appointed as liquidator for St John’s College, Southsea – a registered charity – in August 2022. Although this was well before the imposition of VAT, the key issues remain the same.

Key issues:

Their main problem was the inability to attract sufficient pupils to make the school profitable. The number of pupils had fallen from 630 in 2010 to 256 in 2022. Initially there were hopes that the school would be bought, and investment provided for the site to be redeveloped and allowed to continue, but the deal fell through, and the decision was made to bring in the Liquidators.

Other issues included:

• They were saddled with a large unpaid pension liability.
• The debtors’ schedule of unpaid school fees was c.£400k, dating back years, which coincidentally was about the same size as the balance of the unpaid pension liability. The school had been lenient with parents over unpaid fees, very much out of the kindness of their heart, but it ultimately impacted on the school’s ability to survive.
• The structure of the school premises was suffering and the school couldn’t afford to pay for the repairs which were necessary for the future safety of the pupils and staff.
• Staff liability (redundancy) was large because many of the teachers had been there a long time.
• Site security once the site was closed. Live in guardians on site had to be brought in when the school vacated to ensure that the site was safe & secure.
• Ultimately, an auction of the remaining assets was held, which was successful. Special provisions for the pupil records to ensure they were safe and confidential had to be made a great deal of time spent ensuring that the education authorities had all the information they required in order to rehabilitate displaced pupils and ensuring all sensitive data was properly and securely dealt with. In addition to this a specialist company was employed to dispose of all of the old chemicals in the chemistry lab.
• In order to minimise the impact on the pupils and potential claims from parents for non-supply of services, trading continued to the end of term.

TUPE (Transfer of Undertakings (Protection of Employment)) Regulations did not come into play here as a new school did not come in to take over St. John’s, but TUPE often puts many potential buyers off.

Summary

The imposition of VAT on private schools, as well of the removal of Business Rate Relief for private schools that are charities in England (from 1^st April 2025) will add significantly to a school’s costs. This, added to the on-going difficulties that all businesses have encountered post Pandemic, will likely lead to an above trend increase in private schools’ insolvencies. The scale of this will only become clear in the coming months.

The sooner a Private School that finds itself facing insolvency contacts our Insolvency Practitioners, the more we can do to help.