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VAT in FE: Why something is just not quite adding up - Gerry McDonald

By Gerry McDonald, Chief Executive and Group Principal at New City College

This Think Further post could have been written about any one of our sector’s funding matters that make no sense. From area cost uplifts that bear no relevance to operating costs, to the numerous separate allocations that restrict local responsiveness. But one of the most irksome issues that leaves a £5million-shaped hole in my budget each year (almost 5% of our total budget), is that of VAT in further education colleges.

This is a known issue. The Association of Colleges and institutions around the country did a great job raising its profile last year. There was strong representation at a Westminster Hall debate in May 2023 and lots of associated lobbying.

Easy though it may be to be distracted by the recent announcement of a rise in our core funding, it’s important that we don’t lose sight of the VAT issue. And here is why it’s such a big deal to individual colleges, as well as the wider sector.

The fact that colleges are not part of the VAT refund scheme has always been unfair – but is even more nonsensical since we officially joined the public sector in November 2022. There has been a changing narrative: the Treasury spent 27 years saying that our EU membership prevented it, and then the last few years saying that colleges couldn’t join, actually, as they were officially part of the private sector.

Now, we are no longer classified as private sector. We must adhere to Managing Public Money to the letter, but we are not able to reclaim VAT like most other public sector organisations, including schools (including their sixth forms). Interestingly, academies do benefit from VAT refunds. And when I queried this with the Treasury recently through two very supportive local MPs, we were informed that this is “to ensure VAT is not a disincentive to them when leaving local authority control”. Interesting.

The minister responsible for the UK tax system also pointed out that while colleges don’t meet the rationale for a VAT refund scheme because we provide services to a broader range of students than schools (why that is a punishable offence is quite beyond me), colleges “do benefit from advantageous VAT exemption”.

Big ticket items that have recently distracted me are almost £1million on a new build community use sports and wellness centre and £155k on supplies related to our campus catering operations. Despite our “advantageous VAT exemption” pointed out by the minister, 70 per cent of my college’s expenditure is vatable.

For those of you who haven’t looked into this in detail, it’s worth a chat with your finance team. In addition to the items above, at NCC in 2022-23, we paid:

  • £1.8million on VAT (~2% of our income) for general maintenance and cleaning of our campuses
  • £600k on VAT on agency fees so that students have teachers while we struggle with permanent recruitment to the sector
  • £380k on computer software and hardware for our students’ education.

And those are just the tip of the iceberg.

A school or academy, on the other hand, would not have incurred these costs in the course of their vital day to day operations.

The Treasury told the FE sector at the Westminster Hall debate, confirmed in a recent letter to me, that there are currently no plans to give FE colleges the same VAT treatment as schools. Thinking ahead to the next general election, we at NCC have collated a short list of common sense, easy-to-implement changes for a possible new government to consider. Unsurprisingly, FE joining the VAT refund scheme is on our list. (With Labour looking at plans to charge VAT on private school fees, the rule book for education exemption will be open for editing anyway.)

A final thought: Education and vocational training are services for which we, quite rightly, do not charge VAT. So we don’t charge VAT to our users because we deliver education; yet we have to pay it to our suppliers because we have a broad range of students. Something’s not quite adding up.

The views expressed in Think Further publications do not necessarily reflect those of AoC or NCFE.