Public Bodies and VAT

George Eustice Excerpts

Wednesday 17th May 2023 Westminster Hall

[George Eustice (Camborne and Redruth) (Con)]

I beg to move,

That this House has considered public bodies and VAT.

It is a pleasure to serve under your chairmanship, Mr Betts. Hon. Members will be well aware that His Majesty’s Treasury tends jealously to guard its primacy on tax matters. Indeed, I remember as a Minister frequently being given a briefing inviting me to respond to questions about tax with the simple words, “This is a Treasury matter.” If I ever sent officials to the Treasury to raise an idea or discuss a particular matter, they would go away with a look of trepidation in their eyes and come back looking rather chastened. However, I never accepted that tax is a matter for the Treasury alone. I have always believed that it is a matter for the Government as a whole because tax affects every industry, every public body and every Department. Its effect on all those things means there is also a vital role for Parliament in scrutinising tax policy.

I want to focus on the Value Added Tax Act 1994 and the way we treat public bodies—especially the unfair treatment of further education colleges. The United Kingdom was forced to introduce VAT when we joined the European Economic Community in 1973, and over the years VAT became one of the big three tools used by Government to raise revenue. It has also been the main go-to tool for Governments when they are trying to deal with a crisis. VAT was slashed after the financial crisis of 2008, and again during the covid pandemic.

Under the VAT rules, tax can be levied on goods at either the standard rate—the full 20% tax is levied on sales—or at a reduced rate of 5% for certain items, such as children’s car seats. There are also zero-rated goods—principally food and children’s clothing. Finally, there is another category—exempt goods. That applies to many services, including insurance, finance and, notably, education.

The 1994 Act established a basis for public bodies to reclaim the VAT on their purchases, even though their services were exempt. That applies in particular to councils, the police, schools or academies and, notably, museums. However, there is an anomaly in the way the tax system works, in that FE colleges are not on the section 33 list that would make them exempt.

[Daniel Zeichner (Cambridge) (Lab)]

The right hon. Gentleman is making an important and useful speech. Does he agree that the VAT trap has sometimes been used as a way to lure institutions out of the maintained sector and into academisation and that that is another lever that the Government have used the VAT system to create? That has affected institutions such as Hills Road Sixth Form College, Long Road Sixth Form College and Cambridge Regional College.

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[George Eustice]

The hon. Gentleman makes an important point, but academies are included on the exempt list, which the Government amended specifically when academisation started, so that schools would not be placed at a disadvantage by leaving the local authority. Councils are also on the list, so they can reclaim their VAT inputs.

My argument is that His Majesty’s Treasury should, at the earliest opportunity, introduce a statutory instrument with respect to section 33 of the 1994 Act to ensure that FE colleges are treated fairly and that this anomaly is corrected. FE colleges would therefore be able to reclaim VAT on their inputs.

The Treasury guards tax policy ferociously, but it also has a duty to be fair and consistent and to at least have defensible policies in these areas. Under the current arrangements, there is a ludicrous situation whereby a school with a sixth form can reclaim its VAT, but an FE college with a sixth form cannot. That makes no sense whatever.

[Vicky Ford (Chelmsford) (Con)]

My right hon. Friend is making a really important point. Chelmsford College in my constituency provides an outstanding education to young people from all over Essex, providing skills and training, as well as education. It pays around half a million pounds a year in unrecoverable VAT, which means it cannot pay the same level of remuneration to its staff as a local school with a sixth form can. That is not fair, not just for the college, as compared with a school or academy, but for the young people involved.

[George Eustice]

My right hon. Friend raises an incredibly important point. It is profoundly unfair on the young people who choose to attend an FE college, and perhaps even to do A-levels in its sixth form, that the college is treated differently—almost as a second-rate institution—when a school with a sixth form enjoys the higher funding and benefits that come with being able to reclaim VAT.

[Sir Bernard Jenkin (Harwich and North Essex) (Con)]

I apologise to my right hon. Friend and the Minister that I cannot stay, but I will read very carefully what the Minister says. Perhaps she could quantify what she thinks the VAT take from FE colleges is, so that we know what we are discussing.

Does my right hon. Friend the Member for Camborne and Redruth (George Eustice) agree that we are not discussing a free gift to FE colleges? Like Colchester Institute, which serves my constituency, they are suffering an unparalleled financial squeeze at the moment and are having to inflict redundancies and cost reductions against a background of very low pay for most of the academic staff. Unless the Government can resolve that anomaly, FE colleges will face a crisis.

[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.

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[Abena Oppong-Asare (Erith and Thamesmead) (Lab)]

It is a pleasure to serve under your chairship, Mr Betts. I congratulate the right hon. Member for Camborne and Redruth (George Eustice) on securing the debate, and raising the issue of the important role that further education colleges play in training the workforce of the future, and upskilling the existing workforce.

I am happy to be here on behalf of the Opposition. I thank hon. Members for their contributions to today’s debate, particularly the hon. Member for Torbay (Kevin Foster), and my hon. Friend the Member for Cambridge (Daniel Zeichner). We have heard today about the role that further education plays in the lives of constituents, and the challenges they face, such as the struggle to recruit staff. As the right hon. Member for Camborne and Redruth has explained, section 33 of the Value Added Tax Act 1994 specifies that special provision is made for local authorities and specified bodies to recover VAT incurred on goods and services purchased in relation to non-business activities. The section sets out a list of public bodies eligible to recover VAT, which the Treasury can amend via secondary legislation. Guidance from HMRC says:

“Treasury will consider applications from bodies that meet both the following criteria—the body must undertake a function ordinarily carried on by local government and have the power to draw its funding directly from local taxation.”

I note that last October, the Office for National Statistics deemed that further education colleges should be public bodies. That is the basis of the right hon. Gentleman’s case that further education colleges should be added to the section 33 list. That will allow them to reclaim the VAT that they are charged in the same way that schools can.

This is a very topical debate, and real concerns have been raised about the financial stability of further education colleges. FE college funding fell by 27% in real terms between 2010 and 2019. In that same period, growth stalled, wages fell and prices rose. That has meant that the cost of everybody’s inputs, from energy to textbooks, have become more burdensome and unmanageable, and things have grown more difficult for colleges across the country.

One of Labour’s missions for government is to break down the barriers to opportunity for every young person. We are determined that every child and young person should have access to excellent education, so that the opportunities open up to help them thrive. Thirteen years of Conservative failure have weakened our education system, meaning that all too often young people are held back, unable to fulfil their potential. With our green prosperity plan, we will make Britain a world leader in the industries of the future and ensure that people have the skills to benefit from opportunities. Institutions such as FE colleges can play a vital role in that endeavour.

As the world’s economy changes, Britain needs to grasp opportunities to get ahead in the race, and we need to give British people the tools and skills they need to succeed. As I have laid out, the Labour party believes very strongly in the role of skills, and believes that FE colleges are key to getting Britain growing. We want the education system improved, and we want skills provision updated for a modern economy.

[George Eustice]

The hon. Lady is making a very strong speech about the importance and value of FE, but can she confirm that it is her party’s policy that further education colleges should be added to the list under section 33, so that they can reclaim VAT?

[Abena Oppong-Asare]

The right hon. Gentleman has raised important matters in this debate. The Labour party will evaluate the situation properly before putting any proposal forward. I look forward to the Minister’s response. It is really important to hear from the Government on this issue, and I hope she will address the points raised by the right hon. Member for Camborne and Redruth.

[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.

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[George Eustice]

I thank all hon. Members for attending the debate. I appreciate that at 9.30 am on a Wednesday, the subject of the debate—public bodies and VAT—might have felt daunting for many. As the Minister herself said, tax is complicated and VAT is the most complicated part of tax.

I thank everybody for contributing to the discussion. In particular, I am grateful for the support that I received from my hon. Friend the Member for Torbay (Kevin Foster), and for the supportive interventions from my hon. Friend the Member for Harwich and North Essex (Sir Bernard Jenkin) and my right hon. Friend the Member for Chelmsford (Vicky Ford). As a former Minister in the Department for Education, she knows about the issue; it was great to have her support. There were also very good contributions from all the Front Benchers.

A parting thought: the Minister says that it is important for the Treasury to protect its tax base and that that is why it is reluctant to make changes. We all understand the importance of balancing the books and protecting the tax base, but in doing so the Government and the Treasury must seek to have fairness and consistency. My point today is there is an inconsistency. If the Treasury wanted to raise taxes somewhere else and then bring consistency to the VAT system, we would all understand and appreciate that by all means.

This debate will conclude early. The really good thing about debates that conclude early, when you are a Minister, is that they mean a whole half-hour with nothing in the diary. I used to find that when debates wrapped up early, rather than rushing off to the next thing, it was sometimes quite useful to have half an hour to give instructions to the officials—they are currently sat behind my right hon. Friend—about further work in the area. I hope that she will take up that opportunity.

Question put and agreed to.

Resolved,

That this House has considered public bodies and VAT.