Charity sector round table: Independent schools

The Independent Schools sector has been hit by wave after wave of challenges over recent years and there are more on the horizon. 

At our Charity sector roundtable for independent schools held on 15 September in Horsham, we discussed some of these issues along with actions being taken or considered to mitigate the impact of these on school finances.

A UK general election must take place by mid-January 2025. Some polls are showing a Labour lead of 20%, which would result in a change in government. That change could result in some dramatic changes for the Independent Schools sector with the possibility of VAT added onto school fees and the loss of charitable status.

Our VAT Director, Colin Laidlaw, is writing an article specifically on the VAT point, so I will leave the technical side of VAT to him.  But what impact will this have on the sector?  And what will the impact be on the state sector?  Labour have estimated that significant potential tax will be generated by introducing VAT on school fees, but will parents be able to afford 20% on top of the current school fees which have already been subject to large inflationary increases over the last few years.  Some will be able to cover the additional costs, others won’t and will choose to withdraw their children from the private sector, resulting in loss of fee income for schools and a less tax generated for the government.  This will also cause the demand for state places to increase, when in some areas of the UK there already aren’t enough places available.

The potential loss of charitable status will not only bring Independent Schools into the Corporation tax regime but will also result in the loss of the business rates relief exemption that is available to charities.  Thus, increasing costs even more.  Also, what would be the impact on those students being supported by scholarships and bursaries.  Will schools have to remove these and hence those pupils, or will they consider structural changes to include a charity in their group structure to manage any endowments for scholarships and bursaries.

The repeated rises in interest rates between December 2021 and August 2023 have affected schools differently, but often with the same outcome which is an increased pressure on cashflow.

Schools with borrowings may have had to re-negotiate with their bank if loan covenants are breached, or they try and fix their interest rate to manage cashflow. Any changes to loan arrangements come with a cost, whether it’s an updated valuation that the bank requires or an arrangement fee to cover their costs to amend a loan agreement.  Schools need to consider whether there are any other options for restructuring or refinancing.

For other schools, interest rate rises have had more of an impact on their parent body than the school itself, with pupil numbers declining as mortgage rates are rising. Schools are increasingly finding that pupil retention is their biggest issue.  To mitigate this, they are looking at diversifying their income streams, which in turn comes with its own challenges and considerations.

Can the increase in interest rates benefit schools in any way?  At our roundtable we discussed whether our school clients are charging interest on late payments from parents. Some are, but some are yet to do so but it will be dependent on the wording in your contracts with parents.  Whilst this approach adds to the financial pressures that some parents are already experiencing, the Governors have to run the school with financial sustainability as a key part of their decisions. We also discussed advance fee payment schemes which can help school cash flows, but it is now even more important to price these correctly taking account of both inflation and interest rates.

Staff shortages across many sectors are common now.  Based on discussions with our clients, teacher recruitment isn’t impacted as much as the recruitment of support staff (especially minibus drivers). What can you do to retain staff?  What can you do to attract staff?

At our breakfast roundtable we started to discuss some of these and there are some great examples of what our clients have done.  Some key questions to ask yourselves:

• Can you demonstrate what benefits there are for working for your school and give a clear summary of these to your staff. Remember these aren’t limited to financial benefits. They may also include free onsite parking, free lunches, discounts for staff children and the lower number of working weeks for term time only staff. For teachers there is also the benefit of smaller class sizes. When compared to the State Sector can you show you offer a better work life balance.
• Do you have (or what are) your policies on diversity, inclusion, part time/flexible working or job share arrangements and are they up to date.
• Do you have wellbeing initiatives and CSR policies. How do you manage the work/life balance of your support staff.
• Can you partner with any SCITT’s or Universities or offer apprenticeship schemes for non-teaching roles.

The final topic we had on our agenda was inflation, which in 2023 has been at its highest level for a number of years, squeezing both school and household income further. The invasion of the Ukraine has resulted in a huge increase in the price of energy and whilst some schools will have been protected to some extent by fixed deals, many of these are coming to an end. Whilst prices now are lower than the peak, they are still significantly higher than they were prior to the invasion. We didn’t get to discuss this on the day but our key questions to consider are:

• Tender processes – are you requesting / obtaining rates that cover more than one year or are you now hoping that the inflation cycle is on its downward curve.
• With prices increasing are your approval, quote, and tender levels still appropriate. Do your procurement policy limits need to be updated to save management time on areas which are now lower value.
• Capitalisation policy – similarly, do you need to raise the minimum value at which items are capitalised and depreciated.
• Wages and benefits – do increases need to match RPI or average wage inflation to retain and recruit teaching and support staff.
• With fee levels being set a year in advance of many costs, what rates will you use. Will parents support increases that need to catch up and cover last year’s catering and fuel costs rises even if this means they may exceed more recent headline inflation rates.

Whilst the issues hitting schools in recent years were unexpected and so could not be planned for, the forthcoming challenges have elements over which schools can take control. It was reassuring for bursars to hear others share their worries but also encouraging to hear that positive actions are being taken and recognise that schools are more determined than ever to find solutions to enable them to continue to deliver an exceptional educational experience to their pupils.

If you would like to know about our charity sector roundtables or any of the topics discussed please contact us.