By Dr Anne Murdoch OBE, ASCL Senior Advisor, College Leadership  

Following the Skills for Jobs White Paper (January 2021), and the Skills and Post-16 Education Act (April 2022), the Office for National Statistics (ONS) announced they would carry out a review of the sector classification of further education and sixth form colleges and designated institutions in England in the context of the latest international guidance, sector classifications and public policy.

The ONS review outcome
Reporting their conclusion at the end of November, the ONS announced that colleges would now come into the public sector. This conclusion has triggered the need for decisions by colleges on a range of issues including tax, senior staff pay, accounting, and borrowing.

Whilst it was hoped that a change in classification status from private to public sector might mean a financial gain for colleges, the benefits now seem less clear. The significance of a change is normally that a public sector classification generates financial benefits which are not available to private sector institutions, and reclassification of the FE and sixth form sector would normally expect to provide similar financial benefits to schools and academies. However, at the time of going to print, the change in sector classification has not generated the hoped-for benefit of a VAT refund scheme. 

The private sector status of colleges has been used in the past as justification for the government giving different financial settlements to colleges, excluding them from additional funding in the autumn statement, national insurance compensation, VAT relief, business rate compensation, risk protection and financial support for teacher training etc. However, leading up to the announcement, both the DfE and the Treasury had been negotiating on new rules for colleges should a reclassification to the public sector follow, so we should not have been surprised that they were ready for arguments about refund schemes, such as for VAT.

What next?
There are concerns that a return to public sector accounting rules will come with more red tape and a loss of autonomy for colleges, whilst not bringing the benefits afforded to schools and academies. Letters have been sent to colleges outlining the decision and the reasons for the reclassification and the ESFA will set out changes in the college’s financial handbook. Sadly, the change of sector classification in the past, has not always been followed by more funding or less bureaucracy and, at the time of going to print, it seems that history may be repeating itself. 

The changes for colleges will be new restrictions on private sector borrowing, no VAT recovery scheme, college subsidiaries reclassified as public sector, transactions outside college’s normal business will require DfE approval, and senior staff pay will be subject to public sector controls. The current, uneven, monthly funding commitments to colleges will be addressed, whilst existing debt commitments will not change although the DfE announced that it would fund some outstanding debts, essentially as a loan. Colleges will be able to carry forward surpluses as now and sell fixed assets keeping the receipts, but this will remain under review, as will other banking and accounting regulations. The government will provide £150 million of capital funding as part of the college transformation programme next spring.

Where does this leave the sector?
It would be good to think that a change to public sector classification will eventually bring more funding for the core business of colleges, but we know from the past that this is not always the case. The key issue for leaders is what a move to the public sector would mean in practice for their colleges in the current financial climate. There are still unknowns, where individual colleges are at different stages of borrowing or refinancing negotiations and details in terms of public sector accounting rules, still need to be worked through, both within the DfE, ESFA and in colleges themselves. 

Colleges will continue to do a good job for their students, irrespective of their ONS classification, working in partnerships at local, regional, and national levels. However, the sooner the detail of the sector reclassification is worked through for all those institutions impacted, the quicker colleges can consider what the change means for them in their locality and take action to safeguard the work they do in all aspects of their business.

Dr Anne Murdoch OBE is ASCL Senior Advisor for College Leadership.