Sir Keir Starmer has pledged to “have a look” at the long-running VAT “anomaly” affecting further education colleges.
The prime minister said today he would speak to the Treasury about the issue, which FE leaders warn is draining hundreds of millions of pounds from college budgets and undermining the government’s skills ambitions.
The intervention follows a recent education select committee report calling on the Department for Education to make the case for FE colleges and standalone sixth form colleges to be exempt from paying VAT on expenditure.
Despite being reclassified as public sector bodies in 2022, colleges teaching 16 to 18 year olds are unable to reclaim VAT on most purchases linked to education and training. Schools and academies educating the same age group, however, can.
The government last week rejected the recommendation, arguing that FE colleges are classed as “eligible bodies” for VAT. This means they do not charge VAT on education services but also cannot reclaim VAT on their spending, a position the government said is shared by “many public bodies”.
‘No justification’
Raising the issue during the prime minister’s appearance at a liaison committee session this afternoon, education select committee chair Helen Hayes said her inquiry into FE and skills found VAT was a major factor holding the sector back.
She told Starmer that, “unlike other post-16 providers, FE colleges and standalone sixth form colleges are unable to claim VAT back on their expenditure”.
“This is a tax position for which there is no justification,” Hayes said, adding that the committee’s evidence showed the VAT issue was preventing colleges from delivering against the government’s mission.
She asked whether the prime minister would speak to the Treasury about what she described as an “anomaly”.
Starmer replied: “I [will] certainly have a look at it and talk to the Treasury about it.
“I’m very keen to do what we can to further, further education. I think it’s part of the system that needs more work, more resource, more capability and more weight behind it.”
Millions flowing back to Treasury
The Large College Group, an informal partnership of England’s seven largest colleges, reported last month that £379 million in recently pledged college capital funding is expected to flow back to the Treasury through irrecoverable VAT.
The Association of Colleges estimates college VAT bills cost the sector around £200-£250 million each year.
In its response to the select committee, the government said any tax changes must be considered “in the context of the broader public finances”.
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