There has been a mixed response to the publication of the major review of non-domestic rates - also known as business rates - with some welcoming its proposed reforms and others expressing concern about the impact some of the more controversial recommendations may have on their operations.
In this briefing, we consider the key recommendations and their potential effect on a range of bodies from ALEOS to independent schools, universities and sports clubs. As a result of issues arising from the recommendations in the Barclay Review, we can assist charities and charitable bodies assess their business plans, financial strategy and financial performance.
The long-awaited Barclay Review was commissioned by the Scottish Government in 2016 “to make recommendations that seek to enhance and reform the non-domestic rates system in Scotland to support business growth and long term investment and reflect changing marketplaces", while remaining revenue neutral. The resulting report contains 30 wide reaching recommendations for reforming the business rates system in Scotland, some of which have been welcomed.
The report does, however, set out some controversial recommendations which could have a significant and potentially detrimental impact on Scotland’s independent schools, its universities and “arm’s length external organisations”, charitable bodies created by local councils to carry out and deliver services which the council used to provide. These bodies are known as ‘ALEOS’.
Under the present rates system, a registered charity which occupies property used in accordance with its charitable purposes will qualify for mandatory rates relief at 80%. Each local council has the discretion to increase this relief to 100% should they so wish. This rates relief also applies to community amateur sports clubs and sporting facilities. This relief is largely funded by the Scottish Government.
The Barclay Review and ALEOS
ALEOS can cover a wide range of activities, from the provision of sports facilities, leisure centres, community centres, to libraries and museums etc. The Barclay Review makes the following comments about ALEOS:
- That councils have created ALEOS in order to take advantage of the rates relief position. As the cost of the rates relief is largely met by the Scottish Government, this allows each council to gain additional funding from the Scottish Government as well as their allocated funding. The Review considers this to be tax avoidance which should cease. If the council were still providing these services directly, it would be required to pay rates relief.
- That some councils have a greater number of ALEOS than others. This means that some councils are liable to pay what can be a significantly higher rates bill than other councils. This creates an unfair distinction between councils.
- That ALEOS create unfair competition between the public and the private sector. It gives the example of rate paying private gyms and leisure facilities that are competing with equivalent ALEO facilities receiving rates relief. It also states that some ALEO facilities offer cafes, retail outlets, venue hire etc which gives the ALEO an unfair advantage when compared to private sector businesses that offer the same or a similar service.
- That ALEOS should not be eligible for Sports Club relief if rates relief is removed. Sports Club relief is considered below.
The Review recognises that these far-reaching changes will require primary legislation in order to be properly implemented. In the meantime it suggests that the Scottish Government could cut each councils’ budget by the appropriate amount of rates relief claimed in order to achieve an immediate saving. It recommends that these changes apply from 1 April 2018.
The Barclay Review and Independent Schools
The Review notes that state schools do not qualify for rates relief and therefore pay rates, whereas independent schools which are charities receive rates relief. The report considers this to be unfair and unequal. As a result, it recommends that rates relief for independent schools should be removed.
The loss of rates relief should be manageable for most independent schools resulting in a small increase in expenditure for the larger schools, but smaller schools may find it more challenging. The increase would be passed on through an increase in school fees. We would anticipate that realistically, the earliest any rates change may occur is 2020 to allow for possible transition phasing, which will give independent schools more time to prepare. The response of the independent school sector will be interesting, but in the longer term we do see an opportunity for the independent school sector to potentially negotiate significant change which may ultimately include an ability to cease having charitable status altogether should this be desirable, in a way that would allow assets to be controlled by the institution without OSCR involvement as is the present situation.
We also consider that the legal issues surrounding state aid, human rights and potential consequences for the Scottish educational system of qualifications are all factors which may suggest that there is good reason for the Scottish Government to be willing to sit down and discuss implementation of the report with the independent schools sector.
The Barclay Review and Universities
Universities are recognised charities which qualify for rates relief. The report recommends:
- That the core functions of universities, which include education, research and development should continue to be eligible for charitable relief. This reflects the key role that universities play in supporting economic growth by educating the workforce and supporting innovation.
- That in the interests of fairness and equality, the commercial elements of the university should not be liable for rates relief where they compete with the private sector. It considers the example of university residential properties, such as halls of residence and self-catering flats. It agrees that they should receive rates relief when occupied by students during term time, but when let on a commercial basis outside of term times, they are operating in direct competition with local hotels and hospitality businesses and should therefore pay rates. This would also apply to commercial activities which include renting out venues for non-university conferences and other functions. It suggests that rates relief is apportioned in for multi-use university owned properties which carry out both forms of activity. How this would operate in practice remains to be seen.
The Barclay Review and Sports Club Relief
The report supports a review of the tax position of sporting facilities in Scotland. This is to ensure that rates relief is only provided to local community based sports facilities, rather than to members clubs which can hold significant assets. It states that such members’ clubs should not be entitled to rates relief and that this is an unintended effect of the current legislation. The report gives as an example two prestigious private members golf clubs in Scotland which receive substantial rates relief, one of which is owned by Donald Trump.
The report suggests that the Scottish Government should review the recipients of this relief and consider reforming the relief, possibly by merging it with the Small Business Bonus Scheme. This is to ensure that local community sporting facilities remain fully supported with rates relief.
Aims of the Barclay Review recommendations
The Barclay Report tackles only non- domestic rates and does not seek to challenge the charitable status of ALEOS, independent schools and universities. In making these changes, it claims to seek to reduce scope for tax avoidance, inequality and unfairness and create what the report refers to as “a more level playing field”.
It estimates that carrying out these proposals within the charity sector will save the Scottish Government at least £50 million per year, of which approximately £45 million will come from ALEOS, and around £5 million from independent schools. The changes to Sports Club relief would result in an additional saving of around £3 million per year.
We would strongly emphasise that at this stage, the suggested changes to the charity sector are only recommendations. Ultimately it will be up to the Scottish Government to decide whether or not it wishes to implement all or part of these recommendations, and if so, how to introduce them. The changes could be introduced using a phased approach over a number of years, or implemented more rapidly.
For those charities potentially affected, this report comes as a significant blow, even although it is not yet clear how much of the report the Scottish Government will seek to implement.
In the meantime, the trustees of any affected charity should take this opportunity to review their business plan, financial strategy and financial performance as a matter of urgency in anticipation of possible change. This will form part of the good governance of the charity and the effective management and mitigation of risk.