The case for VAT exemption for FE colleges providing education to 16- to 18-year-olds
Further education colleges play a vital role in delivering high-quality education and skills to young people. There are 693,000 16- to 18-year-olds studying in colleges – more than the number studying in schools (513,000). Students in FE are more likely to come from disadvantaged backgrounds, with 23% of college students having been eligible for free school meals at age 15, compared to just 13% of students attending school sixth forms. Accordingly, colleges are critically important to the Government’s mission of breaking down barriers to opportunity.
Colleges are, however, at a disadvantage. While both colleges and schools are classed as public sector organisations, the way they are treated by the Government is different. Schools are able to reclaim VAT costs from the Government, whereas colleges cannot recover VAT on most of the purchases related to their education activities. This fiscal anomaly reduces the resources available for frontline teaching and learning – especially given that the costs associated with technical and vocational training are significantly higher than those required for academic courses such as A levels. The Association of Colleges estimates that the total annual VAT cost to the college sector amounts to approximately £250 million.
A new research report produced by the London School of Economics in partnership with the Large College Group examines the fiscal and operational impact of the current VAT regime on FE colleges. The analysis suggests that aligning colleges’ VAT arrangements with schools would be fiscally neutral in the medium term for HM Treasury, while unlocking millions in reinvestment for the benefit of students, staff and communities.
One example of this for Luminate Education Group is linked to our recently completed £10.5 million refurbishment of our Park Lane Campus, which accommodates around 2,000 students. The Group incurred just over £2 million of irrecoverable VAT on these refurbishment works. If we had been able to recover this VAT, we would have replaced the whole of the roof and refurbish all of the student toilet facilities.
You can download and read the full report by clicking on the button below.
LSE Report: Executive Summary
- FE colleges operate as exempt charities, typically incorporated as statutory corporations or charitable companies. While they do not have to pay VAT on some of their activities, many of colleges’ services fall outside the scope of VAT exemption, including commercial lettings (e.g. renting out rooms or sports facilities to third parties), retail sales (e.g. textbooks, stationery not essential to the course), consultancy services, catering services open to the public, hairdressing salons operated as part of training but serving paying customers, and much of the capital expenditure on large-scale building projects to provide industry-standard teaching facilities.
- The Association of College estimates that the total annual cost of VAT to colleges in England is £250 million. This is funding which ends up in the coffers of HM Treasury rather than being used to support education and training provision.
- In contrast, schools and academies benefit from the Section 33 VAT refund scheme under the VAT Act 1994, which allows them to reclaim VAT incurred on non-business activities funded by public money. In January 2025, the Government ended the VAT exemption for private schools on education and boarding provision in order to generate additional revenue for state education funding.
- After the Post 16 Education and Skills Act 2022 became law in November 2022, the Office for National Statistics reclassified colleges as public sector bodies, giving them the same status as schools and academies. However there has been no change in the VAT rules since then. As a result of this anomaly colleges remain forced to repay millions of pounds each year which could otherwise be used for improving facilities for students or recruiting and retaining teaching staff with the industry experience needed to train the next generation of skilled employees the UK economy needs.
- This creates a real financial impact, as VAT becomes a net expense that reduces FE colleges’ available budgets for investment, expansion and student services, compared to universities and schools.
- As a result of the VAT rules, FE colleges are less competitive and have fewer resources available for improving facilities, hiring staff or supporting disadvantaged students. The VAT disadvantage has become more pronounced as public funding for FE colleges has tightened over the past decade (Institute for Fiscal Studies, 2023).
- The absence of VAT recovery mechanisms for FE colleges in England contrasts with international practices where vocational and independent education are treated as legitimate public goods deserving of fiscal support. Extending VAT exemptions or refund rights to FE colleges would not be anomalous, but rather aligned with international norms aimed at supporting inclusive and efficient education systems.
- The LSE researchers’ simulation of a VAT rebate on capital investment, using a sector-specific refund mechanism limited to FE and sixth-form colleges similar to the arrangements introduced for academies in 2011, suggests that such a reform could be fiscally neutral over a 10-year period, while delivering significant benefits in terms of educational outcomes and regional development.
- Current VAT policy discourages capital investment and undermines financial resilience. Aligning the fiscal treatment of FE colleges with that of schools and universities is both a matter of equity and of sound economic policy. Removing these distortions would not only improve the efficiency of public investment in education, but also signal a clear commitment to supporting skills development across all regions and social groups. In doing so, it would help unlock the full potential of the UK’s FE sector as a driver of inclusive growth.
