A government decision to encourage academies to take out loans for building work will add “fuel to the fire” of financial scandal, unions have warned.

The right for academies to borrow money was quietly revealed in the middle of a briefing published by the Department for Education during last week’s half-term holiday.

It will be introduced from April, according to the document, which notes that: “Academies are currently not permitted to take out loans without the permission of the secretary of state, which is rarely granted.”

In future, not only will academies and colleges be able to take out loans, for up to a maximum of 10 years, but the government will actively encourage them to do so, it explains.

The document says that those “choosing to take a loan will score higher” on the points system, used to decide whether they will receive money through the Condition Improvement Fund (CIF).

There is also encouragement to make the loans as big as possible. “A project funded 100 per cent through a loan will see a greater increase in score than a project funded 50 per cent through a loan and 50 per cent through a grant,” the briefing says.

Unions claim that the change could trigger further financial problems in academies and lead to schools running out of money as funding is squeezed and loan repayments are prioritised.

Christine Blower, general secretary of the NUT teaching union, said: “The accountability system for scrutiny of the accounting and financial arrangements of academies and free schools is dysfunctional, as evidenced by the numerous financial scandals that have occurred.

“Without proper oversight arrangements, encouraging academies to get into debt is potentially adding fuel to the fire.”

The DfE said the loans would be available only to academies with budget surpluses and clean financial bills of health.

But headteachers’ leaders are still concerned about the impact of loan repayments that have to be made through deductions from the main “revenue” funding the school or college receives from the government.

They warned that the introduction of a national school funding formula after the 2015 general election was likely to mean that some academy budgets would shrink.

Malcolm Trobe, deputy general secretary of the Association of School and College Leaders, said academies would also be have to pay increased national insurance and pension contributions and were “facing an unfunded pay rise next year and potentially in future years”.

“We would certainly not recommend that academies take out loans under these circumstances because there is no guarantee of their sustained income levels over the next few years,” he said. “It would not be a sensible thing to do. We know that funding is going to be extremely tight.”

Sixth-form colleges are already able to take out loans. But James Kewin, deputy chief executive of the Sixth Form Colleges’ Association, said that some of his members were worried about their repayments on existing debt because changes to 16-19 funding were going to lead to a “drastic” reduction in their income from 2016.

“There is certainly a nervousness,” he said. “Some sixth-form colleges are looking into the financial abyss.”

Mr Kewin welcomed the fact that lending under the new scheme would come from the Public Works Loan Board, which offers lower interest rates than the open market. Sixth-form colleges currently have to borrow at higher commercial rates.

But he said that by allowing academies to borrow, the government had removed its only remaining justification for not exempting sixth-form colleges from paying VAT, in the same way that academies and other state-funded schools are exempt.

The DfE said there was still a distinction because academies could not borrow on the open market. But Mr Kewin said sixth-form colleges were “increasingly unwilling or unable to” borrow at higher market rates in any case.

“Their position on the VAT anomaly is completely indefensible,” he added. “We don’t think students should be penalised based on where they choose to study.”

Non-academy schools will not be able to borrow through the CIF or on the open market. But they can sometimes borrow from their local authorities or get advances on capital funding.

A DfE spokesperson said: “To help academies get access to the funding for maintenance and improvement of buildings they can now choose to borrow from the Condition Improvement Fund at a favourable rate - with zero interest for energy efficiency projects.

“All loan repayments will be cycled back into the fund, meaning other academies will continue to benefit once the loan has been paid.

“The Office for National Statistics categorises sixth-form colleges as private sector organisations and, as such, they are liable for VAT. Academies are classed as public sector organisations and are not.”

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