Scotland Bill

Debate between David Gauke and David Crausby

Monday 29th June 2015 Commons Chamber

[The Temporary Chair (Mr David Crausby)]

With this it will be convenient to discuss:

New clause 20—Review of operation of VAT refund schemes in Scotland—

‘(1) The Treasury shall, within six months of the day on which this Act is passed, publish and lay before the House of Commons a review of the application of VAT refund schemes for businesses in Scotland.

(2) The review must include an analysis of the impact of the qualifying criteria for the VAT refund schemes—

(a) in Section 33 of the VAT Act 1994, and

(b) for Government Departments and the NHS,

on the level of VAT payable by Police Scotland and by the Scottish Fire and Rescue Service.”

Following the amalgamation of the (formerly regional) Scottish fire and rescue services and Scottish police forces into a single fire service (the Scottish Fire and Rescue Service) and a single police force (Police Scotland) respectively, they are no longer eligible for VAT exemptions under the VAT refund schemes mentioned. This amendment requires the Treasury to carry out and publish a review of the schemes in Scotland, and in particular in relation to the level of VAT payable by Police Scotland and the Scottish Fire and Rescue Service.

[The Financial Secretary to the Treasury (Mr David Gauke)]

Clause 15 makes changes to ensure that a proportion of the VAT that is attributable to Scotland may be assigned to the Scottish Government’s budget. The Smith commission set the objective that more devolved spending in Scotland should come from tax raised in Scotland. Control over setting VAT rates is not being devolved to Scotland, because EU VAT law does not allow for differential VAT rates within a member state. The changes made by clause 15 will, however, ensure that a proportion of the VAT that is attributable to Scotland may be assigned to the Scottish Government’s budget. Clause 15 sets that proportion at the first 10 percentage points of the standard rate of VAT and the first 2.5 percentage points of the reduced rate of VAT. On the basis of current VAT rates, that would be exactly half, representing, very approximately, £4.5 billion.

Clause 15 will link Scotland’s share of VAT to economic activity, providing incentives for the Scottish Government to promote growth. The Scottish Parliament and Scottish Government have considerable levers to do this, for example on skills and education policy, and it is now for them to set out how they will do that. Assigning VAT to Scotland’s budget will strengthen the financial responsibility of the Scottish Parliament, and strengthen its ability to pursue its own visions, goals and objectives.

Let me say just a word or two about new clause 20, although I am sure the hon. Member for Caerphilly (Wayne David) will be saying more about it shortly. It requests a review of VAT refund schemes in Scotland, with a particular focus on how they affect Police Scotland and the Scottish Fire and Rescue Service. In 2012, Police Scotland and the Scottish Fire and Rescue Service restructured in order to streamline and modernise. As a result, eight local police and fire authorities became one. The restructuring stopped the duplication of support services, potentially saving £130 million, according to the Scottish Government. Like other people and organisations, fire and rescue services and the police pay VAT on the taxable goods and services they purchase, but because they are largely not engaged in business activities they cannot recover this VAT through the VAT system in the same way as businesses do. However, there are, in certain clearly defined circumstances, existing schemes that refund some or all VAT.

Section 33 of the Value Added Tax Act 1994 was introduced to ensure that VAT is not a cost borne by local taxation. There are two long-established criteria for inclusion in this scheme. First, that a body must undertake a local government function—we accept that the successor bodies of the former fire and rescue service authorities do this. Secondly, the body must have the power to draw funding directly from local taxation. The Scottish Fire and Rescue Service is funded by the Scottish Government rather than through any legal call on local taxes, and so does not fit under that criteria. In 2011, the Scottish Government were explicitly advised of this consequence of changing from regional police and fire services to a single authority. The expected benefits in the Scottish Government’s business case far outweigh the loss of any VAT refunds, and so the Scottish Government understandably continued restructuring with that in mind. The restructuring was the decision of the Scottish Government, made with the full knowledge of the VAT consequences of their decisions. This is a historical request and is not a matter that the draft clause regarding VAT assignment should address. Having set out the background, in anticipation of the arguments we may hear from the hon. Gentleman, I urge him not to press his new clause to a Division.

--- Later in debate ---

[Mr Gauke]

It is kind of the hon. Gentleman to say that I am being helpful. In the spirit of continuing to be helpful, let me say that I certainly hope that that will be the case, but of course agreements will require both parties to act in a co-operative way, which I have no reason to doubt will be the case.

With those remarks, I hope that the Committee will support clause 15 and that I have said enough to persuade the Labour party not to press new clause 20.

Question put and agreed to.

Clause 15 accordingly ordered to stand part of the Bill.



Clause 16

Tax on carriage of passengers by air

Question proposed, That the clause stand part of the Bill.

[The Temporary Chair (Mr David Crausby)]

With this it will be convenient to discuss the following:

Clause 17 stand part.

That schedule 1 be the First schedule to the Bill.

Clause 18 stand part.

[Mr Gauke]

Clauses 16, 17 and 18 implement the Smith commission’s recommendations by fully devolving two taxes: air passenger duty and the aggregates levy. Those taxes will be switched off in Scotland and the Scottish Parliament will then have full competence to maintain, redesign or scrap them. The changes made by clauses 16 and 18 will switch off APD in Scotland and give the Scottish Government the power to charge their own tax on passengers departing from Scottish airports. The Scottish Government will be free to make their own arrangements with regard to the design and collection of any replacement tax. Alongside that, funding for the Scottish Government will be reduced by an amount equivalent to the APD that would have been raised in Scotland.

Clauses 17 and 18 and schedule 1 make changes to ensure that the UK aggregates levy can be fully devolved to Scotland. The Smith commission agreement stated that there would be full devolution of the levy to Scotland following resolution of the legal challenges against the levy. The changes made by clause 17 will give the Scottish Parliament the power to charge a tax on the commercial exploitation of aggregate. The clause also introduces schedule 1, and together they enable the existing UK levy to be disapplied to Scotland. These provisions allow the Scottish Government freedom in the design and implementation of any tax on the commercial exploitation of aggregate in Scotland.