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Managing Money in Colleges

Colleges spend more than £2 billion on supplies and services each year. Operating in a complex environment, they need to show their students and the public that they are using their money legally and efficiently.

This section covers various topics including:

  • Energy costs
  • People and staff costs
  • College purchasing
  • VAT
  • Copyright and other licences
  • Shared services

Energy costs

Colleges have faced staggering energy price rises in recent weeks. There is no price cap for charities or businesses and both the gas and electricity markets are highly volatile. In the last few days of August some colleges have faced price increases for 1 October contract renewals of 300% or more.

Pre-pandemic a typical college would spend around 2% of its income on gas and electricity to heat their buildings. The 175 FE college corporations had an average combined energy bill of £650,000 and 45 sixth form college corporations a £250,000 bill. Colleges operate from 4,500 buildings across 800 sites and, while there is currently a growing DFE funded capital investment programme, recent underinvestment in the college estate means that more could be done to improve energy efficiency.

Colleges typically renew fixed price contracts either for 1 October or 1 April for one or two years. Decision-making over the last 12 months has been very very difficult:

  • Wholesale prices started to increase in the middle of 2021 and some colleges found their October 2022 renewal prices were double their existing contract. There was little information then to indicate this would be a long-term problem.
  • Prices escalated in February and March 2022 but fell back a bit in May and June 2022. Some colleges fixed deals then; others waited.
  • Prices have escalated again in recent weeks (July, August 2022) so those who waited to fix are now getting completely stung
  • There are now immense and unexpected increases. For those with April 2023 renewals, it’s anyone’s guess what the prices for the last 4 months of 2022-3 will be.

The impact of this on college budgets will be to drain money available for other variable spending (for example money for pay increases). Colleges are self-governing institutions with responsibility for the costs of all of their activities which is why they typically aim for an operating margin (earnings before interest, depreciation and tax) of 6% of income or more so that they have the money available to invest in buildings and IT and to deal with unexpected events. This margin is likely to be eliminated in many colleges in 2022-3 with some facing a triple cash outflow from a revenue deficit, redundancies to get budgets in balance and the contributions they are required to make to capital projects. With energy prices now averaging 6% of college income and with the prospects of future price rises, there is a case (yet again) for government to review funding rates which have been frozen for years and which are set on the assumption of 2% inflation in 16-18 education and no inflation at all in post-18 education.

People and staff costs

Colleges employ expert and qualified staff to teach, train and support students. They spend the majority of their budgets on people, of which teaching costs are the biggest share. In 2020-1 (the last year for which full figures are available, teaching staff costs represented 2016-17, teaching staff costs represented 33% of total FE college income (47% in sixth form colleges) while other staff costs accounted for 33%. Contrary to what many people sometimes think, education institutions employ far more people than just teachers. Schools spend 52% of their income on teacher pay costs while universities spend 25% on course delivery staff costs (according to 2019 research on costs for the Post 18 review). Colleges are in-between but find themselves spending increasing sums on support for students (including those with learning needs) and on administration

There are considerable variations in teaching staff costs which reflect differing practices in different colleges. A joint review of college cost drivers carried out for HM Treasury and the education departments in 2015 confirmed that the main drivers of teaching costs were:

    • Staffing mix
    • Teacher salaries
    • Teaching contact hours
    • Class or group size
    • Teaching hours per learner

    Colleges manage these ratios carefully but face an upward pressure on staff costs because of the competition to retain, recruit and motivate staff. This means that the majority of colleges exceeded the DfE benchmark that staff costs in FE colleges should not normally be more than 65% of income and in sixth form colleges should not normally be more than 70%. On the definitions used by the FE commissioner (which excludes pension valuation transactions and sub-contracting activity), the average staff cost ratios (staff costs as a share of income) for the 2020-1 academic year were 66.6% for FE colleges; 71.2% for sixth form colleges.

    College staff turnover is at a record high with recruitment a major problem across most roles. AoC’s report shared with DfE in February 2022 (ie before the latest increases in inflation) described retention and recruitment as the worst in forty years . AoC’s recommended 2.5% pay increase plus flat-rate cost of living increases for 2022-3 is more than many colleges can afford yet far short of the joint union pay claim and there are currently 30 UCU pay ballots.

    Colleges face recruitment problems across all staffing types. Here’s what a principal said to us in August

    Even more acute than the curriculum staffing situation at the moment is on the support staff side; there have been unfilled vacancies within our IT team, for example, for 2 years, hampering our development. We cannot match salaries locally, even other public sector roles and particularly the universities. We end up with unfilled vacancies – causing workplace tension – or lower-qualified, less experienced staff, ultimately short-changing students in FE once again.

    Supplies and services

    Between them, Colleges spend more than £2 billion on supplies and services. Colleges have lots of experience at purchasing and are subject to public sector procurement rules. Many college co-operate on purchasing to achieve economies of scale, for example via the Crescent Purchasing Consortium


    VAT is levied on most goods and services provided by registered organisations to other organisations or individuals. The laws and rules relating to VAT are complicated and it is necessary to take advice from suitably qualified and indemnified professionals. VAT is only charged if turnover exceeds the £85,000 threshold. Although the average college income is above £20 million, some colleges are not VAT-registered because almost all of this turnover is exempt.

    Unlike academies, local councils, central government and other public sector organisations, colleges cannot reclaim the VAT they spend on supplies and services under the VAT refund scheme. Colleges typically spend about 2% of their income on VAT which is why college organisations have described VAT as a "learning tax". Absurdly schools with sixth forms (11-18 age range) and 16-19 academies can claim these VAT refunds but sixth form colleges and FE colleges cannot. Government has tried to justify this difference in the past but generally falls back on the excuse that EU rules make it hard to change VAT and that it would be expensive to do so. The consequence of this difference is that the public purse provides slightly more money to 16 to 18 year olds in academy and school sixth forms despite the fact that they are more likely to come from better-off backgrounds and already posses 5 GCSEs. It is unusual these days in the education system for funding to discriminate against the disadvantaged.

    Education is exempt from VAT like some other services (eg finance and insurance). Where an activity is exempt, sales do not count towards taxable turnover for VAT purposes in working out whether to register. When people or businesses buy exempt items, there is no VAT to reclaim. There are some cases where colleges can ask suppliers to fully or partially exempt their services from VAT.

    The law and rules about what exactly is defined as “education” or “vocational training” are complicated with issues around the boundary. In a recent court case (which still applies), the European Court of Justice decided that the bills for a college training restaurant should be VAT exempt because the activities were education rather than a commercial service. There were specific circumstances in this case and HMRC VAT notice 701/30 explains some of the issues.

    VAT is a college-wide responsibility. There are financial penalties from HMRC for careless or inaccurate VAT returns.

    This diagram summarises key points about VAT image
    This diagram summarises key points about VAT

    Copyright Guide for Colleges

    This guide was commissioned by AoC from Scotland's Colleges copyright advisor, Alan Rae, to help colleges navigate the complex territory of copyright and intellectual property licences. The document was published in September 2013 and is available for general advice. It is not a statement of the law.

    Shared Services

    Colleges have developed a number of different models for organising their activities and sharing services. The overall aim has been to innovate, to improve efficiency and to ensure that they are better able to teach people and engage with employers. Government provided funding for a series of projects which tested new models of delivery to provide outcomes that can be shared and replicated for the sector. There is information on federal structures, collaboration, shared curriculum and legalities associated with developing new models of delivery on the Shared Services section.