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Educational Activities (VAT)

Volume 449: debated on Tuesday 18 July 2006

I am grateful to have the opportunity to introduce this topic. I ask your forbearance for the first minute or so, Mr. Hood, because during it you might wonder whether I have drifted into the wrong speech. If you bear with me, you will see that my opening remarks are extremely relevant to the substance of the discussion.

Last week, a famous institution closed its doors for the last time. North Westminster community school achieved many great things over the years, and many fine people worked and studied there, but ultimately, it was overwhelmed by the scale of the challenges it had to face. It had three times as many pupils entitled to free school dinners as the national average, twice as many pupils with a lower level of English as an additional language than even the Westminster council average, 64 languages spoken among its pupils and a fifth of its pupils were either statemented or had a school action plan. We needed something extraordinary, but in fact we had a huge, three-site school that was simply too hard to manage as effectively as was needed to deliver a quality education to those children.

Over the next 15 months, North Westminster community school will be replaced by three new academy schools. They will bring in £70 million of new investment, which will help transform secondary school provision in the borough. All of our three schools will be in wards that are among the most deprived in the UK. One of the academies, opening next year, is sited in Church street, which was found to be the most deprived ward in London according to the 2001 census.

Academies originally sponsored by Chelsfield and the United Learning Trust are opening in the Harrow road and Westbourne wards, both of which qualify for neighbourhood renewal funding on the basis of their deprivation. The neighbourhood served by the three academies has higher unemployment than Jarrow, from where the hunger marches originated, and a higher proportion of children in households dependent on benefit than most of Liverpool and Newcastle, areas traditionally associated with the highest deprivation in the country. Statistics produced by the primary care trust in its recent annual public health report showed that the ultimate indicator of inequality—life expectancy—varied by a staggering 16 years between the most affluent wards in Westminster and the Church street ward. Almost all our low-income families live in flats, and outside or open space is at a premium.

The level of need is starkly obvious not just for the schools themselves, but for what the buildings and facilities could contribute to improving the quality of life in the communities they serve. Yet, perversely, the buildings serving the neediest populations are saddled with a burden which will restrict the very thing we need the most.

The core of the problem is that academies, unlike local education authority schools, incur a liability for VAT on aspects of their construction and use. Academies are organised as charities, of course, which means that they can recover VAT, quite reasonably, on the construction of new schools. However, there are three problems. First, VAT can be recovered only on the construction work itself. Architectural, surveying and other professional fees all attract VAT, which can amount to up to 10 per cent. of the cost of a building.

Secondly, zero-rating applies only to the construction of a new building. Full VAT is payable where an existing school is refurbished or an extension is built on to it. Given that land in areas such as mine—Westminster—is at such a premium, and that other restrictions frequently apply to its use, such as listed building status, that seems to impose a unnecessary penalty to making the best and most imaginative use of such space and facilities as we have.

Thirdly, and most relevant of all in the context of my remarks about deprivation, is the restriction that applies to the community use of the building. A relevant charitable purpose is defined, for this purpose as

“use by a charity in either…otherwise than in the course or furtherance of a business”


“as a village hall or similarly in providing social or recreational facilities for a local”


Her Majesty’s Revenue and Customs regards the letting of facilities to community groups or others as constituting a business purpose, and as such, the amount of VAT that can be recovered is determined by the scale of lettings in the first 10 years. I also understand that the method of calculating the level of the VAT refund tends to result in a disproportionate part of the construction costs being attributed to any such business use.

Her Majesty’s Revenue and Customs seems to take the view that anything generating income is, by definition, a business activity. That includes even the letting of a sports hall for a community football scheme such as that operated by our Bangladeshi-led London Tigers team; a parents’ class supported by Sure Start; healthy-living activities operated by the primary care trust; or a forum organised under the auspices of our neighbourhood management programme.

In other words, the better the academies serve the community, by opening their doors and promoting the use of the buildings for extended school activities, the greater the penalty. On the one hand, we say that we want, and, in the case of academies, we specifically require through the nature of the funding agreements, school buildings to be open in the evenings, and on weekends and school holidays for adult learning, sports clubs, supplementary schools and so forth. On the other hand, we treat such lettings as a pure business activity, thereby, of course, making them more expensive than they need to be, and therefore either reducing demand, or shifting towards a different demographic from that which we want to appeal to most.

There is, of course, a 10 per cent. concession—on time, space or footfall—built into the calculations. However, it is not only inadequate to meet the needs and demands of full community use, but it imposes its own administrative burden. The school’s management has constantly to monitor lettings to ensure that they do not exceed the permitted level. The United Learning Trust, for example, faces a frustrating and unnecessary constraint in letting facilities such as its art and music studios at the Lambeth academy, the state of the art rubber crumb pitch at the Northampton academy, which has a sports specialism and is much in demand within the local community, and the sports facilities at its two Sheffield academies, which are used for about a quarter of the time that the school is not in session. The ULT states that it is committed to allowing community use to the maximum extent possible under HMRC regulations, but it is simply not enough to meet the demands on its services.

The hon. Lady and Ministers will know that in my constituency we have had the same long-running argument, meetings with Ministers and questions answered. We were led to believe that there would be a satisfactory resolution, particularly in relation to our city academy which has recently opened. Part of its premises took over a community park. That was agreed to only on the basis that it would be then open to the community not just for 10 per cent. of the time or less—or for 10 per cent. of the cost or less—but in the school holidays, in evenings and on weekends. There is great frustration that the promise of Government has not been fulfilled.

The hon. Gentleman adds another example to my list. Indeed, exactly the same thing will happen when the Westminster academy opens its doors, when the building is completed in the early spring. It, too, will be taking over a series of sports facilities, which, although currently unsatisfactory, are free and open to the community. There are huge advantages in terms of safety and quality of service in having the academy take over some of that space, but implicit in the agreement was that its use would be open to the community. Yet, if a resolution is not found, we shall find ourselves coming up against exactly that same barrier.

At the risk of treading on political corns, I suggest that we need to do all we can to ensure that academies win hearts and minds, in the face of an indisputable fear in some quarters—one that I believe is wrong—that they will not turn outwards to the community. What seem to be arbitrary restrictions on the level of community lettings, or higher than necessary charges for such use, will do little to deliver those hearts and minds, and above all, will not help the still much needed transformation of our much challenged neighbourhoods.

As I have said, an LEA school does not have to bear a comparable cost, because it is able to recover VAT under a specific legislative provision: section 33 of the Value Added Tax Act 1994. What I am requesting, therefore, is that academies should either be brought into line with LEA schools for this purpose, or that a less restrictive application of the village hall exception be applied, to reduce the liability. Granting section 33 status would, I believe, resolve the problem more or less in its entirety. Applying the exclusion for business activities in a less restrictive manner, or accepting that, when letting our facilities, an academy functions as a building similar to a village hall in providing social or recreational facilities, offer two alternative, albeit slightly less satisfactory, options.

I have talked about academies because they are the starkest example, but many of the same points apply to colleges of further education, such as my much appreciated City of Westminster college, which occupies a prime site in central London just off the Marylebone road and serves a very deprived student profile indeed. When that facility decides to decant and rebuild we will face exactly the same problem, even though ideally we would like the rebuilt City of Westminster college to do everything it can to ensure that its open and outdoor space serves the communities around it. I understand from the Association of Colleges that colleges as a whole paid more than £200 million in irrecoverable VAT last year.

I fully accept that EU rules limit the Government’s flexibility. I also accept that, by definition, if VAT could not be recovered from academies and colleges in that way money would be lost to the Exchequer and other provision would be required. However, my worry is that, as in so many other examples—we have neighbourhood renewal funding, a neighbourhood management programme, Sure Start and a positive futures programme for young people—we are putting public money into community services such as our primary care trusts and our healthy living provision only to have a certain proportion returned in fees and charges for such facilities and if VAT is charged it goes back to the Treasury. There seems to be a bureaucratic spiral of money chasing itself, which we should be able to cut out.

I do not see any need to keep the subject under further review. My academies will open this year and we need those facilities to be in full community use straight away. We must act as quickly as possible or give a clear indication that action will be forthcoming. I look forward to hearing the Minister’s response and I hope that, depending on what she can say today, we might be able to meet, perhaps in September, to discuss how this can be taken forward.

I congratulate my hon. Friend the Member for Regent's Park and Kensington, North (Ms Buck) on raising this issue. I want to respond to her two central points and to her final point to suggest a way in which we can move the matter forward.

My hon. Friend’s two basic concerns about academies are, first, VAT on conversion and extension of existing schools that become academies—the hon. Member for North Southwark and Bermondsey (Simon Hughes) also touched on that in terms of responsibilities that may be combined—and, secondly, the interaction between VAT relief for the construction of charitable buildings and the wider community use of academy facilities. My hon. Friend made a strong case and I agree that one of the purposes of academies is the wider use of their facilities by the community.

On the first point, I want to make clear what happens with VAT. VAT is chargeable on the conversion and extension of existing school buildings but, consistent with the general funding of public services and bodies, those VAT costs are taken into account by the Department for Education and Skills and the Treasury when funding is allocated for academies, including their educational activities. That VAT cost is not, therefore, an unfunded liability to the academies.

The general principle is that we do not have a tax on a tax. Academies are directly funded by the DFES, which receives its allocation from the Treasury, plus its VAT liability to balance the books. There is no circulation or movement of money because it is front-loaded. It is different from local authorities and the use of section 33 of the VAT Act 1994 simply because local authorities raise local taxation, so there is a slightly different interaction. Section 33 provides for the equivalent of what is given to the DFES to neutralise the VAT. My hon. Friend touched on further education colleges and it has always been understood that their funding arrangements and settlements take account of VAT costs.

An entirely new set of questions is now being asked. Having been given the VAT costs and perhaps spent it on other things, the academies now want to return to the pot for the VAT cost that they have already been funded for. There is some confusion and complexity there and my hon. Friend raised the important point of sorting the matter out clearly so that responsibilities are understood and academy facilities are properly used in the community. That deals with the central funding point. The VAT is provided when they receive the money. It is not unfunded.

The second point, which has been raised by a number of hon. Members in the House, concerns the operation of VAT rules and the 10 per cent. I should make it clear at the outset that the VAT rules do not prevent any academy from making facilities available for extended community use and making a small charge if they decide to do so. VAT should have no real impact—this is part of the problem and the quizzical “Why?”—on the extent to which a converted or refurbished school building is part of wider community use. However, I recognise that the VAT rules can impact on the extent to which some academies can offer their facilities on a chargeable basis. If they do not charge a fee, there is no VAT impact. The problem arises when they want to charge and that is the point that my hon. Friend made about the 10 per cent. That is the core issue that I want to address in my closing remarks.

My right hon. Friend may not be able to answer this question now, but one of the key reasons for charging is to cover the cost of caretaking, security and insurance, for example, and I wonder whether that is liable to VAT or whether it is purely a profit element over and above the running costs.

Rather than going into the vagaries of the VAT system—that is not pertinent—I can give an example. The problem seems to be the scale of academies’ use, and whether it tips past the 10 per cent. and is therefore considered business use if they make a charge. The method that Her Majesty’s Customs and Revenue uses to calculate the extent of relevant charitable use of a building is to take a year as a whole, and an academy with 1,000 students could charge for extended services for an average of 50 people a day without any impact on the VAT relief for construction and still remain within the zero rate regardless. The issue is the scale of that use and whether it becomes a business use. The problem—I am sure that my hon. Friend will know this because she has served on Standing Committees of Finance Bills—is to protect the whole VAT system. It is a European tax so we are prevented from extending the zero rate and we cannot behave unequally if something happens to be in the public sector because the position of other designated charities and so on would need to be addressed. I concede that that would not deal fully with the issue of unrestricted use that my hon. Friend raised, but it would represent substantial progress for academies.

The position with regard to VAT is that under our European agreements we cannot extend zero rates, because the academies are funded through the public sector. Instead, we put extra money in, and say, “Here’s your funding plus the 17.5 per cent. VAT.” That way, one does not have a VAT liability, because the VAT is included in the funding in the first place. That is how academies are funded. Although there have been discussions with representatives from the academies on the subject, we need to attempt to do that again.

My hon. Friend the Member for Regent's Park and Kensington, North, will appreciate that our European agreements govern how VAT reliefs work, and we cannot step outside of them. Access to section 33 has been for public bodies that raise local taxes, which academies do not; that is why they are not provided for under section 33. We fund them up front, so they have already got their VAT. We could not possibly attempt to extend zero rates beyond its current operation; the European Community would not allow it. However, I recognise that concerns are still being raised on the issue, including by my hon. Friend today.

I shall just make this point first. The hon. Gentleman has to address the issue; as a good European, he will appreciate what I am saying. If the academies are funded, and not only their construction costs but VAT costs are paid, why would we again fund the costs that we had already met? It would not be possible to make academies unique without causing problems elsewhere.

I have spoken to my officials, and I would like them to have discussions with academies again, because the issue still has not been sorted out, even though I understand that they got their financial advice from their accountants. I want to be absolutely satisfied that the existing VAT rules and the operation of the allowance within the zero rate are being used to the fullest extent. If not, we must make sure that they are, and we must discuss what assistance the Departments can give to ensure that. That has to be the first step, so although I am happy to meet my hon. Friend the Member for Regent's Park and Kensington, North, again in September or October, the first thing is to once more get representatives from the academies round the table with the officials, to find out exactly what the issues are and to find a way through under the current rules. If any matter is outstanding after that, my hon. Friend and I might need to have a discussion. That offers a positive way forward, because I absolutely accept the points made by my hon. Friend and the hon. Member for North Southwark and Bermondsey about the urgency with which we must sort out the issue.

I am sure that, like me, the hon. Member for Regent's Park and Kensington, North (Ms Buck) has been encouraged by the Paymaster General’s response. First, about a year ago I went to see one of the Paymaster General’s colleagues in the Department for Education and Skills. I was told that we were within sight of a combined Treasury-DFES decision—one that came within the European rules, which we all have to accept. What happened to that prospect of an immediate solution? It seems to have disappeared. Secondly, does she accept that the practical problem is that new-build city academies cannot plan maximum use of their space unless they have enough private funding coming in to cross-subsidise the community activity that will keep them open effectively round the clock—well, not 24 hours a day, but 18 hours a day, which is what was intended?

On the hon. Gentleman’s first point, I have been the Minister with responsibility for the subject for some considerable time, and I am not aware that we had any imminent solution, but I shall certainly go back over the records. Perhaps he might like to disclose to me privately which DFES official—

Sorry, which Minister told him that.

On the second issue, and on the point that I am trying to make, I am a little perplexed, in that academies’ VAT is fully funded—it goes into the core grant—so why is the issue being raised? They have had the VAT money. However, sometimes we are talking about the interaction between charitable and business purposes, and that is always a difficult boundary. Where the academy offers its facilities for free, VAT is not an issue. It becomes an issue when academies wish to charge on a business basis for the use of the facilities. Then, the category becomes rather a difficult matter, as always in VAT law. That is what I want my officials to explore with the academies.

We will write to the academies’ representative body after the debate, and I will send my hon. Friend the Member for Regent's Park and Kensington, North, a copy of the letter. We will ask them, as a result of this debate, to come in again for discussions on the specific issue—not to discuss section 33, but to discuss the operation of VAT. When I have the report of that meeting, we can focus, and I shall be happy to meet with my hon. Friend to consider the issues. Clearly, there will need to be discussions between the Treasury and the DFES on why they are experiencing the difficulty, and how the money from DFES to the academies is being processed.

I should make it clear that academies are entirely and wholly funded by the DFES, and therefore their VAT costs should be met. The problem occurs when the use of academies’ facilities flips over into business use; then, rules apply that the rest of the economy has to work with, too, and we need to be careful about the boundaries. That is the point that I want to explore, so that there is no longer the detrimental effect that my hon. Friend, and the hon. Member for North Southwark and Bermondsey, clearly identified today. That detrimental effect could undermine future community use, and that would not be acceptable. If my hon. Friend is happy to leave the discussions until September, I will move them forward as quickly as I can.

I am happy to give the Paymaster General any other information. Will she add to her considerations the issue of those charitable bodies that are semi-educational, including youth clubs such as the Salmon youth centre? They have the same sorts of Treasury and VAT issues. I am happy to write to her to make sure that she is fully briefed about them, too.

No, I shall not add that to my considerations. The Treasury has undertaken two reviews into that difficult subject since 1997, one of which I conducted. Charities were given lots of concessions on the direct tax side—gift aid to name but one—because of the difficulties surrounding VAT business use and charitable use. Opening up our discussion into a wider debate about all charities will prevent us from finding a solution to the problem before us. The hon. Gentleman can certainly write to me, but I will not lump that subject with the subject of academies. I will address the question of academies with my hon. Friend the Member for Regent's Park and Kensington, North, after my officials have had the meeting. I apologise to the hon. Gentleman, but I will not move on that point.