Clause 75 - Academies

Finance (No. 3) Bill – in a Public Bill Committee at 9:00 am on 9th June 2011.

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Question proposed, That the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The clause will create a new refund scheme to enable academies to recover VAT incurred on goods and services used in the provision of free education. As Members will know, academies are schools in England that enter into academy arrangements under section 1 of the Academies Act 2010, or enter into an agreement with the Secretary of State under section 482 of the Education Act 1996.

I have no objection in principle to the clause. As I understand it, it will ensure that a similar situation is put in place to that in schools under local authority control, which have their non-business VAT refunded. However, I have a couple of questions on which I hope the Minister can put my mind at ease.

First, I would like to look at the position of VAT and Europe. My hon. Friend the Member for Gedling (Vernon Coaker) has passed me an e-mail from one of his constituents, who had contacted him as a former schools Minister to raise the issue. The constituent had raised the issue with the European Commission and, on 14 April, received the following response:

“We have analysed the published proposal for legislation to exempt academies from VAT. Following that analysis we have substantial doubts whether that legislation is consistent with the provisions of the VAT Directive; these doubts relate in particular to the combination of a supply of exempt services with a right to deduct input VAT and to the principle of equal fiscal treatment. With your agreement, we would therefore treat your file as a complaint which we would register with the responsible service for monitoring the correct application of EU tax law and which will engage the appropriate procedures for making sure that these provisions are applied properly.”

Will the Minister reassure me and my hon. Friend by responding to the substance of that claim—that the proposals in the clause have created some concern with the Commission? Will he place on record his view of that potential dichotomy between the Commission view and UK Government policy, which I know is a matter close to his heart?

Secondly, the Treasury proposal allows for such VAT to be dealt with in a similar way to that of local authority schools. Academies get a VAT grant to compensate for the fact that, unlike local authority schools, they are eligible to pay VAT, which I understand is around £250,000 per school. I would welcome the Minister’s clarification, but I understand that the grant  is given by the Department for Education to compensate for the situation that he is trying to deal with in the clause.

If that is the case, it raises two questions. First, what will happen to the grant to compensate for VAT paid given to academies by the Department? Will that continue? If the proposal is enacted, there could be a question of double counting, with academies getting the grant, as they currently do, and then receiving the relief.

Logic says that the grant could ultimately be withdrawn. There are about 200-plus academies that could be receiving the grant. That number could rise to 400-plus, all of which could receive the grant. Therefore, this should be a revenue-neutral move if the Minister is withdrawing the grant. What will happen to the money that is being saved? Will it be removed from the Department for Education’s budget for future years?

Photo of Bill Esterson Bill Esterson Labour, Sefton Central 9:15 am, 9th June 2011

My right hon. Friend is raising an interesting point about how academies benefit from some of the financial arrangements. Does he agree that if this clause goes through, about £250,000 will need to go back to local authority schools otherwise they will be further disadvantaged by some of the other arrangements that have been made for academies?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I am grateful to my hon. Friend for raising that point. If the information is correct—I would genuinely welcome some clarification on that—and there is a £250,000 grant from the Department for Education for schools that become academies to compensate for the VAT, and if clause 75 effectively neutralises that VAT, it means that £250,000 per school times the number of academies now and in future has been factored into the overall education budget.

If the Minister is neutralising the VAT issue, does the Treasury intend to repatriate that portion of the budget for another purpose or will it use it to pay for the VAT position in the clause? Will the Department for Education maintain the £250,000 per school times however many academies there are now and in future to ensure that the money stays within the overall education budget?

In essence, my hon. Friend the Member for Sefton Central is asking whether the spending review headline figures for the schools budget will be altered in any way as a result of the VAT changes in the clause, given that the VAT grant was paid by the Department for Education to schools which became academies or which are to become academies.

Has the Treasury calculated how much extra VAT it will receive in 2010-11, 2011-12 and beyond? Moreover, has the Treasury included the loss of income from existing academies in future scoring for VAT? Has the EU given any indication that there might be a problem with this exemption, as seen in the e-mail from the constituent of my hon. Friend the Member for Gedling? What is the net effect on schools funding overall? If the EU objects, is there a plan B for this particular issue and where are we on that?

While the principle of the clause is fine, the Minister needs to reflect on and provide satisfactory answers to a couple of questions.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 75 creates a new refund scheme to enable academies to recover the VAT incurred on goods and services used in the provision of free education. For these purposes, academies are schools in England that  enter into academy arrangements with the Secretary of State for Education under the Academies Act 2010 or the Education Act 1996. VAT can ordinarily be recovered from HMRC only on expenditure relating to taxable business activities. The provision of free education is a non-business activity, so VAT incurred on related expenditure cannot usually be reclaimed. An exception to this rule is that schools under local authority control, which of course provide free education, can claim the VAT paid on their expenditure through the refund scheme for local authorities in section 33 of the VAT Act 1994. Academies cannot access the scheme because they are not under local authority control, consequently, the changes that the clause makes enable academies in England to recover VAT incurred in their provision of free education.

It is important to be clear that the measure is not about giving academies additional funding of any kind or a funding advantage over local authority schools. Instead, it is simply the most efficient and sustainable means of ensuring that academies are funded in a manner consistent with how local authority schools are funded. If we did not introduce such a refund scheme, academies would be at a significant disadvantage compared with local authority schools, because they would have to pay VAT out of a funding allocation that was never designed to cover such costs.

Photo of Roger Williams Roger Williams Liberal Democrat, Brecon and Radnorshire

The Minister knows that we do not have academies in Wales, but we have charitable institutions set up for educational purposes, such as Christ college in my constituency, which was established after the dissolution of the monasteries in 1541. Charities complain, particularly after the latest increase to 20%, that they cannot reclaim all their VAT, which puts them at a disadvantage. The Charity Commission now insists that such establishments demonstrate that they meet their charitable purposes, so is it not time to reconsider their VAT position?

Photo of David Gauke David Gauke The Exchequer Secretary

There is a wider point about charities and VAT to which I suspect we will return in detail this afternoon. Voluntary-aided schools that fall outside the scheme are not in the same position as local authority schools that become academies, and are not disadvantaged by the clause. The new refund scheme does not in any way discriminate against them. Voluntary-aided schools have always had the VAT element of their revenue costs refunded via the local authority, but they remain responsible in law for their own buildings and land, therefore they have never had the VAT element of their capital costs refunded. However, the Department for Education adds an allowance for irrecoverable VAT on eligible capital funding.

As far as academies are concerned, we obviously did not want unfairness in the system, and the only other way around the problem of academies having to pay VAT out of a funding allocation that was never designed to cover such costs would have been to design a whole new means of allocating funding to academies, meaning that we financed academy schools in one way and local authority schools in another. I suspect that that would in itself cause some controversy and be unlikely to be fair to one group or the other.

The right hon. Gentleman asked some sensible questions that I shall attempt to address. His first point was about whether the refund scheme was compatible with EU VAT  law. This is a public expenditure measure, and as such falls within the competence of the Government as opposed to the EU, but it is wholly compatible with EU law. The European Commission has accepted VAT refund mechanisms, such as this one, provided that they do not affect the EU budget or distort competition with business, and the provision does neither. The important point is that we intend to refund academy schools’ VAT incurred on purchases relating to their non-business activities—mainly free education. Refunds under the measure do not extend to business activities, thus there is no issue of distortions or competition breaches in fiscal mutuality.

I am aware that a junior official from the Commission has offered a preliminary view on the measure, but it is clear that it was based on a misunderstanding of the proposal. We have written to the Commission to clarify the position and are entirely confident that it will not pursue the matter further, so there is nothing to prevent the Committee from allowing clause 75 to stand part of the Bill. I am grateful to the right hon. Gentleman for allowing me to clarify that point.

Photo of Steve Barclay Steve Barclay Conservative, North East Cambridgeshire

I very much welcome the clause and think that it will be beneficial. As my hon. Friend the Minister knows, there is a distinction in the treatment of further education colleges’ VAT. In my constituency, the college of West Anglia is grappling with the fiasco of the previous Government’s decision on the capital expenditure of FE colleges—the consequences have created particular challenges for its budget. Will he instruct his officials to look at the impact of VAT on further education colleges? Over the coming years, given the convergence of funding planned for 16-18 education and for academies and FE colleges, what work can be done to help vis-à-vis VAT?

Photo of David Gauke David Gauke The Exchequer Secretary

I appreciate my hon. Friend’s expressing those concerns affecting his constituents. It is worth pointing out that further education colleges have always been funded differently from schools. They have never been able to receive VAT refunds against expenditure on their non-business activities. That restriction is already included in their budget planning, and this measure does not affect that, meaning that those institutions are no better or worse off. I appreciate that that is not the point he was making, but he has put it on the record. As I say, the budget planning for FE colleges is always done on the assumption that VAT on expenditure is not refundable.

Photo of Stella Creasy Stella Creasy Labour, Walthamstow

I think my colleague on the Public Accounts Committee is referring to our discussion yesterday about how much of an impact the VAT increase has had on the problems that many FE colleges face in meeting their expenditure commitments and ambitions for local students. Will the Minister undertake a review of the extent of that impact, especially when we are looking to narrow the gap between the funding for sixth-form colleges and for FE colleges? Clearly, if FE colleges have to pay VAT, and if VAT has been increased by the Government, there is a financial consequence for them and for the students in many of our constituencies.

Photo of David Gauke David Gauke The Exchequer Secretary

I first point out that, again, sixth-form colleges are not being treated in the same way as schools, and are more comparable with further education colleges  in not being able to receive VAT refunds. However, we had a substantial deficit which we needed to close. I could also make the point that FE colleges, sixth-form colleges and charities have all been affected by the substantially greater increase in employers’ national insurance contributions planned by the previous Government. The reality is, we have had to take steps to reduce the deficit. I know that that point is not always appreciated by the Labour members of the Committee, but it remains the case.

Photo of Nicholas Dakin Nicholas Dakin Labour, Scunthorpe

I declare my interest as, this time last year, I was the principal of a sixth-form college. I draw the Minister’s attention to the fact that when sixth-form colleges were incorporated, and when I enjoyed a similar transfer—I use “enjoyed” carefully—to that which academies are having now, they did not have this done in relation to VAT. Whereas FE colleges—he is quite right—have always been in that situation, sixth-form colleges’ VAT status changed at incorporation, and has not been reversed, despite being a different sector.

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Gentleman, as always, brings his expertise to our debates, and I accept that point of information. As I said, however, the clause will not have an adverse impact on sixth-form colleges, FE colleges or local authority schools. Its objective is to ensure that we can proceed in a fiscally neutral way.

On that point, I must respond to the question of the right hon. Member for Delyn about how to ensure no double counting—that academies are not paid twice for the VAT, through the refund scheme and through the current VAT grant. The current VAT grant is paid to academies through the Young People’s Learning Agency, to replace the VAT that is currently irrecoverable. That will continue until 31 August. However, since academies will be able to reclaim VAT under the refund scheme from 1 April, the YPLA will require that portion of the grant to be repaid to them in the next academic year. The YPLA will write to academies to confirm the funding position for next year.

The right hon. Member for Delyn also asked about the current grant—where does the funding go and so on? The VAT refund was agreed at the spending review. No additional funding was given to the Department for Education. It was all taken into account in the funding plans set out for that Department, so I hope that that clarifies that point.

I hope that I have answered the questions asked by the right hon. Gentleman and other members of the Committee.

Question put and agreed to.

Clause 75 accordingly ordered to stand part of the Bill.