Managing Money in Colleges

This section covers various topics including:

• Energy costs
• People and staff costs
• VAT

Energy costs

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 spend quite a sizeable share of their budgets on energy. Before 2020, costs were around 2% of income but have risen since to around 3%.

Data collected from 2023-4 college finance records shows that 76% of spending was on electricity, 23% on gas and 1% on other energy sources.

Most colleges get their energy via brokers such as SE First, TEC (The Energy Consortium) and a range of others. They typically secure multi-year contracts which fix the majority of the price and which typically renew in October or March.

Back in summer 2022, concerns about energy costs rose as the months went by reaching a peak point in early September. Colleges whose contracts were ending (generally 1 October 2022) were quoted substantial increases. A day or two later, the government-wide scheme capped the problem.

The biggest immediate risk is for colleges with fixed price contracts expiring in autumn 2026.

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. Teaching staff costs account for around one-third of FE college income (47% in sixth form colleges) while other staff costs accounted for another third. 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), fewer than 30% of colleges meet the benchmark.

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

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 £30 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.