Scrap VAT plan if OBR says it will not raise money, Starmer told

Labour must abandon its plans to charge VAT on private schools if the budget watchdog forecasts that it will ultimately lose the taxpayer money, an education chief has warned.

Sir Keir Starmer should ditch the policy if it is not seen as a revenue-raising measure by the Office for Budget Responsibility (OBR), according to the Independent Schools Association president.

Lord Lexden, who is a Tory peer, believes it is likely that the OBR would find that the policy will end up costing the taxpayer more than it will be able to raise in revenue.

Labour has announced plans to impose 20 per cent VAT on fees, which it says will help fund the recruitment of 6,500 new teachers in state schools.

Parents and headteachers across the country fear the move will result in an exodus of pupils into the state sector, as families struggle to afford fees.

According to the Institute for Fiscal Studies (IFS), the move would raise £1.7 billion from VAT and £104 million in business rates.

But the think tank found that up to 40,000 children will be pushed out of private schools and into state schools as a result of Labour’s plans – at a cost of up to £300 million a year to the taxpayer.

The IFS warned that the policy could also drive up tax avoidance as schools and families seek out loopholes to cut bills.

Lord Lexden told The Telegraph: “The central question is – would Labour abandon or not abandon this policy if the OBR said to them that it will cost more than it will bring in?

“Is this crude party politics, or is it a serious effort to raise money for the state sector? That is where the OBR judgment is so central and that is why Labour should not be able to evade it.”

Labour has already said it will increase the powers of the OBR, promising to legislate to guarantee that any future chancellor making significant tax and spending changes would be subject to an independent forecast by the fiscal watchdog.

Rachel Reeves, the shadow chancellor, made the commitment in the wake of former prime minister Liz Truss’ disastrous mini-Budget.

Despite the criticism, Sir Keir has doubled down on its commitment to apply VAT “straight away” on private school fees if it wins the keys to Downing Street next month.

Independent school heads have warned that already struggling smaller schools will close as a result of the 20 per cent tax raid.

The IFS report, published last year, said: “Our view is that it would be reasonable to assume a range of somewhere between a 3 per cent and 7 per cent fall in private school attendance – or about 20,000 to 40,000 pupils – as a result of a 15 per cent effective VAT rate.”

It also said: “With many other aspects of the VAT system, there is potential for tax avoidance. One could envisage schools seeking more gifts or donations to reduce the impact of the tax changes or charging more for other non-VATable goods and services –  there are almost certainly more opportunities for avoidance [under Labour’s policy].”

The Labour Party declined to commit to abandoning the policy if the OBR forecast went against it, with a spokesman saying: “Labour will invest in delivering a brilliant state education for children in every state school by recruiting over 6,500 new teachers, funded by ending tax breaks for private schools.

“Independent schools have raised fees above inflation for well over a decade and do not have to pass Labour’s proposed change on to parents.”