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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:

  • People and staff costs
  • Pensions
  • College purchasing
  • Sub-contracting
  • VAT
  • Copyright and other licences
  • Shared services

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 2016-17, teaching staff costs represented 37% of total college income while other staff costs accounted for 28%. 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 should not normally be more than 63% of income. Staff costs averaged 65% of income in FE colleges and 71% of income in sixth form colleges.

    Pensions in colleges

    Colleges are required by law to offer membership of public sector pension schemes and spend as much as 10% of their income on employer contributions. The diagram summarises the key points about membership:

    Employer contributions to the TPS and LGPS are now quite high. The TPS contribution will rise from 16.48% to 23.68% in September 2019 and applies to all employers. LGPS contributions vary by college but average 20%.


    LGPS is a funded multi-employer. Actuaries to the funds allocate a share of assets and liabilities to the individual employers both in the statutory valuations and on request by colleges for their financial statements. The average LGPS liability per college is around £15 million. A growing number of LGPS schemes assess the financial strength of their employers and have offered lower employer contribution rates if the employer offers assurances or security over their buildings. Higher pension costs have already squeezed the money available for pay and will continue to do so.

    A few colleges have already set up subsidiary companies to employ new support staff as a way to limit the costs associated with Local Government Pension Scheme membership. This is not a step to be taken lightly and requires both legal advice and staff consultation. There may yet be unanticipated consequences.

    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.


    AoC, AELP (the Association of Employment and Learning Providers) and LSIS (an improvement agency which was closed down in 2013) produced a publication in January 2013 which provides guidance on supply chain managment in further education


    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.

    VAT will continue after the UK leaves the EU because it is an important source of tax revenue (£110 billion a year).

    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, 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.