Scotland Bill

Wayne David Excerpts

Monday 29th June 2015 Commons Chamber

[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.

[Wayne David (Caerphilly) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Crausby.

The Smith commission’s report was very clear about VAT, particularly in paragraph 84. The Government have spelt out in the Bill how this arrangement will work in practice. The Opposition support the Government in implementing this part of the Smith agreement, but we have a real concern about the position of Police Scotland and the fire and rescue service in Scotland. A number of organisations have expressed concern about VAT relief schemes in Scotland, and I very much hope that the Government will accept our new clause 20 and that the review will be sufficiently broad based to cover a wide range of organisations, including charities.

I wish to focus my remarks on the situation, which has already been referred to in part, regarding Police Scotland and the Scottish Fire and Rescue Service. Surprisingly, none of the 43 police forces in England and Wales, or the Police Service of Northern Ireland, pays VAT—not even the National Crime Agency has to pay VAT—but both Police Scotland and the Scottish Fire and Rescue Service do. There is widespread indignation at this unfairness in Scotland. Sir Stephen House, Scotland’s chief constable, has said, in unambiguous terms:

“It simply isn’t correct. It is not right. It’s unfair and it shouldn’t be allowed to continue”.

The eight police forces and the eight fire and rescue services, before they were amalgamated, were exempt from VAT, but now Police Scotland has a huge annual bill—a bill that is unfair and unique in the whole of the UK. At a time when Police Scotland has no alternative but to make significant cuts, it is a liability that every year it has to put forward a forfeited bill of about £10 million—the figure for the Scottish Fire and Rescue Service is approximately £11 million.

Why has this situation arisen? The Government’s position was spelt out in some detail in a letter to Cathy Jamieson, the then Member for Kilmarnock and Loudoun and shadow Economic Secretary to the Treasury, on 9 March. The letter from the Financial Secretary explained that the fire and rescue service, and by implication Police Scotland, pays VAT on the taxable goods and services it purchases, but because these bodies cannot recover VAT through the system in the same way businesses do, there are special schemes in place. He then explained that there are two schemes relevant to fire and rescue services. The first, as set out in section 33 of the 1994 Act, made sure that VAT is not a cost borne by local taxation. There are two criteria for inclusion in this scheme. First, the body must undertake a local government function—and the Treasury did accept that was the case with the Scottish Fire and Rescue Service. Secondly, the Treasury claimed that the body must have the power to draw funding from local taxation. The Scottish Fire and Rescue Service is funded directly by the Scottish Government rather than through any legal call through local taxes. Hence, the Government have argued that a “key condition” of the section 33 VAT refund scheme does not apply.

That was the first refund scheme, but there is a second one, which is for Departments and the NHS. It is doubtful whether the Scottish Fire and Rescue Service would be in a position to claim refunds on outsource services, but the Treasury made it clear that the Scottish Fire and Rescue Service would not be eligible in principle because it is not a “central government” Department. To be honest, those reasons might be technically valid, but they are also morally suspect and unjustifiable. I am a great believer in the saying, “Where there’s a will, there’s a way.” Clearly, the situation in Scotland with regard to the Scottish Fire and Rescue Service and to Police Scotland is an anomaly, which applies to only one part of the United Kingdom.

I very much hope that the Treasury can muster the wherewithal to address that anomaly, and to do it through our proposed new clause 20.

[Dr Philippa Whitford (Central Ayrshire) (SNP)]

I note that Highways England and London Legacy, which was created after the Olympics, have both been granted VAT exemption. They also fall into the same group. Surely Highways England is in exactly the same boat, yet it is given VAT exemption. We are not talking about something that is chiselled in stone or set in concrete, so surely it can be changed.

[Wayne David]

Well, things can be changed through political will. As I have said, where there is a will to make that change, a change can be made. A way can be found, if there is the desire to do so. I very much hope that the Government listen carefully to what has been said this evening.

I must say that something else worries me, too. I refer again to the letter to Cathy Jamieson from the Financial Secretary. The penultimate paragraph says:

“In 2011 the Scottish Government were explicitly advised of this potential consequence of changing from regional police forces to a single authority as part of the proposed revised funding model for Police Scotland. At the time they took the decision to make these reforms they would have known they would no longer be eligible for the VAT refunds as a result.”

There we have it in black and white: the Scottish National party Government were warned that their plans to reorganise emergency services would, in effect, cost millions in VAT refunds. Yes, cost savings might have been made; but they knew the situation and they were prepared to see that loss occur. They still pressed ahead with their plans. This is in part a mess of the SNP’s own making, compounded by an indifferent and apathetic Tory-led Government here in Westminster. The sensible thing surely would have been for the Scottish Government and the UK Government to have come together and sort out this problem before Police Scotland and the Scottish Fire and Rescue Service were constituted on an all-Scotland basis. That is the common-sense thing that should have happened. But that is in the past.

[Callum McCaig (Aberdeen South) (SNP)]

Will the hon. Gentleman enlighten this Chamber as to whether the situation we have here is what the Labour party has in mind when it talks about the pooling and sharing of resources?

[Wayne David]

The hon. Gentleman is really stretching things to try to make that point. What I am suggesting is that for devolution to be effective, there needs to be a consensus, a coming together or an agreement on the best way forward. I quoted an excellent example. Both services would have materially benefited if both the Government of the day and the SNP Government had had the wherewithal to come together and work things out sensibly.

[Dr Whitford]

The SNP Government had written extensively to the Government to try to deal with that issue. Is the hon. Gentleman suggesting that Police Scotland and the Scottish Fire and Rescue Service should have been left in eight divisions?

--- Later in debate ---

[Wayne David]

No, of course not. What I am saying is that it would have been far better if the Government in Scotland and the Government in London had sat down maturely and worked things out for the benefit of services in Scotland rather than pursue a fixation with the idea that things had to be brought together on a centralised basis in Scotland, irrespective of the consequences. The Government were absolutely adamant on this. Presumably they could not find parliamentary time, or did not have the political inclination to bring forward an amendment to have a scheme that would have benefited everyone.

The sensible thing would have been to do precisely what I have said, but that is in the past. The important thing now is to move forward and resolve this situation. Our proposed new clause 20 calls for a review of the situation. It is a modest request, which I very much hope that the Government will accept. If they do accept it, it could provide an opportunity for everyone to get together and, hopefully, resolve the issue.

It has been suggested by the Scottish Council for Voluntary Organisations that VAT rebates should be devolved so that they better conform to devolved policy to support society and public services. A suggestion has been made that the UK Government could allocate a Barnett formula-based share of the VAT rebates to the Scottish block grant. That is one possibility, but, like all the other suggestions, it needs to be soberly and carefully discussed. It could be a part of the review that we propose. I hope that the Government will accept our amendment so that we can have that meaningful discussion and reach a decision for the benefit of Scotland.

[Stewart Hosie]

It is a pleasure to take part in this debate on clause 15 stand part and proposed new clause 20 in the name of the Labour party.

Let us turn to the way that the Smith commission has spoken about the assignation of a proportion of VAT. It said:

“The receipts raised in Scotland by the first 10 percentage points of the standard rate…will be assigned…All other aspects of VAT will remain reserved.”

The Scottish Parliament Information Centre analysis for the Scottish Parliament Devolution (Further Powers) Committee referred to it in its interim report on the draft Scotland Bill clauses. It said:

“Draft clause 13 [now 15] would give effect to the Smith Commission recommendation that the Scottish Government be assigned receipts from the first ten percentage points of VAT. With the agreement of both governments it also proposes to go slightly further by notionally assigning 2.5 percentage points of the reduced rate of VAT as well…The amount of VAT receipts attributable to Scotland is to be the subject of an agreement between the UK Government and the Scottish Government.”

It did point out that there are no draft clauses in relation to the corresponding adjustment to the block grant. Hopefully, the Minister will confirm that that does not require legislation. In effect, the Scotland Bill proposes the assignation of half of VAT receipts to the Scottish Parliament. However, that will provide no actual control of VAT.

The Devolution (Further Powers) Committee had no particular concerns with the draft clauses, but it did want details of the assignment of VAT revenues and the share of any benefits to be produced—the mechanics of the assignment—before the Scottish Parliament could be expected to give its legislative consent. The committee said:

“There is still significant uncertainty on how the assignment of a share of VAT revenues will be calculated and whether the Scottish Government will be able to reap the rewards of any economic stimulus that yields higher VAT revenues.”

It is also worth noting that the Devolution (Further Powers) Committee’s analysis paper, which set out the differences between the draft clauses and the published Bill, noted that:

“No further detail is provided on the assignment of VAT revenues, or the corresponding block grant adjustment.”

There are a number of technical issues for consideration notwithstanding the fact that there is no particular issue with the legislation as such.

The committee’s interim report considered the evidence on VAT assignment from a range of sources. It said that the bulk of the evidence received by the committee, while welcoming the principle, called for greater clarity in how the assignment of revenues would work. As the Institute of Chartered Accountants of Scotland told the committee:

“Clause 13 in the ‘Draft Scotland Clauses 2015’ regarding VAT delivers the mechanics of the assignment of VAT, but with the large caveat that it applies ‘where there is an agreement between the Treasury and Scottish Ministers’...The rules for agreeing this have not been provided and it may not be easy to identify ‘Scottish VAT’”.

I take on board what the Scottish Secretary said earlier about not giving a running commentary, but on that specific point—and I shall have more specific questions—at least I hope we can get clarity.

In oral evidence to the Scottish Parliament committee, Charlotte Barbour of ICAS elaborated:

“The assignment of VAT offers more opportunity for discussions on how that might be calculated. It slots in with the difficulties with the fiscal framework”—

we discussed those in the last debate—

“and some of the no-detriment issues”—[Scottish Parliament, Official Report, Devolution (Further Powers) Committee, 5 February 2015; c. 4.]

I mentioned those previously. The Scottish Trades Union Congress was broadly supportive of the assignment of VAT. Its deputy general secretary told the Committee that

“I am quite a fan of assigned revenue”,

but he took the point that

“it is not a power in the sense of being usable to promote particular behaviours”.

However, he said:

“A degree of assigned revenue clearly rewards the Scottish Government for economic growth and, in our view, the closer we get to an amount of revenue that is derived from positive actions undertaken by the Scottish Government, the better.”—[Scottish Parliament, Official Report, Devolution (Further Powers) Committee, 15 January 2015; c. 13.]

I do not think that any of us would disagree with that. We want responsibility, which rather prompts the question that given that there is no control over VAT, why assign only half of it? Why not assign it all? The Scottish Government could then quite rightly benefit, if there was a benefit, from the entire rise in VAT in Scotland rather than just half of it and could take responsibility if there was a shortfall, not just for half the shortfall.

Speaking to the committee, John Swinney, the Cabinet Secretary for Finance, Constitution and Economy, highlighted two issues for discussion with the UK Government, which are both important:

“One is establishing the analytical base for how VAT should be apportioned and the other is the policy question of guaranteeing that if those estimates are exceeded, Scotland retains the benefit of that improved economic performance”.—[Scottish Parliament, Official Report, Devolution (Further Powers) Committee 12 March 2015; c. 26.]

The former Secretary of State for Scotland also commented on the issue of VAT in a letter to the Committee, in which he said that he could

“confirm that VAT assignment will link the Scottish Government’s budget with economic activity in Scotland, providing incentives for growth. The amount of VAT to be assigned…will be based on an estimated share of the total VAT generated in the UK...The UK and Scottish Governments will need to agree a methodology”.

Will the Minister provide further details, not on the specific discussions with the Scottish Government but on the themes? What are the options for how VAT will be assigned? Will it, for example, be a consumption-based approach? How can we improve the robustness of the measure and the timescales, for example by improving the survey data? What will be the costs of implementation and how will they be met? Does there need to be a proxy measure over a transition period until the methodology is robust? Has any thought been given to indexation and comparable measures of growth? What has been said about governance and accountability, for example developing a separate strand to the memorandum of understanding with the HMRC on VAT to expand the role of the project board?

The question of the robustness of the survey data is vital. At present, VAT is estimated by the Scottish Government in the Government Expenditure and Revenue Scotland report, based on a household survey of expenditure, therefore missing tourism spend entirely. That is corrected by a percentage share adjustment, meaning that the Scottish Government estimate what percentage of UK tourism happens in Scotland, but if the Scottish Government managed to increase tourism spend through other actions, such as reducing air passenger duty, that would not show up according to the current methodology. We therefore need to agree a new robust methodology and, perhaps, an interim measure until that methodology is in place.

As the Minister has said, VAT cannot be varied within a state and we understand and respect that. So let me repeat the question: why give only half rather than all, unless to camouflage the fact that the tax over which Scotland will have control will be such a small share of our tax base? Could the assignation of VAT revenue be designed simply to make that number seem a little bigger?

Let me turn to new clause 20, on the subject of VAT on Police Scotland and the fire service. We heard the hon. Member for Caerphilly (Wayne David) describe the amendment, which proposes a review of the application of the VAT refund scheme for business in Scotland. It has been tabled with the intention, it would appear, of addressing the anomaly of the inability of the Scottish Police Authority and the Scottish Fire and Rescue Service to reclaim VAT. Although we agree that that is an inequitable position for both services, we do not necessarily believe that a review is the way to address it. Instead, the UK Government—as the hon. Gentleman said, where there is a will, there is a way—should simply amend the VAT status of the single police service and fire and rescue service in Scotland.

There are some technical issues with the new clause. VAT is UK-wide, so any review could not be confined solely to Scotland. Proposed subsection (1) requires a review of VAT refund schemes for “businesses” but there is no business VAT refund scheme as such. Subsection (2) would make the VAT refund scheme applicable to central Government bodies that sit outwith EU law but are the subject of an EU-wide consultation process. The reference to Police Scotland should instead be to the Scottish Police Authority, which is the legal entity and VAT-registered body; Police Scotland is the part of the SPA relating to police officers. However, notwithstanding all of that and the fact that the new clause simply proposes a review, it never does any harm to find out that what we thought we knew was correct—

[Wayne David]

rose—

[Stewart Hosie]

In a moment. We think that the better approach to fix the problem might be through a forthcoming Finance Bill after the Budget in July, but nevertheless we are happy to back the new clause today if Labour presses it to a vote.

[Wayne David]

I was going to ask the hon. Gentleman if he was going to support us, but he has pre-empted me. It is very good that he will, because, of course, the SNP did not table an amendment on this issue. I thank him.

[Stewart Hosie]

We did not table an amendment because there was not an amendment that we could table to fix the problem. As I have just said, that requires an amendment to a Finance Bill. One might have thought that an experienced old hand like the hon. Gentleman might have known that and advised his younger and less experienced colleague, the shadow Secretary of State, on how things work. Having said that, and that we are happy to support new clause 20, I will sit down and hopefully we can move on.

--- Later in debate ---

[Mr Gauke]

But the reason for that is the decision that the Scottish Government took, with full information. This did not come as a surprise or as an unexpected consequence of a decision. It was a decision that the Scottish Government made, fully informed and understanding the situation. I am not criticising the decision because, according to the business case made by the Scottish Government, the benefits far outweighed the costs. But the costs were there and identified to the Scottish Government in advance.

[Wayne David]

I am sure the Minister would acknowledge that devolution is based on mutual respect. With the benefit of hindsight, does he agree that it would have been far better if the Government here in London and the Scottish Government had sat down and worked out a way forward?

[Mr Gauke]

A request was made of the UK Government and we provided information on what the position was. As I was saying a moment ago, there are many calls for an expansion of section 33 and the refund scheme. The cost of the scheme being widely expanded could be substantial. At a time when there are considerable constraints on the public finances, we have to be careful about responding to every request and claim, however reasonable it might be.