To ask His Majesty’s Government what assessment they have made of the impact on further education colleges of their inability to recover VAT on expenditure; and what plans they have, if any, to address this disparity to create equality with other publicly funded education providers.

My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In doing so, I draw attention to my role as president of Capital City College Group.

My Lords, further education colleges are publicly funded and provide free education. No VAT is charged on these services, meaning colleges cannot recover VAT on their costs. Further education colleges are currently outside the scope of VAT refund schemes that allow some public bodies, such as schools maintained by local authorities, to recover their VAT. The Government are continuing to look into the VAT position of these colleges.

I thank my noble friend the Minister for that response. As he correctly identifies, since 2011, FE colleges, unlike councils, academies and almost all other public sector organisations, have been unable to reclaim VAT costs from the Government’s refund scheme. LSE research estimates this to be a loss to the sector of £200 million a year. This puts college students at a funding disadvantage compared to their peers in state-funded schools and reduces resources for courses in government priority areas such as construction, engineering, digital and health. Given that colleges deliver disproportionately to young people from more disadvantaged backgrounds, and in the context of the current national crisis of young people not in education, employment or training, will the Government commit to reviewing this funding inequity for the FE sector as part of their cross-departmental response to the Milburn review?

I am grateful to my noble friend for his question. As I have said, the Government are continuing to look into the VAT position of these colleges. Of course, admitting further education colleges to a VAT refund scheme would be a change in tax policy. As my noble friend knows, the Chancellor makes decisions on tax policy at fiscal events in the context of the overall public finances. I agree with my noble friend about the importance of FE colleges. That is why we are investing in FE colleges: £1.7 billion to support them to maintain their estates; £375 million to expand capacity for post-16 education; £590 million to support priorities such as recruitment and retention; and £295 million into 29 technical excellence colleges to support key sectors for growth including construction, engineering and manufacturing.

Does the Minister accept that there are some areas where the law has already told the HMRC that it ought not to be demanding VAT—for example, agricultural shows—and that it refuses to accept the law and keeps on standing in the way of spreading what it has had to do for the Great Yorkshire Show to other shows? It is also true that the HMRC has lost its case about plug-in electric cars and is supposed to reduce the VAT to the same level as you pay at home. At the moment, it is penalising people who do not have a drive, and therefore people who do have a drive get their VAT very much lower. Why does he not intervene and make the HMRC accept the law?

There is a lot there. I am confident that HMRC accepts the law and is following the law, but I am more than happy to look into the points that the noble Lord raises.

My Lords, I will return to colleges and the original Question from the noble Lord, Lord Forbes. I want to follow up on the issue that he raised about the amount of VAT that is collected from colleges—about £200 million, if I heard the noble Lord right. What assessment have the Government done of the opportunity cost in improved facilities, more equipment and staff training that could be delivered if colleges were able to get that £200 million in VAT refunded?

As I have already said, the Government are aware of this issue and we are looking into the VAT position of these colleges. As I have also said, we have significantly increased the amount of funding that is going to FE colleges to do the exact things that the noble Lord is asking for: £1.7 billion to support colleges to maintain their estates and £375 million to expand capacity for post-16 education, among other investments.

My Lords, although the funding gap has halved in the last 10 years, FE continues to play second fiddle to HE in many respects beyond this important VAT issue. Does the Minister agree with the Milburn review that colleges face a further disadvantage because of the way funding is provided on a lagged basis, which disincentivises them from taking on NEETs who are less likely to complete their studies and therefore bring funding to the institution than other types of students?

There is a great deal to be said in favour of what Alan Milburn sets out in his interim review. He has published his interim review, setting out the drivers of youth unemployment. Clearly, some of the issues that the noble Lord raises are important to that and a factor in the rise in economic inactivity among those with health conditions. Alan Milburn will set out his final report later in the year, at which point he will set out his policy recommendations. I look forward to him doing so.

My Lords, picking up what the noble Lord, Lord Johnson, said, the FE college sector really is the poor man of the education system in this country. This follows years of neglect by previous Conservative Governments. My noble friend the Minister read out a number of different improvements in the resourcing of these colleges, but does he agree that there also needs to be greater parity of pay? Those who work in FE colleges are worse paid than those who teach sixth formers and much worse paid than those who teach in universities, despite neither of those groups being particularly highly paid. Will he look into this, with the Department for Education, to see whether there can be some improvement in pay and in the training of leaders in FE colleges, so that we can have better skills training in order to support the economy and a better deal for those young people who do not want to follow an academic route and go to university?

I agree with my noble friend’s overall point that we want greater levels of parity between FE colleges and other educational establishments. The Government are delivering those measures through our post-16 skills white paper on developing the skilled workforce that our economy needs and on reaching the target of two-thirds of young people participating in higher-level learning. FE colleges are a vital part of that. One thing that I have not read out is that, in recognising rising student numbers, the Government are providing £87 million of exceptional in-year growth payments to colleges this year and are increasing funding by nearly £800 million next year.

My Lords, as noble Lords know, I am huge supporter of vocational education, so I welcome this Question. Does the Minister agree with the noble Lord, Lord Forbes, that it would cost the Exchequer £200 million to extend the scheme in the way proposed? More generally, do the Government consider that the criteria to reclaim VAT are fit for purpose?

Both of those points are swept up in the point that I have already made: the Government are continuing to look into the VAT position of these colleges.

My Lords, another funding disparity currently planned for the next academic year relates to funding for free meals for students from poorer backgrounds. I strongly welcome the expansion of eligibility for free meals, but, in my experience, teenagers who attend FE colleges are no less hungry than those who attend schools. Will my noble friend agree to look again at the funding uprating for free meals?

I am grateful to my noble friend for her question. I hear what she says and reassure her that the Government are aware of this discrepancy and are actively looking into it.

Why do the Government so often favour a model that takes a lot of tax off institutions, people and companies and then has to give some back by way of grant to help pay for it? Is that not just a double handling charge that we do not need?

Yes, although overhauling the entire VAT system would be something of a long-term project.

My Lords, I endorse everything that the noble Baroness, Lady Blackstone, said about the disparity in pay between FE lecturers and schoolteachers, and the iniquity of that. FE is simply not treated in the same way as other educational systems. The Minister keeps saying that the Government are looking into this. Can he put a timescale on that? Are they looking into it this year, next year or way in the future?

As I have said, we are looking into the VAT position of these colleges. I am not in a position to put a timescale on that just now.