Public Bodies and VAT

Clive Betts Excerpts

Wednesday 17th May 2023 Westminster Hall

[George Eustice]

My hon. Friend raises an important issue, which is affecting colleges in Colchester, the rest of Essex, Cornwall and the whole country. The cost of having staff at an FE college to run courses in practical skills such as electrical engineering or bricklaying and construction is probably higher than at a university, which can just cram a couple of hundred students into a lecture theatre and simply deliver a lecture. The cost of providing those important skills, which are vital to our economy, is higher. My hon. Friend is right that it is incredibly difficult for FE colleges to recruit and retain staff, because of the squeeze on their budgets, so we need to do better.

During the EU era, the Government were able to blame EU law for the fact that FE colleges had to be treated differently. I have done my share of blaming EU law in the past for various things that were my responsibility, but EU law is no longer a barrier and cannot be used as an excuse or a reason for not doing the fair and just thing. We have now vanquished EU law and we have the freedom and power to set a coherent tax policy that is consistent and fair.

Doubts have sometimes been expressed about whether FE colleges are public bodies per se, but that has now been settled. I understand that, last autumn, the Office for National Statistics, which has been going through a rather tortuous classification exercise, has deemed that all sorts of bodies that might have been considered private are now public. It has cleared the issue up and said that FE colleges are public bodies, and in my view they should therefore be included in the section 33 list of public bodies that can reclaim VAT.

I have looked at parliamentary questions that have been raised in this area, and Treasury Ministers have sought to insist that the ONS designation does not change anything and, indeed, that it does not change the Treasury’s right to set out what it considers the right bodies to be included in the section 33 list. That might be the case, but the House is entitled to a rational answer as to why FE colleges are treated differently. We are entitled to insist on consistency and fairness in the tax system and, therefore, to request and require the Government to bring forward a statutory instrument to remedy this unfair situation.

This issue matters because the FE sector really matters. I declare an interest: as a teenager, I attended Cornwall College, which has a campus in my constituency and is the leading FE college there. My hon. Friend the Member for St Austell and Newquay (Steve Double) is also passionate about the interests of the college, which has a site in his constituency. I learned to arc weld at the college; I was not particularly good at it—indeed, I returned recently and tried my hand at it, and if I was not good then, I am certainly not very good now. I also attended a course on business studies and management, and a second course on farm management, and the skills and knowledge I gained were invaluable to me, not just during my first career, when I went into the farming business, but for things I have done since.

A succession of Ministers in this Government have been passionate about the FE sector and have recognised the importance of apprenticeships. The Government can be proud of the way they have tried to raise the status of vocational courses through apprenticeships. That is one of their great achievements; it started under the coalition Government and has been maintained. That is important, because apprenticeships add real value to the real economy, but we have to put our money where our mouth is, and at the moment FE colleges just do not have a fair financial settlement.

We often point to the success in technical skills of other countries in Europe and elsewhere, and we argue that we want to match that. We have lots of good ideas about apprenticeships and raising the standard and consistency of the courses, but sadly it feels like we do not follow through by providing the funding offered by countries that have shown us how to do technical skills properly.

Last year, schools were rightly given an injection of about £2 billion to help them with the cost of energy and the pressures on labour charges and wages. We all have schools in our constituencies that are suffering those pressures, but FE colleges, although they had some uplift, received just a fraction of what schools were given. Again, it is difficult to escape the impression that they were treated unfairly.

FE colleges are really struggling to recruit staff. They have the difficulty of running courses that are much more hands-on. There are all sorts of health and safety considerations for courses such as bricklaying, carpentry or electrical engineering, and the tutor-to-learner ratios are probably much higher than in universities, where everyone is just sat in a lecture theatre with their notebooks out. The situation is very different, and it is much harder for FE colleges to cope with fewer staff. Because these are successful parts of the economy—wages have been rising for technical skills such as electrical engineering and construction—it is difficult for colleges to lure people back from the private sector. They often find that people do the work partly out of a sense of duty or public service.

It is important that we recognise that, because the FE sector really matters. It gives us the skills we need for the economy of the future. We increasingly recognise that if we want to level up economic growth around this country, we need to rekindle and start to respect again manufacturing industries and the sectors of the economy that require technical skills. We cannot just get by with people in pen-pushing roles and the service industry; we have to recognise the value of those skills and fund them.

Even in new sectors of the economy, such as computer software and coding, the best way to learn those skills is often in a business, so that an apprentice can actually learn the approach taken by an individual computer software company and really learn on the job, while getting generic training in computer coding from the local FE college as well. As my right hon. Friend the Member for Chelmsford (Vicky Ford) said, we should value young people who have chosen such a career and to train in something that will be of real value to our economy.

The Budget earlier this spring had much in it to welcome. In particular, I welcomed the introduction of investment allowances, which will benefit the manufacturing sector and help it to get tax relief and capital allowances for investments in business, but I must say that it feels like there was a failure to support FE colleges in the Budget. That was disappointing for many Members on the Government Benches, and dozens of us wrote to the Chancellor asking him to take the plight of FE colleges seriously and to look at whether additional funding to help FE colleges could be found, but that appeared to fall on deaf ears. I hope the Chancellor will take the earliest opportunity to put that right and rectify that unjustified omission.

I invite the Minister simply to commit to bring forward a statutory instrument under section 33 of the 1994 Act. I appreciate that she may need to do a bit of a Government write-round before being able to commit fully, but I hope she will at least express an openness to the idea and give us a clear explanation, if she is able to, of why a school with a sixth form can reclaim VAT, but an FE college with a sixth form cannot. That is the key question, which highlights this terrible unfairness.

In conclusion, many hon. Members on both sides of the House want to see fairer funding for FE colleges. Introducing the change I have set out would help; it would not involve a huge amount of money, but it would probably give FE colleges somewhere in the region of a 2% to 4% respite on their budget. They would probably all use that money immediately to help retain and recruit staff. It is a relatively small amount of money but, like my hon. Friend the Member for Harwich and North Essex (Sir Bernard Jenkin), I am interested to hear what the Minister considers it would cost. Among those who support the change is my hon. Friend the Member for Worcester (Mr Walker), who is Chair of the Education Committee. There is widespread support for this, and I very much hope that the Minister will give us positive news in her response.

[Mr Clive Betts (in the Chair)]

We have only one other Member asking to speak, which makes things quite easy this morning.

[Kevin Foster (Torbay) (Con)]

It is a pleasure to serve under your chairmanship, Mr Betts. I congratulate my right hon. Friend the Member for Camborne and Redruth (George Eustice) on securing this very worthwhile debate. I agree with much of what he said about the impact this issue has on the further education sector, and that will be the focus of my remarks as well.

For background, there are 10,000 public sector organisations in the UK, the vast majority of which can claim the VAT they pay back from His Majesty’s Revenue and Customs, on the basis that that simplifies budgeting. Although public bodies may account for VAT on supplies of goods and services in the same way as any other business, they will often undertake non-business activities, which are outside the scope of VAT. As HMRC’s own guidance for local authorities and other public bodies explains:

“the general rule is that where a public body is funded by way of public expenditure (such as grant-in-aid) to do something for the public good, it’s unlikely to be engaging in business activities for VAT purposes.”

In that context, the term “public body” already includes Government Departments, non-departmental public bodies, NHS bodies, local government bodies, the police and fire and rescue services.

The impact of VAT on further education and sixth-form colleges—in particular, South Devon College in Paignton —is significant. The crucial background to the argument being made today is this: 228 further education and sixth- form colleges, operating from around 850 campuses across England, were reclassified as public sector organisations in November 2022 and are now subject to the same controls as academies and other local organisations, but they must still pay VAT, without having an opportunity to recover it, because they are not part of the refund scheme.

That has significant consequences. It means that money that Parliament voted to have spent on 16-to-19 education is taxed if spent on colleges. Colleges account for the vast majority of students taking T-levels, and their students in general are more likely to come from disadvantaged backgrounds, so those courses are essential to providing young people with the skills that they will need in a wide variety of sectors, including construction, engineering and health. Those funds would not be taxed in the same way if they were spent on schools, which, as my right hon. Friend the Member for Camborne and Redruth outlined, may similarly provide education for 16 to 19-year-olds on a range of subjects.

As my right hon. Friend will know from discussions in our previous roles, the skills that we are talking about are often those over which there is a debate about the balance between immigration and domestic supply. It is vital that we look to fill more of these skills gaps domestically, and ensure that colleges can step up and provide that training. He touched on his training in arc welding. For many jobs in which there are skills shortages across the economy, it is colleges that will be training people to meet that skills demand, so that they can then access the rewarding salary packages and careers that often come with them.

The impact on South Devon College is clear. Unlike Torbay’s schools or others in the public sector, South Devon College pays VAT that it cannot claim back, which gives it an immediate 20% disadvantage in spending power compared with a school. This becomes even more odd when we consider that South Devon College has South Devon High School within it. South Devon College’s non-pay spending each year is approximately £15 million, including VAT, so if it could reclaim the applicable VAT, it would have in the region of another £1 million to £2 million each year to invest directly in education, skills and training. That would obviously make a significant contribution to what the college can offer its students and the wider community that it serves across Torbay and south Devon.

Given the impact on South Devon College, I would be interested to hear the Minister’s thoughts on a few specific points. First, what assessment have the Government made of the financial impact on the further education sector of not being able to reclaim VAT? Secondly, why was that not changed during the reclassification of organisations as public sector organisations in November 2022? It would be a simple decision for Government to amend the Value Added Tax Act 1994, so that colleges such as South Devon College were included in the refund scheme, in the same way that previous Governments extended the refund rules to cover academies, national museums and various new regulatory bodies. The position of colleges seems even more odd when we consider the decisions taken previously. This is a logical step to take that will boost vital skills training and help provide the opportunities that our next generation needs, so I hope that this decision can be taken very quickly.

[Mr Clive Betts (in the Chair)]

We now move on to the Front Benchers, starting with Douglas Chapman for the SNP. There is no time limit; just take the necessary time.

--- Later in debate ---

[Victoria Atkins]

For the sake of avoiding any headlines, I do not agree with or accept my right hon. Friend’s description of the ONS. As I said, I appreciate that he has a particular set of experiences with ONS classifications; I do not know whether that is replicated in other Departments. I gently point to the range of public bodies that do not have VAT refunds or VAT exemptions, even though they have publicly funded activities. I am not sure that I can improve on that point. If it was not right when he was in the role, I am not sure we should be replicating that on his account going forward.

On the estimated cost, as I say, we know that there will be an impact elsewhere in the Budget, but it is the Department for Education and the Secretary of State for Education who make those decisions. I must not trespass on that Department’s funding decisions, but the funding that we provide does bear in mind the VAT issue.

On VAT, I mentioned that colleagues have a great many helpful suggestions as to how we could improve the VAT scheme. I have had this debate at least once or twice in Westminster Hall already, but we have had requests for more than £50 billion-worth of relief from VAT since the EU referendum. I know colleagues feel passionately about each and every request, but sadly the job of Treasury and of Ministers is to ensure that we keep our tax base in place because, of course, we have to pay for the services we care so much about.

I have very much enjoyed the debate, but I regret to inform my right hon. Friend the Member for Camborne and Redruth that at the moment we have no plans to make changes here. We will, of course, keep the matter under review. He has raised some important points that I will take away and mull over. I thank him for this debate.

[Mr Clive Betts (in the Chair)]

As the Chair, I obviously have to be scrupulously independent in these debates, but I just have to say that Angela Foulkes, the principal of the Sheffield College, wrote to me to draw my attention to this issue. I said that I was chairing the debate and could not contribute, and I am not going to.