Public Bodies and VAT

Debate between Victoria Atkins and George Eustice

Wednesday 17th May 2023 Westminster Hall

[The Financial Secretary to the Treasury (Victoria Atkins)]

It is a pleasure to serve under your chairmanship, Mr Betts. I thank my right hon. Friend the Member for Camborne and Redruth (George Eustice) for securing today’s debate; I know his great personal commitment to the issue. I was extremely interested in his description of how officials from his former Department viewed meetings with Treasury officials—I do not know whether that is a badge of pride for the Treasury or whether we should take some learning from it.

We are a nation that takes enormous pride in its education system, and rightly so. May I take this opportunity to celebrate the news, which we heard yesterday, that England has risen up the international league tables and is fourth in the world for progress in literacy? That is an extraordinary achievement that has been made possible by the intense concentration that the Government have put on phonics and on driving up standards in schools. It is right that we applaud the teaching sector and everybody else involved in education for their significant achievements, and the students themselves for working so hard.

I note the constructive way in which the SNP has contributed to this debate. I genuinely hope that Scotland will be able to join us in rising up the league table in due course, because we know that sadly it is not there yet. However, I am sure we will have many more discussions about standards of education in Scotland.

Students from around the world flock to our schools, universities and institutions of learning throughout the country, where they have a tremendous diversity of subjects to study and people to meet. For example, a pupil from a disadvantaged background is something like 83% more likely to go to university now than they would have been in 2010-11, because we have put the expansion of life chances at the heart of our education programme.

The further education sector has a huge role to play in preparing young people for university, and indeed for whatever life they wish to live as they leave their teenage years behind. That is an important distinction to make, because the education structure that we have known for decades has undergone significant change in recent years. We now have vocational study, T-levels, technical colleges, academies, state schools, independent schools and free schools all catering to the unique needs of young people and our local communities.

Of course, further education can continue through one’s career when one leaves formal education. I had the great pleasure of visiting Brompton Bikes recently. I saw not just that it had taken advantage of the Government’s super deduction and capital allowance schemes in recent years, but that it was doing wonderful work to train its workforce at various stages of workers’ careers. That has an enormous benefit not just for the individual’s career path but for the business.

I am pleased to be having this discussion with hon. Members today. We want to support the FE sector and ensure that it continues to be able to cater for people’s various needs. If I may, however, I will take a step back, because although our focus today is on a particular provision in the Value Added Tax Act, it is important to look at investment in the FE sector over recent years. We have invested £300 million before the end of the previous financial year to eliminate the current deficit in funding experienced by March each year. That completes a move to a more even profile of funding that better matches the needs of FE colleges, recognising the challenging environment that the sector faces. We have also provided an additional £150 million allocation of capital grant funding in this financial year to support and protect colleges that are planning to invest in their infrastructure or estate.

We have made other changes, including opening a new college capital loan scheme and allowing colleges to continue to retain surpluses and proceeds from asset sales. At the most recent spending review, we announced large-scale investment in skills, including funding to increase the average hours funded in 16-to-19 education by an additional 40 hours per pupil per year, bringing us closer to high-performing countries such as Sweden. We have also committed to increased capital funding in FE, including £1 billion over the spending review period to transform the FE college estate.

[George Eustice]

All that funding is, of course, welcome—indeed, Cornwall College would acknowledge that it has had a very good capital investment settlement—but the real problem is not the capital departmental expenditure limit. Welcome though it is, there is no point in colleges having that capital if they cannot afford to recruit the lecturers and teaching staff to run the courses. The increase in budget to extend the hours of teaching is also welcome, but it still does not address the core problem of the difficulty that colleges are having in properly funding, recruiting and retaining staff to run the courses.

[Victoria Atkins]

If I may, I shall develop my argument. I have taken careful note of the issues raised by my right hon. Friend, and I hope to respond to them through the rest of my speech.

Let me give a little overview of VAT. I think it is fair to say that VAT is the most complicated area of tax law, which itself is pretty complicated, to put it mildly. I have a whole team of very erudite experts who advise me on all aspects of VAT. It is charged on most goods and services. Taxable businesses can recover the VAT cost on their inputs, but public bodies, which generally engage in non-business activity, cannot. That is why there are several VAT refund schemes in the Value Added Tax Act 1994 that allow some public bodies to recover, to differing degrees, the VAT on goods and services purchased in the course of non-business activities. Section 33, to which my right hon. Friend alluded, provides a scheme that allows local authorities and similar public bodies to recover the VAT incurred on purchases of goods and services relating to their statutory non-business activities. Its rationale is to prevent VAT costs from falling as a burden on local taxation.

Funding for maintained schools is channelled via local authorities, which benefit from the scheme. We allow academies to recover their VAT through section 33B, which we introduced in April 2011 to ensure that academies were not disincentivised from leaving local authority control. The hon. Member for Cambridge (Daniel Zeichner), who is no longer in his place, intervened on my right hon. Friend the Member for Camborne and Redruth, but I was not clear whether he was supporting academies or was agin them. We are certainly very proud of the academy system and the benefits that it provides to our education system. Again, that is a point of contrast between the parties.

Sixth-form colleges and FE colleges are not included in the section 33 or section 33B refund schemes as they do not fit the rationale for either, which is to protect local taxation or encourage academisation. Like many other providers of public services, FE colleges and sixth-form colleges are expected to cover their VAT costs from their funding allocations. Sixth-form colleges have the choice to restructure as academies, enabling the recovery of VAT under the refund scheme, but many choose not to. That is their decision.

My right hon. Friend raised the comparison with a school that has a sixth form. More widely, FE colleges are different from schools and academies in that they provide a range of different services for a broader range of students. In my constituency, Boston College is moving into Horncastle, and we are very excited about it. I fully hope and expect that it will offer a range of services not only to 16 to 19-year-olds, but to a wider field of people. Because FE colleges have a different, more autonomous way of operating, they benefit as eligible bodies from an advantageous VAT exemption when competing with commercial providers of higher levels of training. That is a difference.

[George Eustice]

I think I understand my hon. Friend’s argument, but I am not sure that it is a very persuasive one, since academies are independent for all intents and purposes. They run their own ship. They are not funded out of local taxation—if that were the objective of section 33, we would not have protected academies in that way, as they are funded directly by central Government grant. The ONS has effectively now said that FE colleges are public bodies. I really do not see the difference between an independent academy, funded by central grant, and an FE college that is also funded through central Government funding.

[Victoria Atkins]

We have to be a little careful about the ONS argument. The ONS has many attributes, but it is the Office for National Statistics; 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, such as the Bank of England or university research grants. We are hoping to encourage even more university research with some of the measures set out in the Chancellor’s Budget, including through investment zones, but these are not eligible for VAT refunds. These colleges have never been eligible for refunds, regardless of their classification by the ONS. Where public bodies cannot recover VAT, we provide overall funding with the irrecoverable VAT in mind.

My hon. Friends the Members for Torbay (Kevin Foster) and for Harwich and North Essex (Sir Bernard Jenkin) asked for an estimate of the cost of allowing FE colleges to join the section 33 scheme. The estimate is £200 million a year, which is a significant sum. As I always find myself saying when I am at the Dispatch Box or the lectern, there is a balancing act. We have to look at these extremely large numbers in a whole variety of areas, particularly VAT: I am asked frequently by colleagues to move something out of the VAT scheme, but we have to look at the figures.

It was interesting that when my right hon. Friend the Member for Camborne and Redruth asked the shadow Minister, the hon. Member for Erith and Thamesmead (Abena Oppong-Asare), whether Labour would commit to adding FE colleges to the section 33 scheme, she did not commit. We all recognise that there is a significant cost, but those are the figures that we have to work with. We know, because we believe fundamentally in sound money, that if we allocate £200 million to this scheme, we will have to find that £200 million from elsewhere in our vital public spending priorities such as the schools budget.

[George Eustice]

The Minister is being very generous in accepting my interventions. As you have said, Mr Betts, we have plenty of time, and sometimes these sorts of discussion are better had via intervention.

I want to return to the point about the ONS classification exercise. In most other fields of Government policy, in other Departments, the Treasury allows the ONS tail to wag the Government dog. For example, the ONS has a view about how the Flood Re scheme should be treated in the public accounts; as a result, the Treasury insists on the Department for Environment, Food and Rural Affairs applying all sorts of public sector restrictions, including salary restrictions, to the way it operates. We have seen a similar approach to the Agriculture and Horticulture Development Board and the extended producer responsibility scheme.

With all those schemes, when the ONS says, “These are public bodies,” the Treasury is first in line to tell the Department, “You must now change your behaviour, change your laws and change your approach as a result.” That is what it says to other Government Departments, so what is different here? Now that the ONS has confirmed that FE colleges are a public body, should the Treasury not bring them in line with academies, schools and local authorities?

[Victoria Atkins]

I hope my right hon. Friend will forgive me, but I do not have an intimate knowledge of the treatment of the bodies that he describes. I respect the fact that as a former Secretary of State he knows a lot about those schemes. I do, however, hear him kicking back against the seeming power of public bodies or of those who have a role in our national life in ensuring that statistics, budgets and so on are certified and scrutinised. If he is complaining about that power, I am not sure that that is an argument for extending it.

[George Eustice]

I think what I am trying to say is that it would be a legitimate approach for the Government to say, “We are going to disempower the ONS. It is out of control. It is doing all sorts of things that cause chaos with Government policy and is driving a coach and horses through it. We are not going to allow this to go on, and we will pass emergency legislation to overrule it.” However, in the absence of that—and I have only ever detected intense reverence for the ONS in the Minister’s Department—she has to fall in line with what the ONS says. I think that that requires her to bring FE colleges into line with academies.