Fresh fears have emerged that dozens of colleges may be snared by Labour’s private school fee VAT rules.

Government guidance on its finance bill, which is making its way through Parliament, says it is “confident” its current definition of a private school “does not capture” FE colleges.

However, the guidance also warns that FE colleges which have chosen to apply VAT rules set out in a complex 2020 tax court ruling involving the Colchester Institute “could” be counted as private schools.

It states: “[FE] Institutions can, if they choose to, apply the conclusion of the Upper Tribunal in Colchester, which would result in them treating the public funds they receive as business income. 

“This could bring these institutions within scope of this policy, as this income would be treated as consideration for the provision of education. 

“However, FE institutions should carefully consider this decision and ensure they understand what their new VAT obligations would be and the financial implications of this.”

There are about 30 unidentified colleges understood to have applied the rules from the 2020 ruling on a dispute between the HMRC and Colchester Institute.

A HMRC spokesperson told FE Week that colleges have until January 1 to decide whether to begin charging VAT for the first time.

Increased VAT cost risks

College income from fee-paying and government grant-funded students is currently exempt from VAT.

So being caught up under the new definition of a private school could have a significant impact on a college’s VAT returns.

Ian Brown, VAT director at S3TAX, said some FE colleges risk being “caught up” in this definition by HMRC.

He added: “How the government legislated for this surprised everyone, there’s an uncertainty around the risk for some FE colleges.

“Between Colchester, the private school legislation and HMRC’s application of VAT to private schools there’s uncertainty all around at the moment.”

What was the Colchester dispute?

The 2020 court ruling stemmed from a claim the Colchester Institute made for VAT paid on a large building project in the 2010s using a rule known as the ‘Lennartz mechanism’.

The result of the ruling – which set a precedent for similar cases – was that the tax treatment of grant-funded education shifted from being defined as a “non-business activity” to a “business activity”.

This change in legal definitions means that colleges no longer have the right to claim significant discounts on their VAT bills, known as “reliefs”, which include a zero rate for new buildings and a reduced rate for fuel and power.

However, soon after the 2020 ruling, HMRC said it acknowledged the court decision but would not impose the new rules on colleges while it mounted a new “test” appeal.

Following Colchester carries the risk of a large future tax bill, as HMRC vowed to “protect its position to secure tax revenues” and plans to take the case to the Court of Appeal.

Colleges already at a disadvantage

The dispute highlights wider concerns about the tax status of FE colleges, which suffer an estimated £200 million per year on irrecoverable VAT, leading to complaints that they are on an unfair financial footing compared to schools and academies which can reclaim VAT in full.

Julian Gravatt, deputy chief executive at the Association of Colleges, said apart from the Bank of England, colleges are the only public institutions that cannot reclaim their VAT, putting their students “at a disadvantage” compared to their academy counterparts.

He added: “Private school VAT rules add to the complexity and the HM Treasury October 2024 update helpfully exempts publicly funded institutions but leaves a doubt about those who entered into Lennartz arrangements and we’re awaiting clarification”.

Another layer of complexity

Socrates Socratous, a VAT consultancy partner at Buzzacott, told FE Week that private school legislation has added “another layer of complexity” to VAT rules for colleges, including those that specialise in special needs.

He said: “I think part of the problem may well be that the introduction of VAT on private school fees has been rushed through and its full implications haven’t been considered.

“The guidance that HMRC have issued is proving quite difficult to interpret because there are a lot of grey areas that they are sitting on the fence on.

“Private school VAT rules add to the complexity and the HM Treasury October 2024 update helpfully exempts publicly funded institutions but leaves a doubt about those who entered into Lennartz arrangements and we’re awaiting clarification.”

Teachers say they are more productive, save time spent commuting and enjoy a better work-life balance now they work from home each Wednesday.

St Charles Catholic Sixth Form College in West London is trialling a timetable that compresses classes into four days to give teaching staff one dedicated day a week for planning, preparation and assessment.

Most of the 80 teaching staff have praised the change, saying the opportunity to work from home mid-week reduced exhaustion and gave them more time to focus on their subject knowledge.

Meanwhile, the college’s 1,100 students participate in volunteering, work experience and cultural visits when their teachers are away.

One-year pilot

Principal Martin Twist told FE Week leaders first discussed the four-day teaching week 18 months ago to make the sixth form a more attractive place to work and a more competitive place to study.

Leaders tested the water with a small trial in May, and after a review the switch was extended across the college this academic year as a “one-year extended pilot”.

The college claims the initiative is at the “most radical end” of changes in the sector.

Twist said: “We know some schools and colleges are trying to go to a nine-day timetable over 10 days, so having a day off every other week. We haven’t seen or heard of anyone who’s doing it like this.”

To maintain teaching hours across four days, classes have been stretched from 55 minutes to 100 minutes. 

Staff teach three lessons per day, with a 30-minute morning break, a 45-minute lunch and a further 45 minutes at the end for directed time or student interventions.

Teachers have also been taken off additional duties such as tutoring so they are solely subject experts delivering their curriculum on Mondays, Tuesdays, Thursdays and Fridays.

“It does mean the other four days are busy, but we’ve consulted with them all throughout,” Twist said.

Though teachers are asked to come into college to do their PPA one Wednesday per month for “quality assurance”, the principal said leaders did not audit their time, and staff are free to cater to family needs such as doing their own school run. 

St Charles initially made cost savings by not needing agency staff on Wednesdays.

Twist said the college is now looking into alleviating resourcing issues that have arisen for the small team of staff who deliver trips and organise work experience on Wednesdays.

Energy boost

Based on initial feedback from 39 teachers, seen by FE Week, 58 per cent said they were more productive due to the dedicated PPA day.

Staff members told the college they had ample, uninterrupted time to plan good lessons from home, resulting in better classroom delivery.

One teacher said: “There is an enormous improvement in teaching impact for pupils, removing the midweek to end of week low points in energy. 

“I am able to teach up to the bell on Friday afternoons with no complaining about tiredness.”

Another teacher said they had time to work on subject knowledge, “which is the biggest hurdle to teaching GCSE retake classes”. It also let them “rest and recover between days to burn out less quickly”.

Some staff were also saving up to three hours of commuting on their work-from-home day and one hailed the “slower start to the day”.

Another said: “I would not want to return to five days, and this would affect my choice of workplace.”

‘Race to the canteen’

However, a small number of teachers who gave feedback were less enthusiastic.

One said having a day dedicated to PPA made “little difference” to them, and three teachers also complained the 45-minute lunch break was too rushed.

“It isn’t a break, it’s a race to get to the canteen, breakroom and back to the classroom,” one noted.

Another teacher said: “The condensed delivery has left little time (and energy!) at the end of the college day to deal with department business. 

“This is compounded further for part-time staff; in my case, I don’t work in college on Fridays, which means I only have face-to-face contact with the whole team three days a week.”

Positive attitude

Parents were generally positive about the sixth form’s Wednesday activities for students, which include volunteering at charity shops and soup kitchens, and doing work experience in hairdressers and nurseries.

Some said their children had a more positive attitude to studying and were more refreshed and active.

Most agreed that allocating Wednesdays for home study in the lead-up to mock exams was effective for Year 13s.

Twist said it was too early to say student attendance had been impacted by the four-day teaching week but leaders said they expected improvements since an absence meant students missed more learning given that classes are now twice as long.

While four-day weeks aren’t common in education, St Charles Catholic Sixth Form College isn’t the only one to trial the concept. South Essex College closed classrooms on Fridays two years ago to save energy costs, encouraging students to do independent learning and teachers to complete marking and admin.