A controversial UK Government decision to impose VAT on private school fees with the funds promised to boost state education, has raised questions over what has happened to the money in Scotland.
The Labour Government’s showpiece VAT policy was introduced last January amid dire warnings that it would put pressure on families and lead to private sector pupils being withdrawn and placed in state schools instead.
Campaigners warned the issues would be particularly striking in Scotland, and highlighted fears the policy – a key element of Labour’s election manifesto to target expensive private schools in England to help pay for more state teachers – would stretch local authority schools here and disrupt children’s education.
However, the UK Government insisted the move to impose 20% VAT on school fee payments would raise an estimated £1.5 billion a year across the UK, with Chancellor Rachel Reeves stressing that “every penny” would be invested into state schools.
It raised the prospect of an estimated £150million a year from the policy arriving at Holyrood, specifically for use to improve Scottish state education and help offset the impact of pupil movements as families withdrew from the private sector.
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- ScotGov worried no private school VAT money will come north
However, a year on from the policy’s introduction, it has emerged that VAT cash bonus had no clear ring-fencing around the income to ensure state primary and secondary schools would benefit.
With no sign of an obvious cash pot that can be traced directly to the pockets of fee-paying parents, there are now calls for clarity over where the cash has ended up and how it’s being spent.
Rather than being distributed as a ‘ringfenced’ fund as first suggested, proceeds from the VAT policy appear to have been consumed into funds received via the Barnett Formula, the process which decides how much money the UK Treasury distributes annually to the Scottish Government based on per capita public spending in England.
That raises the question over how much the policy has actually raised in Scotland, and whether the annual block grant includes the additional estimated £150m VAT cash pot.
The issue has added to further calls for a rethink of the entire policy in Scotland, where it has already led to a 13% drop in the number of private school pupils.
Campaigners say that the full impacts of the policy may take years to emerge as pupils leave the private system for state schools. However, it’s estimated it's already cost the state sector more than £20 million.
That makes tracing the VAT income crucial to helping balance some of the expected knock-on impacts of the policy on state schools.
The gothic spires of Fettes College in Edinburgh, one of Scotland's independent schools
The issue has now evolved into a point of contention between the UK Government and Scottish Government, with Holyrood suggesting the funds were expected to be delivered outside of the block fund, and the Treasury stating: "It is for the Scottish Government to allocate their Barnett-based funding as they see fit.”
A Scottish Government spokesperson said: "This is a UK Government policy, but the Scottish Government has been advised that the monies raised from the removal of the VAT exemption for application to schools have not been ring-fenced.
“This is a change to the UK Government’s position.
“While additional funding was applied to the Department for Education as part of the UK Government’s Autumn Budget and for future years at the 2025 UK Spending Review, on which Barnett funding was received, we cannot confirm the extent to which this has been funded by the removal of VAT on independent schools.”
The confusion is at odds with clear comments made by Chancellor Rachel Reeves in the run up to the policy’s introduction.
She said at the time: “Every single penny of that money [an estimated £1.7 billion a year by 2029] will go into our state schools to ensure every child gets the best start in life, and that is so often through being able to recruit and retain the best teachers.”
Read more:
- Private school VAT: The impact in Edinburgh so far
- Private school vat fee row: Edinburgh schools 'fit burst' says city MP
- Education committee to question impact of private school VAT
To add to the uncertainty over where the money is going, last summer Prime Minister Sir Keir Starmer claimed that the “tough but fair decision to impose VAT to private schools” had enabled “the largest investment in affordable housing in a generation”.
Critics say confusion over where the funds have gone is another indication of a chaotic policy imposing unnecessary pressure on state schools.
Lorraine Davidson, chief executive of The Scottish Council of Independent Schools (SCIS), said: “Every Scottish pupil has been let down by the UK government's refusal to consider the harm this policy is doing in Scotland.
“There is no evidence VAT on fees will benefit state schools, and plenty of evidence that it will harm education choice as well as the economy.
“It will also leave taxpayers to pay for the education of thousands more children. There are no winners from this flawed policy.”
Teachers union EIS called for clarity over the funds.
A spokesperson said: “The EIS is clear that all promised funding should be paid to Scottish education, to ensure a high quality learning experience for Scotland's young people.
“Clearly, funding models can be complex, but where money is pledged to support schools, this must be properly accounted for in Barnett consequential funding.
“There is a need for greater transparency in the funding allocations to public services, including education.
“At present, local authorities are free to divert funding pledged to education to other areas of public services, which is having an impact on education budgets across the country.
“A return to ring-fencing of funding allocations to local authorities by government would be hugely beneficial, and ensure that all pledged funding for education is spent for its intended purpose."
Labour MP Ian Murray, Scottish Secretary when the policy was being introduced, urged the SNP government at the time to ensure the extra cash went to state classrooms and not to fill a “black hole” in their budget.
He says the onus is on the Scottish Government to identify the £150m and ring fence it to ensure it heads to state education.
“The recent Scottish budget doesn’t seem to do that,” he said.
“Where is the money?
“The purpose of the policy was to get more teachers into our schools and we’d expect the Scottish Government to fulfil the commitment they made to do that.”
Miles Briggs MSP, Shadow Cabinet Secretary for Education and Skills, also called for clarity over where the funds have ended up.
He said: “Labour’s ideologically driven policy has already seen private schools shut their doors and huge additional pressures placed on state schools as a result.
“Yet there still appears to be no sign of the £150 million Labour promised would end up in Scottish state schools and ministers must urgently come clean on this.
“We repeatedly warned that many pupils would transfer from private schools due to this VAT raid and Edinburgh alone has seen nearly 100 transfers so far.
“Scotland’s schools are already struggling after years of cuts. The last thing they need is to be the victim of another broken promise from Keir Starmer’s government.”
