VAT on private school fees and the impact on separated families – who is footing the bill?

As family lawyers, it is always necessary to advise our clients on the division of assets with the broader financial climate in mind. This has been particularly poignant this past year with the substantial changes brought in by the new Labour government in their autumn Budget. It was not a surprise, given the publicity given to this particular policy throughout the election campaign, that one of the first announcements was the elimination of the value-added tax (VAT) exemption on private school fees. By bringing in this change mid-academic year, in January 2025, it has caused additional financial stress to many families, particularly those going through a separation, who are already navigating increased demands on a limited household pot.

What will the changes mean in practice

Although some schools are expected to absorb some of the additional costs, at least in the short term, the standard VAT rate of 20% applied to private school fees will increase the cost of education by thousands of pounds per year. For a family currently paying £24,000 annually in school fees, the cost will rise by as much as £4,800 per child, per year. Attitudes to whether school fees are a luxury or a necessity to be prioritised above all else vary considerably between families and often become an issue for family lawyers to advise on.

Although the changes have not yet come into force and therefore haven’t been considered specifically by the family courts, recent case law has clarified that when there is a disagreement about whether school fees are affordable, the court will prioritise meeting housing and income needs, and only if there is sufficient funding remaining will an order be made to allow school fees to be paid. 

The courts

In the recent case of GW v GH [2023] EWFC 298 (B) it was held that, although the welfare of any minor children is the first consideration, it is not the only consideration in Section 25 of the Matrimonial Causes Act and the court cannot abandon the obligation to make a fair distribution of the assets, just to meet a school fee obligation. This decision was reached, even in the context of there being a Child Arrangements Order in force, specifying that the children attend a specified fee-paying school until the end of the term. Relevance was given to the wording in that order that the children could be moved to any school ‘to be agreed’, without stating that it must be another fee-paying school. It is now therefore clear that there comes a point at which deploying financial assets to meet the children’s educational needs will adversely affect their other emotional and physical needs and these need to be considered along with all of the circumstances of the case.

It is important for practitioners engaging in school fee order applications to establish the parents’ intentions prior to their separation. Mr Justice Mostyn referred to this specifically in the case of Renée v Galbraith-Marten [2022] EWFC 118. This case involved a protracted history of litigation and the mother applied for permission to bring an application for school fees under Schedule 1 of the Children Act. The mother had been privately educated in Australia but the father had not and the first reason given by Mostyn J for denying the mother’s application, was that ‘there has never been an agreement, plan or understanding between the parents that ‘A’ should be educated privately.’ 

In certain situations, separated parents may look to ‘top slice’ a fund from their capital resources, prior to the remaining balance being made available to meet housing and other needs. To calculate an appropriate capital school fees fund, the quantum of the school fees, extras, estimated school fees inflation, the anticipated return/tax on the fund and now, VAT on school fees will need to be added. If a top slicing exercise has been carried out historically, it might now be an insufficient sum to meet the VAT and fees for the anticipated period. 

The impact

It is perhaps, reasonable to think that, at the time of making a school fees order, an increase to cover inflation would have been anticipated, but rather less likely that a change to the VAT rules could have been foreseen three, four or even ten years ago, when an order might have been made. When increased mortgage rates and rising inflation are taken into account, it is not unreasonable to think that families who could once afford to pay fees, and had an order made accordingly, may no longer be able to afford to do so. 

An analysis by the Independent Schools Council (ISC) in October 2024 shows that, since the government announcement, the number of children in private education has already fallen by 10,000. It is worth advising any clients who might be in this position that they should not take matters into their own hands and that they are aware of the consequences of breaching a court order if there is already one in place. 

Mediation or other non-court dispute resolution (NCDR) options are well-suited to these types of issues, particularly because the costs of legal proceedings are only going to add to the strain. If necessary, however, an application can be made to the court for the variation of an existing order to change the terms. This could include a request to for the costs to be shared between parents, if this is an affordable option. 

In deciding whether or not to vary the order, the court will consider the financial circumstances, affordability and whether a variation application can be justified. It might be that the duration of the order is altered so that the children move to state education at a suitable time, for example between primary/prep school and secondary school, or that the other party makes a financial contribution when they haven’t previously. These types of applications are potentially costly in themselves, and pragmatism must be exercised to ensure that legal fees do not become disproportionate, or in themselves cause the school fees to become unaffordable. 

Conclusion

The decision of which school a child goes to remains one of the most important exercises of joint parental responsibility. If a move out of a private school becomes necessary for financial reasons and an agreement cannot be reached, the parents will be encouraged to engage in a non-court dispute resolution method, such as mediation. Ultimately, if agreement is not reached, a specific issue application can be made under the Children Act and it remains to be seen whether there will be a rise such applications in the coming months. Ultimately the decision on which school a child should attend is a welfare issue and should be determined with the children’s best interests as the foremost consideration.  The issue of the cost of schooling is distinct from the welfare question and the court is very unlikely to make a specific issue order for a child to attend a fee-paying school unless it is clearly established that it is affordable and was the intention of the parents.