SCOTTISH colleges fear they could lose millions of pounds under a change in the law that prevents them building up reserves of private cash.

Around one-quarter of the income generated by colleges in Scotland – some £200 million – comes from private sources such as commercial activity and overseas students.

As private bodies – despite their considerable public funding – colleges can currently keep such income and either hold it in reserve or reinvest it.

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But that will no longer be the case after a decision by the UK Office of National Statistics (ONS) to reclassify institutions as full public bodies.

That means from April next year, private reserves will be treated as public money and could be clawed back by the Scottish Funding Council.

The Westminster Government and the Welsh Government have already bowed to pressure on the issue and are expected to pass legislation exempting colleges, but the Scottish Government has decided against a similar move.

The issue comes at a difficult time for colleges, which are facing cuts to their teaching budgets and a major restructuring, which will see a series of mergers along regional lines.

John Henderson, chief executive of Colleges Scotland, which represents the sector, warned the changes could prevent institutions working with business.

"The ONS decision to reclassify the further education sector has the potential to have a significant impact on colleges in Scotland," he said. "For example, moving colleges out of the private sector could both restrict and act as a disincentive to colleges continuing their commercial and inter-national activity, which benefits both employers and learners."

Michael Russell, the Education Secretary, described the UK-wide changes as "unwelcome and unhelpful", but stressed the Government would work with the sector to resolve the issue.

"This is a complex and technical issue that has the potential to disrupt the way colleges manage their budget," he said.

"We are absolutely committed to working with the sector to make the changes required by the decision from ONS, but in a way which minimises their negative impact.

"The Scottish Government has offered full support to the sector, through the Scottish Funding Council, to identify solutions which mitigate the risks this decision creates by placing colleges within the public sector budgeting and accounting rules."

A Scottish Government spokeswoman said examples of public sector bodies, such as the Scottish Qualifications Authority and Historic Scotland, which were already generating additional income from private sources, would be used to help devise a solution for colleges.