The Scottish government’s decision to remove business rates relief from independent schools with effect from 2020 will create a major inconsistency within the charity sector, writes Gavin McEwan.

Business rates 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 Scottish government’s decision to single out one part of the charity sector for removal of relief, however, creates a new divergence in Scotland on how these reliefs have been applied for several decades.

The removal of rates relief from independent schools flowed from the Review of Non-Domestic Rates chaired by Kenneth Barclay which was reported on in August 2017. The Barclay Review suggested that providing rates relief to some charities was creating unfairness and inequality in the system. As well as commenting on universities which let student accommodation on a commercial basis outside of term time, the Review also identified 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 receive 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 decided to focus solely on removing relief from independent schools.

The Scottish government’s implementation plan reported 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 said that they were “unconvinced about the principle” of the current arrangements applying to independent schools, although they did not seem particularly convinced that local authority tax avoidance (as Barclay described it) should be dealt with quite as rigorously. This sends out a curious message from government, particularly at a time when deliberate tax avoidance is otherwise 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 position. They individually presented clear cases to the Office of the Scottish Charity Regulator (OSCR) 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. Quite apart from the delivery of education in itself, they each ensure facilitated access to their benefits through a range of different measures. Those measures include scholarships and bursaries, sometimes amounting to total fee-remission for deserving pupils, and other ancillary access to facilities which is of benefit to the wider community. The clear message from OSCR was that independent schools meet the charity test. It is by virtue of meeting that test that independent schools qualify at all for relief from business rates – on the same basis as Scotland’s other registered charities.

It is fair in general terms to expect that 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 the 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.