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Further Education Colleges reclassified as Public Sector Bodies

On 29th November 2022, the Office for National Statistics ('ONS') reclassified further education corporations, sixth form college corporations and designated institutions in England ('Colleges'), as public sector bodies, forming part of Central Government.

This decision is a significant change for the sector. Prior to it, colleges were classified as private sector bodies and had been since 2012. The decision comes after a review from the ONS of the classification of all sectors of the economy, and as a result of it colleges will officially be part of central government once again.

What does this mean for colleges?

The Department for Education ('DfE') has advised that it will begin work to write a new college financial handbook in light of the reclassification, although this is not expected to be published until March 2024 with an effective date of August 2024. Further guidance from the DfE is expected before that time, and a response to the ONS decision has already been published on gov.uk. Information contained within that response, and taken from other guiding sources, includes the following;

1. Managing Public Money - Now that colleges and their subsidiaries are part of central government they will be required to manage their resources in line with the 'Managing Public Money' framework. This will change how colleges report to, and interact with, government and will require colleges to ensure their systems of financial control support the public sector standards of accountability. The framework includes guidance on senior pay which will also apply to colleges. It is likely that some of the requirements and obligations found in 'Managing Public Money' are already placed upon providers under their funding agreements.
2. Debt - Existing debt commitments are not required to be amended, however the DfE expects colleges to phase out existing overdrafts and revolving credit facilities by 2024 at the latest.
3. Surpluses - Colleges will maintain the right to carry over surpluses, in full, from one year to the next and will still be able to spend these without DfE approval.
4. Subsidiaries - Colleges' trading subsidiaries will also be classified as public sector bodies. The full extent of the implications of this are not yet clear, although for now there are no changes to the ability of colleges to operate and control their own trading subsidiaries.
5. Financial reporting - the DfE will be responsible for consolidating accounts from 2024. Until then, the status quo will remain for the 2023 academic year.
6. Assets - Colleges will continue to be able to dispose of fixed assets, and keep the proceeds of the same, without approval. This will however be kept under review.
7. Novel, contentious or repercussive transactions - Any transactions of this nature must be referred to the DfE for prior approval, and this can include termination or settlement payments to exiting employees. Novel transactions are described as 'those of which a college has no experience or which are outside its range of normal business'. Contentious transactions are 'those that might cause controversy or criticism of the corporation by Parliament, the public or the media' and repercussive transactions are, according to gov.uk, 'those that set a precedent or are likely to cause pressure on other colleges to take a similar approach, and hence have wider financial implications.'
8. Borrowing - Colleges may, subject to compliance with Managing Public Money rules, continue to borrow from private sector sources, however with the caveat that the transaction must deliver value for money for the Exchequer. Colleges are advised to carefully consider commercial borrowing going forwards to ensure compliance with this complex area.
9. Pensions - currently there is no action required with regards to the LGPS.
10. Recruitment of International students - no change arises from the reclassification.
11. VAT - the new classification should not impact upon colleges' ability to recover VAT.
12. Banking - colleges are able to use commercial banking facilities or the Government Banking Service, the latter being preferred by the DfE and there is likely to be transition to sole use of the Government Banking Service over time.
13. Budgets - the DfE will be requesting information from colleges regarding their budgetary spend on a fiscal year basis to 31 March.
14. Pay controls - colleges will retain responsibility for setting the pay, and terms and conditions for their workforce. However, the reclassification means that colleges will fall within the scope of senior pay controls, as set out by HM Treasury.
15. Capital investment - the DfE have announced a further £150 million of capital grant funding to FE colleges and sixth form colleges, which will be allocated in spring 2023. The aim of the grant funding is to support providers to invest in their estates.

It appears, therefore, that significant changes could arise from the ONS decision to reclassify. Notwithstanding this, Colleges will continue to be self-governing charities regulated by the Secretary of State for Education and in a letter to all Accounting Officers from David Withey, Chief Executive of the Education and Skills Funding Agency (ESFA), providers are reassured that the reclassification decision does not alter the strategic aims of colleges and the sector in general, as set out in the Skills for Jobs White Paper. Assurances are also given in terms of the ESFA's desire for colleges to retain key powers and flexibilities "so that maximum flexibility is given to [college's] longer-term plans".

College leaders should watch this space for further information, and for now familiarise themselves with government guidance and 'Managing Public Money', seeking advice where uncertainties arise.

For more information contact Laura McHugh in our Education department via email or phone on 0161 918 0008. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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