When is a tax break not a tax break? When it's education at stake

Those sticking up for choice and quality in education have too often conceded Labour's bad language. Following Solzhenitsyn, here's what they must do instead

“The simple step of a courageous individual is not to take part in the lie. One word of truth outweighs the world.”

- Alexsandr Solzhenitsyn

Labour’s favourite rhetorical trick is telling everyone about the “unfair tax breaks enjoyed” by independent schools. Unfortunately, it’s worked. It’s driven the superficial popularity of this policy, among millions of people who don’t understand the situation (why should they?) and, faced with a poll, provide their 3-second response to a leading question (why shouldn’t they?). Like the equally effective dodgy stereotypes Labour have managed to present to the country, it’s worked against rather subdued counter-arguments.

Today I explain why this is so important and offer a better response. I hope you’ll agree the counter-arguments are compelling, and join me encouraging everyone to channel Solzhenitsyn.

TL:DR. There’s a legal definition of “tax breaks/subsidies” as “financial assistance”. It refers to revenues that would otherwise, or normally, be due and in terms of prevailing conditions reasonably expected by market participants, and in terms of the effect on competition. Education does not have a anomalous tax break; the Education Tax creates, rather than eliminating, an anomaly. I offer four reasons:

• It is not normal to tax independent education or education in general;

• It is not normal to tax merit goods, especially those that save the taxpayer money;

• It is not even normal to tax goods and services in general; the OBR couldn’t be clearer that only half of household consumption expenditure is taxed at 20pc, with the remainder at reduced or zero rate, or exempt.

• As regards competition, by a country mile the salient feature of the market is the 100% taxpayer funding of 93% of the market, backed up by obligatory attendance and price-fixing. It is nonsense to talk about “tax breaks” for independent schools without, in the same sentence, acknowledging financial assistance to the state sector.

The importance of vital ground

The military term “vital ground” refers to territory you must hold in order to achieve your objective. If you don’t put your artillery spotters on the only hill overlooking the objective, you can’t accurately wallop the enemy with shells before sending in the infantry. The hill is the vital ground.

Very sadly, the “unfair tax breaks” and the equally effective, equally misleading “Eton, billionaires, the richest in our society” stereotype are the “vital ground” in this debate. Once somebody believes Labour’s nonsense on both counts, you’ll never persuade them that taxing education is a bad idea. Harm to children, unintended cost to taxpayers, pressure on state schools, disruption of SEN and exam-year children….none of this registers because unfairness; and because of the unfairness, distrust - how can you possibly defend this thing that’s so unfair? Why would I entertain all your selfish arguments?

With the honourable exception of Maxwell Marlow of the Adam Smith Institute, writing here, those who try to stick up for independent schools have yet to combat the falsehood of “tax breaks”. We haven’t heard from the Conservative Party, Liberal Democrats, Reform UK, not to mention the Independent Schools Council, on this question.

Couldn’t they muster counter-arguments? Did they think they’d curry favour with Labour by letting them have the vital ground? (yeah, right) Were they under the impression they’d become popular by letting Labour become even more popular?

Never concede the vital ground. Can we encourage them to heed Solzhenitsyn’s advice now?

A legal definition

Marlow rightly refers to the Subsidy Control Act 2022. You can read the full text of the Act, noting:

• Section 2/2/c “the forgoing of revenue that is otherwise due”;

• section 3/2 “terms that are more favourable to the enterprise than the terms that might reasonably have been expected to have been available on the market”;

• Section 4/3/d “the principle of tax neutrality”;

• Section 4/4/b “"treated more advantageously than one or more other enterprises in a comparable position”

More legibly, here’s some useful legal advice:

Financial assistance will only be a subsidy for the purposes of the Act where it has certain other characteristics, notably, that the assistance confers an economic advantage on an enterprise.

However, importantly, an economic advantage is only conferred where the financial assistance is provided on terms that are more favourable than those that might reasonably be expected to have been available on the market to the recipient. For example, a loan provided by a public body at a market rate of interest would not fall within the definition of subsidy.

In line with the EU state aid regime, financial assistance will only amount to a subsidy where it favours one enterprise over another (i.e. it is "specific"). Therefore, financial assistance would not amount to a subsidy where all market players benefit from the same favourable terms

Financial assistance will also only amount to a subsidy of it has, or is capable of having, an effect on competition or investment within the UK, or trade and investment between the UK and other countries.

As Labour love to tell us, 93% of the market is free served by a taxpayer-funded monopolist. That’s certainly part of the context as we consider what’s “normal”, what’s “otherwise due”, and what’s the nature of competition.

Why it’s foul language

To me, this is like seeing a priest call a child a #?~@%! during his Christmas sermon. Here are my four massive, thumping objections to Labour’s language, vs the legal definition:

First: it’s education. Would a value-added tax “normally” be applied to independent schools? No, because (i) VAT has never been applied to any education (ii) it’s still not proposed to add VAT to education more broadly (tutoring, music lessons, homework clubs except when provided by independent schools) (iii) globally, it is highly unusual to put VAT on education; it’s illegal in the EU (iv) it’s perverse to tax merit goods i.e., where there is social benefit.

In the UK it is (and it remains) “normal” not to tax education. Therefore there’s no tax break.

Second is it “normal” to apply VAT to goods and services? Labour love this one. Here, for example, is the Chancellor (that great economist) insisting that schools must be taxed like restaurants. Because everything that is bought and sold is subject to VAT, see? It’s not only “normal”, it’s ubiquitous…

…except it’s not. The OBR couldn’t be clearer. I’ve also written about both Yvette Cooper’s declaration that VAT should be applied “like other organisations” and worse Stephen Morgan’s “like nurseries and childcare providers”.

There is no “normal”. As the Adam Smith Institute’s Short Term Thinking outlines (page 29), other goods and services exempt VAT (in addition to education) are: groceries, children’s clothes, childcare, books, newspapers, water, welfare and residential care for the elderly, healthcare generally. Domestic energy has VAT at 5% not 20%. Nobody thinks these goods and services have “tax breaks” or “subsidies”.

These are not selective exemptions favouring some providers within a market, they are instead exempt at the market-level, for reasons of necessity, distribution, and social benefit. Like education.

It’s not normal to apply 20% VAT, or 5% VAT, or zero-rated VAT. There is just a bunch of industries with different treatments designed into the tax system.

Third as the legal advice above makes clear, consideration of “tax breaks” is in light of market conditions and advantage between competitors within a market. Again the Adam Smith paper Short Term Thinking has it right (page 16).

A state school place unclaimed is a saving to the taxpayer - it is not correct to talk of “unfair tax breaks” or “subsidies” without reference to taxpayer funding of the state sector.

The market for education is not confined to the ~2.5k independent schools serving ~600k (~6.5%) of children. The market for schooling also contains the ~25k free taxpayer-funded schools serving 8.8m (~93.5%) of children. It makes no sense to insist that the former are “advantaged” by virtue of an education-wide VAT exemption worth £1.5bn or whatever, without reference to the financial advantage of £8-12k per child provided, by the taxpayer, to maintained schools, at a cost of ~60-100bn (depending if you include all overheads and fixed costs).

To return to the legal advice:

terms that are more favourable than those that might reasonably be expected to have been available on the market to the recipient.

There’s that implication of “normality” again. Normally (in 93% of cases), school education receives direct funding from taxpayers worth £8-12k per child. So education that doesn’t receive that funding, and instead is VAT exempt, is disadvantaged not privileged.

Fourth it’s about competition. Independent schools provide a bundle that includes not only classroom teaching, but extracurricular activities, Aside from the competition between maintained and independent schools, there is competition between independent schools and tutoring services, and independent schools and music / sports / drama clubs, and independent schools and nannies / after-school clubs. For a few more weeks, there is a level playing-field between these VAT-free private sector services, therefore it’s not a tax break. The Education Tax creates an unlevel playing-field.

Conclusion

The tax break rhetoric from Labour is not only ugly and divisive, but completely false. I strongly encourage everyone concerned about the Education Tax, to do Solzhenitsyn’s bidding, fight for the truth, and regain the vital ground.