Number of private schools going bust doubles after VAT raid

The number of private schools collapsing into administration has doubled in the first half of this year, as the government’s VAT changes bite into the sector’s finances.

Figures released by risk advisory firm Kroll show that 12 private schools went into administration between January and July, compared with six during the same period last year. Four of those failures occurred in July alone, raising fears that closures could accelerate further.

Kroll warned that administrations across the education sector could end the year almost 50 per cent higher than in 2024. Experts attribute the sharp increase to Labour’s decision to apply VAT at 20 per cent to private school fees from January and to abolish the sector’s charitable status in April, which removed business rate relief.

Benjamin Wiles, managing director at Kroll, said: “While there continues to be economic uncertainty, weak business confidence and unwelcome speculation on further taxes, we are not seeing a surge in company insolvencies. Naturally, what is more interesting is the picture within certain sectors. We saw a jump in administrations among education and schools, most likely as a result of the government’s VAT increase that took effect at the beginning of the year.”

The VAT measure was one of Labour’s flagship tax policies, designed to raise additional funds for state education. But critics warned that smaller private schools, particularly those outside major cities and with lower fee structures, would struggle to absorb the additional tax.

Administrations are a formal insolvency process aimed at restructuring businesses or salvaging value for lenders, and they are often viewed as a bellwether of economic health. Their growing use in the education sector is seen as evidence of financial strain on mid-sized and regional independent schools.

The squeeze comes against a broader backdrop of rising business costs. Companies across all sectors are facing higher taxes following a £25 billion rise in employers’ national insurance contributions, alongside a 6.7 per cent increase in the minimum wage. Interest rates, though cut five times in the past year, remain relatively high at 4 per cent.

According to the Insolvency Service, 2,081 companies entered insolvency in July, up from 2,053 in June. Retail continues to be one of the hardest-hit sectors, with 324 retailers collapsing into insolvency in June, including the UK arm of Claire’s, the high street jewellery chain, after its US parent filed for bankruptcy.

While the total corporate insolvency figures remain broadly stable, the pressure on private schools is expected to intensify. Analysts say the combination of higher taxes, reduced reliefs and ongoing cost-of-living pressures on parents could see more schools forced into mergers, restructures or closures in the months ahead.