Colleges that refuse to convert into academies in England are being denied funding worth more than £100m a year at a time when many of them are desperately short of cash, an analysis has revealed.

Sixth form and further education (FE) colleges that are not academies – state schools independent of councils – are missing out on a funding boost worth 3 per cent of their income as they are not eligible for a government VAT refund scheme, the report found.

The “learning tax” is costing colleges under local authority control nearly £100m a year at a time when the college sector has faced significant funding cuts over the past decade, the research by the Liberal Democrats concluded.

The same council-run colleges also lose out on the teachers’ pay grant – introduced by the government to cover some of the costs of a pay rise for teachers in schools.

Currently only colleges that convert to 16-19 academies are given the grant. Last year, colleges lost out on £25m because of this rule.

Layla Moran, education spokesperson for the Liberal Democrats, said: “Successive governments have left our colleges and sixth forms underfunded and unloved.

“Students are being taught fewer subjects for fewer hours. Class sizes are going up. Support for the most disadvantaged students is woefully inadequate.”

The Lib Dems say they would abolish “learning taxes” that council-run colleges face as part of a £1bn investment package for the sector.

Sixth form and further education colleges run by councils would become eligible for the VAT refund scheme and Teachers’ Pay Grant for the first time under the plans.

It comes as the Treasury has announced that colleges will benefit from a £400m funding package – with the 16- to 18-year-old funding rate increasing for the 2020-21 financial year.

But unions and organisations that represent colleges say the announcement does not address the anomalies that colleges face if they are not an academy.

FE colleges and sixth form colleges will continue to pay VAT and miss out on the Teachers’ Pay Grant, whilst school sixth-forms and 16- to 19-year-old academies do not have to pay VAT and they’ll receive the grant.

Julian Gravatt, deputy chief executive of the Association of Colleges (AoC), said: “It is wrong that sixth form colleges lose out on so much public funding if they decide not to convert.

“There are several reasons why colleges decide that conversion is not for them, including the fact that it makes it harder for them to diversify by offering adult education courses and training apprentices. The Department for Education should support them in that decision.”

Kevin Gilmartin, post-16 and colleges specialist at the Association of School and College Leaders (ASCL), said: “All colleges should be exempt from paying VAT and should also be eligible for the teachers’ pay grant to help fund salary awards in the 16-19 phase.

“Unfortunately, there is nothing in the recent government announcements which ends the current iniquitous situation and penalises many colleges.”

Bill Watkin, chief executive of the Sixth Form Colleges Association, added that the “funding inequality” between schools and colleges must be addressed.

He said: “As colleges do not have their VAT costs reimbursed and are not eligible for the teachers’ pay grant, they have significantly less funding to spending on the front line education of students.

“All young people should receive the right level of investment in their education – irrespective of where they choose to study.”

The Liberal Democrats’ proposals on sixth form and further education colleges will form part of a motion to be debated at the party’s annual conference in Bournemouth next week.

A Department for Education (DfE) spokesperson said: “The government has announced a £400m increase in 16-19 funding in the 2020-21 financial year in comparison with 2019-20 budgets. This is the biggest year-on-year increase since 2010, and will have great benefits for sixth form colleges.

“As independent organisations, sixth form colleges are free to choose whether to apply for conversion to academy status. We have recently simplified the application procedure, with input from the Sixth Form Colleges Association and in July we published updated guidance on how to apply.”