Scotland Bill

Debate between Wayne David and David Gauke

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.

--- 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.