Should we care whether our school is a charity?

Up until relatively recently, almost all independent schools were charitable trusts (or similar charitable organisations), most of which could trace their lineage to religious institutions or Victorian philanthropic efforts.

More recently, seismic fiscal shifts (notably the loss of the VAT exemption) have changed the landscape.

Consolidation into group structures is accelerating, many of which are proprietary (for profit) corporate businesses.

But should we, as parents, care? Read on, and join the conversation to share your thoughts.

Explaining the shift

The primary driver of sector transformation is a "perfect storm" of cost inflation and government policy changes that have eroded the traditional financial margins of independent schools. For years, the sector benefited from a VAT exemption on educational services, which was removed by the Labour government as part of a fiscal plan to raise approximately £1.5 billion for state education (1). While the Institute for Fiscal Studies (IFS) estimated an "effective" VAT rate of 15%—accounting for the ability of schools to reclaim input VAT on goods and services—the psychological and financial impact on parents has been profound (2).

Other policies, including the removal of Charitable Business Rates Relief, increased inspection costs for schools inspected by Ofsted, increases in national insurance and teachers’ pension rates, as well as the background of inflation we have all faced, have piled on the operating costs for schools.

Simultaneously, the sector is grappling with a demographic downturn. The 2024–25 academic year marked the first annual decline in national pupil numbers since 2010, as the post-2010 "baby-boom" cohort began to exit the secondary school system (3). London has recorded the steepest decline at 8.1%, followed by the South West at 4.4%, a trend that is expected to persist as birth rates continue to fall over the medium term (3).

As a result of this economic pressure, many schools have consolidated into groups and/or shifted to a proprietary model.

Arguments for each model

As a parent, it’s hard to know how to feel about this. We may feel an intuitive instinct that distribution of profits saps resources from the core mission of the school, or we might see it as a more modern and professional model that will drive the ecosystem forward.

Arguments for the charitable model

Champions of the charitable model would argue that it’s superior by definition. In order to secure and retain charitable status a school MUST reinvest any surpluses from operations back into the “advancement of education” (4)(5).

There is also an obligation to demonstrate “public benefit”, most often achieved through bursarial awards.

Across the sector, schools allocate nearly £500 million annually to bursaries, with the average award approaching £12,000. Approximately 18% of bursary recipients pay no fees at all, a metric often cited by the Independent Schools Council (ISC) to justify the sector's charitable status (6).

However, the legal threshold for "public benefit" has been criticised as being historically low. Following a landmark 2011 Upper Tribunal ruling, it was established that schools only need to provide more than "token" or "de minimis" assistance to the poor to satisfy the public benefit test. This allows trustees significant discretion, and some schools continue to grant fee assistance to families earning up to £150,000, which sits in the top 3% of the income distribution (6).

The Charity Commission polices the conduct of charitable trusts, preventing sleight of hand tricks that enrich voluntary governors, trustees and related parties. One such trick might be to move the property (lands and buildings) into a separate,for profit business owned by the trustees and lease them back to the charitable school at inflated rates.

Many schools do follow such a split structure, but it is done for accounting reasons with all proceeds of the “estate company” being gift-aided back to the charity. Although the Charity Commission has opened investigations into wrongful behaviour (7), a tiny number have been found to be "irregular and/or improper", so it’s pretty safe for parents to assume that there are no hi-jinx.

This is in contrast to the phenomenon of “asset stripping” in private equity (a practice made notorious by Arcadia, who were widely accused of this practice in their retail stores).

Asset stripping is when PE acquires a company with negligible cash-flow, but significant assets (property, etc). The assets are sold (and often sold cheap for a sure sale) and leased back to the business. This creates a windfall of distributable profits, but adds significant overhead to the operations of the business. In the long run the business may become unsustainable, but the investors have already seen their return by this point.

This is not to say that this is common practice in proprietary school groups, but it is certainly a possibility. It is also not to say that charitable schools are immune from this practice—a charitable school can sell its properties (albeit not to a related party) and lease them back in order to raise capital as long as the trustees can demonstrate that this is in the interests of the school (which might be an easy argument to make if the school is facing financial challenges and desperately needs capital).

In summary, proponents argue that every penny paid in fees is directed towards the “advancement of education” and "public benefit", rather than the enrichment of investors.

But the question is, how effectively is that money invested, and is the model too fragile to last?

Arguments for the proprietary model

First it’s worth noting that not all proprietary schools are equal.

Some are small, solo, family-owned, schools without external investors demanding a return. Many of these are multi-generational and, whilst the owners may want to live comfortably on the profits from their school, they also need to protect their assets (the school). It would be incredibly short-sighted to starve the school of the resources it needs to flourish in order to pump profits.

Proponents would argue that this principle scales up to the level of school groups that are backed by private equity (these same proponents would overlook the risk of “asset stripping” outlined above).

In the highly competitive independent school sector, a school whose standards are slipping—or even a school that is maintaining a "barely good enough” standard—will, ultimately, decline in attendance, revenue and profitability.

Proponents of the proprietary group model would argue that their schools are more resilient to economic shocks and that profits are generated by more efficient operations and the ability to raise capital for forward-leaning investments.

School groups are able to cross-subsidise their schools, meaning that if one school is facing headwinds it can be subsidised by the group to buy it time to review its strategy, make investments, and turn it around. This is a very real benefit as many schools are facing closure as a consequence of the financial challenges described above.
Groups have consolidated their buying power, reducing costs for software, grounds and facilities maintenance, computers, recruitment, etc.
Groups are able to create internal promotion opportunities for their staff, reducing the reliance on recruitment effort and fees (an experienced games teacher at one school might be an excellent candidate to replace the Head of Sports retiring at another).
Groups are able to raise capital for investments without needing to raise more expensive external debt. For example, a padel court would be a stand-out feature for a school, but also open up a new revenue stream as they rent it out to clubs, creating a return on that investment in short order.
They would also argue that the voluntary boards of governors and trustees in charitable schools are too ‘cosy’ and unprofessional. They would argue that their more professional approach and salaried positions builds a stronger leadership team, which is leveraged across all schools in the group, leading to greater strategy, marketing execution, and financial management.

In summary, they would argue that times have changed and the old model is not fit for the modern environment. The imposition of VAT was a turning point that made independent schools feel a lot more like businesses, and it takes business operators at the helm to give Heads the resources they need to build the best product (the private school education).

Not all groups are proprietary

It’s important to note that consolidation into a group does not imply that they are a for-profit organisation.

The Girls’ Day School Trust (GDST) is a good example. GDST comprises over 20 schools, but remains charitable in nature.

Conversely, many solo schools (not owned by a group) are proprietary (for profit).

We encourage you to do your research, and we help in that aim by providing the group ownership, charitable status and links to Companies House and the Charity Commission for all schools and school groups. You can also filter by charitable status in our UK independent school finder.

For what it’s worth…

As with all these posts, we don’t pretend to present answers—rather to ask the questions that we ourselves (as parents) wrestle with.

So, this was written with an open mind, but a nagging sense that I’d be more comfortable with my kids being in a charitable school.

So, did my mind shift whilst researching and writing this? Yes and no.

As someone that has previously founded and run for-profit companies, I know that this doesn’t automatically make them ‘greedy’ and short-termist. In fact, many were the years we cut our salaries and took no profits in order to invest in the future.

Along that journey I also saw the benefits of scale and professional leadership. When we really needed to secure growth capital in the early days, it was impossible to get. The bigger and more profitable we became, people were climbing over themselves to offer us cheap debt. We were also able to negotiate better deals on our buying - which is something we could have really done with in the early days! This kind of flywheel is a perverse-but-true feature of scale.

But I’ve also had experience with private equity, and know that they are not above pushing through changes that will be long-term destructive in order to create short-term returns.

So, in conclusion:

With a charitable school I’d want to look at their books (we add links to Companies House on every listing) and learn more about the governors and trustees in order to make myself comfortable that it’s a sustainable and well-run institution.
With a proprietary school I’d want to trace the chain of ownership to understand who owns a stake. It might be a multi-generational family (in which case I’d relax), up to a private equity conglomerate (in which case I’d think twice and want to learn more about them).

So, yes, I think we should care about this, and it’s worth the research. Your child could be at this school for over a decade, so it’s worth making yourself comfortable that it’s not going to be asset stripped or go bust during that time.

What do you think? Do you have any stories or insights to share?

Sources

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