Colleges are set to return £379 million in recently pledged capital funding back to the Treasury due to its “penalising” VAT policy, a group of colleges has argued.
The figure is an estimate of the amount of VAT FE colleges will pay on the £2.275 billion the government pledged to spend on the sector over the next five years in last month’s post-16 education and skills white paper.
The Large College Group, an informal partnership of England’s seven largest colleges, has also commissioned a report by the London School of Economics (LSE) Consulting that details the “uneven playing field” they face.
One college in the partnership, LTE Group, estimates that its annual VAT bill of about £5 million would fund an extra 400 places for 16-18 students, an additional pay rise of 3.5 per cent for teachers, or purchase 8,770 laptops to “close the digital divide”.
LTE Group CEO John Thornhill said VAT is a “striking example” of the inequality colleges face compared to schools and academies, which are both exempt from the tax.
He added: “We urge the chancellor to use the budget to reverse this unfair and damaging policy and unlock badly-needed funding to turbocharge the UK’s future growth.”
Large College Group member Activate Learning estimates that its £3.5 million VAT bill from last year could have paid for the maintenance costs of all eight of its campuses, or carbon neutral upgrades to its City of Oxford college and University Centre campus.
New City College said its £800,000 bill on a recently completed £5 million teaching block could have provided three fully equipped science labs rather than standard classrooms.
The LSE Consulting report argues VAT rules are “penalising” colleges, despite their role as “key enablers” of social mobility and contribution to the UK’s relatively high rates of degree-educated adults.
Granting an exemption to VAT rules in line with schools, academies and local authorities would “immediately” improve margins and cash flow for the sector, the report says.
It estimates that the seven colleges would see an uplift on their income of 1.55 to 2.96 per cent, giving almost all of them an extra six to eleven days of operating coverage.
Releasing additional capital funding through VAT exemptions could result in 1.1 to 4.4 per cent additional investment each year, the report also argues.
The Association of Colleges estimates college VAT bills cost the sector around £200-£250 million each year.
Currently, Section 33 of the VAT Act 1994 allows local authorities and other such public bodies to reclaim VAT from non-business activities.
However, complex rules that allow colleges discounts on VAT for some construction projects and fuel and power costs are also subject to an ongoing legal dispute between the Colchester Institute and HMRC.
The LSE Consulting report suggests the government could create a “sector specific refund mechanism” limited to FE colleges and sixth form colleges through “similar arrangements” to those created for academies in 2011.
It says the case for an exemption is not only “fiscal fairness” but a “necessary policy correction” to support the sector.
It adds: “FE Colleges disproportionately serve students from low-income families, first-generation university-goers, and immigrant backgrounds.
“These are precisely the groups most in need of tailored support to remain in education beyond the age of 16.
“The current VAT regime, however, penalises the very institutions that work most intensively with those at risk of educational exclusion—undermining not only the principle of fiscal equity, but also broader goals of social mobility and inclusive growth.”
Speculating on why the Treasury has “historically resisted” VAT refund schemes, the report suggests officials could be concerned that “others delivering services of public benefit may also press for equivalent treatment”.
A government spokesperson said: “FE colleges are exempt from paying VAT on education supplies, and therefore cannot recover any VAT.”
“As the Prime Minister outlined earlier this year, Further Education is key to achieving our mission to grow the economy, that’s why we’ve invested £7.5bn in education for ages 16-19 last academic year and are providing a further £590m for colleges this financial year.”
They added that a further £590 million will be invested in colleges and other 16-19 providers this year, on top of the £7.5 billion for 16-19 education in 2024-25.
Your thoughts