Future challenges for independent schools – how best to prepare?

The wait for the Labour party to announce its plans in respect of how it will treat private schools is over.  Speculation on the potential consequences for the independent school sector has been growing as the likelihood of a new Labour administration has increased.  Now we have some clarity.

Private schools will not be stripped of their charitable status, according to the latest reports.  Sir Keir Starmer and his senior team have long been hinting at significant changes to the benefits currently enjoyed by private schools which are charities.

Charity lawyers had similarly been debating how the removal of charity status could be achieved without major, lengthy legislative change.  It was an ambitiously complex possibility, and one which Sir Keir, perhaps in light of his legal expertise, now appears to have abandoned.

The swifter, more straightforward, way to target independent schools is the – now very real – threat to end VAT relief. More detail is anticipated in the coming weeks, presumably beginning with a further announcement at the Party’s conference this month.

Sir Keir knows that he needs to do something to show that he believes in equality for all children, but he cannot risk alienating all those aspirational families who want to have the choice of where to send their children.  Equally, if his advisers have been doing their job well, he will not want to risk the significant work of some of the UK’s private schools and their headteachers who lead by example, inspiring their pupils and sharing their resources and facilities with local state school students who may not otherwise access these opportunities.  For now, that seems safe.

The public benefit requirement is a key principle of charity law.  All charities, including private schools with charity status (which according to Government figures is around half of all independent schools in England) must not only pursue a charitable purpose such as the advancement of education, they must also operate for the “public benefit”.  With this responsibility comes benefit in the form of tax exemptions and reliefs.  (This article is concerned only with those schools with charity status.)

Although referred to within the Charities Act 2011 as being an essential part of charity status, there is no statutory definition of public benefit. It is explained and examined in guidance and numerous articles and case law – but it is accepted that there is too much nuance and societal change which must play a part in determining its character and therefore it remains legally unspecified.

Nonetheless, if a charity fails to comply with the requirement, then this may constitute a breach of the trustees’ duties and with that comes the potential full force of a Charity Commission investigation. Independent schools should – now more than ever – be fully aware of their duties in respect of the public benefit requirement and ensure not only that their school fully and imaginatively complies but also that it is seen to comply.

Working with independent schools over 50 years has enabled our team to have unrivalled insight into the full range of outreach activities which independent schools have embraced, for the benefit of the public.  The possibilities are limitless.  Bearing in mind that their charity status is sharply in focus, there is potential benefit in shining a light on that work and keeping it firmly on the agenda of every meeting of their governing body.

The introduction of VAT of 20% on school fees meanwhile is a far more tangible matter to grapple with.  Many readers of this article will already be familiar with the publication from the Institute for Fiscal Studies which examines the detail and the impact of introducing VAT on school fees.  This note does not examine the political repercussions of the decision, nor its effectiveness in terms of generating substantial funds for the state sector (the IFS study does that).  Instead, it briefly explores ways in which those schools which will be impacted by this change, might seek to manage the transition from the perspective of their charity’s governance.

Undoubtedly all those schools affected have an urgent need to review their current governance and assess its effectiveness to withstand the changes.  Where assets sit and where income flows must be carefully reviewed – school governors like all charity trustees have a clear legal duty to ensure that they always act in the best interests of their charity.  This means that school governors must now actively engage with that process and do the best they can for all their beneficiaries.

Many schools run grant-making schemes with assets held as restricted funds and governors should consider whether these would sit better in a separate charity for which separate fundraising might now take place.  Schools, to this end, should consider how best to raise funds through alumni networks.  Bursary funds may face even greater demands, and governors must consider how best to service those needs.

Cost saving measures may be necessary for many schools and governors may want to ask themselves the following questions.

• Core assets – If charities hold non-core assets could they properly divest themselves of these?
• Generating income – Could assets which do not currently assist the school in delivering education be used for different purposes to generate income?
• Trading subsidiary – Is the school’s trading subsidiary generating sufficient income or should it be reviewed and should its board be refreshed?

Note that directors of a trading subsidiary can receive remuneration for that role and now may be the time to consider increasing the workload of that body.

• Professional trustees – Equally, with the likely increase in demands on the governing body itself, is now the time for schools to consider bringing on professional trustees, or making an application to the Charity Commission to pay their chair.  If this is in the best interests of the charity and its future resilience, then a robust case could and should be made.

Our Education and Charities team is on hand to discuss the challenges presented by all of these issues.  Get in touch if you want to discuss any of the questions above, or matters generally.