Colleges in Scotland could establish charitable trusts as a way to avoid losing reserves and financial surpluses, according to a paper from the Scottish Funding Council (SFC).
Many in the sector fear that colleges could lose money at the end of every financial year once they are reclassified as public bodies by the Office for National Statistics (ONS) next year.
But in a paper circulated by the funding council last week, obtained by TESS, college leaders were told that the use of arm's-length charitable trusts could aid the management of reserves and surpluses over more than one year.
Several Scottish colleges currently already use charitable trusts, which operate "alongside the college board of management" to hold funds for particular projects, the report said. "The trust is a registered charity and is not consolidated in the college's financial statements", it added. The university sector already makes use of similar set-ups.
According to the SFC paper, the Office of the Scottish Charity Regulator has confirmed that there is nothing preventing colleges from setting up charitable trusts "as long as they are properly constituted".
There also appears to be "no barrier to reserves and surpluses being transferred over to the trust and back to the college from where they originated", it said. The SFC's project team will now test further the feasibility of colleges using trusts and produce guidance on how to implement them.
Colleges have been concerned that they will have to give their surpluses back to government because of their reclassification as public bodies.
Trusts are not the only tool that colleges may be able to use to mitigate the reclassification, the SFC says. The project team is exploring other solutions, such as possible "flexibilities" in the Scottish government's budget management arrangements, as well as the possibility of adjusting the profile of the monthly grant payments to colleges by the SFC.
But one college principal, who did not want to be named, said that setting up a trust would require additional red tape. This would involve "time and money which should be better focused on maintaining services in these cash-strapped times", the principal said.
"What the sector really needs is a mechanism which would allow us to retain the flexibility and entrepreneurial activity we have. We want the ability and the responsibility to return a surplus and accumulate reserve balances which would be available to the college when it needs them."
Education lawyer Michael Royden, a partner at Thorntons law firm, said the uncertainty around the reclassification and its impact was the main concern for many colleges.
"At the very least, there is going to be a major change in current accounting practices, but there are larger, unanswered concerns that colleges' ability to raise, manage and use their own reserves will be compromised," he said.
The SFC guidance should be reviewed by all colleges, Mr Royden said. Because each college's individual circumstances varied, he said colleges should then seek legal advice on their case.
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