The knock-on effects of the imposition of VAT on independent school fees continue to bite, with The Times reporting that 54 schools had either closed or announced plans to close between January and July 2025. Typically, 50 schools close annually, but recent VAT changes and the less well reported removal of business rates relief have significantly increased this rate and contributed to a nearly 2% drop in independent-educated students, almost offsetting the 2.1% rise recorded between 2023 and 2024.
Faced with increased costs and falling student rolls, schools have little choice but to look to develop additional revenue streams, and a further Times article details the number of schools that now offer their premises for weddings and similar private functions. Some schools have offered wedding venues for some time, but this has often been restricted to alumni rather than being available to the public at large. The article also notes that many schools are recruiting people with a commercial income generation background in either the events or the arts and heritage sectors with the aim of maximising non-student income.
A strategy of maximising income from non-student sources to offset the loss of income arising from the imposition of VAT on fees makes perfect commercial sense, but also brings additional tax risks of its own – the risk of the school being exposed to a corporation tax charge on income that is deemed to be from trading.
For independent schools that are constituted as charities, income from trading that is not classed as “primary purpose” will be exempt from corporation tax provided it is less than £80,000 per annum. If that £80,000 income/turnover threshold is breached, then all profits arising from that trade will be subject to corporation tax at 25% for the 25/26 fiscal year. A further complication is that charity law does not permit charities to carry out non-primary purpose trade solely with the aim of fundraising.
Faced with the potential corporation tax trap, many schools will consider setting up a wholly owned trading subsidiary. The advantage here is that any trading profits of the subsidiary can effectively be eliminated by using Gift Aid to transfer the profits of the subsidiary to the parent charity, where the receipt of the Gift Aid is not taxable in the charity’s hands.
Practical issues that can arise in setting up a trading subsidiary can include:
How to fund the subsidiary beyond the initial share subscription, as the payment of Gift Aid to the parent to avoid a tax charge will result in the subsidiary having no retained earnings. Whilst it is common for charities to make loans and similar advances to a subsidiary, the charity’s trustees need to be mindful of their duty to act in the charity’s best interests. The trustees of a charity must consider any advance to the subsidiary in the same way as they would consider any other investment and must avoid any perception that the subsidiary enjoys preferential treatment
The trading subsidiary will need to maintain its own accounting records and possible be subject to a different filing regime to the parent charity. Where the parent school exceeds the Companies Act thresholds for a “small” company, the trading subsidiary may often have a full statutory audit requirement regardless of its own size
Although a subsidiary has fewer operational restrictions than the parent charity, the charity trustees need to be satisfied that there is sufficient monitoring of the subsidiary’s activities to prevent it tainting the reputation of the parent charity
In summary, whilst many schools will be looking to diversify and maximise their non-student income to offset higher costs and falling rolls, the expansion of trading activities can bring several financial and operational risks that need to be considered and managed on an ongoing basis.
If you would like to discuss this in further detail, please get in touch with one of our Education team members here.
