NCG has joined calls for urgent reform to the VAT rules affecting further education colleges.  following the launch of a major new report this week at an event in Parliament.

The report, produced by academics at the London School of Economics (LSE)  and commissioned by seven of the UK’s largest college groups (including NCG) highlights the financial and operational impact of the current VAT rules on FE institutions.

It finds that aligning VAT treatment for colleges with that of schools would be fiscally neutral for the Treasury in the medium term, while unlocking millions in reinvestment for students, staff and communities.

Robert Peston, award-winning political editor, journalist, author and founder of Speakers for Schools, spoke at the launch about the current economic context and challenges, and how further education and skills are an absolutely key part of the solution:

"The single most important task for the government is to increase growth, productivity and living standards. Further education colleges can be such an important contributor. Ministers rightly highlight the scandal of a million young people not in education, employment or training. And when I talk to employers they tell me there are not enough people in this country with the skills that they need. Further education colleges should be front and centre in resolving these."

"It matters that the future of further education is a confident future. The country depends on it. You deserve the nation’s support. You need proper resources."

FE colleges support nearly 700,000 16-to-18-year-olds (more than school sixth forms) and serve a disproportionately high number of students from disadvantaged backgrounds. Yet, unlike schools, colleges cannot reclaim VAT on education-related purchases, forcing them to absorb costs and divert funding away from frontline teaching and student support.

The Association of Colleges estimates this VAT anomaly costs the sector around £250 million annually. This is especially damaging for colleges delivering technical and vocational education, which often requires specialist equipment, facilities and staffing.

For NCG, the impact is significant. In the last academic year alone, the group paid around £9 million in irrecoverable VAT. With that funding, NCG could have restored a disused building to expand teaching capacity for young people and the local community and replaced an ageing heating system at one of its colleges with a greener, more efficient alternative - supporting both environmental goals and student wellbeing.

This outdated rule also contributes to the £12,000 pay gap between college and school teachers, making it harder to attract and retain the talent that students deserve.

Liz Bromley, CEO of NCG said: "At NCG, our mission is to enable social mobility and economic prosperity through exceptional education. We are here to transform lives, yet every year, millions of pounds that could be invested in our students, staff and communities are lost to an outdated VAT system. Reforming this rule would allow us to do more of what we do best - breaking down barriers, expanding opportunity, and helping every learner realise their potential."

As the Government continues to champion opportunity and skills, NCG is urging policymakers to address the VAT inequality facing colleges - a practical and powerful step toward ensuring all young people, regardless of background, can access high-quality education and training.

You can download and read the full report here.

LSE Report: Executive Summary

  • FE colleges operate as exempt charities, typically incorporated as statutory corporations or charitable companies. While they do not have to pay VAT on some of their activities, many of colleges’ services fall outside the scope of VAT exemption, including commercial lettings (e.g. renting out rooms or sports facilities to third parties), retail sales (e.g. textbooks, stationery not essential to the course), consultancy services, catering services open to the public, hairdressing salons operated as part of training but serving paying customers, and much of the capital expenditure on large-scale building projects to provide industry-standard teaching facilities.
  • The Association of College estimates that the total annual cost of VAT to colleges in England is £250 million. This is funding which ends up in the coffers of HM Treasury rather than being used to support education and training provision.
  • In contrast, schools and academies benefit from the Section 33 VAT refund scheme under the VAT Act 1994, which allows them to reclaim VAT incurred on non-business activities funded by public money. In January 2025, the Government ended the VAT exemption for private schools on education and boarding provision in order to generate additional revenue for state education funding.
  • After the Post 16 Education and Skills Act 2022 became law in November 2022, the Office for National Statistics reclassified colleges as public sector bodies, giving them the same status as schools and academies. However there has been no change in the VAT rules since then. As a result of this anomaly colleges remain forced to repay millions of pounds each year which could otherwise be used for improving facilities for students or recruiting and retaining teaching staff with the industry experience needed to train the next generation of skilled employees the UK economy needs.
  • This creates a real financial impact, as VAT becomes a net expense that reduces FE colleges’ available budgets for investment, expansion and student services, compared to universities and schools.
  • As a result of the VAT rules, FE colleges are less competitive and have fewer resources available for improving facilities, hiring staff or supporting disadvantaged students. The VAT disadvantage has become more pronounced as public funding for FE colleges has tightened over the past decade (Institute for Fiscal Studies, 2023).
  • The absence of VAT recovery mechanisms for FE colleges in England contrasts with international practices where vocational and independent education are treated as legitimate public goods deserving of fiscal support. Extending VAT exemptions or refund rights to FE colleges would not be anomalous, but rather aligned with international norms aimed at supporting inclusive and efficient education systems.
  • The LSE researchers’ simulation of a VAT rebate on capital investment, using a sector-specific refund mechanism limited to FE and sixth-form colleges similar to the arrangements introduced for academies in 2011, suggests that such a reform could be fiscally neutral over a 10-year period, while delivering significant benefits in terms of educational outcomes and regional development.
  • Current VAT policy discourages capital investment and undermines financial resilience. Aligning the fiscal treatment of FE colleges with that of schools and universities is both a matter of equity and of sound economic policy. Removing these distortions would not only improve the efficiency of public investment in education, but also signal a clear commitment to supporting skills development across all regions and social groups. In doing so, it would help unlock the full potential of the UK’s FE sector as a driver of inclusive growth.