One in four specialist colleges will be snared by Labour’s VAT rules for private education due to changes to the legal definition of a private school.
A technical note published alongside last week’s Budget confirmed the definition change. And while affected colleges can reclaim the extra costs paid out, leaders warned they face cashflow problems and unnecessary bureaucracy.
Unlike FE colleges, specialist colleges do not enjoy a legal status of their own. Most are a mix of charities and private companies.
It means around 33 specialist colleges in England have until January 1 to register to add 20 per cent to the fees they charge local authorities, while another 28 are unsure whether the tax reforms apply to them.
Local authorities pay the college fees and VAT, then reclaim the VAT from HMRC.
The government’s policy to remove a VAT exemption on private school fees is strongly opposed by the Conservative Party and private school sector, but Labour says it is needed to raise up to £1.7 billion a year for public services.
Some stuck in limbo
Specialist colleges were braced for the possibility they would pay VAT.
Draft legislation published in the summer outlined an amendment to the legal definition of a private school to include institutions where most 16 to 19 year olds are funded through fees, such as local-authority funded students with an education, health and care plan.
According to this year’s high-needs place numbers, 33 colleges will be liable for charging 20 per cent VAT, while 94 Education and Skills Funding Agency-financed colleges are unaffected.
But Clare Howard, chief executive of Natspec, the representative body for specialist colleges, said 28 colleges are stuck in limbo as their 16-19 numbers fluctuate between 40 per cent and 60 per cent year-on-year. Neither the Treasury nor HMRC have provided clarification.
However, colleges affected by the policy change will also be able to reclaim input VAT, the tax paid by a business on its purchases.
Claire Quick, Deaf Academy director of finance and resources, said it was “positive” the charity was now in scope and could recover some of the VAT on its costs.
She added: “This is particularly welcome when we are facing significant increases in employer’s national insurance.”
But she revealed the VAT reform meant added complexity as the college would have to split costs between student age groups to calculate how much VAT could be recouped.
Quick said: “Each provider will be spending time to digest the changes and spending additional costs on VAT consultant fees to support with the changes and calculations.”
Going round in circles
Last week’s announcement that non-maintained special schools would also have to pay VAT came as a surprise to some – including head of Treloar College Ben Bastin.
Treloar has 178 physically disabled students from across the country who attend its college and non-maintained special school.
Bastin said staff received fees from more than 50 local authorities and any delays caused by the VAT reforms risked causing cashflow pressures.
He added: “We will be invoicing local authorities for that additional VAT, but then we likely need to be paying that VAT before those invoices have been paid. There’s no benefit to anyone.”
Howard had said previously: “The government will effectively be taxing itself and the money will go round in circles, likely causing headaches, confusion and an extra administrative burden along the way.”
Lynette Barrett, chief executive of National Star which provides education for people with disabilities, said: “Combined with the fact that some specialist colleges will have to charge local authorities VAT, these measures will cause extreme cashflow difficulties at local authority level and for providers.”
Quick’s main concern was whether local authorities would understand the change.
She said: “Cashflow and prompt payment of invoices at the start of each term is crucial for our charity. I have concerns that local authorities will reject invoices with VAT added.”
Howard added: “We are concerned that the administrative demands of implementing VAT on fees could significantly impact specialist colleges, and we will collaborate with the government to find ways to reduce this burden.”
The Treasury was approached for comment.
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