The Barclay Review of non-domestic rates in Scotland has published its report, making a series of recommendations to the Scottish Government on changes that should be made to the business rates system, including one to remove the ability of independent schools and Arm’s Length External Organisations (ALEOs), as well as university buildings let out for commercial use outside term-time, to claim charitable rates relief. The Scottish Government has since responded (see below).

The primary aim of the recommendations is “to better support business growth and long term investment and reflect changing marketplaces, whilst still retaining the same level of income to deliver local services upon which businesses rely.” The report comes to the over-arching conclusion that some form of property tax is still an appropriate way to fund local services provided by councils, with the whole of society benefiting from the services they provide. It also sets out a proposed timeline, taking into account the fact that for various recommendations to be implemented, accompanying legislation would also need to be passed.

Noting that charity relief costs have increased significantly in recent years, the report suggests that a significant portion of this relief relates to ALEOs. It suggests that, on the grounds of fairness, there is a need to level the playing field where rate-paying organisations have to compete with ALEO facilities that benefit from at least 80 per cent rates relief (with some councils self-awarding the remaining 20 per cent discretionary relief). The prevalence of these situations, as well as the uneven distribution of ALEOs across Scotland suggests that some councils use ALEO status to gain additional funding from the Scottish Government outwith the usual funding arrangements. The recommendation is being made, therefore, to tackle this form of tax avoidance and stop councils from being able to abuse the system.

Similarly, the report notes that independent schools that are charities benefit from reduced or zero rates bills, whereas council schools do not qualify and will generally pay rates. It recommends ending this inequality by removing eligibility for charity relief from all independent schools. They will still retain charitable status and other benefits will continue to flow to them from that status.

The report also highlights a small number of examples where charity relief has been awarded incorrectly in Scotland to some of the trading arms of the parent charity. As part of its recommendation that the Scottish Government be responsible for checking rates relief awarded, to ensure compliance with legislation, it recommends that a formal review be undertaken of the provision of charity relief in specific areas, to ensure that relief ceases to be provided to charities’ separately established trading arms and to correct any errors which have arisen. While this is a question of compliance with legislation as it already stands, it remains to be seen exactly how many charities would be affected by any review.

The report also recommends that commercial elements of university operations (e.g. renting out halls of residence or self-catering flats commercially and renting out venues for conferences and other functions) outside of term times should be liable for rates where they compete with the private sector. They recommend that where a property is multiuse, the relief applied to educational or research and development should be set pro-rata to the number of whole day equivalents per year the property is used for those functions. Similar principles should apply when private student accommodation is let outside of term time to compete with local hotels and other accommodation providers to ensure a level playing field. The report also suggests that a more general exploration of the taxes paid by student accommodation is merited.

The authors of the report appreciate that the recommendations in this section may be controversial, but note that there is precedent elsewhere in the UK – in Northern Ireland, the established position is that certain educational, cultural and public sector bodies are prohibited from receiving charitable relief.

They note that in each case, it will be for the Scottish Government to decide whether to implement the recommendations in this section at once or to adopt a phased approach over possibly a number of years. They note that a phased removal of these reliefs would reduce the savings to be made which could not then be diverted to introducing measures which support both public and private sectors equally and have the potential to grow the economy. The report notes, for the avoidance of doubt, that removal of charitable status for any organisation is outwith the scope of this review and does not form part of this recommendation. All the organisations involved will of course continue to recieve wider benefits of charitable status such as Gift Aid or differential VAT treatment.

UPDATE: 12 SEPTEMBER 2017

The Scottish Government has confirmed that the vast majority of recommendations made by the Barclay Review will go forward, but in respect of the crucial section of recommendations on removing charity relief for certain recipients (including ALEOs, independent schools and accommodation by universities) Ministers believe “merit further thought and engagement”.

This decision is in line with recommendation number 8 in the Barclay Review that wherever possible the Scottish Government should consult on changes to the rates system in advance of these being implemented.

Finance Secretary, Derek Mackay, stated that he will aim to fully understand the impact of each of these individually, as well as any wider implications and possible unintended consequences, before outlining his position in an implementation plan due to be published later this year.

His full speech can be read here.

UPDATE: 28 November 2017

Following lengthy consultation with stakeholders, Finance Secretary Derek Mackay today confirmed that the Scottish Government will not be accepting the recommendation of the Barclay Review to end rates relief for ALEOs. The Scottish Government also announced that it will take steps to offset the charity relief benefit to councils from any new ALEO expansion in future.

Finance Secretary Derek Mackay MSP said: “In my response to the Barclay review I made clear that this was a recommendation that I wished to engage on before coming to a conclusion. In these discussions I have heard a strong and consistent message about the importance of this benefit to sports and leisure facilities and to keeping the costs of these services affordable especially in disadvantaged and vulnerable communities”.

UPDATE: 21 December 2017

The Scottish Government has also accepted all the remaining recommendations from the Barclay review of non-domestic rates, with the exception of the removal of charity relief entitlement for certain university properties and for ALEOs. This will mean that charitable business rates relief will be removed for private schools in Scotland, though the review makes no comment on their overall charitable status.

UPDATE: 26 June 2018 

The Scottish Government  has now published a consultation on how best to implement the proposed changes. Read more here.