Further Education Public Sector Classification

The pendulum for the FE sector has swung back following a decision of the ONS last week to reclassify further education institutions as public sector bodies, a status they haven't held for over a decade. The decision will impact further education colleges, sixth form colleges and designated institutions in England and perhaps comes as little surprise following the extension of the Secretary of State's intervention powers in the Skills and Post-16 Education Act 2022.

The DfE has published its response to the decision (Further education reclassification: government response - GOV.UK) stressing the decision will not alter the strategic aims of colleges who will continue to play a leadership role in England’s skills system. The response outlines to some extent the fiscal impact of this reclassification for colleges including:

• a duty to manage funding in accordance with HM Treasury rules
• a restriction on private sector borrowing (which will now require DfE approval)
• a requirement to follow HM Treasury guidance on pay controls for senior managers and executives
• additional financial reporting obligations
• a reprofiling of funding payments for both the 16-19 and adult education budgets

The public sector rules will curtail a college's freedom to engage in transactions which the college has no experience of or which are outside the range of its normal business - DfE's prior approval will now be required. Likewise for any contentious or repercussive arrangements a college wishes to enter into. Trading subsidiaries of colleges will also be caught by the reclassification (and therefore the same restrictions). No change is expected to the VAT status of colleges or LGPS pension arrangements for college staff. Colleges retain their freedom to carry forward surpluses and dispose of assets (although proceeds must be ringfenced for capital expenditure).

The DfE response is coupled with a commitment of extra funding for colleges - including £300m before the end of the current financial year aimed at reducing deficits, and £150m in 2023/24 for supporting capital projects which might otherwise have been funded by commercial lenders. Similar to the academies sector, the DfE plan to draw up a college financial handbook which will provide more detailed guidance for colleges on what is expected from them under this new status. A draft will be issued for consultation next autumn with a view to its content taking effect from august 2024. In the meantime, College Accounting Officers should look out for their letter from the DfE providing more detail on their new obligations.

It will be interesting to see in due course what additional controls the Government expect to exert over the sector in respect of this new status, especially with regards to strategic initiatives that might impact the balance sheet.

For further information, please contact Morag Roddick in our Corporate law team on 0121 227 3735. Alternatively, please complete the form below.