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School Community Activities (VAT)

12.30 pm

Mr. Graham Allen (Nottingham, North) (Lab): My hon. Friend the Economic Secretary visited my constituency when he was an Education Minister. He has seen our massive educational under-attainment. He knows that we send the fewest young people to university of any constituency, and that at all seven secondary schools on my patch youngsters have no option of staying on at their own school at the age of 16—they all have to leave. Now he can do something to help.

I wish to raise an issue that might seem small in scope but it is gigantic in its absurdity. I am referring to the extraordinary VAT penalty that new schools and colleges risk if they open up their facilities to the local community. Such schools should be the hub of regenerating our disadvantaged communities—open to adult learning, evening classes and public use of their gyms, halls, classrooms and swimming pools, so as to be central to personal and family development. As we develop our three academies in the city of Nottingham and get more local youngsters qualified to go to our local sixth-form college, the problem will become ever more obvious and unacceptable. There is room for a piece of joined-up thinking by the Government.

In 2005 a brand new sixth-form college, Bilborough college, was opened in my constituency. At the moment only a handful of young people from the constituency get the grades to be educated there, but we are working hard on improving that. One way forward is for the college to play a bigger role in serving the community in which it is located; to break down the barriers and literally open up its doors. The principal of the college wants to play his role. The world-class facilities lie idle at evenings, weekends and holidays. While the Prime Minister and other Ministers are urging greater community involvement, the Treasury and Her Majesty's Revenue and Customs block the way.

The price that the principal would pay for opening up the college to the community starts at £2 million. Why? Because when Bilborough college was rebuilt, it received a zero rating for VAT on the cost of its construction. That is to say, it avoided the levying of 17.5 per cent. taxation—a sum of about £2 million. However, it received that rating at a price. If Bilborough college opens its state-of-the-art theatre to the local cub scouts for their annual play, or its media centre to the learning and skills council for literacy courses, it must not charge anything. If it opens its doors for more than 10 per cent. of the time—about an hour a day after school—it will lose its zero rating and have to pay the £2 million in VAT.

According to the college's principal, Martin Slattery,

The restrictions mean that 90 per cent. of the school's usage must be for its principal activity: the post-compulsory education of 16 to 19-year-olds. That severely restricts them from the education of adults. By failing to address that HMRC regulation, and instead of the school being a familiar environment for local youngsters to aspire to, the Treasury is in effect waving two enormous fingers at a needy community. Would it
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not be better to turn this perverse policy on its head and levy VAT on schools that do not open their doors to the local community?

Bilborough college, like many further education institutions, was taken outside local education authority control and turned into an independent charitable corporation. For the most part, its cousins in the local education authority do not face the same problem. They can do as they wish with their existing buildings and realise their potential. However, the 5 per cent. de minimis level for exempt attributable input tax is clearly challenging many local authorities, at a time when there is desire to develop new buildings for wider community use.

We could find LEA schools adding VAT to prices, pricing out many of the locals who would want to come in and use the facilities, or we could find facilities being handed over to for-profit organisations. That is not what our school policy should be about. New buildings should be, first, for those who use them during the school day, and then—not far behind—for all the community. That is particularly true given that we are trying to break the anti-education culture, in which schools are places that no one goes to other than children up to the age of 16, and when they reach 16 they are released from that imprisonment to do whatever else they need to do. We need to get a sense of the school being at the heart of the community.

Exactly the same issue affects some further education colleges. For example, the principal of New College Nottingham told me this morning that he would love to use the brand new building in High Pavement—which is in the middle of Nottingham—in the evenings, but cannot. He says that that is a terrible waste of a resource. He cannot do what he needs to do to spread the education mission in Nottingham, North, where we are desperate for that sort of revival. As I shall suggest, that education loophole could be closed quickly and to the benefit of all with very little loss to the Treasury.

Simon Hughes (North Southwark and Bermondsey) (LD): Will the hon. Gentleman allow me to intervene?

Mr. Allen : I would like first to move on to academies, because that subject is of interest to the hon. Gentleman.

Appalling as the impact of the VAT problem is, it gets much worse when we consider the Government's expansion of their academies programme. In Nottingham, North, we have worked tirelessly to get two academies. Again, I thank the Minister and his education team for all that they did to help us in that regard. Those two academies will help us to break into our poor educational culture by concentrating on vocational work and training for 14 to 19-year-olds. They will help us once again to make education not just academic, and so irrelevant to many of the kids off the estates in Nottingham, North. Instead, it will be relevant to them, their future and the future of local families, and that will help to crack that anti-education sentiment.

We are grateful that academies have been given the flexibility to allow that sort of curriculum and approach, rather than a plain, straightforward academic approach; that is a brilliant breakthrough, yet we are
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banning those same youngsters, adults, and families on those estates from their school outside normal school hours. As with the other schools in my constituency, I want these new institutions to be key players, not just in local education, but in the local community, and I want them to offer services to local people as well as day pupils. However, as those institutions fall outside local education authority control, any community involvement outside the school's core functions will incur a colossal VAT bill.

In my constituency, three secondary schools are uniting to create two academies. The two people likely to be head teachers of those academies are full of trepidation that their dream of building schools that will play an integral part in the community will be shattered because of this nonsense.

Simon Hughes : The hon. Gentleman will be aware that this is not just a Nottingham issue; Ministers will know that we in Bermondsey have been pursuing it with the Government for more than a year. Does the hon. Gentleman agree that it needs to be sorted so that schools can be rescued—in our case from a £3.5 million burden—and sorted soon? Until the Government come up with an alternative solution, the problem will blight not just those places that are waiting to do their job but many plans in the pipeline. This is a serious, central issue. Ministers keep saying, "Any day now, we'll get you an answer", but we have had lots of those, and we need an answer soon.

Mr. Allen : I agree very much that this is not just a Nottingham problem. In fact, people are anxious about the issue throughout the UK, particularly as the academies programme unravels. For example, Sam Price of the Bexley business academy estimates that the opening of his school doors to the community would cost £7 million in VAT. That flies in the face of the objectives of academies, which, according to the academies sponsor prospectus from the Department for Education and Skills, is to

It is set out in the prospectus that is issued to the people whom we are trying to draw in—as we are doing in Nottingham, North. For example, the university of Nottingham is intimately tied in to the health academy that we want to build, and there are many other sponsors. The founding prospectus states that we want to share the facilities with the community, yet a small loophole could be disastrous for the meeting of that objective. The point is not to open to provide nice add-ons in middle-class areas. It is central to our belief in building our academies that they should be part of the answer to the broader problems of regeneration in our area. They must be at the heart of what we are doing, not peripheral to it.

To return to the subject of the Bexley academy, it cost £31 million to build, which is why it has the sword of Damocles of an enormous VAT bill hanging over its head if it involves the community. VAT on construction was waived by the Treasury, which gave it a zero rating just as it did for Bilborough college. If we are not careful, we could end up defying the very drive that has led us to try to improve schools locally.
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In Nottingham, North it is imperative that the two fantastic new institutions that we hope for in the next couple of years should not be, effectively, useless outside the school day. Ironically, they would then be offering less to the community at large than the schools that they will replace. It would be a tragedy if during evenings, weekends and school holidays local people were left looking enviously through the windows of those state-of-the-art buildings and could not use them and develop as a result. We in Nottingham have lobbied, cajoled and begged our way to getting the two academies, so that they can be at the heart of our revival and regeneration—not so that they can be off limits and elitist.

So, that is the problem; here is the answer. The Treasury has argued that the sixth European VAT directive prevents it from exempting academies and new build further education colleges from VAT. The obvious solution, therefore, is to allow them to recover their VAT under section 33 of the Value Added Tax Act 1994—a provision that is already enjoyed by local education authority schools without the collapse of civilisation as we know it. Section 33 allows local authorities, along with other specific bodies, to reclaim VAT on non-business activities and certain VAT-exempt business activities. Article 4 of the sixth VAT directive provides for such VAT reclamation:

Academies, sixth form colleges and FE colleges clearly fit the EU's test for

under the Council directive 93/96. The sixth directive stipulates that those bodies should be considered taxable only if their activities

I fail to see how offering evening classes to parents, facilities for local amateur dramatics, language classes, music classes, computer classes or five-a-side football for local disenchanted youngsters would cause significant distortions of competition. The present state of affairs is madness and the Government need to resolve it quickly. The activities that I outlined are exactly what the LEA schools are able to provide, and what academies and sixth form colleges, particularly in educationally under-attaining areas, should be aiming to provide. The last bit of Treasury advice was that schools should dodge the article by providing their facilities for free, which means misusing money from the Department for Education and Skills and sponsors as a way round this stupid regulation.

I understand that HMRC told the DFES that academies would not be eligible for section 33 status because they do not have tax-raising powers. That is ludicrous. The sixth directive makes no such restriction on existing bodies included under section 33, such as probation committees, charter trusts, the National Rivers Authority, galleries and museums—none of them have any tax-raising powers. Providing academies with section 33 status would not require any primary legislation, so we have even got rid of that feeble excuse;
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a statutory instrument from the Treasury would suffice. Indeed, there is a precedent, and a good one too. A statutory instrument was used in 2001 to place museums and galleries under section 33. Giving academies that status would provide them with the capacity to fulfil a key part of their charters. Will the Minister give a commitment seriously to consider introducing a statutory instrument to deal with the problem?

I am afraid that that was a rather dry exposition of some parts of EU and tax law, but it is the way forward. The point that I made may appear to be a technical irrelevance, but it is central to what the Minister did so well in his previous incarnation as an Education Minister and what the current education team is also doing so well: helping me and those of us fighting for better education in Nottingham, North—the UK's most educationally under-attaining constituency—to propose ways of using schools, in accordance with what Ministers and the Prime Minister have said.

I look forward to the Minister's reply on behalf of the Treasury—so too, I suspect, will my right hon. Friend the Prime Minister, who will wish to understand why the schools that he intends to be the flagships of his educational reforms should be subject to a VAT penalty that other schools escape. I am sorry to put my hon. Friend the Minister on the spot, but I will be ruthless in ensuring that everybody, whether at No. 10 or anywhere else, realises the damage that this technical loophole is doing to one of our key education policies.

The heads, teachers and local education authority officers in Nottingham, North, sweat blood in the UK's most difficult teaching environment, yet together we are creating a way forward to break the cycle of generations of under-attainment. That solution places a central role on schools as the heart of our communities, and unless it does that, it will fail. If the Minister cannot give us an immediate answer, I hope that he will make it clear that he is across the problem, sees it as a difficulty and will do his level best to help us, not only in Nottingham, North, but throughout the UK. The development of academies will give an extra boost to our efforts to involve communities in schools and schools in communities.

12.49 pm

The Economic Secretary to the Treasury (Mr. Ivan Lewis) : I congratulate my hon. Friend the Member for Nottingham, North (Mr. Allen) on securing this very important Adjournment debate.

I know, from my previous incarnation, how much he personally has championed the importance of raising educational standards, ambitions and aspirations in his constituency if that area is to undergo the social and economic regeneration that he spends a great deal of his time trying to facilitate. I understand the passion that underpins his contribution. I shall also try to address the concern of the hon. Member for North Southwark and Bermondsey (Simon Hughes). I say to both hon. Members that I may be happy to disappoint them on any occasion, but to disappoint the Prime Minister might be more difficult. We will see whether my response helps to address some of the issues raised.

As my hon. Friend said, the Government are committed to supporting all schools in opening their facilities for wider community use as part of our extended schools agenda. The Secretary of State for
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Education made it clear that in future all secondary and primary schools will offer access to extended services that help to meet the needs of their pupils, families and the wider community—child care, adult education, study support and community sports facilities, for example. The same potential benefits also apply when a further education college opens its facilities to extended community use. To support our commitment to extended schools, we have already provided £160 million-worth of resources across the school sector, and intend to invest a further £680 million by 2008.

The provision of extended services and wider community use is our ambition for all schools, but I am aware that VAT consequences have been a concern in that respect. As a Treasury Minister, I do not deny that it is a live issue that we need to address as promptly as possible. It is important to make it clear that VAT rules do not prevent academies and FE colleges from making their facilities available for community use and charging for doing so. However, the VAT rules can have an impact on the extent to which that can be done if academies and FE colleges are to benefit from full VAT relief on the construction of their buildings.

It is therefore important to put it on the record that VAT relief applies to the construction of charitable buildings or identifiable parts of those buildings provided that use other than for a relevant charitable purpose will be less than 10 per cent. of the total use. A building is used for a relevant charitable purpose when used for non-business activities such as the provision of core-free education or other activities for which no charge is made.

It is a long-established principle in VAT that making facilities available in return for a charge, as an extended school or FE college may do, is generally regarded as a business activity regardless of the type of facilities, the level of the charge or the commercial or charitable nature of the supplier. That means that if the institution is to benefit from the VAT relief for construction, any use for which a charge is made must be less than 10 per cent. of the total use. Hon. Members are aware of the background to that provision.

The VAT rules apply equally to all charities. I am sure that my hon. Friend appreciates that the situation is not unique to academies or FE colleges; many other charities are in a comparable position in that they provide a range of facilities or services to the community and are subject to the same VAT rules.

My hon. Friend referred to VAT reliefs, which are governed by European VAT agreements entered into by successive Governments, under which we cannot extend our existing zero rates or introduce new ones. It is therefore not possible to allow full VAT relief regardless of the extent to which academy or FE college facilities are used for charge-business purposes.

As European agreements make it impossible to extend the existing VAT relief, it is reasonable to ask why we do not simply undertake to refund any VAT that an academy or FE college is charged. We are continuing to consider that possibility, but it is important to state that that solution is not without its own substantial difficulties.
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I say to my hon. Friend that, in relation to FE colleges, the central funding provided by the Learning and Skills Council should take into account VAT costs which cannot be recovered. As he is fully aware from experience in his constituency, schools have benefited from record increases in funding in recent spending reviews equivalent to 60 per cent. real-terms growth in resources between 1997 and 2008.

The Government have ambitious plans for the development of academies. My hon. Friend has direct experience of fighting for academies and being successful in attracting them to his area. We believe that it is important to target available funding as effectively as possible. In that context, we want seriously to consider whether resources available for the academy programme are best and most effectively deployed in VAT refund arrangements designed to allow academies a free hand in the extent to which they use their facilities for a business purpose.

Simon Hughes : I do not want to eat into the Minister's time, but will he explain why we cannot apply the same principle as in local government? Councils are obliged to charge rates on a building—it might be a community building—but they will then give a grant so that there is a net zero cost. It seems that there would be no loss to the Treasury, even if we had to go through an accountancy loophole.

Mr. Lewis : Our concern is the precedent that that would set for other organisations. We are actively considering the options, because we are concerned about the financial implications, the precedent and the constraints imposed by legislation.

To return to my earlier point, there would be a need not only to find additional resources, but to ensure that the rules for academies were consistent with those for other charitable organisations. As hon. Members are aware, there are always difficulties in deciding in a fair and principled way that some charities will be refunded VAT costs while others will not.

My hon. Friend mentioned section 33 of the Value Added Tax Act 1994 and local authority-maintained schools. The refund scheme is a public spending measure that operates outside the VAT system and the scope of article 4 of the VAT directive that he mentioned. It reflects a commitment made when VAT was introduced in 1973 that the tax should not become a burden on local taxation. In keeping with that principle, since 1997 we have admitted new bodies to the refund arrangements only where they meet two conditions: first, they must undertake a function ordinarily carried out by local government and, secondly, they must have the power to draw funding directly from local taxation. Academies, as bodies that are funded directly by the Department for Education and Skills, clearly do not meet the second condition.

My hon. Friend mentioned the inclusion in section 33 of other bodies that do not levy local taxation. Although the Government have taken no action to remove bodies that were already covered by section 33 when we came into government, we have been clear that new bodies will be admitted to those VAT refund arrangements only where they undertake a function ordinarily carried out by local government and have the power to draw
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funding directly from local taxation. The refund scheme for museums and galleries, for example, is entirely different from that which applies to local authorities.

More generally, the principles for funding public services require that special VAT refund arrangements, such as the scheme for local authorities, remain limited exceptions to the general rule and are applied only where they provide the most cost-effective and efficient way of achieving the Government's objectives. That demands that we remain cautious when considering any request to extend VAT refund arrangements, or introduce new refund schemes, for public service providers.

The VAT constraints that I explained earlier mean that we cannot guarantee academies or FE colleges that wish to benefit from full VAT relief a free hand in allowing the use of their facilities for a charge. However, on academies, officials at the Treasury and the Department for Education and Skills, as well as the Academy Sponsors Trust, are working together to see how academies can make the best use of the existing relief or, in the limited number of cases where this would be relevant, how they can manage any VAT costs that arise.

For example, in calculating the extent of relevant charitable use within a building, it is open to academies or FE colleges to consider identifiable parts of the academy or college separately. In addition, several methods of calculating the extent of relevant charitable use are available and, in some cases, are subject to agreement with HMRC. Using one such method, and taking the year as a whole, a 1,000-student institution could provide charged extended services for an average of 50 people a day. Obviously, that does not amount to fully unrestricted use, but it would still represent significant community participation.

An academy or FE college might prefer not to restrict the extent to which it offers its facilities for a charge and might therefore be prepared to incur VAT on some part of its buildings. In such circumstances, it will be entitled, under the normal VAT rules, to register for VAT and reclaim from HMRC any VAT attributable to taxable business use of facilities. That might, for example, include the use of sporting facilities such as gyms or other leisure facilities.

This is a live, important issue. It is about trying to ensure that we are consistent in achieving Government objectives. We understand the importance of addressing the issue promptly, and this debate will, I hope, make an important contribution towards our reaching a solution that deals with the constraints to which I have referred to do with precedent, financial implications and legislation.

Mr. David Wilshire (in the Chair): The Minister's timing was impeccable.

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