Colleges have been warned they could be breaking the law if they act on advice from their local learning and skills councils when claiming cash from the European Social Fund.

The Association of Colleges is issuing urgent advice to all colleges after it was revealed that some local councils are advising colleges to include non-ESF students alongside bids to the fund - worth around pound;450 million nationally - in order to balance the books.

The advice follows a reform of the bidding system requiring colleges to match the funds they claim from Brussels for courses in deprived areas. Under the old scheme, the ESF paid 45 per cent and the then Further Education Funding Council gave the rest.

Under the new system, to improve local planning, colleges bid through the LSC, not direct to Brussels. However, European bureaucrats still want evidence of matched funding, so some local councils have told colleges to include other students as “theoretical ESF students”.

John Brennan, director of FE development for the AOC, said this was a misapplication of the fund. “There is no such thing as a theoretical ESF student. We would be concerned at any suggestion that colleges claim such money for a student who was not funded this way,” he said.

But the LSC nationally insisted the approach was valid. A spokesman said:

“Everything is agreed with the ESF division of the Department of Works and Pensions and DFES Joint International Unit. It is endorsed by them and they are our co-financiers.”

However, college principals have also told FE Focus that, such legal issues apart, the red tape behind the Euro-bidding system was so complex that many were pulling out. One West Midlands college was sending back pound;250,000 as it was “near impossible” to calculate its entitlement.

“We cannot believe it will pass audit muster or that auditors are even aware of the LSC approach,” the principal said. “Sadly, we are returning about pound;250,000 that we could, but dare not, claim.”

Other managers report that the system has generated a “new mountain of bureaucracy”, undoing much of the good done by the LSC this year.

Thomas Rotherham College has pound;175,000 ESF money for 16 to 19 enhancement such as key skills, IT and student support. But to meet the matched-funding demands, it will include as “theoretical ESF” students all others on courses of more than 60 hours.

Maurice Patterson, finance director, said the ESF was irrelevant to these students. “But the evidence for matched funding requires us to put about 400,000 individual student entries into our database - all done manually - just to satisfy bureaucrats.”

Costs are considerable. Thomas Rotherham has spent pound;17,000 on support staff for the purpose. South Birmingham has deployed five staff and Sheffield must recruit two to three extra staff.

Alan Birks, principal of South Birmingham, which has pound;2m ESF money, said: “Many colleges are getting close to saying ‘many thanks but no thanks for the money’. Is it all really worth it?”