Last year the Government introduced VAT on private school fees and ended their business rate exemption.
I wrote about this at the time. That blog was widely read — which says something about the demographic of my readership.
The question I asked then was about price elasticity of demand.
What is Price Elasticity of Demand?
Price elasticity of demand (PED) measures how sensitive the quantity demanded of a good or service is to a change in its price:
- Elastic demand: quantity demanded changes by more than the price change.
- Inelastic demand: quantity demanded changes by less.
Elasticity relates strongly to substitutes. If there are plenty of alternatives, demand is elastic:
- Coke vs. Pepsi → elastic, because if Coke hikes its price you can switch.
If there are few alternatives, demand is inelastic:
- Insulin or petrol → people buy almost regardless of price.
The big question a year ago was: how elastic is the demand for private education — especially after the rise in UK private school fees VAT?
Prediction vs. Reality
My prediction was that demand would be inelastic. Parents who liked the idea of private schooling but were price-sensitive had already opted for state schools. Those who stayed in the private sector had few substitutes, so they’d cut back elsewhere to pay higher fees.
A year on, we can measure the impact.
- Enrolments: between 582,477 (DfE) and 538,214 (ISC) pupils are now in private education — down 1.9–2.4% from the previous year.
- Fees: the Government predicted a 10% rise, assuming richer schools would absorb part of the VAT. In fact, average UK private school fees with VAT rose by 22.6%, with elite schools pushing hardest.
So what does this mean for elasticity?
That’s extremely inelastic. Demand hardly budged despite a sharp fee rise.
The State Sector Angle
There’s another wrinkle: overall school enrolments (state and private combined) fell by about 1%. That reflects a smaller cohort, not just shifts between sectors.
Fears of a tidal wave into state schools after the VAT on private school fees haven’t materialised. Most councils report stable or even improved first-choice placement rates in state secondaries. A few hotspots — Kensington & Chelsea, Gloucestershire — saw pressure, but this was down to demographics and oversubscription, not VAT.
Why It Matters
This all matters because the Chancellor is under pressure to find extra tax revenue in the next Budget. Closing VAT exemptions is an easy way to do it, even if unpopular.
Whether the Treasury really benefits depends on elasticity:
- With inelastic demand, revenues rise even after enrolments dip.
- With elastic demand, revenues might actually fall as people abandon the market.
And don’t forget the sibling concept: cross-price elasticity of demand (XED), which measures how demand for one good responds to the price of another:
For private schools, the “substitute” is state education — but as we’ve seen, parents don’t yet view it as a strong enough alternative to trigger a big exodus.
That’s why the Chancellor will keep aiming VAT at goods and services with few substitutes. Particularly those consumed by the wealthy.