Major education service providers, including Nord Anglia, the Centre for British Teachers, and Vosper Thorneycroft, have all had contracts terminated.

All the cuts have been made since February, when the Government ordered the 47 local Connexions partnerships in England to make savings of pound;25 million. Connexions partnerships were urged to avoid disrupting frontline services by finding the money by reducing their VAT liability and becoming more “tax efficient”.

Private providers believe that it is as a result of the tax request that they have been axed, as they have to charge VAT for their services, while Connexions partnerships are not liable for it.

Neil McIntosh, chief executive of CfBT, said his company has lost two contracts totalling more than pound;6m with Berkshire and Bedfordshire. He said delivery of careers advice would suffer. “It remains to be seen if the changes will be in the best interest of young people or if they will enhance service performance,” he said.

He is convinced that the instruction to make VAT savings had a significant impact on the decision by both Berkshire and Bedfordshire to end the contracts with CfBT, a not-for-profit education company with a turnover of pound;120m a year.

Mr McIntosh explained: “Berkshire met as a board within two weeks of the VAT problem becoming apparent and took the decision to give notice to CfBT.

They subsequently said that the adoption of an in-house model would prove advantageous. They did not provide information to support that belief and had no criticism of our performance or service delivery.”

Bedfordshire’s position was slightly different. He feels that the VAT issue “spurred them into action they may have already wanted to take”.

Nord Anglia has lost three contracts in Greater Manchester, where Bolton, Bury and Stockport local authorities have taken over its Connexions work.

Liam Duffy, chief executive of Nord Anglia’s Lifetime Careers group, said:

“The VAT changes are not the reason why we lost these contracts because the process was set in motion before the changes were announced, but they certainly didn’t help.

“It is more to do with anti-private sector sentiment. We invested a great deal in service delivery and it has been taken over with no compensation.

“The VAT decision is very damaging to the private sector. It provides more ammunition to those who want to run direct delivery organisations rather than work with private partners,” he said.

Carolyn Caldwell, executive director of the National Association of Connexions Partnerships, said: “The VAT situation triggered some partnerships to look at how they were delivering the service and to see if it could be made more efficient.”