MPs raise concerns over VAT treatment of further education

The debate was led by George Eustice (Con) who highlighted what he described as an ‘anomaly’ that see FE colleges liable for VAT despite the education sector being exempt under the Value Added Tax Act 1994. He called on the government to introduce a Statutory Instrument to ensure colleges are able to reclaim VAT on their ‘inputs’. He argued “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”.

Daniel Zeichner (Lab) suggested that this ‘VAT trap’ provided a means for the government to move colleges out of local authority control and into the academy sector.

Kevin Foster (Con) spoke about the ‘significant’ impact of VAT on the sector and asked the government for an  assessment of the financial impact on the sector. He argued that extending refund rules to the FE sector would be  a “logical step to…boost vital skills training and help provide the opportunities” for future generations.”

Douglas Chapman (SNP) spoke in favour of the measure, noting that VAT was a “huge part of the UK’s tax income” and that Eustice’s proposal represented a “tiny speck” of the £162 billion generated by the tax. He urged the government to provide support to the FE sector and  used the opportunity to press for the devolution of VAT powers to the devolved administrations.

Shadow Exchequer Secretary Abena Oppong-Asare said it was possible for the Treasury to amend the list of public bodies eligible to recover VAT via secondary legislation.

She also noted that the Office for National Statistics (ONS) had deemed that further education colleges should be classed as public bodies last October, strengthening the case brought forward by Eustice. Oppong-Asare  expressed concerns about the financial stability of the sector and emphasised that the Labour Party’s position that they were “key to getting Britain growing”.

Asked by Eustice whether the Labour Party will consider adding further education to the list under section 33, Oppong-Asare said that her party will “evaluate the situation properly before putting any proposal forward”.

Financial Secretary to the Treasury (FST) Victoria Atkins responded for the government, agreeing with MPs about the vital role of FE colleges to society and pointing out the different ways that the government has provided support to the sector.

She described VAT as a  “complicated area of tax law” and explained that the purpose of section 33 of the VAT Act (exempting public bodies from paying the tax) was designed  to “prevent VAT costs from falling as a burden on local taxation”. She argued that FE colleges were not included in this section because they do not align with this rationale and that, as with other providers of public services, they should cover their VAT costs from the funding allocations.

George Eustice argued that both FE colleges and independent academies were funded by central government, and he could not understand why academy schools have been protected by legislation and the FE sector not, especially now that the ONS has deemed them to be  public bodies.

In response, the FST emphasised that eligibility for VAT refunds was not related to ONS classification. She reiterated that “where public bodies cannot recover VAT, we provide overall funding with the irrecoverable VAT in mind”.

Atkins added that if the government were to allow FE colleges be exempt from VAT, it would cost the Exchequer approximately £200 million per year. 

Atkins expressed her willingness to improve the VAT scheme and added that the government had secured over £50 billion-worth of relief from VAT since the EU referendum. However, she emphasised the need to “keep our tax base in place” and concluded by saying that the government currently has no plans to make changes to the sector.

Eustice, not pleased with the outcome, said that the government and the Treasury should strive for consistency in the VAT system.

You can read the full debate here.