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VAT: Colleges and Schools

Volume 759: debated on Monday 23 February 2015


Asked by

To ask Her Majesty’s Government what assessment they have made of the effect of VAT on the finances of sixth form colleges and non-maintained special schools.

My Lords, the Department for Education estimates that for sixth-form colleges their VAT costs are equivalent to approximately 3% of their income. Non-maintained special schools are able to cover the full costs of provision, including VAT costs incurred, from their total funding from the Education Funding Agency and local authorities. The effect of VAT on their finances is therefore minimal.

My Lords, this is not a satisfactory situation at all, and has been the subject of a letter written by 76 Members of Parliament of all parties to the Education Secretary. They make the point that maintained schools and academies are able to reclaim VAT on their purchases but sixth-form colleges are not. The effect on those establishments is the loss of around £335,000 a year, even though they are highly graded by Ofsted and, indeed, perform better than the majority of other schools and colleges, being rated as good or outstanding. As far as the special schools are concerned, my information is a little different from that which the Minister has just given us, and I should be grateful if she would look again at that information, because my understanding is that they are at a serious competitive disadvantage compared with local authority special schools and special academies. I am thinking particularly of colleges such as New College Worcester, which caters for blind and partially sighted pupils.

I entirely agree with the noble Lord about the high standard of sixth-form colleges and the great service they provide. The position is that schools are able to retain VAT costs because they are part of the local government sector, and academies are able to reclaim VAT beca use specific legislation allows them to do so. Sixth-form colleges are liable for VAT because they were categorised as private sector organisations by the Office for National Statistics. Non-maintained schools would normally include VAT in the fees they charge outside and, in that respect, they would be able to reclaim the VAT that they have paid.

My Lords, is it not strange, not to mention unjust, that a 16 year-old studying at a secondary school receives more funding than a 16 year-old studying exactly the same subjects at a sixth-form college? Is this not doubly strange when research shows, as my noble friend alluded to, that sixth-form colleges provide better education outcomes and better value for money, and do more to improve social mobility? Given all that, does the Minister agree that relentlessly cutting the 16 to 19 education budget is not the cleverest idea that the Government ever had? Would she, by any miracle, support our policy on this side of the House to protect the 16 to 19 education budget and increase it by the rate of inflation, so that we invest in all our young people, including those studying at sixth-form colleges?

The noble Baroness is a wonderful optimist in her assumption. Of course we would do so in an ideal world, but, as we know, funding has been restricted. The Government’s policy has been to focus on those earlier years, where the most difference can be made to young people’s aspirations and futures. The differential in funding has been as a result of successive decisions by successive Governments. It is not just the coalition Government who have brought about this change.

As no one else is standing up, I ask the Minister why Sure Start places have been cut if that is the case? Secondly, these sixth-form colleges are providing better outcomes, so let us protect that budget. That is a policy commitment in our manifesto and it would be fantastic if the Government could give sixth-form colleges the same protection that we are offering.

Sure Start is somewhat wide of the remit of this Question, but the likely annual cost to the department of reimbursing sixth-form colleges for their VAT costs is currently estimated to be £31 million. That, in the totality of things, is not something that we can currently afford. We intend—or we would have intended—to look at this issue again in the event that we are in the next Government. We cannot predict what will happen for the next Government, but we hope that we would be able to level the playing fields rather more than they are at the moment.

Will my noble friend confirm that the Government intend to maintain the current tax arrangements in so far as they affect independent schools, and reject completely the proposals put forward by the Labour Party towards the end of last year?

Once again, that is somewhat outside the remit of this particular Question, so it would probably be wisest if I let it lie.

My Lords, given the answer that the noble Baroness gave to my noble friend, £31 million is being transferred from one hand of government to another. Why on earth can that not be reimbursed to the colleges?

If we extend the scheme to the sixth-form colleges that are charities it would make it much more difficult for the Government to justify not providing similar systems for other charities. According to the Treasury, providing a VAT refund to all charities in this way would simply not be affordable at the current time.

There is an injustice here. We are talking about children aged up to 18 and then, of course, those in early adulthood, who are being treated in a different way from other children going through the same educational process. I find it difficult to understand why we are talking about a level playing field at some future stage, when here is an injustice at this moment.

As I said, the categorisation of sixth-form colleges was a matter for the Office for National Statistics, which categorised them as private sector organisations, hence the different approach to funding. In spite of the fact that the colleges cannot reclaim VAT, they have other benefits from being in the private sector: for instance, they can borrow and provide other ways of raising money to keep their provision going.

My Lords, how can the Minister justify her Government’s policy, which has led to pupils in different categories of school getting totally different amounts of money? Free schools have been overfunded, as have academies; we now have another example, which the noble Baroness just referred to. Why on earth will the Government not treat every pupil and student as equally important, instead of trying to bribe, at worst, or muddy the water by allocating the money badly? We are not asking at this time for more money, but for fair allocation.

As I said, this is not a matter that has been a decision of this Government. Successive Governments have had this distinction between schools and sixth-form colleges. Were the money there, of course we could do amazing things, but that is currently the position.