Independent schools fear ‘money laundering’ risk as parents seek to pay fees years in advance
Should Labour win the General Election on July 4, one of its set-in-stone policies will see the removal of exemption from VAT that independent school fees currently enjoy.
The party claims that the move will both correct unfairness and also generate funding to be invested in the state education sector. The Institute for Fiscal Studies (IFS) has said the policy will generate roughly £1.5bn a year which Labour has said it will use to pay for 6,500 more teachers.
On the other hand, the schools themselves are suspicious of the tax hike which, they say, would simply mean that a lot would be forced to close.
What most parents’ want to know, of course, is whether the 20 per cent will be added to their fees or if schools find a way to absorb it.
The short answer is most probably a combination of both; VAT is a consumer tax and therefore they should expect to see it on a school bill.
Due to the likelihood of this added cost being unavoidable for many, however, an Independent Schools Council (ISC) survey suggests as many as 20 per cent of parents would have no choice but to withdraw their children.
Avoid price rise
We are seeing, however, cases of canny parents – who can afford such a move – proposing to their children’s schools that they pay, for example, five years’ worth of fees in advance to avoid any price rise in the near future. (It’s also been reported in the media.)
They then use the cash-up-front tactic to negotiate a good discount of, perhaps, five per cent.
As a result, schools have been approaching us for help with money laundering checks; in certain circumstances, someone wanting to hand over upwards of £60,000 up front for payments that would otherwise be staggered can set all sorts of alarm bells ringing.
We’ve been helping schools with their due diligence by ensuring no one among the parents is using this route to mask income that came from a questionable, untaxed source.
Interest from lump sums
Meanwhile, receving payments up-front presents a fresh set of dilemmas for the schools.
Do they take the money immediately, invest it, and hope on-going costs don’t rise such that the interest from the lump sums are wiped out?
What happens if the parents want the money back at some future point – should schools produce a Filon process tailored to these circumstances with, perhaps, a longer notice period?
Besides money laundering risks, might there be other processes required or steps to take if your school bank account is suddenly flush with money?
As usual, politicians propose a grand plan which has all sorts of potential knock-on effects for those at the sharp end.