Colleges’ hopes of claiming an exemption from VAT have been dashed again, after a Treasury minister confirmed there are no plans to change the law despite strong opposition from MPs.
Victoria Atkins, financial secretary to the Treasury, told a Westminster Hall debate this week that exempting colleges from VAT would cost around £200 million a year, which she implied would mean a significant loss of public spending elsewhere.
The debate, tabled by Conservative MP George Eustice, argued that, while academies and schools with sixth forms do not have to pay VAT, FE colleges and standalone sixth form colleges are in a “ludicrous situation” where they are not exempt from the tax.
Eustice explained that, considering colleges were reclassified by the Office for National Statistics late last year as public bodies, they should now also benefit from the exemption.
“At the moment, it is incredibly difficult for those FE colleges to be able to recruit and retain staff because of the squeeze on their budget,” he told MPs.
Conservative MP for Harwich and North Essex Sir Bernard Jenkin said that VAT exemption had led to negative consequences in his area. He told MPs that Colchester Institute, which serves his constituency, was suffering an “unparalleled financial squeeze” leading to redundancies and cost reductions at the college.
“Unless the government can resolve this anomaly, they are facing a crisis,” he said.
Labour MP for Cambridge Daniel Zeichner, Conservative MP for Chelmsford Vicky Ford, and Conservative MP for Torbay Kevin Foster also made pleas for the Treasury to exempt colleges from VAT.
But Atkins resisted the calls, stating that the Treasury has no plans to make amendments for FE colleges mostly because of the amount it would cost the department each year.
“There is a balancing act here,” she said. “If that is £200 million that we are attributing to this scheme, then that is £200 million elsewhere in our vital public spending priorities, like the schools budget.”
She said the Treasury was facing its own post-Brexit bureaucratic pressures regarding requests for VAT exemptions. “We have had requests for more than £50 billion-worth of relief from VAT since the EU referendum,” she said.
Currently, Section 33 of the VAT Act 1994 allows local authorities and other such public bodies to reclaim VAT from non-business activities. In 2011, the law was amended to include Section 33b for academies to become exempt from VAT on costs incurred.
But Atkins said that sixth form colleges and FE colleges are not included in section 33 or 33b section of the law as “they do not fit the rationale for either”.
The rationale of Section 33, she said, is to “prevent VAT costs from falling as a burden on local taxation”.
She added that sixth form colleges can restructure as academies if they want to take advantage of the tax benefit.
Atkins also said the eligibility for VAT refunds is “not related” to ONS classification.
“There are a number of public bodies and publicly funded activities that make significant contributions to our lives but are not eligible for VAT refunds, for example, the Bank of England and university research grants,” she explained.
The opposition also raised concerns about colleges’ financial stability but stopped short of committing to exempting colleges from VAT if Labour wins the next general election.
Abena Oppong-Asare, shadow secretary to the Treasury, said the Labour party’s mission is for colleges to play a “vital role” in breaking down barriers to young peoples’ access to further education. “The Labour party will evaluate the situation properly before putting any proposal forward,” she added.