Ministers are wrestling with the impact of legislation that says organisations cannot continue as charities if they are not independent of government.

Colleges are subject to some direction by government, such as ministers’

right to remove boards in the event of financial mismanagement. The Scottish Executive would either have to change the law or make colleges exempt.

But, in her address to the Association of Scotland’s Colleges conference, Ms Hyslop said: “We are looking at the ministerial controls in the legislation to see if what was set out in 1992 is still relevant in 2007.

“We recognise the importance of charitable status to FE colleges, not least in financial terms, and we will work with the sector to achieve a satisfactory outcome.”

The potential loss of tax and rates relief, if colleges were removed from the charities register, would cost colleges many millions.

Roger McClure, chief executive of the Scottish Funding Council, said this would be a “disaster” and he hoped common sense would prevail.

The funding council will be hoping that its pre-conference announcement, which confirmed that Scotland’s colleges are financially secure, will provide reassurance that colleges are capable of looking after their own affairs.

All but two of the 43 colleges - Inverness and James Watt - recorded an underlying operating surplus by the end of July 2006, the deadline for achieving financial security. This compares with the 2000-01 financial year when 34 colleges were in deficit to the tune of pound;18 million. Mr McClure said it was important college management boards were now trusted to sort out their own problems.

Ms Hyslop said she regarded spending on colleges as an investment. The first report from the Review of Scotland’s Colleges showed that for every pound;1 spent on FE, there was a return of pound;3.20 for society as a whole. “That’s a very conservative estimate,” she said.