Councils accused of tax avoidance in major review of rates system

Council leisure centres, universities and private schools would be forced into paying business rates under reforms suggested in a major review.

Ken Barclay, the former RBS chief, accused local authorities of tax avoidance by delivering services such as gyms and cafes through arm’s length organisations (ALEOS) that attract charity relief.

He said exemptions for certain activities run by universities and independent schools are also unfair because they are unavailable to competitors.

The Scottish Government commissioned the review in March last year and said they would “respond swiftly” to the recommendations.

In a 140-page report, Mr Barclay also called for nurseries to be exempt from the tax and the supplement that large business pay to be reduced to the English level.

Mr Barclay said: “Any well-functioning tax needs to rely on principles of fairness. Increasing fairness and transparency will increase credibility from ratepayers.

“Ratepayers providing the same goods or services should not be treated any differently because of their location, or by virtue of them operating in the public or private sector.

“We have also highlighted unfair advantages gained by anomalies within the system, and of those who deliberately avoid payment of tax. Neither is fair.

“These measures are essential for the rates system to remain credible for ratepayers and to ensure revenues are not undermined by avoidance tactics.

“We are clear, this is not about penalising certain sectors, it is about compliance, fairness and transparency.”

The system came under fresh criticism earlier this year when some businesses saw their bills rise by up to 400% following a controversial revaluation of what premises were worth on the rental market.

Mr Barclay proposed more regular revaluations – every three years from 2022 – to help counter that.

He also said councils had been deliberately avoiding tax by using arm’s length external organisations to run services, including leisure facilities.

ALEOS are eligible for charity relief when directly-run services are not.

Mr Barclay said this is unfair on private operators and those local authorities that do not exploit ALEOS as much as others.

“This allows councils to gain additional funding from the Scottish Government out with the usual funding arrangements, a fact that was acknowledged by councils themselves as one of the primary
reasons they put services into ALEO status in the first place,” he said.

“This is tax avoidance and should cease.”

Gail Macgregor, from council umbrella body COSLA, said they “absolutely refute any suggestions that councils have deliberately avoided paying rates”.

She added: “We do not accept this. These are legitimate decisions and cannot be construed as avoidance.”

The review also recommends that reliefs for sports clubs are reviewed to ensure they support affordable community-based facilities “rather than members’ clubs with significant assets which do not require relief”, such as prestigious golf clubs.

It also calls for an evaluation of the effectiveness of the SNP’s small business bonus scheme, which means more than half of all businesses do not pay any rates at all.

Other recommendations include the introduction of a year’s worth of rates relief for those firms investing in expansion and reductions for shops to encourage them to stay in town centres.

Finance Secretary Derek Mackay said: “Having now received the Barclay Review, the Scottish Government will respond swiftly to its recommendations.”