The Scottish Government recently published its decision to remove business rates relief from independent schools with effect from 2020. This decision, if enacted, will create a major inconsistency in relation to business rates within the charity sector for the first time in several decades. The relief, which is currently given at a mandatory rate of 80% and with an additional discretionary 20% exemption available at the option of individual local authorities, has been available until now to all registered charities in Scotland.
The decision to remove rates relief from independent schools in Scotland flows from the Review of Non-Domestic Rates chaired by Kenneth Barclay which reported in August 2017. The Barclay Review suggested that providing rates relief to some charities was creating unfairness and inequality in the system. The Review commented in particular on universities which let student accommodation on a commercial basis outside of term time, independent schools and arm’s-length external organisations (ALEOs) as cases requiring reform.
ALEOs are charities established by local authorities for the purposes of delivering services – mostly culture and leisure services – and which, like other charities, receive business rates relief. ALEOs were created with a primary objective of escaping a charge to business rates, as councils themselves admitted to the Review. The Barclay Review stated unambiguously that this was “tax avoidance and should cease”. The explicit conclusion of the Review was clear: ALEOs should compete on a fair and level playing field with commercial providers of culture and leisure services, just as independent schools should suffer business rates in the same way that maintained schools do.
Rather than reforming universities’ reliefs, or tackling local authority tax avoidance through the creation of ALEOs, however, the Scottish Government has decided to focus solely on removing relief from independent schools.
The Scottish Government’s decision has created concern amongst civil servants, evidenced by documents released recently under the Freedom of Information Act. One particular released document said that,
“If the real issue is whether these organisations should be charities in the first place, this would be better addressed by … amending the charity test in the [Charities and Trustee Investment (Scotland) Act 2005], rather than subjecting [independent schools] to what is essentially a financial penalty”.
The Office of the Scottish Charity Regulator (OSCR) also commented in a briefing on the Barclay Review that “allowing the creation of a two tier charity sector” by revoking rates relief for schools “would be messy and could be damaging to the charity brand”.
The Scottish Government’s position is that the 2005 Act is not up for review at the present time, but the ‘financial penalty’ created through the removal of rates relief remains firmly on the agenda.
The Scottish Government’s implementation plan reports that independent schools would be able to afford to pay business rates in a way which is “fair and sustainable”, and that “all reliefs must be focused in line with priorities”. The Scottish Government have also said that they are “unconvinced about the principle” of the current relief arrangements applying to independent schools, although they did not show the same concern about local authority tax avoidance (as Barclay described it). This is a curious message from government at a time when other deliberate tax avoidance is receiving short shrift.
The principle on which charities are afforded relief from business rates has been long established. In a Report issued as far back as 1959, the Committee on the Rating of Charities and Kindred Bodies commented on the position with a focus on England and Wales, but setting down principles which were subsequently adopted across Great Britain. The Committee stated that it would require a strong argument to deny one group of charities relief, while all other charities would be treated more favourably. One might think that deliberate tax avoidance was a suitably strong argument for the removal of relief – but the Scottish Government appears to take an opposing view.
Independent schools worked hard to obtain their charitable status, and they continue to work hard to maintain that status. They individually presented clear cases to the Office of the Scottish Charity Regulator at the time of OSCR’s full review of the sector in order to demonstrate their charitable activity and the public benefit which they each provide and the message from OSCR was that independent schools do provide public benefit and meet the charity test. It is by virtue of meeting the charity test that independent schools qualify at all for relief from business rates – on the same basis as Scotland’s other registered charities.
It may be fair in general terms to expect those who can afford to pay a bit more tax should do so. What is not fair is to expect independent schools (or any other person or body which might otherwise be exempt) to pay tax simply because the Scottish Government thinks that they can sustain payments, while at the same time allowing local authority tax avoidance to continue. The Scottish Government’s implementation plan will create an inconsistency within the charity sector which does not presently exist, and which, in the wider charity sector context, lacks clear justification.
The proposal to remove business rates relief from independent schools in Scotland will require primary legislation to be passed through the Scottish Parliament. A legislative timetable for the proposed change is yet to be announced.
Gavin McEwan is a Partner and Head of Charities at Turcan Connell
Comment from South of the Border
As Gavin has outlined above, the Scottish government announced in its 2017 Winter budget that all business rates relief will be removed for independent schools. In England, a consultation looked at the charitable status of independent schools, and in particular what more might be expected of independent schools in benefitting children from a wider variety of backgrounds. It was proposed that independent schools would be expected to sponsor academies, set up a new free school, or offer more fully funded bursaries. The consultation paper stated that the Government would consider legislation to remove the benefits of charitable status from schools which did not meet new benchmarks.
Since then the Secretary of State has indicated that the government intends to continue to work closely with the Independent Schools Council to take forward the proposals for more independent schools to support state schools. A new System Partnership Unit was established in September 2017, aimed at supporting the independent schools sector to broker partnerships and relationships with the state sector. The Conservative Manifesto for the 2017 General Election stated that the leading independent schools would be required to sponsor academies or found free schools, and that they would work with the Independent Schools Council to ensure that at least 100 leading independent schools become involved in academy sponsorship or the founding of free schools in the state system. The Manifesto also expressed that they would keep open the option of changing the tax status of independent schools if progress is not made.
Labour on the other hand has criticised the voluntary basis of the arrangements, and in their 2017 Manifesto set out plans to introduce free school meals for all primary school children, paid for by removing the VAT exemption on private school fees. Whilst it appears no similar change in removing rate relief is anticipated in England, it is noted that the House of Commons published a briefing paper on charitable status and independent schools, including an analysis of the Scottish position, in September 2017. Further, it is clear that if Labour came to power, there would likely be significant changes in relation to relief for independent schools. The Independent Schools Council has emphasised the financial contribution made by the independent schools sector, highlighting also that the imposition of additional business rates would cause some independent schools to close, whilst others would be likely to have to cut back on bursary funding for low income families.