College reclassification: Major changes you need to know about

Restrictions on senior pay and borrowing announced, plus bad news on VAT

Restrictions on senior pay and borrowing announced, plus bad news on VAT

29 Nov 2022, 11:43

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Salaries of over £150,000 will need government sign-off and private sector borrowing for colleges will be highly restricted following their reclassification as public bodies, the Department for Education has announced.

College hopes of being exempt from VAT have also been squashed and while they will still retain the ability to operate their subsidiaries, those subsidiaries will now also be brought into the public sector and be subject to new constraints.

But there will be additional cash pumped into colleges this year to “eliminate the current deficit in funding” and to make up for their new inability to borrow commercially, and colleges will be allowed to retain surpluses and proceeds from sales of assets.

The DfE outlined the key changes to financial rules for colleges as a result of today’s announcement from the Office for National Statistics that they will switch from the private to public sector.

The DfE said that colleges will “maintain many of the flexibilities they currently have,” and day-to-day operations will continue with “minimal changes”.

But the guidance added: “It is our intention that reclassification allows colleges to continue to operate efficiently and in the best interests of students and taxpayers, while complying with managing public money and other central government guidance.”

A new college financial handbook is to be produced, with sector consultation expected in the autumn of 2023 ahead of publication in March 2024 and introduction in the autumn that year.

Here are the key developments the DfE has confirmed.

New private sector borrowing restrictions

DfE permission will be required, as a condition of funding, for any new private sector borrowing, the department confirmed, adding that colleges “may only borrow from private sector sources if the transaction delivers value for money for the Exchequer”.

It said that it was “very unlikely” colleges would be able to satisfy that condition given the higher financing costs of non-government avenues.

Finance leases are not affected.

Extra funding to address historic cashflow issues

To help colleges manage their cashflow, the DfE said it will “address the historical issue of uneven monthly payments from central government, which leave colleges out of pocket by March”.

This will include investing £300 million before the end of the current financial year “in bringing forward payments”, which will “enable us to smooth out the funding, so we have a new even profile for colleges from 2023 to 2024 for both the 16-to-19 and adult education budgets”.

Each college will get an additional funding payment in March 2023, with equivalent reduction in funding for each college between April and July, which will be made available between January and March 2024.

Existing debt

The DfE confirmed that colleges’ existing debt commitments will not change, but recognised some colleges had loans which require a lump sum to be paid at the end.

The government said that expectations of refinancing that debt commercially is unlikely to be possible as it doesn’t fit with its criteria on managing public money.

For colleges that can’t pay that lump sum at the end, the DfE will provide funding for that debt to be paid, with an agreed timeline set out between the DfE and the college to recover the handout by “withholding an agreed amount of planned future funding”.

It added that further use of existing overdrafts and revolving credit measures will be subject to DfE consent, and expectations for those arrangements to be phased out by August 2024.

Senior pay controls

Colleges will maintain responsibility for setting the pay, terms and conditions for the workforce, but senior pay will be subject to government rules.

It means that from May 2023 government approval will be required for salaries over £150,000 and bonuses above £17,500.

No change to VAT

The DfE said VAT-recovery is not linked to colleges’ ONS classification and therefore has not changed despite today’s announcement.

It added: “Many public bodies cannot recover the VAT they incur. We keep all taxes under review, and any proposals to change the tax system would need to be considered in the context of the broader public finances.”

Subsidiaries

Subsidiaries of colleges will also be reclassified into the public sector with the parent college, and colleges will continue to be able to operate those.

“Subsidiaries play an important role in the college system, both in delivering provisions and generating commercial income,” the guidance said.

Fresh capital investment

The government will provide £150 million of capital funding for general FE colleges and sixth forms from spring next year, building on the existing FE transformation programme.

That is in recognition that some colleges will have been planning commercial borrowing to fund improvements to their estates.

‘Contentious’ transactions

The DfE will be required to approve any transactions by colleges or subsidiaries that are considered to be outside of colleges’ normal sphere of business, may cause controversy or criticism, or have wider financial implications on other colleges.

Surpluses

Current flexibilities to carry over surpluses will remain, including unspent grants.

The DfE said this is to enable long term financial planning.

Asset disposal

Colleges presently can sell fixed assets without government approval and keep the proceeds.

That will remain but “be kept under review”, the guidance states, although income from those disposals must be used for capital expenditure.

Banking and pensions

Commercial bank account facilities can continue unchanged, or colleges will be able to bank with the government banking service.

The DfE is set to encourage establishments to switch to the government banking service over an unspecified period of time.

Colleges will not have to take any action with regard to the local government pension scheme.

Accounts

Colleges will produce an annual report and accounts as normal for the year ending July 31, 2023, with a review for measures in future years.

Further information will be sought from government from 2024 as the DfE said it must consolidate the accounts for colleges into one.

Requests will be made to colleges for information on budgetary spend on a financial year basis (April-April).

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