Why VAT on fees is just part of the pressure on private schools’ finances

For independent schools, these pressures have become long‑term, embedded challenges facing the sector, raising increasingly acute questions around governance, solvency and long‑term viability.

In practice, financial distress in educational institutions rarely arises abruptly. In our experience at Pinsent Masons, schools often operate at a loss for several years before seeking formal advice, typically once all alternative funding sources have been exhausted and the risk of insolvency has become imminent.

The introduction of VAT on independent school fees has undoubtedly increased financial pressure across the sector, but it represents only one element of a broader and longer-term set of challenges.

Since 2024, many independent schools have experienced a sustained decline in pupil numbers, driven primarily by demographic change. This has been exacerbated by affordability constraints affecting parental choice and by a weakening in international recruitment, particularly for schools reliant on overseas pupils – though independent schools could see an uptick in students as a result of families choosing to relocate from the Middle East amidst the ongoing conflict there.

At the same time, rising employment, pension and energy costs have further constrained schools’ ability to operate profitably. The addition of VAT on fees has, for some schools, acted less as a root cause of financial distress and more as a catalyser of problems stemming from pre-existing structural fragilities.

Where a school is no longer able to sustain ongoing operations, it may face either a solvent or insolvent closure, depending primarily on its cash flow position and its ability to meet liabilities as they fall due.

A solvent closure enables an orderly wind‑down, with greater control over creditor payments, staff redundancies and pupil transitions. Where resources are insufficient, an insolvent closure may be unavoidable, triggering formal insolvency processes or regulatory intervention, and reducing the control retained by governors or trustees.

Early assessment of cash flow and careful planning is essential to mitigate legal exposure, protect stakeholders and preserve educational continuity.

Governors and trustees should be mindful that, as financial pressures intensify, understanding their personal duties as directors or charity trustees – and taking timely advice when an institution’s financial position deteriorates – is essential to avoid personal liability.

Restructuring within the education sector has become more prevalent, with mergers emerging as a common strategy for institutions seeking long-term viability. Other innovative models are also emerging, including brand‑licensing arrangements with overseas schools and international campus expansion, generating recurring income while maintaining charitable objectives.

Ultimately, the choice of structure is highly fact-specific and will be influenced by regulatory requirements, speed of execution and the need to maintain stakeholder confidence, which can waiver quickly where there is prolonged instability.

Continued contraction in the sector appears likely. For governing bodies, trustees and advisers, early identification of risk, compliance with fiduciary duties and realistic assessment of restructuring options are critical.

Advisers with experience delivering restructurings for school institutions can help with careful contingency planning, ensuring that where a sale or merger proves unworkable, trustees retain a clear, compliant and controlled pathway forward.

Natalie Colaluca is a Partner at Pinsent Masons