Colleges have been reclassified as public sector bodies: the changes you need to know

The Office for National Statistics (ONS) has reclassified colleges and their subsidiaries into the central government sector for public accounts purposes. This article explains the changes for colleges after reclassification as public sector bodies.

Why have colleges been reclassified as public sector bodies?

The decision was based on a change in international statistical guidance. Further education corporations, sixth-form college corporations and designated institutions are established by legislation which allows the Government to appoint or remove members of a governing board in certain (albeit rarely used) circumstances.

With the passing of the Skills and Post-16 Education Act 2022, government powers have increased and as such the ONS has concluded that these corporations are effectively under public sector control.

The reclassification is retrospective with further education corporations and designated institutions being considered public sector from 1 April 1993 and sixth-form college corporations from 1 April 2012.

What does reclassification mean for colleges?

The Department for Education (DfE) has confirmed it will write a new college financial handbook for publication in March 2024. In the meantime, DfE has set out what the decision means for the following areas:

1.    Existing Debt

Colleges’ existing debt commitments do not need to change although it is expected that colleges will repay their existing loans until maturity.

It is understood that any refinancing commercially will not be possible under the managing public money framework which public sector bodies must follow.

DfE has stated it will provide funding where colleges had originally intended to repay loans through commercial refinancing although it is not known when such funding will become available.

Overdraft and revolving credit facilities will be subject to DfE consent and it is expected that colleges will phase out these facilities by no later than August 2024.

2.    Private Sector Borrowing

Any proposals for new private sector borrowing will require DfE consent. Colleges will be able to continue with existing finance leases until they come to the end of their term and will be able to enter into new finance leases.

3.    Capital Investment

DfE has committed to adding £150 million of additional capital funding to mitigate the new limitations on commercial borrowing.

4.    Surpluses

Colleges will retain the flexibility to carry over surpluses from one year to the next.

5.    Asset Disposals

Colleges will retain the ability to dispose of fixed assets without approval and to keep the proceeds from such disposals but such proceeds must be ringfenced for capital expenditure.

6.    Novel, Contentious or Repercussive Transactions

As is the case with academy trusts, transactions made by colleges or their subsidiaries which may be considered novel, contentious or repercussive must be referred to DfE for prior approval. There is no further guidance at this stage as to what is considered novel, contentious or repercussive.

7.    Subsidiaries and Commercial Operations

Colleges will retain the ability to operate trading subsidiaries.

8.    Senior Pay Controls

Colleges remain responsible for setting the pay and terms and conditions of their staff. However, now that colleges fall within the public sector, HM Treasury’s senior pay controls will apply. Colleges are advised to familiarise themselves with this guidance.

Response from the Association of Colleges

The Association of Colleges (AoC) has described the changes as “academy-style controls with a few commercial features”. While DfE has committed to publishing a new college financial handbook, the AoC has described the rules which have been put in place in the meantime to be a copy and paste approach from the academy trust handbook.

The AoC has set out five key immediate actions for DfE to do to mitigate the impact of the decision in the short term:

1.      Implement VAT changes for colleges akin to those for schools;

2.      Issue a Local Government Pension Scheme guarantee letter as they do for schools;

3.      Support teacher recruitment, as they do for schools;

4.      Add colleges to its centralised buying schemes like business rates, licenses and insurance which are all funded for schools;

5.      Provide capital funding to compensate for borrowing restrictions and help colleges save energy by winter 2023.

The situation continues to develop and we will have more updates to come in the New Year.

For any questions please contact Joanne Davison using [email protected] or 0191 211 7958.