Apply Now
My Courses
Add more courses Apply Now

Funding Futures: Making the Case for VAT Reform in Further Education

A new report by the London School of Economics and the Large College Group calls for VAT reform to unlock investment in skills, opportunity and growth.
Download

The Case for VAT Exemption for FE Colleges

Unlocking investment in skills, opportunity and growth

Further Education (FE) colleges are at the heart of delivering high quality education and technical skills to 16 to 18 year olds. There are 693,000 young people studying in colleges, more than in school sixth forms, and they are more likely to come from disadvantaged backgrounds. Colleges therefore play a crucial role in the Government’s mission to break down barriers to opportunity and drive economic growth.

Despite their public sector status, 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. This creates a significant funding disparity, in effect, a 17 year old studying at a college is valued around 20 per cent less than a 17 year old in a school. As a result, millions of pounds that could be invested in students, staff and facilities are instead returned to HM Treasury.

The Association of Colleges estimates that this costs the sector around £250 million each year, funds that could transform learning environments, close pay gaps and boost participation.

Research by the London School of Economics and the Large College Group

A new report by the London School of Economics (LSE), produced in partnership with the Large College Group, examines the financial and operational impact of the current VAT regime on FE colleges.

The study concludes that aligning VAT arrangements for colleges with those of schools would be fiscally neutral for the Treasury, while unlocking hundreds of millions of pounds for reinvestment in skills, technology and community growth.

Sector voices

Robert Peston, award winning political editor, journalist, author and founder of Speakers for Schools, spoke about the current economic context and challenges, and how further education and skills are an absolutely key part of the solution:

“The single most important task for the government is to increase growth, productivity and living standards. Further education colleges can be such an important contributor. Ministers rightly highlight the scandal of a million young people not in education, employment or training. And when I talk to employers they tell me there are not enough people in this country with the skills that they need. Further education colleges should be front and centre in resolving these.”

“It matters that the future of further education is a confident future. The country depends on it. You deserve the nation’s support. You need proper resources.”

Why this matters

  • Half of all 16 to 18 year olds in England are educated in colleges, compared to fewer in school sixth forms
  • 23 per cent of college students were eligible for free school meals at age 15, compared with 13 per cent in schools, showing the sector’s essential role in promoting social mobility
  • Colleges drive economic growth, supporting national priorities by equipping young people with the technical and vocational skills employers need
  • VAT inequality costs the sector £250 million each year, equivalent to the cost of educating 60,000 students for a year
  • VAT reform would be fiscally neutral but would release significant resources for improving facilities, retaining expert staff and reducing inequalities between schools and colleges

Real impact: what colleges could do with VAT reform

  • LTE Group could create 400 additional student places or close the pay gap between college and school teachers
  • New City College could have built three new science labs instead of paying £800,000 in VAT on a single teaching block
  • Activate Learning could have covered annual estate maintenance costs across all eight campuses
  • Luminate Education Group could have fully refurbished its Park Lane campus roof and facilities
  • Capital City College Group could have invested an extra £1.6 million in industry standard digital equipment for students

These examples highlight the lost potential of VAT funding, which could instead be reinvested directly into students’ education and the skilled workforce the UK needs.

Policy context

The Government’s Post 16 Education and Skills White Paper describes colleges as “anchor institutions” and “the bedrock of technical education and training.” Yet, as the paper itself acknowledges, “for decades this sector has been treated as second rate.”

Under current rules, building a new teaching facility costing a school £1 million could cost a college £1.2 million once VAT is added. Unless this anomaly is addressed, up to £379 million of the Government’s £2.275 billion capital funding for colleges could be lost to VAT over the next five years.

A call for reform

The LSE report sets out a clear case: VAT reform for Further Education is fair, economically sound and fiscally neutral.
Aligning colleges with schools would:

  • Remove an unfair financial burden on the FE sector
  • Strengthen colleges’ capacity to deliver the Government’s skills agenda
  • Improve regional growth, social mobility and productivity
  • Demonstrate a genuine commitment to equitable public funding in education