Select Committee on Deregulation and Regulatory Reform Fourth Report

Appendix 2

Reply from the Department for Education and Skills

Proposal for the Regulatory Reform (Voluntary Aided Schools Liabilities and Funding) (England) Order 2002

1.  Thank you for the opportunity to make a presentation to the Committee on 11 December 2001. I am writing to respond to the points raised in your subsequent letter, and to provide some additional contextual information. Please let me know if there is anything further that you think the Committee might need. There are some complex issues to cover; I would be quite happy to clarify anything further, either in writing/e-mail, telephone, or by meeting.

2.  I have dealt with each of your subject headings in the separate sections attached to this letter, although see paragraphs 4 and 5 below in respect of Wales and the drafting of the Order.

3.  I am sure that you will find the additional information reinforces the complexities of the issues. I would like to follow this up with some practical illustration of the impact of the changes on existing capital projects at the VA schools in an area such as Burnley. Unfortunately, because of the impact of the holiday period, I have not been able to have the information ready for today; if you are agreeable, I would like to send this to you by around the middle of next week.

4.  I would also like to take this opportunity to address a point raised during the presentation which we were not able to answer, relating to the equivalent arrangements in Scotland. Having checked with the Scottish Executive, I can confirm that there is no equivalent category of Voluntary Aided schools in Scotland. All schools, including those designated as denominational, are funded by Local Education Authorities in the same way as other categories of school.

5.  I have confirmed with the National Assembly in Wales that their consultation produced no consensus for change to the current arrangements. This has been agreed by their Minister.

6.  The very helpful comments on the proposed draft Order, together with the other points raised in your letter, have enabled us to prepare what I hope the Committee and its legal advisers will consider to be an improved version. I am enclosing the latest version, although our Legal Adviser is still in correspondence with Alan Preston on the detail; I understand he wishes to discuss some of the issues before it is considered again by the Committee.

7.  Our Ministers have confirmed they are content with this response.


Project Leader

Transitional provisions

1.  The provisions in the draft Order are intended to give effect to the proposals very much as outlined in the consultation document at paragraphs 99 - 115. As you will have noted, no major concerns were expressed in the responses to the consultation, although we have expanded on some of the more detailed arrangements in the light of further discussion with our own staff and others within the Department.

2.  In practical terms, the proposed arrangements can be summarised as set out below. The term 'financially complete' refers to the point at which all grant entitlement has been paid.

Formula Repair Grant

3.  This grant would end at 31 March 2002, as all revenue repair liability would transfer to the LEA, with funds being delegated to schools through Fair Funding formulae. To ensure that schools do not lose any money during this transition, any unspent Formula Repair allocations at 31 March 2002 would be added to the school's NDS Devolved Formula Capital balance, and could then be rolled forward if unspent by the end of 2002-03 for a further two years. The cash (85%) figure would be transferred, although it would, from 1 April 2002, be regarded as 90% of the costs of any work.

4.  Although the cessation of Formula Repair grant would remove a funding process to which VA schools have become accustomed, necessary protection would be provided by the simplified proposal to pay all revenue repair funds through Fair Funding formulae. Our proposal to pay £18 million to LEAs through the Standards Fund would provide the necessary adjustment, even to those LEAs which have not reduced their revenue funding for VA schools (see page [16] paragraph [2]). We consider that the proposal would protect the position of schools, in that unspent grant would be transferred to NDS Devolved Formula Capital, and unspent grant could be carried forward. We accept that the value of work which any carried forward sum would support would be lower (because it would represent 90% of the costs), but the amount of the governing body contribution reduces by 5% - which, as reiterated later in this letter, ensures cost neutrality).

NDS Devolved Formula Capital Grant

5.  This grant would be allocated in full to schools from 1 April 2002. There would be no need for separate allocations to be made to LEAs (currently 10% of the total amount of the grant is paid via the Standards Fund) for their liabilities at VA schools.

Unspent grant - LEAs

6.  For 2000-01 and 2001-02, LEAs have received an allocation through the Standards Fund for their share of liabilities at VA schools. We would monitor, from Standards Fund information, whether or not these allocations have been spent, or whether individual LEAs have rolled balances forward.

7.  Later this month we plan to remind LEAs of this proposal, and encourage them to use any unspent allocations for work at VA schools in 2001-02. Should any LEA have an unspent allocation for VA schools at 31 March 2002, we would ask it to complete any projects already planned, but not yet financially complete at VA schools. Where no such projects are planned, we would regard the underspend as being available to the LEA's LCVAP allocation. For many LEAs, the amounts involved as unclaimed Standards Fund grant should be quite small.

Unspent grant - schools

8.  Any unspent Devolved Formula Capital allocations held by VA schools at 31 March 2002 would roll forward into 2002-03 and be added to that year's allocation. The cash (85%) figure would be rolled forward, although it would, from 1 April 2002, be regarded as 90% of the costs of any work.

Liabilities and rate of grant

9.  Devolved Formula Capital can be used by schools in two main ways: either on its own, to complete a small capital project; or as a contribution to a larger project.

Small projects - the division of liabilities will already have been agreed, and the LEA will have received funding through the Standards Fund to meet its costs. We therefore propose that this division of liabilities should remain but that, where the project is not financially complete by 31 March 2002, and if the school has sufficient grant available, we would pay grant at up to 90% of the governing body's liabilities.

Contribution to a larger project - the arrangements for that type of project (Named Project or LCVAP) would apply (see below).

10.  We consider that our proposals maintain the protection currently available to VA schools, by allowing unspent grant to be carried forward. Again, there is an impact on the value of work which any carried forward sum would support, and the amount of the governing body contribution, as outlined in paragraph 4.

Named Capital Projects placed on the Design List, Starts List, or given a Project Development Allocation - from 1999-00

11.  LEAs receive Supplementary Credit Approvals (SCAs) on a project by project basis to meet their share of liabilities at VA schools. Where the LEA has received an SCA, we propose that the division of liabilities should remain unaltered but that, if the project is not financially complete by 31 March 2002, we would normally increase the total grant element to 90%.

12.  If the LEA has not received an SCA by 31 March 2002, we propose that the work should be progressed on the basis of the revised arrangements, with grant entitlement normally at 90%.

13.  We consider that this approach would provide the most practical arrangement. Those projects not financially complete (as in paragraph 11 above) would receive, in effect, reimbursement for costs already incurred. We have taken this approach with a view to encouraging schools to continue to claim grant at the existing rate during the current year (2001-02). They might otherwise be tempted not to claim grant now, or even to delay work, and this would lead to a potential underspend on the VA capital baseline in 2001-02.

Named Capital Projects placed on the Design List or Starts List—prior to 1999-00

14.  These projects should be well on their way to completion. We do not wish to delay their completion and do not propose to change the division of liabilities, or to increase grant support to 90%.

LEA Co-ordinated VA Programme (LCVAP)

15.  LEAs receive funding through credit approvals for their share of liabilities for work funded through this route. These credit approvals are linked to the grant allocations available to spend in any given year, rather than related to specific projects. We would ask LEAs to identify their outstanding liability on any unfinished LCVAP projects at the end of 2001-02, and then we would allocate SCAs specifically for the completion of those projects during 2002-03. This would ensure that LEAs receive appropriate finance for any outstanding liabilities.

16.  For projects begun in 2001-02, but not financially complete by 31 March 2002, we would increase grant support to a maximum of 90% of the governing body's share of liabilities. Projects approved and begun prior to 2001-02 would, however, receive grant support at the 85% rate. This is because this is an annual programme for medium scale projects and, as such, any work should be well on its way towards being completed by 31 March 2002.

17.  We consider that this approach would provide the most practical arrangement. Those projects begun in 2001-02 but not financially complete would receive, in effect, reimbursement for costs already incurred. We have again taken this approach for the reasons outlined in paragraph 13.

Projects being funded through the Private Finance Initiative (PFI)

18.  PFI projects are funded in a variety of ways, with the costs being spread over a number of years (typically 25). We propose, therefore, that the parties to those contracts which have been signed by April 2002 should consider whether the new arrangements would be more beneficial (whilst still representing good value for money). We would consider, on an ad hoc basis, any revised proposals which we might receive. Any contracts currently in the course of preparation but for completion after March 2002 are being made aware of our proposed changes to the liabilities and funding arrangements.


19.  We do not consider that there would be any significant additional burdens placed on VA governing bodies or LEAs in dealing with the transition to the proposed new arrangements. There would be some minor tasks on the following basis:

VA governing bodies - would need to become familiar with the arrangements. We will provide appropriate written information, and whatever additional support might be required. It would, in any event, be only a temporary situation, leading to longer-term benefits. We therefore consider any extra burden to be proportionate to the overall benefits which would result.

LEAs - in addition to becoming familiar with the new arrangements, LEAs would need to identify any outstanding liabilities on some projects so that they can be met by specific credit approvals. We consider that this is a benefit, in that LEAs would not need to manage the funding streams currently available to them. Once again, we would consider that any extra initial burden would be proportionate to the overall benefits which would result.

100% grant for condition-related work in excepted buildings

1.  We have not been able to assess the potential capital backlog in respect of all of the additional liabilities which would transfer to VA governing bodies. That is because the information from Asset Management Plans (AMPs) is not available in a form which we can use for this purpose. As you will be aware, liability can depend on whether the work is internal or external; this level of difference cannot be ascertained from AMPs without making some extremely broad assumptions. We also cannot easily differentiate between those costs which should be met from revenue funds and those which should properly be capital costs.

2.  By way of illustration, AMP information suggests that the most urgent backlog of work to electrical and mechanical services in VA schools amounts to £47 million. What we cannot do is say how much would be attributable to work which would transfer to governing bodies and, as indicated in the previous paragraph, how much is for normal revenue costs.

3.  It is for the reasons set out in the two previous paragraphs that we feel that we need to carry out a specific condition survey of the excepted buildings; this should provide a very large degree of security for VA governing bodies. We discussed the position with the VA sector representatives on the Project Board, and concluded jointly that our strategy should be one of seeking a reasonable balance in the first instance. That balance was the basis upon which we consulted - that 100% funding should apply to excepted buildings (including kitchen equipment). As with other aspects of the proposals, we received a very large degree of support for this approach.

4.  In the light of the responses, we also considered how we might provide additional safeguards for VA governing bodies (given that we are not able to assess accurately the full potential scale of the overall backlog). We consider that our proposal to pay grant at up to 100%, in exceptional circumstances, would provide that additional security. Our scope for using this flexibility would, of course, depend on commitments arising from the existing undertaking in respect of excepted buildings, and the overall level of funding available for the sector as a whole. But we think that it is a balanced and reasonable approach, which we are making transparent to the VA sector through the consultation process, through the documents required to support our proposed Regulatory Reform Order, and through the guidance which we will make available.

5.  By way of a practical illustrative example, we would probably regard any school facing a major problem (such as the unforeseeable sudden need for a complete replacement boiler) as being exceptional, at least in the first year or so of operation of the proposed new arrangements. This should prevent any individual school being substantially disadvantaged. The model used in the draft Regulatory Impact Assessment demonstrates that, over a standard lifecycle, the changes are affordable to VA schools. Ministers would, of course, want to monitor the impact of the new arrangements as part of our review process.

Protection of governing body capital expenditure on excepted buildings

1.  In the light of the very helpful comment in your letter, we have decided that it would be appropriate to extend the proposed amendments to Schedule 22 to the School Standards and Framework Act 1998 to include all excepted buildings. Our view remains that caretakers' dwelling houses would, in practice, be the only potential excepted buildings to be sold as separate items, with the sale value reflecting any investment by governing bodies. It is conceivable, however, that there might be examples of other excepted buildings (possibly swimming pools) where this might apply.

2.  The minor additional burden for VA governing bodies, identified in paragraphs 40 and 108 of the Department's Statement which accompanied the draft Order, would be extended accordingly. We still believe, however, that it remains proportionate (it would only apply in respect of buildings owned by the LEA), and is desirable and represents a fair balance in respect of the overall benefits which would result.

Proposed setting of a statutory de minimis level

1.  It might be helpful to provide some further background to our proposal. It is somewhat lengthy, but I hope it will give you and Committee Members a more complete picture of what we are trying to achieve.

2.  Until April 1999, the VA capital baseline was split administratively between 'repairs', 'Basic Need' (provision of new pupil places) and 'improvements'. Repairs in this context were defined strictly as being work done on a like-for-like replacement basis and, in the extreme, could include the replacement of a whole school. In practice, VA schools had access to funds for these repairs on an unrationed basis (except that there was a degree of 'first come, first served', given that the VA baseline was itself limited). This funding related only to governing body liabilities, and required a 15% contribution. 'Improvements', on the other hand, were deemed to be any work which included an element of improvement to the existing premises. No distinction was made between what is conventionally defined as revenue expenditure (that which can be regarded as routine and recurring) and that which should be defined as capital (generally one-off expenditure). No de minimis level was applied.

3.  This approach produced two major consequences:

  • VA schools were relatively well maintained in comparison with other categories of maintained school (who saw this as unfair). However, work was often on a like for like basis, even when this did not represent best value (for example, many flat roofs were perpetuated when pitched roofs would have been more appropriate);

  • relatively little was spent on improvements to VA schools, as the overall VA baseline was set centrally at a level that was equitable compared with LEA schools, and the amounts available for improvement were squeezed out by unrationed repairs.

4.  As part of our development of the Department's capital strategy, we took a first step in April 1999 towards introducing a greater degree of consistency, fairness and transparency between VA schools and other categories of school. We introduced Formula Repair grant from that date to bring some measure of consistency and fairness with other schools (which, as mentioned, do not have such unrationed access to funding for major repairs). At the same time, we introduced the concept of a de minimis level - a standard accounting practice used in Local Authorities, and which also helps distinguish between revenue and capital expenditure in relation to smaller items of expenditure.

5.  When we introduced NDS Devolved Formula Capital for schools in April 2000, we wanted, as far as possible, to ensure a consistent approach across all schools. Our consultations at that time with VA representative bodies confirmed that they too wished to have access to Devolved Formula Capital, and that they accepted the need for a de minimis level. The subsequent operation of these arrangements has demonstrated that, at a local level, VA schools and LEAs can work effectively within these sorts of parameters.

6.  Associated with the proposed transfer of significant additional capital liabilities to VA school governing bodies, we felt that it would be appropriate to establish a formal de minimis level. Since April 1999, this had effectively been set administratively at £1,000 as this was considered to be a reasonable and pragmatic level. We have deliberately proposed that the level should remain low as this would give reasonable flexibility to VA schools by allowing them greater choice as to whether to fund work from revenue or capital. A higher level would reduce the scope for using capital grant. The results of the consultation process supported the proposed level of £2,000 (over 70% felt that the arrangements would be manageable locally).

7.  To demonstrate the impact of the proposed level, it might be worth re-stating the example used in the consultation document, which was as follows:


8.  The Committee rightly asks whether this would impose a burden on schools or LEAs. Our view is that the burden is already there, in that a wide range of de minimis levels is already operated by LEAs (ranging from nil to £25,000 in examples of which we have been made aware) whilst, in respect of claims for Formula Repair grant, we already set a minimum value of £1,000. We consider that any resultant burden (for example, for schools in LEAs where a nil de minimis currently operates) would be proportionate, however, as it would be a move towards bringing schools in the VA sector further towards a more consistent position with other categories of school, and would bring about the benefits set out in the following paragraph. We are confident that LEAs would take a pragmatic approach on this issue. We would wish to keep the de minimis level under review. We are therefore proposing that the level is made a subordinate provision, to facilitate changes (if required) as the result of evaluation and review.


9.  We consider the benefits of having a de minimis level to be as follows:

  • the setting of de minimis levels for that part of capital expenditure which can be ordinarily financed from capital resources is conventional practice in Local Government. It is only right, therefore, that a similar principle should be applied to all schools funded in revenue terms through the LEA;
  • because the funding of capital expenditure in VA schools is primarily reliant on grant paid on a national basis, we consider that a national de minimis limit should be set. Whilst there is already effectively such a limit in operation, this is not statutory. It seems appropriate, therefore, to move to this stage at the same time as other statutory changes are implemented for VA schools;

  • because an administrative limit of £1,000 already effectively applies to VA schools, on balance we consider it appropriate that any revised limit does not depart too significantly from a level to which schools have been accustomed. This is especially important, given the extra capital liabilities it is proposed that VA schools should take on for excepted buildings etc;

  • the variable levels currently set by LEAs mean that there are differential impacts across all types of school. This already gives rise to significant variations in the relative ease or difficulty with which schools can use their Fair Funding budgets. Setting a statutory national level for VA schools might cause some LEAs to reconsider their own arrangements; and

  • having a de minimis level avoids the bureaucracy of processing many small claims for capital grant.

10.  The 'process of transition' referred to in paragraph 75 of the Department's Statement relates to this continuing move towards consistency and fairness in relation to other categories of school. By formally proposing a national de minimis level for VA schools, combined with the Department's current programme to introduce consistent financial reporting across all schools and LEAs, we hope that this will help bring about some greater degree of consistency and convergence of levels used by LEAs for other schools. We see this as another step towards achieving the aim in the Department's overall capital strategy of bringing greater fairness and consistency in funding between different categories of school.

11.  As far as the impact on maintenance budgets is concerned, we have indicated that we consider it appropriate to adjust the annual funding available to LEAs to provide for their additional revenue liabilities. Our proposal to provide £18 million for LEAs would ensure that appropriate funding can be made available to VA schools in their delegated revenue budgets. It would be paid in proportion to the number of VA schools and pupils in LEA areas, and would represent a fair distribution of the estimated annual spend by VA school governing bodies on revenue premises liabilities. We cannot be certain of actual amounts paid to schools for repairs and maintenance, because Fair Funding formulae can operate in varying ways:

  • in some LEAs, the amount included for repairs and maintenance can be stated explicitly;

  • in other LEAs, there may be no explicit factor, but amounts will be included in pupil-led funding;

  • other LEAs may have no specific factor at all.

12.  On whichever basis the funds are allocated, the school governing body decides how much it will allocate for premises-related repairs and maintenance expenditure. The position is further complicated by the fact that some LEAs have not reduced Fair Funding budgets for VA schools in recognition of the grant support available to VA

schools from DfES for revenue premises work. We would still provide those LEAs with their share of the £18 million but we cannot be certain how they would use that money (the VA schools having, in effect, been previously double-funded). Many of these LEAs may spread the benefit of this funding adjustment across all schools.

Arrangements for claims and payments

1.  Our view is that, taking the balance of risk into consideration, it seems unfair not to provide the benefits which our proposals would introduce. We estimate that up to some £30 million is being 'bankrolled' by Dioceses and others at any time (anything up to about £½ million in any Diocese). This was never the intention, it adds additional financial and administrative costs, and we feel that it is right that we should do something to rectify this unfair position.

2.  There is also a bureaucratic burden which can be eased. To provide the evidence which we currently require to demonstrate that bills have been paid, schools often have to resort to submitting documents such as cashed cheques, or bank statements. This results from the varied ways in which transactions take place with contractors, or because the documents are required for other purposes (e.g. for the school's accounting purposes). This burden would be significantly reduced under our proposals - we would simply pay grant on receipt of an approved invoice, and would not require any subsequent documentation.

3.  Although we consider that our proposals are justified, we would need to ensure that appropriate controls are in place. We are therefore asking our internal auditors for a view, by mid-February, on what those controls might be, and would be glad to make that information available to the Committee. For information, I am enclosing an example of one of the claim forms which we currently use; you will note that it is comprehensive and detailed, requiring at least two signatories. An additional check is provided by the requirement for every school to have its accounts audited independently.

Liability for insurance

1.  This is another area of past uncertainty and inconsistency, which we are seeking to clarify. Although not a direct part of our proposals, there are insurance implications for stakeholders. There is no existing guidance from the Department as to what should be an appropriate level of insurance cover for VA school premises. What has happened in the past, therefore, is that various arrangements have developed. Some VA school governing bodies insure only in respect of the 15% contribution to their capital liabilities; others insure all of the buildings (including those parts which are LEA liability). And there are no doubt many variations between these different approaches.

2.  We believe that there are also many different arrangements concerning whether or not LEAs delegate funding to VA schools for property insurance premiums, whether any adjustment is made to take account of the 15% contribution, and what (if any) provision should be included in LEA group insurance schemes.

3.  This is not helpful, either to VA governing bodies or to the DfES. In particular, it leaves the Department vulnerable to potentially large and sudden calls on the VA capital budget in respect of the 85% of costs which are not insured. It also provides little incentive for VA school governing bodies to take adequate security or other precautions. There are risks of double insurance, or gaps in insurance cover, both of which are potentially costly.

4.  There are also implications for LEAs. We have already discussed the issue with other stakeholders, and have arranged to meet the Local Government Association (LGA, which represents LEA interests) and the Association of London Government (ALG, which fulfils a similar role in respect of London Boroughs) to agree a policy. Initial legal advice suggests that there is a funding obligation on LEAs. Unfortunately, an earlier planned meeting was deferred, at the LGA's request; we have rearranged this meeting for 11 January. I would be pleased to provide the Committee with a report on the outcome before the Committee's next meeting which, I believe, is scheduled to 15 January.

Increase in the rate of grant support

1.  The Committee has asked what proportion of the proposed 5% increase in the standard rate of grant support would be accounted for by the liabilities changes, as compensation for the effects of VAT, and to help meet contributions to rising capital baselines. We believe that almost 4½% (i.e. around 90% of the proposed 5% increase) would be required to meet the ongoing costs associated with the additional liabilities, the small remainder being available to help with the other aspects. A more detailed explanation is provided below.

2.  The net increase in liabilities shown in Table B of the draft Regulatory Impact Assessment amounts to an increase of 36.4% (£375m gross, compared to £275m). The Table also shows that the level of DfES grant required to support such a net increase in liabilities rises from £233.75m to £337.50m. This equates to an increase of 44.4%, not the 36.4% above, because of the effects of increasing the standard rate of grant from 85% to 90%. By comparison, the proposed reduction in the governing body contribution from 15% to 10% would mean, in effect, that they could 'afford' a 50% increase in gross expenditure from the same total spend on their part. For example, if the total cost of some work falling to the governing body is £10,000, it would contribute £1,500. However, a £1,500 contribution under our proposals would support work to the value of £15,000.

3.  Because a 50% increase in gross expenditure is consistent with the liabilities changes being cost neutral for governing bodies, it is appropriate to consider what the equivalent effect would be if DfES grant increased by 50%. If the amount above required to support current liabilities increased by 50%, the £233.75m shown would become 350.625m. The extra grant needed to pay for the liabilities changes of £103.75m (£337.50m less £233.75m) can then be compared with the extra grant needed to support a level of expenditure which ensures cost neutrality for VA school governing bodies of £116.875m (£350.625m less £233.75m). The amount of £103.75m is equivalent to 88.8% of the total of £116.875m (or 4.4% of the extra grant), leaving only 11.2% of the total (or 0.6% of the increase) for VAT/rising baseline compensation. The following table summarises the figures set out above:
£m %
(1). DfES grant required to fund existing liabilities 233.750
(2). DfES grant required to fund revised liabilities 337.500
(3). Extra DfES grant required to fund liabilities


(2)-(1) 103.750 88.8
(4). DfES grant to fund governing body cost neutral


(5). Extra DfES grant to fund governing body cost neutral position (4)-(1) 116.875100.0
(6). DfES grant to fund other than liability changes (5)-(3) 13.125 11.2

4.  This indicates that almost 90% of the increase in grant rate from 85% to 90% would be needed to support the liabilities changes. This equates to nearly 4.5% of the overall increase of 5%. It is not possible to split the remainder between the two elements; the balance being so small, it is likely to be absorbed entirely by increased VAT.

5.  The Committee asked whether any responses to the White Paper consultation had referred to our proposals. Although there was a lot of support for the overall deregulatory approach outlined in the White Paper, none of the 2,300 replies referred particularly to our proposal for VA schools.

6.  The final point under this heading related to whether VA governing bodies should still be required to pay, as a matter of principle, a contribution equivalent to that which they had paid previously if they are to access the funds available. The Committee will note from the first paragraph of this section that there is probably very little help in this direction. This is a point which we discussed specifically with the Project Board. The clear consensus was that, whilst it might be argued (as you suggest) that an even higher rate could be required to give the necessary help, the standard rate of grant support should be no higher than 90%.

7.  This is, of course, linked to a wish to ensure that the particular rights of VA governing bodies are maintained. It is part of the overall balanced and pragmatic approach in our proposals. Some additional help would, of course, be provided through the proposed flexibility to pay grant at up to 100% in some cases, and through the programme of full funding for any condition backlog in excepted buildings.

This proposal and the Department's legislative programme

1.  You are right in pointing out that we regard the Education Bill as a deregulatory measure. As you may be aware, we had begun to proceed with our proposals for VA liabilities and funding reform before we could be certain that proposed new legislation would be guaranteed a slot in the Parliamentary timetable. We had also considered the most appropriate date for implementation of our proposals, and agreed that it should be 1 April 2002.

2.  If we had known at the outset that an Education Bill was being proposed, then we might have considered it appropriate to include these proposals in that Bill. However, we were keen to use the powers available under the Regulatory Reform Act 2001, and also to obtain legislative approval (subject to the scrutiny process) to implement the proposals from April 2002. There has been very strong support from the Churches for implementation from this date. The Regulatory Reform Order (RRO) route has also helped in building awareness of our proposals, and achieving a strong consensus for change amongst all key stakeholders. For example, yesterday we received an e-mail from the Chief Building Surveyor at Portsmouth City Council, in response to our sending him a copy of the proposals: he said 'For many years there has been confusion over 'who is responsible for what' in the VA school maintenance area. This document is excellent. It finally seems to reduce the problem to simple terms that can be understood and implemented by all. I believe that this will have many benefits, not least of which will be the time (and therefore saved costs) previously invested in discussion and research when trying to work out who should be paying for various works. This sort of advance is very welcome.'

This should help to embed the changes quickly, if approved.

3.  The Department acknowledges that the Regulatory Reform Act 2001 is a very useful mechanism to deliver the regulatory reform agenda. However, given the large package of deregulatory proposals, the Department took the view that it would be appropriate to deliver these proposals through the Education Bill. It was felt that this route would be quicker and less burdensome on the Department's resources than embarking on a series of new proposals through RROs. The Department began to pursue proposed changes in respect of after-school childcare through the RRO route, but found that there were wider issues to consider before formal consultation could be undertaken in accordance with the Act. This particular initiative, as you have indicated, now forms part of the Education Bill.

4.  The Department remains committed in principle to using the Regulatory Reform Act 2001. Relevant new policy initiatives will be considered for implementation through this route.

Financial Implications

1.  The Committee has asked for additional information on the financial impact. Because of the range of factors involved, it is difficult to give a direct illustration of how individual schools or LEAs will be affected. It might be helpful to summarise some of the background and the issues which will have a bearing on the financial impact.


2.  The complexity of the current arrangements has caused problems for LEAs:

  • some have not realised that they ought to make funding adjustments to VA school budgets in respect of the liabilities arrangements and the grant support available direct from DfES to VA governing bodies for premises work;

  • others have realised that they should make an adjustment, but have decided for various reasons not to do so;

  • others have made an adjustment, but have used differing methods and so the amounts and proportionate changes have varied between LEAs.

3.  Based on an informal survey of 43% of LEA Fair Funding formulae for 2000-01, we have estimated that, if a similar proportion of all LEAs had applied the same rates of adjustment to those in the survey, the scale of that adjustment would have been in the order of £9m. If all LEAs had applied the same level of adjustment, then the total would have amounted to around £15m.

4.  As has been indicated earlier in this letter, funding for repairs and maintenance can be allocated to schools in a number of ways. In any event, schools then decide how much to set aside for such costs.

5.  We have already indicated that we think it is appropriate to transfer funds from the VA capital baseline, in recognition of the additional liability falling on LEAs for all revenue expenditure. Because we would pay this money to LEAs through the Standards Fund in 2002-03, we can guarantee that it would be available to LEAs in the right proportions (we will be able to show shortly how the £18 million would be allocated, if the Committee would find that helpful). This transfer of funds would also feed into the arrangements for LEA revenue funding for subsequent years. Particularly in view of the relatively very small sums involved, there is no reason why there should be any effect on Council Tax levels. It should also be noted that the £18 million total is around 50% higher than VA schools have actually spent in the first two years of the Formula Repair grant, although there has been a roll forward of unused funds by many schools towards bigger projects. The sum is also higher than the estimated total level of adjustments (£15m) referred to in paragraph 3 above, thus representing a potential gain to LEAs.

6.  The impact on VA schools would depend on whether LEAs pass on the relevant amount as calculated using the same basis as that used for Formula Repair grant, or an alternative calculation using local factors. Taken as a whole, LEAs could potentially receive more funding than is strictly necessary to compensate for the adjustments currently being made. The effect for the VA schools will depend both on whether any adjustment is currently made, and the formulae used by LEAs to allocate extra money in Fair Funding budgets. We have already advised LEAs that their implementation of the new arrangements would be monitored through our process of appraising Asset Management Plans.


7.  At a national level, the position is a little easier to illustrate than for revenue budgets. I should emphasise at this point that the VA capital baseline and other relevant figures quoted below include what is currently paid to LEAs, either as credit approval or grant, for their share of liabilities at VA schools. These amounts would, of course, in future be available direct to VA schools.

DfES - because the VA capital baseline is fixed, the Department will spend the same in cash terms as it would have done had the grant rate remained at 85%. However, part of the allocations would be in 100% terms to fund backlog/exceptional circumstance spending, and most would be at 90%. So a smaller gross capital programme would be supported in absolute terms. To illustrate this further, the 2003-04 VA baseline of £437.4m will support gross programmes of £514.6m at 85%, or £486.0m at 90%. Of the £437.4m, potentially £103.75m (see earlier section on "Increase in the rate of grant support") is now required to fund the net extra liabilities.

VA governing bodies - the rising VA capital baseline means that, at a 15% contribution rate, VA school governing bodies would have needed to increase their share of the total programme costs from £39.6m in 2001-02 to £77.2m in 2003-04. The amount in 2003-04 at 10% reduces to £48.6m, still £9m more than in 2001-02, but a lot less than if they still had to contribute 15%. Once again, funding part of the overall programme at 100% would impact on these figures.

LEAs - will need to spend less on capital items, but will receive reduced SCAs etc as a consequence.

8.  Having commented on a range of issues which would affect the financial impact of our proposals, I will now deal with the specific questions raised.

Changes to Local Authority Funding

9.  Paragraph 5 above indicates how we intend to compensate LEAs for their additional liabilities on revenue repairs expenditure, and the implications. Similarly, paragraph 7 above sets out the equivalent effects for capital expenditure.

Value Added Tax

10.  You also mentioned the complications of VAT. I agree that it would be a lot more straightforward if VAT liability could be abolished. We have, in the past, put this case to the Treasury. Whilst the Financial Secretary was sympathetic to the arguments, removal of VAT liability, or full recovery, would not be compatible with EU law and practice. We have therefore continued to allow for VAT in funding allocations to the VA sector, and included it as a pressure in our Spending Review bids to the Treasury. For information, I have set out below the changes in VAT rates since the tax was introduced.

1.4.1973      10%

9.7.1974      8%

18.11.1974    higher rate of 25% introduced (for petrol)

1.5.1975      higher rate also applied to domestic electricals, radios, furs, boats etc

12.4.1976     higher rate reduced to 12.5%

18.6.1979    higher rate abolished, all VAT at 15%

1.4.1991      standard rate increased to 17.5%

1.4.1994      reduced rate of 8% introduced, for qualifying fuel and power.

1.9.1997      reduced rate decreased to 5%

Validation of the estimates

11.  The earlier calculations were verified as reasonable by PricewaterhouseCoopers. We have shared with them our new calculations. Mindful of the complexities of ascertaining precise information, they accepted our revised approach, but suggested that we need to be confident of the soundness of our assumptions, given that they relate to an average school and are based on an assumed replacement period. We have therefore subsequently agreed the figures and assumptions underlying the model with the Department's professional quantity surveying and accounting staff, as well as with an independent external surveyor. They, and the Project Board, agree that this revised approach reflects a much sounder methodology for assessing the likely ongoing average annual effect of the proposed changes.

Actual Effects of the Changes

12.  Assessing the financial impact of proposed changes of this nature can only be carried out on a best estimate basis. What has been spent, or could be afforded, in the past may or may not be a fair measure of spending in the future, even assuming reliable, accurate and complete data are readily available. Recognising the limitations of the previous data, it was decided, in response to comments made in the consultation process, to adopt the more complete approach as shown in the model in the RIA. This is felt to be the best representation the Department can provide of the actual effects on all of the parties involved.

13.  The model is based on the costs of replacing/maintaining the present stock of VA schools in its current state. In addition to this, further capital works will be carried out to improve the stock and cater for additional pupil places etc. However, because of the fixed VA capital baseline, the Department will only allocate the same in cash terms as it would have done had grant remained at 85%. Part of this allocation will now be in 100% terms to fund backlog/exceptional spending. So a lesser gross capital programme can be supported than previously planned in absolute terms, as indicated in paragraph 7 above.

14.  As stated in paragraph 7 above, the rising baseline means that, at a 15% contribution rate, VA school governing bodies would have needed to increase their share of the total costs from £39.6m in 2001-02 to £77.2m in 2003-04. The amount in 2003-04, at a 10% contribution rate, would reduce to £48.6m, still £9m more than this year, but a lot less than if they still had to contribute 15%. Similar caveats as above apply also to the value of work etc. LEAs will need to spend less on capital items, but will receive reduced SCAs etc as a consequence. They will need to spend more on revenue repairs, but the overall effect of this is compensated by the payment of Standards Fund grant.

Value of Work to be Funded

15.  This has been partly dealt with above. Since the total value of work could potentially reduce, we accept that the wording in paragraph 52 is less than clear. We were seeking to indicate that the equivalent of the resources currently allocated to LEAs to fund their existing liabilities would now become grant support to VA schools.

Additional Financial Support

16.  I believe we have now dealt with the point you raise here.

Cost Neutrality

17.  We have used the term "cost neutrality" essentially to test that the financial impact of the proposals would not result in one or more of the parties involved being disadvantaged. What we are seeking to do is to satisfy ourselves that all parties can afford the financial consequences of the changes and that they are fair. We believe that what we have set out in the RIA, and earlier in this document, clearly shows this to be the case.

18.  For VA school governing bodies, the test has always been that the changes will not cost them more than the existing arrangements. We believe we have demonstrated this in the RIA, where there is a small reduction in the cash value of their contribution as a result of taking on the extra liabilities. Given that the total VA capital baseline is fixed in terms of the total grant available, the Department cannot spend more in total than it otherwise would have done. So for both governing bodies and DfES it can reasonably be said that, for a combination of reasons, the effect will - at worst - be cost neutral. For LEAs, there would be a saving due to reduced capital costs (although we would remove the funding currently made available to LEAs, there would be no borrowing charges which would have been financed through credit approvals) and the proposal to provide £18m to compensate for the extra revenue repair liabilities that they are taking on.

19.  I hope that the above comments now satisfy you on what is understandably an issue on which clear assurances are needed. The summary, derived by the Committee's staff from the draft Regulatory Impact Assessment, of the financial implications is indeed correct. The only caveat I would add is that, because of the way in which Local Authorities are funded, it is not only a matter of looking at 'cash' figures. Whilst that approach is correct for DfES and VA governing bodies, Local Authorities finance much of their capital expenditure from borrowing and this spreads the cost to the revenue budget over a period of years.

Illustrative examples

20.  The guidance, referred to at paragraph 97 of the Department's Statement, relates to training material which we would provide. We cannot issue any such material until we have legislative approval, but would aim to have something ready in draft form by the middle of next month, and would then be able to share this information with the Committee.

Proposed Changes to Liabilities And Funding Arrangements At Voluntary Aided (VA) Schools: Illustrative Example

1.  To provide an illustrative example of the financial implications of the proposed changes in liabilities and funding arrangements at VA schools, we have used, as an example, schools in the Burnley area over the period since 1996. We have assessed how the liabilities would change under the proposed revised arrangements, and what would be the impact on the VA governing body (VA GB), the Department (DfES) and the Local Education Authority (LEA). The results are summarised in the tables in paragraph 2 below, with more detail included in the attached Table A.

2.  The summary tables below demonstrate the movements in liabilities and funding arising from the proposals, and how they would impact on each of the three stakeholders. It might be helpful first to highlight some of the issues:

  • the existing total cost of the work identified in Table A is some £2.781m (column (a)). This would increase, under our proposals, to £2.844m (column (d) + column (e)) due to the effects of VAT on the items transferring between the LEA and the governing bodies. We have assumed, in each case, that liabilities transferring would either attract (where they move to the VA school governing body) or lose (when moving to the LEA) the full 17.5% rate of VAT, although in some cases the effect might be less;

  • revenue changes relate to the switch of VA GB liabilities to LEAs on external repair (Formula Repair) projects in Table A (column (e)); capital changes relate to the other project types.








External revenue repairs transfer from VA GB to LEA responsibility - effect on 'Formula Repair' projects (at existing VA GB contribution rate of 15%)

(note 1)




Switch of capital items from LEA to VA GB responsibility (at existing VA GB contribution rate of 15%)

(note 2)




Extra VAT following switch

(note 3)




Increased grant support (85% to 90%)

(note 4)




Total liabilities change





1.  LEA increase is taken from Table A, column (e), less the existing LEA liability on these items in column (c), reducing liabilities to VA GBs and DfES

2.  LEA reduced liabilities total is taken from column (c), and excludes existing external revenue repair liabilities

3.  Increase in total cost of the work, resulting from the net effect of VAT

4.  The gain to VA GBs, and opportunity cost to the VA baseline, representing 5% of the proposed VA GB/DfES liabilities of £2.834m (column (d)).

Funding Changes (to achieve cost neutrality)







External revenue (transfer from VA baseline to LEAs)

(note 1)




Switch of capital liabilities to VA GBs

(note 2)




Increased grant

(note 3)



(opportunity cost +142 to VA programme)

Total funding change





1. Assumed value of transfer from VA baseline to LEAs via Standards Fund (no overall change to DfES)

2. Represents removal of funding to LEAs for their liabilities (becomes part of overall VA baseline, so no overall change to DfES)

3. The increased grant support results in a potential reduction in the overall value of work which would otherwise be supported from the existing VA baseline.

3.  Given the level of VA baselines over the last five years, and the project activity they have supported, the increased liabilities for VA school governing bodies in Burnley, as indicated in the first table above, would be some £65,000. In other words, this would be the amount required to ensure cost neutrality. But, as is also indicated, the 5% increase in the rate of grant support to VA school governing bodies would amount to £142,000. Using this historical data, the results would suggest that an increase of around 2.3% in grant rate (to 87.3%) would be required to achieve cost neutrality. This was the basis used in the Consultation Document.

4.  As a result of the consultation process, it became clear that our initial analysis of the position did not represent the full picture. The position would change substantially with more realistic baselines reflecting the capital funding needed to sustain the whole of the VA school estate to a satisfactory standard. For example, if we were to use lifetime cost analyses, as in Annex D to the Department's Statement (the draft Regulatory Impact Assessment), this would increase the proportion of LEA liabilities under the current arrangements. Also, the specific examples in Table A cover only those projects that have either a mix of governing body and LEA liability, or are governing body liability only. They do not include projects that were solely LEA liability, and the Department is often not aware that this type of work has taken place. For example, this could form part of an LEA-wide contract for boiler and heating system replacement or refurbishment.

5.  Across the country, there are currently many examples notified to us by VA schools and Dioceses, where LEAs:

  • have not funded their liabilities until the problem has reached an emergency situation (for example, the complete failure of the school's boiler);
  • have prioritised work across the Authority, giving VA schools the lowest priority, and therefore in practice the work is rarely undertaken;
  • have refused to fund their liabilities, and the Diocese or VA school governing body has therefore had to fund the work.

The table below indicates the type of work, and estimated associated costs, that is currently the liability of the LEA and has either been undertaken without the Department's knowledge, or may not have been funded by the LEA for a variety of reasons. Under the proposed arrangements, these liabilities would fall to the VA governing body.

Type of Capital Project

LEA Liability

LCVAP Led Projects

Internal re-wiring (primary school)

Replacement boiler & heating system (primary school)

Replacement laboratory benches and services (secondary school)




 Sub Total


Devolved Formula Capital Led Projects

Playground resurfacing (primary school)

Resurfacing of access road (secondary school)

Resurfacing of paths (primary school)

Replacement perimeter fencing (primary school)





 Sub Total




6.  There are also instances where significant sums may have been expended by VA school governing bodies from their own funds on other work which is currently LEA liability. This ranges from fairly small projects that governing bodies would be able to undertake next year from their NDS Devolved Formula Capital, such as re-surfacing of playgrounds, to the replacement of antiquated and ineffective heating systems which they will be able to fund substantially from LCVAP.

7.  The consequence of the increased levels of investment that will be possible with higher baselines from 2002-03 onwards would be that the additional funding requirements falling on VA school governing bodies would rise significantly. This would result in a much greater proportion of the 5% increase in grant support being required to ensure cost neutrality. As can be seen from the following table, taking account of all factors, the 5% increase in the rate of grant support to VA school governing bodies would amount to £164,000. As the net increase in VA GB liabilities would be at least £133,000, a minimum of 81% of the extra grant would be needed to fund the liabilities changes. These revised results therefore indicate that a minimum increase of just over 4% in grant rate (to just over 89%) would be needed to achieve cost neutrality on an equitable basis in the future. Combined with the factors in paragraph 6, we therefore think that a more accurate estimate of the required increase would be around 4.5%. This reflects the lifecycle costing approach included in the tables in the Regulatory Impact Assessment.







External revenue repairs transfer from VA GB to LEA responsibility - effect on 'Formula Repair' projects (at existing VA GB contribution rate of 15%)




Switch of capital items from LEA to VA GB responsibility (at existing VA GB contribution rate of 15%)




Additional capital work not previously undertaken

(note 1)




Extra VAT following switch

(note 2)




Increased grant support (85% to 90%)

(note 3)




Revised total liabilities change





1. Assumed value of extra capital work based on table in paragraph 5

2. Allows for increased cost of VAT on additional capital work (VA GB increase is £10,000, DfES increase is £57,000)

3. The revised increased grant support of £164,000 (compared to £142,000) allows for the extra 5% on the additional capital work plus the related VAT. The total VA GB/DfES liabilities increase by £0.452m (£0.385m plus VAT of £0.067m) from £2.834m to £3.286m. There is no additional cost to central government arising from the increase in VAT liability (in fact, there is a small saving of £20,000 due to the additional VAT liability falling on VA school governing bodies).

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