Education briefing - ONS Reclassification of Colleges

Reclassification as public bodies

Until today, 29 November 2022, further education corporations, sixth form college corporations and designated institutions in England (“Colleges”) were classified as part of the private sector - a decision taken by the Office for National Statistics (“ONS”) in 2012. Colleges were classified as private sector bodies from set up in 1992 until 2010 but were then reclassified as public sector bodies by the ONS. That public sector classification by the ONS in 2010 prompted the passing of the Education Act 2011 (the “2011 Act”) which gave Colleges freedom over their governance, removed the need for Colleges to seek consent before borrowing from banks and limited Government powers to intervene where a College is being mismanaged or is performing poorly. As the Government powers became so limited in the 2011 Act, the ONS took Colleges in England out of the public sector classification and back into the private sector.

The ONS has today published the results of a review of that classification following the coming into force of the Skills and Post-16 Education Act 2022 which again gives the Government more control over Colleges and announces that with effect from 29 November 2022, Colleges would again be reclassified as “Central Government” or public sector bodies.

A copy of the ONS’ public sector classification guide which contains the decision to reclassify Colleges is available on the ONS website.

Effect of reclassification

The Department for Education (“DfE”) has also today published its response to the reclassification. The response in full is available on the DfE website.

It is not yet completely clear what a change in classification will mean for Colleges since it very much depends on all of the controls which the Department for Education (“DfE”) intend to introduce. Our initial view is that the effect will be to limit the ability of Colleges to merge, diversify or acquire assets or other entities. We expect the full implications to become clearer over the next few weeks/months.

Key issues from the DfE response for Colleges to note are:

Surpluses - Colleges will retain the flexibility to carry over and spend their surpluses without needing the DfE’s approval.

Assets – Colleges will retain the flexibility to dispose of and retain the proceeds of the sale of any of their assets without needing the DfE’s approval.

Subsidiary companies – Colleges will retain the ability to operate their trading subsidiaries as they do now. ONS has however reclassified Colleges’ trading subsidiaries (along with Colleges themselves) as being public sector bodies. We do not yet know the full implications of this reclassification and whether Colleges will be able to engage in commercial activity through their subsidiaries to the extent they do now.

Novel, contentious or repercussive transactions – Colleges will be required to seek the consent of the DfE before engaging in any transactions of which “they have no experience or which are outside of its range of normal business”. This is likely to cover a wide range of transactions including mergers, joint ventures and the acquisition of companies. We do not yet know what criteria the DfE will use here in assessing whether or not consent can be provided to such a transaction.

Managing Public Money – Colleges will be required to manage their resources in line with the Managing Public Money framework.

College Financial Handbook – The DfE will begin work on a new college financial handbook with input from sector representatives. The handbook will be published for consultation in Autumn 2023, with a final draft to be published in March 2024 ahead of the handbook becoming effective in August 2024.

Financial Reporting – Colleges will continue to provide their own annual report and accounts for the 2023 academic year. From 2024, the DfE will need to consolidate accounts for all College. Further information and guidance on this is to follow.

Commercial Borrowing – The DfE expects that existing debt commitments will continue to be repaid by a College to maturity. Commercial refinancing is however unlikely to be possible under the Managing Public Money framework and the DfE will look to provide funding to Colleges to enable them to repay those debts where lump sums are due at the end of a fixed term. New commercial borrowing will need the prior consent of the DfE. We do not yet know what Colleges then are likely to be permitted to borrow money for and whether there is likely to be a Government facility to allow them to do so beyond the capital grant funding mentioned below.

Capital Grant Funding – The DfE will provide an additional £150m of capital grant funding in 2023/24 to support College to invest in their estates. The intention being that this grant funding replaces the commercial borrowing a College would have used to fund capital build projects.

Banking – Colleges are free to continue to use commercial bank account facilities though will be encouraged to switch to the Government Banking Service over time.

VAT – The DfE has confirmed that the ability of Colleges to recover VAT is not related to their ONS classification. We do not yet understand why Colleges are not being permitted to reclaim VAT in the same way as academy trusts do. 

Pension Liabilities – The DfE has advised that no action is required by Colleges in respect of the local government pension scheme.

Intervention Regime – The DfE has not yet commented on the current intervention regime so we do not yet know how and whether this will operate and what might happen when a College runs into financial difficulty.

Workshops

We are pleased to be running a series of workshops in conjunction with MH&A to consider the implications of this recent decision in further detail.

Indicative workshop dates (subject to confirmation) are:

Leeds – 23 January 2023 (4:00pm – 6:30pm)

Manchester – 13 February 2023 (4:00pm – 6:30pm)

London – 13 March 2023 (4:00pm – 6:30pm)

Further information in respect of these workshops will follow, but to register your interest please do get in touch with any of the contacts below or email

edubooking@eversheds-sutherland.com.