Value Added Tax (Education)

HC Deb 19 May 1994 vol 243 cc1002-16 6.19 pm

The Paymaster General (Sir John Cope)

I beg to move,

That the Value Added Tax (Education) Order 1994 (S.I., 1994, No. 1188), a copy of which was laid before this House on 28th April, be approved. The order will replace the existing VAT exemption for supplies of education, training and research. It will leave existing VAT liabilities largely unchanged but I hope that, in line with the Government's commitment to deregulation, it will greatly improve the clarity and consistency of VAT treatment in that sector.

The key change is that profitability and the subject matter of individual courses will no longer be factors in determining eligibility to VAT exemption in most cases. Applying such criteria has been at the root of many of the disputes and inconsistencies in that area in cases that have gone before VAT tribunals.

The proposal is that exemptions will depend predominantly on the type of provider. If the supplier is an eligible body as defined in the order, its educational and training courses will be exempt from VAT. Schools, universities and further education colleges will continue to enjoy VAT exemption but the exemption has been extended in some respects.

First, sporting and recreational courses are no longer excluded. There was a contentious area of overlap between taxable recreational courses and exempt vocational training. One man or woman's recreational course is another's vocational course. A favourite example was that of flower arranging, which could be learnt for recreational purposes but also to become a florist.

Secondly, a specific VAT exemption has been introduced for examinations, assessments and similar activities. The new exemption covers a broad range of suppliers of such services and should facilitate the developing of national vocational qualifications.

Mr. Andrew Smith (Oxford, East)

I welcome what the Paymaster General says about the exemption of courses that fell on the borderline between education and recreation, such as Women's Institute courses. But exactly where does the order make it clear that courses of that nature will be exempt from liability to VAT?

Sir John Cope

The whole order makes that clear. The new group 6 category says that the provision by an eligible body of education or vocational training will be brought into the exemption. It goes on to define "eligible body", and I assure the hon. Gentleman that the education branch of the Women's Institute to which he refers—he has written to me about that—is such an eligible body and therefore falls within the terms of the exemption provided in the order.

Thirdly, the exemption for private tuition has been broadened and will ensure that very few private tutors will be caught in the VAT net. It was previously limited to one-to-one tuition. I doubt whether many individuals will be affected because there is a £45,000 turnover limit to VAT, which excluded most such people from the VAT net and will continue to do so. Lastly, local authority adult education classes that are currently taxable will be brought within the exemption.

Although the order is technical in nature, it is the result of a considerable consultation process. The House will know that the issues were discussed last year, with private notice questions in the House and correspondence, in the course of an internal review by Customs and Excise. That resulted in a consultation document being published last December, with press releases and so on. Although the issue was not front page material, its existence appeared in public print. In all, some 500 copies of the document were sent out, some to people whom we knew were interested and others to people who had seen the press release and were concerned about its ramifications, so had requested copies. Comments were invited by 28 February and those were carefully considered, as can be seen by the changes to the order between the December draft and the order before the House today.

When the order was tabled, it received a certain amount of support from those who had made representations during the consultation period. However, in the past week there has been a flurry of representations from people who teach English as a foreign language and had not seen the order before. Some of them are concerned about the proposals because the order extends exemption to organisations that are accredited under the British Council recognition scheme for English language schools. But that does not cover everybody who teaches English as a second language in a commercial environment. Those who are not covered by the British Council scheme will, under the order, continue to pay VAT and they have complained that it discriminates against them by exempting some of those whom they regard as competitors.

I have given no undertaking in response to those recent representations but have said that we shall consider them carefully and decide whether we should modify the arrangements in the order. It concerns a small part of the scheme of the order and I did not think that it would be right to hold up the whole order for that reason. It would, however, be right to give those who missed the earlier consultation process an opportunity to make proper representations. We may be able to achieve equitable operation leaving the order as it stands, with co-operation between the British Council and other representative organisations. The British Council has assured me that it will consider that. Alternatively, a brief amending order might be required. I am willing to consider representations from Members of the House in the course of this debate, which is part of the consultation process, and from others.

I believe that we should be justifiably proud of the English language. It is no longer ours alone but has become a world language, which is a great advantage to this nation and our daughter nations that also have English as their first language. I admit that I am not particularly good at foreign languages and take the view that, if foreigners could agree among themselves on one language, I would be prepared to make a greater effort to learn it. I have observed that when many foreigners from different countries wish to communicate with one another, they often use English. That is a great advantage to this country as well as to others who speak English as their first language. In those circumstances, I shall look favourably on the teaching of English as a foreign language. I am glad to be able to propose that favourable treatment be given to it in the order and will consider the further representations that may be made. At the same time, I recognise that, wherever we fix the boundaries, difficulties will arise.

The order makes the application of VAT much clearer in the whole field of education and training, and I am happy to commend it to the House.

6.28 pm

Mr. Andrew Smith

As the Paymaster General says, the order seeks to resolve the long-standing confusion, ambiguity and contradiction that have bedevilled the operation of the imposition of VAT on the education-recreation divide, which had become increasingly difficult to police.

The Labour party has campaigned long and hard for that to be sorted out. I welcome the fact that consultation took place. I shall point out later in my remarks where I feel that consultation was not wide enough. I also welcome the fact that the Government now appear to accept our argument that the benefits in terms of education and personal development, for example, of evening classes as a bridge to further education and training opportunities, are such that VAT should not be imposed on those courses. As the Paymaster General said, the progress of the campaign—with many millions of people throughout the country affected, directly or indirectly, and many making representations—has resulted in the welcome fact that VAT will not now be imposed. The National Institute of Adult Continuing Education has praised the campaign in that regard.

Lest the Paymaster General be tempted to relax under the weight of plaudits, I have some questions to ask and some important reservations to express. First, I should like the right hon. Gentleman to confirm once again that the order does what we think it does. He referred to flower arranging. Other courses that often come up are those in cake decoration that do not lead to a qualification, as well as those in assertiveness, self-defence and other areas of adult education previously categorised as recreational. I should like the right hon. Gentleman to confirm that these will not be liable to VAT.

Secondly, I want to press the Paymaster General on whether the Government are convinced that it is consistent with good taxation principles to mix—as the order does —liability to tax, as defined by the nature of the supplying institution, with the nature of the supply. Is it not more generally the case that, with the exception of public bodies, the nature of the supply defines liability for VAT, for reasons of consistency but also in the interests of fair competition? As the Paymaster General has explained, the problem arises most acutely, in relation to the order, in the case of schools teaching English as a foreign language. In choosing to extend exemption to British Council-recognised schools, to which the right hon. Gentleman has referred, the Government are making provision for 250 accredited institutions. But these are a minority of the estimated 1,200 schools—a fact that understandably gives rise to enormous concern among those to whom the exemption is not extended.

It seems to me that there is something of an inconsistency between the Government's treatment of language schools for taxation purposes and their categorisation of those schools for educational purposes. Liability to VAT is being tied to a particular voluntary accreditation scheme in a sector where the Government have refused to acknowledge, for educational purposes, the need for any official distinction, in a regulatory framework, between schools. I have advocated a common registration system. The British Council system, good though it is—as many in the industry will have pointed out to the Paymaster General—does not provide such comprehensive oversight of the industry.

I should like to know what the Government say to the Association of British Language Schools when it points out that the order confronts its members with unfair discrimination. The discrimination is referred to in the association's briefing:

We are the only accrediting body for all types of EFL service, whereas the British Council is more restrictive in the types of school or college it will inspect. Our inspections are yearly, not three yearly, employ a highly qualified inspectorate, and are part of a Trade Association which is rapidly gaining respect for realism as well as reasonable costs. British Council charges are far beyond the means of many schools…. If the order does go through as it is, the legislation will be seen as flawed from the outset and will have a divisive and distorting effect upon the market. As I have said, there is a good argument for regulation. It can be argued that the contents of the order provide a form of regulation, the need for which many non-British Council schools acknowledge. But this is regulation on the hoof. It is discriminatory and has been brought in without adequate consultation with those whom it affects.

I understand that the English language division of the British Council did not know anything about the order until April, when the customs authorities asked it about the finer points of drafting. The Oxford Language Forum was not consulted, nor was the Cambridge Language Forum, the Association of British Language Schools or the language schools information service. The Paymaster General says that he is willing to listen to further representations and, if necessary, produce an amending order. Fairness and natural justice demand that this process be taken very seriously in the interests of providers.

The order will raise serious issues for the British Council itself. The council has said that it supports the principle and will try to help in its implementation—for example, by accommodating providers of distance learning and of one-to-one home tuition who are not currently eligible for accreditation. However, this will cost money and will take time, yet the order is due to come into effect within a couple of months.

I understand that the British Council currently inspects about one in four centres run by an organisation. That is the sample that it believes is necessary for the assessment of quality. Clearly, this will present problems in the case of distance learning or lots of individual tutors, where there will have to be individual rather than sample inspections. Thus, there will be resource implications for the British Council if the order is to be workable.

At the moment the financial year accreditation fees are £620 for members of the Association of Recognised English Language Services and £704 for non-ARELS schools. Reinspection costs another £800 to £900 every three years. These fees are supposed to cover the costs of assessment, monitoring and inspection, but in the past the British Council has ended up subsidising the process. It has been trying to phase out the subsidy, and future schemes will be expected to pay for themselves. This may well have implications for membership and accreditation fees. In the light of the extra responsibility being imposed by the Government, the British Council will have to review its own operations, and this will possibly have resource implications. Clearly, it is very important that accreditation criteria be made as objective and defensible as possible. Bearing in mind the significant amounts of business that are at stake and the substantial sums of money that are involved, it is not fanciful to imagine that litigation will arise if a school which believes that it is entitled to accreditation and, therefore, to exemption from VAT is not accredited and has to damage its prospects by passing on the cost of the taxation.

In a number of respects the order indicates insufficient understanding and insufficient consultation with the industry. Currently, a school that operates throughout the year must have been established for two years before it can apply for British Council accreditation, and a seasonal school must have been established for three years. Am I right in thinking that, by implication, a newly established school will have to operate for two or three years, charging VAT, before receiving the accreditation that is the passport to exemption? That is an extraordinary proposal, given that it would hit new schools at precisely the time when they are trying to build up their custom. Surely it ought to be regarded as a massive and unfair barrier to entry to this sector of education services.

What is more, the differential liability to VAT may well be very damaging to many reputable schools, which will suddenly find themselves having to explain why they have to levy VAT when their competitors do not. We can all imagine the problems that will arise.

As I said earlier, I think that the timing of the order's implementation also betrays some ignorance of the education sector involved. I understand that the Customs explanatory leaflet is due to go out in June, and that the order is due to take effect in August—bang in the middle of the peak EFL season. Could not a more satisfactory arrangement be considered even at this late stage?

I think it likely that the cost to the Exchequer will exceed the Customs estimate of £10 million. Obviously that will become clear in due course, but we should take into account the hundreds, sometimes thousands, of pounds that are charged in fees for many courses.

The differing treatment of different sorts of institution that are similar in other respects gives rise to issues of hy bridity in the order. It is an affirmative instrument; if it went to the House of Lords, whether it was in fact hybrid would have to be considered. If it were found to be so, it would be subject to the petitioning procedure. I mention that in the light of a Customs and Excise news release issued on 28 April, which stated in its notes to editors: The Treasury Order is subject to the Affirmative Resolution procedure and will be debated in both Houses of Parliament. I understand that the Government now say that that was a mistake. I should be grateful if the Paymaster General would explain the position: if it was a mistake, how did that mistake come about?

I have a further question to ask in connection with language schools. It relates to the position of universities. The exemption that Customs intends to extend to EFL seems—certainly in the case of universities—to be dictated by the need to realign United Kingdom interpretations of VAT law with the European Commission's interpretation of the sixth directive, which exempts education provided by a body governed by public law.

The Customs consultation paper to which the Paymaster General referred concedes as much in paragraph 3.2, which states: However, if EFL is accepted as 'education' (and the European Commission has argued strongly that it is), then it must be exempt when provided by bodies entitled to mandatory relief under Article 13 A 1 (i), eg we should not exclude EFL from the exemption when provided by a UK university. That raises the question of the previous supply of EFL tuition by universities. If such courses should not have been taxed and, in effect, were taxed incorrectly, are universities now entitled to ask for a refund of the VAT that was levied on them?

At the bottom of the first page, the brief on the order states: There will be some changes at the margins from exemption to taxation and vice versa. Whether or not these changes are welcome will depend on the trading circumstances of individual providers. Can the Paymaster General clarify the reference to some changes at the margins"? How many providers does he expect to be caught in that way, and what kind of providers will they be?

My next question bears some relation to that last point. It relates to the word "any" in note (1)(f)(ii) of the order, which provides that a body that does not fall within the other categories for exemption—as the Paymaster General said, schools, colleges and universities fall into those categories—will be exempt if it is non-profit-making and applies any profits made from the supplies of a description within this Group to the continuance or improvement of such supplies. Where that provision applies, does "any" mean any part of the profit, or all of it?

Let me give an example. What will be the position of a charity that sells some expertise—perhaps a course in public speaking—to the business sector, and then ploughs the profits back into a different area of its charitable work? Will all that supply still be exempt? Many charities will consider the question important.

I can give a converse example. What will be the position of a management college that provides tuition for corporate clients who can simply recover any VAT that they pay? Such a college might well prefer to charge VAT on its supply to reclaim the VAT on the input costs of such courses. Could it opt to do so under the order?

We welcome the clarification of the position of evening classes, adult education and so forth, because we campaigned hard for their exemption from VAT. Nevertheless—as I hope I have made clear—I think that the operation of the order will pose serious problems, especially in relation to English language schools. We all want the position of adult education classes to be sorted out as a matter of urgency, and there is no reason why that cannot be done on the basis of the order, which in that respect has our full support; but would it not have been better for the Paymaster General to withdraw the order this evening, and return it later minus the reference to EFL? He could have consulted before bringing back a revised order that reflected proper consultation and thorough consideration—which clearly has not gone into the part of the policy that we are now discussing.

We do not oppose the motion, but we shall pay close attention to the consultation with EFL providers and the conclusions—and, I hope, amendments—to which it gives rise.

6.46 pm

Mr. Harry Greenway (Ealing, North)

I am pleased to be able to speak in what I consider a very important debate.

I hope that the hon. Member for Oxford, East (Mr. Smith) will not think me churlish when I say that many people feel that their campaigning was what led to the remission of VAT on adult education. Admittedly, the hon. Gentleman did not say that the campaigning of the Labour party alone had produced that result. The all-party Committee dealing with adult education, which I chair, has campaigned hard and I also pay tribute to the good work of the National Institute of Adult Continuing Education, its director Alan Tucket and others associated with it.

Mr. Andrew Smith

I did praise the campaign mounted by people up and down the country. I meant that to include the all-party group, whose contribution I acknowledge; I also mentioned NIACE.

Mr. Greenway

In that case, there is no difference between us. I am grateful to the hon. Gentleman.

Although I taught in schools for 23 years, for 12 of those years I also lectured in adult education, in which I have a great interest. I believe that I am almost the longest-serving member of the council of the Open university; I constantly examine distance learning on a university basis, and that includes adult education. The organisation is very interested in this important order and we are glad that it is to be introduced as early as 1 August.

The hon. Member for Oxford, East concentrated on the teaching of English as a foreign language, which is indeed an important subject. Every night, 1 billion people throughout the world sit down and study English as a foreign language. If there were more resources, that figure could rise to 5 billion. The demand is almost insatiable. Arising from that demand and flowing from that work is the enormous flow to this country of people who wish to learn English. They come to language schools, as the hon. Gentleman mentioned, and that brings money into the country. It brings employment. It is most valuable.

There is no doubt in my mind, however, that some of those institutions are an unashamed and disgraceful rip off to those who come to this country honestly and pay their money for a course in English language and English literature and do not get a fair deal. I feel sure that the exemption in the order will—perhaps fortuitously, but it will—lead to regulation of that situation, which is greatly needed.

There is no reason why language schools should not pay for the accreditation and inspections which have been referred to and which are urgently required. Some, of course, are quite marvellous, but some do not do an honourable and honest job.

There needs to be a thorough inspection system across the country. I have no doubt that it could be self financing; language schools charge enough in their fees. The hon. Gentleman might well agree, because he said that they might well have to resort to law if they thought that they were not getting a fair deal. If they thought about doing that, and some of them certainly would, it would not be just a few hundred pounds; legal action might mean hundreds of thousands of pounds. Some would be prepared to contemplate that, because their interest in holding their position is so strong. I ask my right hon. Friend to address himself to that important point.

I hope that we shall hear from my right hon. Friend tonight, or in the near future, that there will be a system to ensure that the schools that teach English as a foreign language do an honourable and thorough job, in which the progress of those who come to learn English as a foreign language can be properly measured, as all learning and teaching can and must be. That is what testing is for. Part of the national debate on education at present is about just that. If that means that, to measure progress, those schools have to make some initial assessment of those who come into them—I am not saying that they might refuse people on substandard qualifications—so be it. At least they would be seen to be doing an honest job.

Young people and people of mature age come here and are keen and set to learn English as a foreign language, and our culture. They do not get a fair deal, and go back to their country feeling that they have been ripped off. That area of our public and academic life discredits our country more than it should. It is shameful and must cease. That can be achieved through the order, and I hope and believe that it will be.

Vocational courses in adult education to enhance careers were mentioned by my right hon. Friend. He spoke of non-vocational qualifications. I warmly welcome the emphasis on the vocational and adult education that we currently have, but do not want to see adult education revert exclusively to the vocational. It is because it has had such high value over many years in non-vocational terms that we must encourage it. I believe that the relaxation of VAT will help that.

My right hon. Friend spoke of the value of flower arranging and pointed out that such courses can lead to people becoming florists, or working in that area. And so it can, and does. But many people want to learn to arrange flowers nicely for its own sake and for the sheer beauty of seeing beautifully arranged flowers. That is so valid.

Not so many years ago, in an educational establishment with which I was associated, a Lord Chief Justice of this land was following a course in basket making. He was never absent or late. I presume that he rushed from his court to be there. He loved it and needed it. A man or woman with a highly concentrated job gets so much out of such non-vocational courses, which are highly creative and highly valuable. If anything, there is a slight slippage in that area at present with all the pressure for vocational adult education.

I see that my hon. Friend the Under-Secretary of State for Further and Higher Education, who is doing such an excellent job, is here. He addressed the launch of the adult learners' week a few days ago, with great aplomb and to the thrill of all present, with his interest and knowledge of the area. I want to encourage him and pay tribute to him for what he is doing.

Similarly, physical education, including dance, is valuable to all. Is it covered by the measure? Let us be sure. Swimming is valuable to people of all ages. Perhaps they are people who just qualify in terms of age for adult education. Perhaps they are people of 90 who are going off to learn to swim. That is happening, as it should and must. Are they covered by the order? Does my right hon. Friend accept the enormous value in such courses being covered?

I speak for all those involved in adult education. I do not like to lose the term "night school", which is part of it. People continue to talk of night school. Let us import that into the term "adult education". All those people will welcome the Government's proposals to clarify exemption from VAT on adult education, including voluntary bodies such as the Women's Institute, and the simplification of the situation in local education authorities where, as we have heard, the Treasury is said to be forgoing £10 million in revenue. It is money well spent. It will all come back, as I will show. It is particularly welcome at a time when many local authority adult services are under financial pressure.

There are strong feelings that the imposition of VAT would represent a tax on learning. It is especially welcome that the Government propose not only to restate the principle that where LEAs subsidise courses they are non-business activities and, therefore, outside the scope of VAT, but to extend the exemption to LEA classes that do not attract subsidy. It is important that this be said. It will be particularly helpful for LEA adult services contracting with the Further Education Funding Council to provide schedule 2 courses—this might be part of the answer to the hon. Gentleman—which lead to qualifications and contribute to the national targets.

It is important to note the value of all forms of adult education. There is widespread agreement that adults as well as young people need to be encouraged to gain skills and qualifications. The lifetime learning targets are recognised to be necessary for our economic well-being, though they do not look like being achieved unless they receive added impetus in some areas.

However, many adults use adult education for a variety of purposes. For example, they may wish to pursue an interest or to re-establish contact with the outside world after an illness or a bereavement. In such cases, adult education is important and precious. They may wish to keep up with a child's enthusiasm or to keep fit in retirement. If these inexpensive services are cut, there is a danger that additional costs may fall on doctors' surgeries —I say that advisedly—or on local social services. Such cuts could also lead to the loss of the crucial sense of dignity without which people cannot live happy and integrated lives.

The Government recognised all these factors when they preserved the local education authorities' duty to secure the adequate provision of general adult education under the Education (Schools) Act 1992. That was very welcome, but there is no doubt that a number of authorities, in London and elsewhere, have been struggling to maintain their budgets. It is not easy for them—we all know that.

The National Institute for Adult and Continuing Education believes that there is a need for "adequacy" to be defined to make clear LEAs' statutory duties. In that context, the first Government consultative paper on VAT and adult education, which omitted any mention of LEAs, aroused anxiety among professionals and students. A number of members of the all-party parliamentary group on adult education wrote to my right hon. Friend the Paymaster General to express their concern. They did not want the Government to be seen to be taxing learning when we are all trying to stimulate learning among adults. In my role as chairman of that all-party parliamentary group, I especially welcome the proposed measure and congratulate the Government on it.

7.1 pm

Mr. David Jamieson (Plymouth, Devonport)

I, too, welcome the measures that we are discussing. I shall not detain the House by rehearsing the arguments again, because they have been excellently dealt with by my hon. Friend the Member for Oxford, East (Mr. Smith). I certainly could not speak with the eloquence of the hon. Member for Ealing, North (Mr. Greenway) about basket making and flower arranging, my knowledge of which could not possibly compete with his.

I wish to draw the Paymaster General's attention to another way in which value added tax is being paid out of the education budget. The relevant proposal does not go far enough. Had the Paymaster General considered it more fully, he would have realised that he should have brought other matters before the House tonight. I want him to share with us his thoughts on some of the issues to which I refer briefly.

The Paymaster General will be aware of the fact that, despite the proposals, grant-maintained schools are still liable for VAT on the services that they buy in, unlike local education authority schools, which are exempt and can claim back the VAT that they may be charged. Grant-maintained schools have to pay VAT on building and maintenance, perhaps on computers and even on legal services. The Department for Education recognises that there is an additional burden on grant-maintained schools. It does so through the special purposes grant VAT which is set at 2.5 per cent. of the annual maintenance grant that is paid to those schools. It is a considerable sum.

On 29 October last year, a reply to my written question revealed that the grant-maintained school in my constituency—one of the very few in the south-west—received £40,700 in 1993–94 towards its liability for VAT. At the moment, there are about 960 grant-maintained schools. Let us do some simple arithmetic. If there were 1,000 grant-maintained schools each receiving £1 million in grant—that is a low figure because most secondary schools receive considerably more than that but let us take it as a notional sum—it would cost £1,000 million, so the special purposes grant for VAT would be in the region of £25 million. Of course, that figure does not include their liability for VAT on fuel which, I estimate, comes to at least another £7 million a year at the rate of 8 per cent. and would be about £15 million to £16 million a year when the rate increased to 17.5 per cent.

The Paymaster General might be interested to know that I have worked out a little prognosis for him of what is perhaps an unlikely scenario, but it is one that has been wished on us by the team at the Department for Education. In that scenario, more and more schools opt for grant-maintained status instead of being run by local education authorities. If all 24,000 schools across the country became grant maintained—I recall Conservative Members saying that that was their ultimate desire—the total VAT bill, for all services, including VAT on fuel at the higher rate, would be in the region of £585 million a year. Where is that money going to come from?

It is disturbing that there is no accurate information available. Also in October last year, I asked how much fuel grant-maintained schools were using, so that I could calculate how much VAT they were paying. I was told: This information is available only at disproportionate cost. More learned heads tell me that that is a polite way of saying that the Department does not know. I also asked about the total VAT bill paid by grant-maintained schools. I wonder whether that information is held by the Treasury. However, I asked the Department for Education and was told: This information is not collected centrally."—[Official Report, 25 October 1993; Vol. 230, c.448] That is another way of saying that the Department does not know. If we do not know how much fuel grant-maintained schools are using, and therefore how much VAT they are liable to pay, how can we accurately assess how much grant will be required in future? Is an open cheque to be made available to those schools?

My chief concern is that the imposition of VAT on grant-maintained schools must be a considerable burden on the education budget. I should like the Paymaster General to tell us whether the Government are giving the Department for Education sufficient funds to pass on directly to grant-maintained schools. I have scrutinised the budgets carefully and I have asked questions, but I cannot get an answer. If we are ultimately expecting all £585 million to be spent on VAT, the Paymaster General should provide an answer. The £25 million which is being spent at the moment would buy an enormous number of books. It would buy more than 2 million books at £10 each, and £585 million would buy nearly 58 million books at £10 each. I suggest that he consider that proposition for a moment.

Other budgets are having to take account of VAT on educational services. The Department for Education is spending in the region of £93 million a year on the assisted places scheme. In other words, it is buying in education at private and independent schools on behalf of the taxpayer. I will not exercise the arguments for and against that practice because it is inappropriate to do so in this debate. But I point out to the Paymaster General that, in most cases, private and independent schools will be liable to pay value added tax on many of their services.

If we work on the notional 2.5 per cent. figure that the Department for Education has come up with for grant-maintained schools, we must assume that 2.5 per cent. of the £93 million is being used to pay VAT. Can we, therefore, assume that, in this case, more than £2 million from the budget for the assisted places scheme is being ploughed back directly into the Treasury and is not buying any extra education, not helping a single child, buying a single book or adding to children's knowledge in any way?

I also direct the Paymaster General's attention to the Ministry of Defence. In the last financial year, it paid out more than £130 million through the services boarding scheme. That involved buying education from private independent schools, most of whom are liable to pay VAT. Therefore, we assume that about £3 million to £4 million is being spent from the Ministry of Defence budget which goes through the education system and back to the Treasury as VAT. That is not an inconsiderable sum.

I ask the Paymaster General to address the other side of the equation. We have heard tonight about the very sensible measures to exempt from VAT those services sold by educational establishments. But what will the Paymaster General do about the VAT that education establishments are having to pay from their finite budgets? If he does not give us a satisfactory answer tonight, we can only assume that the Government have found a very clever way of cutting the defence or education budgets by charging VAT, in a circular route, on the education services that the departments buy.

7.11 pm

Mrs. Jacqui Lait (Hastings and Rye)

I am interested to follow the hon. Member for Plymouth, Devonport (Mr. Jamieson) in the debate. Last year, when I served with him on the Standing Committee considering the education legislation, his concern for grant-maintained schools was not precisely the one he expressed tonight.

I want to return to the terms of the order and, particularly, to welcome the exemption that has been extended to English language schools. I do so for two reasons. First, I have a constituency interest. Like many south coast towns, Hastings has a very large English as a foreign language schools sector. In fact, many people maintain that if it were not for these schools, our economy would be in an even worse state than it is at the moment. My second, broader reason is a concern about high standards in that sector.

English as a foreign language was originally a great British idea. It has since been exported throughout the world and now every country whose people speak English in one form or another—we have to recognise the barrier of the common language—is competing very hard in the marketplace. We need to ensure that, as far as possible, British schools remain competitive with others throughout the world. That means that they must be able to offer rates that are competitive with schools in Australia, New Zealand, Canada, America and, probably very soon, South Africa.

Therefore, we gratefully recognise that we are not disadvantaging the private sector in competition with colleges and charities in allowing recognised schools exemption from value added tax. I feel a certain disquiet about the impact of the order because, in essence, it uses the taxation system to improve standards. There are perhaps better ways of achieving that than using the taxation system.

However, I agree with my hon. Friend the Member for Ealing, North (Mr. Greenway) that there is a need to ensure that in this competitive world we offer only the highest possible standards of teaching and pastoral care. In the past, schools have been used as visa factories. There is the well-known example, which has gone into mythology, of the school in London which had 5,000 names on its books but only one classroom.

The Oxford Language Forum recently discovered students living five to a room. As I travel through my constituency and to towns along the south coast, my constituents and other members of the public draw to my attention the abuses perpetrated by such schools over the years. They must be rooted out. We have to ensure that we offer high standards to students who come to study in this country.

The accusation is often made that British Council recognition is just for posh, expensive schools. Those who are involved in the sector and have British Council recognition will confirm that some schools that are members of the Association of Recognised English Language Schools charge students £50 per week for 15 hours tuition in large classes. Those schools can also charge up to £1,000 per week for a one-to-one, total immersion course designed more for business men and those who need to learn the English language very quickly. This shows the range of courses offered by the recognised schools and colleges with ARELS membership.

In my constituency, a typical school charges £171.63 for 15 hours instruction per week, including accommodation. It charges £945 per month for full-time tuition—25 hours a week—including accommodation. That gives us some idea of the range of fees charged by schools which are already recognised by the British Council. It is not an exclusive regime. If schools wish to compete internationally and know that they have high educational standards, recognition by the British Council is probably the best way to go. That is one of the reasons why the taxation system will improve standards and, I hope, root out some of the schools with poor standards that are a disgrace to the industry.

I am grateful that the order will reassure not only constituents who have expressed concerns to me about the non-recognised sector, but people from other countries who wish to study here or to send their children to this country to receive English language tuition of a high standard. The English language is our major export and we must ensure that it is taught to the best possible standard. I have great pleasure in supporting the order.

7.17 pm

Sir John Cope

I am grateful for the welcome that all hon. Members who have spoken in the debate have given to the main part of the order—although obviously they raised individual points. The hon. Member for Oxford, East (Mr. Smith) and my hon. Friend the Member for Ealing, North (Mr. Greenway) asked about the coverage of non-vocational courses. The hon. Member for Oxford, East talked about cake decorating and other such courses. Those courses will be exempt from value added tax so long as they are provided by an eligible body. I believe that the courses that he had in mind are provided by such bodies.

The hon. Gentleman also criticised the order for dealing with both the nature of the institution and the nature of the supply. He is quite right: usually VAT depends on the nature of the supply. But sometimes it depends on the type of institution—or, for that matter, the type of goods—involved in the transaction. There are all sorts of special arrangements in the calculation of VAT. I have only to mention cars, for example, and the hon. Gentleman—who knows a good deal about the subject—will know what I mean. VAT takes into account the type of supply as well as the type of body providing a service or buying and selling goods.

In defence of the order, I must say that we are sorting out to a considerable extent the mixture between the nature of the institution and the nature of the supply being made. It was all much more mixed up before, under the old order; clarifying it is a large part of what we have done in the new order.

The hon. Member for Oxford, East asked about the timing of the order. As the House knows, it does not apply solely to institutions teaching English as a foreign language, but I realise that for some of those, the date of 1 August may be considered inappropriate, although it has been welcomed by others. However, the beginning of the academic year, to which the vast bulk of the order applies —or even before the beginning of it—is an appropriate time for its provisions to take effect.

The hon. Gentleman also spoke about the relationship between the order—and its predecessor—and the European Community agreements that govern some of our activities in connection with VAT. He asked whether universities might be able to recover some of the VAT that they had paid in the past. Although the hon. Gentleman represents such a distinguished university city, I have to disappoint him. Apart from anything else, the apparent contradiction concerning the EC agreements has not been firmly established. In any case, if any refund were due, the university would not benefit. It would have to be refunded under the unjust enrichment rules, and would go to the students who had paid it. Such retrospection would be extremely difficult for the university to achieve.

The hon. Gentleman asked several other questions, one of which concerned note (1)(f)(ii), which refers to charities or youth clubs ploughing back any profits made into their activities. Yes, that means that any surplus should be ploughed back, not necessarily into the specific courses that gave rise to the surplus, but into such activities as would otherwise qualify as an exempt supply within this group.

The main interest in the debate has centred on the teaching of English as a foreign language. I do not agree that it would have been right to put the order on hold. As I said in my opening remarks, it is right to go ahead with it, but I am prepared to consider carefully the representations that have been made in the past few days.

I am not complaining about the fact that the Association of British Language Schools did not respond to the consultation before Christmas or in the first couple of months of this year. It is a new body, which has not existed much longer than the consultation document. It is a self-inspecting body, which was set up last autumn. I am certainly prepared to consider the representations made by that body, as well as by hon. Members and others.

My hon. Friends the Members for Ealing, North and for Hastings and Rye (Mrs. Lait) drew attention to some of the difficulties. My hon. Friend the Member for Ealing, North said that some of the institutions were a rip-off, and spoke eloquently about the problems that they have caused. My hon. Friend the Member for Hastings and Rye described some institutions as "visa factories". Those are all reasons for exercising caution in extending the tax relief. That is why we acted as we did, and why we drafted the order in its present form. We shall consider the arguments advanced both in the debate and by the various bodies that have been mentioned.

Mr. Andrew Smith

I am sure that the right hon. Gentleman would not want either what he has said or the way in which the order is couched to give the impression that simply because a language school does not enjoy British Council accreditation—under the existing scheme some are not eligible—it is more likely to be a cowboy operator. I agree that cowboy operators would not fall within the present British Council accreditation scheme, but the right hon. Gentleman must recognise that for many reputable schools that do a good job, the requirement for British Council accreditation gives rise to problems. Consultation needs to take place on that matter.

Sir John Cope

Absolutely. I am undertaking to consult on that. I do not wish, and I am sure that my hon. Friends do not wish, to tar with the same brush any institution that does not happen to have British Council recognition at present. In any case, British Council recognition, including the way in which it is awarded, is and will remain one of the matters that we discuss with the British Council.

If I may say so, the hon. Member for Plymouth, Devonport (Mr. Jamieson) opened the debate beyond the order when he referred to grant-maintained schools, and so on. In a way, he was drawing attention to the difference between exemptions from VAT and a zero-rate for VAT. If an institution is registered for VAT, but the supplies that it makes are zero rated, it can collect back the input tax —the VAT that it has had to pay. But if the supplies that an institution makes are exempt, it cannot reclaim the input tax. Here we are talking about exemptions, not about zero-rating.

The position of local authorities is governed by section 20 of the Value Added Tax Act 1983. The VAT that they pay is refunded. The equivalent of that is the grant to which the hon. Member for Devonport referred in connection with grant-maintained schools. He was looking forward, if that is the appropriate word, to the possibility that all schools may one day be grant-maintained.

Mr. Jamieson

indicated dissent.

Sir John Cope

I did not mean that the hon. Gentleman was looking forward to that day in the sense of welcoming it, but he did say that all schools might be grant-maintained. That, of course, would free up the money now used for section 20 grants, which would balance to a considerable degree, if not perfectly, the grant that the hon. Gentleman mentioned. I cannot answer off the cuff the detailed questions about the various figures, but I shall read in Hansard what the hon. Gentleman said, and write to him. The question does not arise out of the order.

Mr. Jamieson

Will the Paymaster General put my mind, and the minds of other hon. Members, at rest? The Department for Education currently makes substantial sums available through the special purposes grant to grant-maintained schools for VAT purposes. My worry is that that money is coming from the Department's budget, and that it should and could be spent on education in other ways. Will the right hon. Gentleman tell us whether that money is being provided over and above any other funding that the Department would receive, so that it can pay the grant-maintained schools?

Sir John Cope

I think that the hon. Gentleman would prefer an accurate answer to an answer off the cuff. Although the question does not arise out of the order, I shall include an answer to it in the letter that I promised to write to him about the other matters that he raised.

I am grateful to all hon. Members who have welcomed the order.

Question put and agreed to.

Resolved, That the Value Added Tax (Education) Order 1994 (S.I., 1994, No. 1188), a copy of which was laid before this House on 28th April, be approved.