DCH 277 Independent Schools Council (Further
Evidence)
Independent Schools Council
Grosvenor Gardens House
35-37 Grosvenor Gardens
London
SW1W 0BS
Tel: 0207 798 1590
Fax: 0207 798 1591
Andrew Kennon
Clerk to the Joint Committee
Scrutiny Unit, Room G10
7 Millbank, London SW1P 3JA
12 July 2004
Dear Andrew
Independent schools: fiscal
benefits from charitable status
In the evidence from the Independent
Schools Council sent on 2 June 2004 we quantified the annual fiscal
benefits of charitable status as £88 million for ISC charitable
schools.
In the Joint Committee hearing
on 30th June we were asked to identify precisely which
tax exemptions or reliefs were included within the £88 million
and whether there were other tax exemptions or reliefs from which
schools which were charities could also benefit.
The Chairman asked whether the
£88 million was "the tip of the iceberg". The answer
is that it is virtually the whole iceberg. For a small number
of schools, in some years, there will be further exemptions or
reliefs which are detailed later in this letter.
The £88 million includes:
- rate relief, which is a benefit
for all charities. 80% rate relief is mandatory: the remaining
20%, if given, is discretionary
- exemption from tax on investment
income
- tax relief on gift aid and
covenants.
For most schools, these three
elements represent the totality of the fiscal benefits of charitable
status
Lord Campbell-Savours asked whether
Accumulation and Maintenance trusts were of benefit to independent
schools. Income within these trusts, which has in the past been
taxed at below 40%, is now taxed at 40%. There is therefore no
income tax advantage in using these trusts, and there are no tax
benefits arising from those trusts which, as far as we are aware,
could even indirectly benefit the independent schools sector.
Your letter also referred to
VAT. The provision of education is exempt from VAT under European
Community law regardless of whether the provision is by a charity
or by a non-charitable institution. Charitable status is therefore
irrelevant in terms of VAT, except that educational charities
are not able to reclaim input tax and are therefore paying irrecoverable
VAT.
In the remainder of this letter,
may I emphasise a point made in our evidence of 2nd
June, namely that most ISC schools are, in business terms, very
small operations. The majority have an annual income of less than
£3 million. Most schools do not have endowments, have little
in the way of investment income, and are dependent on fee income.
In many cases, rate relief, mentioned above, is the single benefit
of substance.
The other potential tax benefits
are:
- relief from stamp duty. On
the whole, schools buy property rarely. For most schools in most
years, the benefit from this relief will be nil. We will conduct
research which will attempt to quantify the benefit across the
sector, but the result is likely to be very small
- relief from tax on capital
gains. This would apply to those schools which make capital gains
on shares or on other assets. This is not a sphere of activity
for most schools. In the current state of the market, those schools
with a share portfolio will probably have made capital losses
which they cannot set against other taxation. The benefit to the
sector as a whole is, therefore, likely to be negative. Any gains
would be reduced first by indexation relief and then by tax-adjusted
trading losses. The way in which the relief applies is that, if
schools were liable to pay corporation tax (see below), any capital
gains in the year would form part of the assessment. We will conduct
research which will attempt to quantify the significance of relief
from capital gains, but, as will be seen from the paragraph on
corporation tax, the effect is likely to be very small
- relief from corporation tax.
The majority of the benefit from this relief has been accounted
for in the £88 million figure given in written evidence,
in the form of tax relief on investment income. If schools were
liable to corporation tax, they would, quite legitimately, arrange
their affairs so that their surpluses, which are already very
small for most schools, would become virtually non-existent. Our
understanding is that the Strategy Unit concluded that, if charitable
schools were liable to corporation tax on their surpluses, these
surpluses might amount to no more than 10% of their current level.
Assuming average surpluses of 3%, which is what most schools
strive, often without success, to attain, the resulting tax would
be £3.5 million per year.
For completeness, I should refer
to two types of tax relief which do not benefit schools directly,
but do benefit individuals who make donations to schools which
are charities:
- relief from inheritance tax
on legacies. Gifts on death to charities are exempt from inheritance
tax. In preparing this letter I took advice from an accountant
who is chairman of the governors of an ISC school: his school
has not received a legacy in 40 years. It is likely, therefore,
that most schools in most years will not benefit from this relief
to any significant extent. We will conduct research which will
attempt to quantify the extent of legacies to ISC schools. The
notional tax for each legacy, which in some cases will be nil,
depends on the inheritance tax position of each individual donor.
This will not be within the knowledge of schools. We will therefore
take professional advice to quantify the likely range of the tax
relief to the estates of the individual donors, and will state
the assumptions that are used
- relief from capital gains
tax to an individual making gifts to a school which is charitable.
A gift to a charity can be paid gross of any CGT liability: i.e.
someone who gives shares to a school will not have to pay CGT
on any gain made on those shares. Benefit to most schools will
be nil, and across the sector is likely to be minimal. We will
conduct research which will attempt to quantify this figure, but,
from enquiries to date, the figure will be very small indeed.
We intend to conduct research
so that the results can be analysed and published before the end
of 2004. Nothing in the research is likely to change to any major
extent the ratio between fiscal benefits and the amount given
in scholarships and bursaries, which we shall also be researching.
More than double the amount of the fiscal benefits is given in
scholarships and bursaries - and the figures for scholarships
and bursaries do not include fee assistance for children
of staff or for brothers and sisters of children already at the
school. We expect the ratio to remain at more than double the
fiscal benefits of charitable status.
The annual benefits to the exchequer
from ISC charitable schools remain at £1.98 billion, equal
to the cost, on the Government's own figures, of educating 440,000
UK-resident children in the maintained sector. Additionally there
is the £283 million balance of payments advantage from fees
paid from overseas, and £170 million paid in irrecoverable
VAT by ISC charitable schools which, unlike maintained schools,
cannot reclaim VAT.
Yours sincerely,
Jonathan Shephard
General Secretary
Independent Schools Council
Independent Schools Council
Grosvenor Gardens House
35-37 Grosvenor Gardens
London
SW1W 0BS
Tel: 0207 798 1590
Fax: 0207 798 1591
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