Colleges to retain reserves if reclassified

Further education colleges will retain their reserves and continue to operate subsidiaries in the event they’re reclassified to the public sector as widely expected, FE Week understands. 

As the Office for National Statistics (ONS) comes to the end of its six-month long classification review, fears that a move to the public sector could result in a raid on reserves appear to have not materialised.

Due to report later this month, the statistics body is expected to reclassify colleges from the private sector – a change which will trigger the need for decisions on a range of issues including tax, staff pay, accounting, and borrowing. 

Possible reclassification of colleges to the public sector was first reported by FE Week two years ago when the government’s further education white paper was being developed.

The very same white paper, Skills for Jobs, and its resulting legislation, the Skills and Post-16 Education Act 2022, triggered the ONS’ current assessment of colleges’ classification status.

The ONS regularly carries out classification reviews to check that various parts of the economy are properly accounted for on the government’s books. Reviews are independent of government and follow a strict set of criteria and international standards on government finances.

Neither the Department for Education nor the Treasury will comment on the ONS’ review while its ongoing. However, both departments have been negotiating on new rules for colleges following reclassification to the public sector, according to sources.

One fear of reclassification to the public sector was around whether colleges would be able to retain their reserves. 

According to David Hughes, chief executive at the Association of Colleges, colleges have been approached by firms telling them to “hide their reserves” in charitable trusts in case DfE “decides to take them away. Which they could,” he told us in a recent interview.

Multiple sources have told FE Week that colleges will be able to keep their reserves.

While this might come as some relief to colleges, further questions remain unanswered. 

One of those is on tax, where the AoC believes over £200 million could be reclaimed by colleges in VAT if they are be made exempt in the same way as schools and academies.

Others will remain fearful that a return to public sector accounting rules will come with more red tape and a loss of autonomy.

Colleges were last reclassified, as private sector, by the ONS in 2012. Since then, colleges have found themselves treated as private sector organisations, for example by not receiving public sector grant funding for the recent rise in national insurance, public sector organisations, because of their requirements to offer staff particular pensions right, and exempt charities, by not being allowed to make a profit. 

The ONS are due to reveal their classification on November 29.