Colleges are part of the Public Sector – briefing note

Following its review, on 29 November 2022 the Office for National Statistics determined that colleges are classified as being part of the public sector, backdated to 1993 for FE Corporations and 2012 for Sixth Form College Corporations. 

There will be many questions to address, in particular what the direct application of the Managing Public Money framework will look like for colleges, but some of the implications of reclassification have already been clarified by the Department for Education (DfE) in its response.

What has been confirmed?

From the DfE’s response, we know that:

• Existing commercial borrowing can continue to be paid off until maturity, but any residual debt outstanding at that point is expected to be paid off by the DfE who will then recoup this from revenue over time - rather than refinancing that debt commercially. The DfE expect colleges to phase out existing overdrafts and revolving credit facilities by no later than August 2024, and any use of unutilised existing facilities above the borrowing levels as at 29 November 2022 will require DfE consent.
• New commercial borrowing is now only permitted with DfE consent, which is generally unlikely to be given. This will present specific issues for some colleges. Some have debt which will be due to be refinanced and which may now instead involve the Government paying lenders directly when the debt matures and then recouping those amounts over time from colleges by way of set-off. Other colleges will have shortfalls in capital projects which instead of being met by borrowing might be satisfied with additional Government funding.
• Surpluses can be kept.
• Finance leases are still permitted.
• Fixed assets, such as land, can be disposed of without consent, but sale proceeds must be ringfenced for capital investment (although this will be reviewed in the 2025 spending review).
• Transactions - whether novel, contentious or repercussive - must be approved by DfE. This is a regime similar to that in place for academies, albeit in the context of what is normal for a college.
• Trading subsidiaries are permitted and are now part of the public sector, which poses interesting questions for some colleges.
• New restrictions relate to severance payments, write-offs and contractual indemnities.

A College Financial Handbook will be consulted upon and published in March 2024, coming into force from August 2024. Whilst this suggests something similar to the Academy Trust Handbook, it remains to be seen given the different starting points for colleges and academies.

We have been working with a number of colleges on these issues and considering the potential impact on their missions of varying regulatory approaches. Some of the points have at least been partially addressed in the DfE’s initial published guidance and in a letter from the ESFA to the sector’s Accounting Officers. There are many further questions that will need answering in more detail, for example, at a sector-wide level on practical issues arising in relation to borrowing, pay, VAT (which at the moment looks like no change), pension guarantees, governance, subsidiaries and land issues, as well as for each college in its specific circumstances. 

A bigger picture 

There are fears within the sector of over-regulation and some early signs suggesting a move towards colleges being regulated in a way resembling academy regulation. There are experiences which might usefully be shared, however, colleges are not schools and any new form of regulation will need to be appropriate to support the specific mission of colleges. This will be an important issue to advocate for as the College Financial Handbook is developed. 

Looking at this positively, there ought to be a real opportunity to create a more strategic, coordinated and collaborative relationship between colleges and the State – respecting the charitable independence of colleges and the commonality of purpose in what the Government wants to achieve, with the ability of colleges to deliver that. The coming months will be critical in trying to make sure this happens, working together to create a new relationship which fully recognises and supports the role colleges play in advancing society.

The Further Education Team at Stone King are on hand to support colleges as they navigate these changes. Please don’t hesitate to get in touch with Tom Morrison, Ciara Campfield or your usual Stone King contact.