SCVO Briefing - Scotland Bill Committee Stage, Second Day (Clauses 12-18, Schedule 1, Part 2)

Income tax and Gift Aid

Gift Aid is a relief on income tax that benefits charities and community amateur sports clubs (CASCs). Last year Gift Aid provided over £1 billion to the third sector in the UK. Given the sums involved SCVO calls for a specific commitment for Gift Aid to be considered as a priority alongside the devolution of income tax. Given that Gift Aid is deeply connected with income tax, SCVO is concerned that there is no mention of Gift Aid within the Scotland Bill alongside the devolution of income tax. This is a concern for any charity in UK or EU collecting Gift Aid from Scottish taxpayers. Moreover, it is a major concern for Scottish donors who use Gift Aid as, understandably,donors will want all their money to be gifted to the charity they have chosen, regardless of their Scottish taxpayer status. Without paying attention to Gift Aid under income tax devolution, the trust of donors in the Gift Aid system is at stake. To that end we note the proposed new clause NC20 from Ian Murray regarding a: 'review of operation of VAT refund schemes in Scotland'. SCVO would like to see the introduction of a clause which would allow for a review of the operation of Gift Aid as it relates to income tax in Scotland.

Differing tax rates

Gift Aid was designed to operate under a single coherent UK-wide income tax system. Beyond the broader concerns outlined above, the impact of income tax devolution on Gift Aid becomes a real concern with the prospect of differing income tax rate in Scotland to the rest of the UK. There is a very genuine and immediate prospect of this, as a 1% tax rise was mooted recently for 2016 by Scotland’sCabinet Secretary for Finance. Yet, under the current arrangements, Gift Aid would continue to operate at the (rest of the) UK income tax rate. As a result:

• The link between tax paid and donations received would be broken. Gift Aid was designed as a way of redirecting income tax directly to a charity. However, if Gift Aid were no longer a relief on tax in Scotland, it would in effect become a public spending measure, subject then to chops and changes made by the Government of the day.
• Under the current Gift Aid system declarations made by donors explicitly link Gift Aid to income tax alone. This is how Gift Aid is generally understood by the public and often introduced by, for example, visitor attractions that ask if you are UK taxpayer before raising the prospect of a Gift Aid donation. These declarations would become very confusing if income tax isn't connected to the Gift Aid claimed, particularly for low income tax payers (moving from 40-50% of taxpayers as the personal allowance rises).
• Tax payers that don’t reconcile their tax accounts through self-assessment forms, may find that they are over or under paying through the Gift Aid system. This could create difficult negations between UK and Scottish Governments as each try to seek compensation for subsidy or overpayment by the other.

In order to maintain the UK rate of Gift Aid against lower Scottish income tax rates, the UK Government could issue a cut to the Scottish Block grant, a cut to devolved services that is not sanctioned by the Scottish taxpayer or Scottish Parliament. Alternatively, the Scottish Government could seek compensation from the UK Government but without any ability or recourse to redirect this tax to the charities concerned. There are further uncertainties about tax status. For taxpayers who may have moved within the UK, it would be impossible to know if they were  classified as a Scottish taxpayer until the financial year end due to the Scottish Rate of Taxpayer residency rules. Yet Gift Aid is usually claimed by charities well in advance of the financial tax year end. It may also be impossible to track whether a Scottish taxpayer’s Gift Aid should be set at the Scottish or UK rate (should they differ) if they have mixed earned income with savings income (which will remain reserved). Without paying attention to Gift Aid, income tax devolution could create confusion and undermine the trust of donors, governments and charities in the coherence of the Gift Aid system. SCVO has been working closely with the Charity Tax Group on these issues, and would welcome further discussions with the UK and Scottish Government to ensure the implications for Gift Aid are given appropriate consideration.

VAT re-allocation and VAT rebates

Under the Smith Agreement and its translation into the Scotland Bill, 50% of VAT receipts generated in Scotland will be re-allocated to Scotland. This follows the principle that Scottish performance on generating VAT income is linked (at least partly) to devolved policy to support the Scottish economy. Under the previous Coalition Government, a number of VAT rebates for charities were enacted for academy schools, search and rescue services, museums, hospices and blood transport. These VAT rebates compensate for the irrecoverable VAT burden these charities face as a result of becoming a final end-user of services under European VAT regulations. Following the reasoning of the Smith Commission above, SCVO would argue that VAT rebates should be devolved so it better conforms to devolved policy to support society and public services. We provide the following arguments:

• Even though VAT rebates are public spending commitments and not connected to VAT receipts, they are being enacted in public service areas that are already devolved; health, emergency services, education, culture. They should therefore follow devolved public policy.
• This is a relatively easy measure to enact, as the UK Government could simply allocate a Barnett formula based share of the VAT rebates to the Scottish block grant. We accept that UK-wide organisations claiming the VAT rebate would need to disentangle their application for rebates for non-Scottish operations, but as this is already reflected in most accounts, this should not be administratively prohibitive.

Again we note clause NC20 in the name of Ian Murray. Although this relates specifically to the VAT arrangements for Police Scotland and the Scottish Fire and Rescue Service, we would like to see the clause amended in such a way that any review of VAT relief schemes in Scotland also looked at the application of VAT refunds to charities and as well as businesses in Scotland.

National Insurance

We note the new clauses NC39 & NC40  from Angus Robertson. AsNational Insurance is a form of income tax, it can be used to undermine devolved income tax decisions, something which was made evident during the Calman Commission discussions that led to the Scotland Act 2012. Therefore there is an argument that National Insurance ought to be devolved in order to ensure coherence with income tax devolution and in principle we would support such a move. However, National Insurance is also used to calculate entitlements to the second state pension and entitlement to some of the old forms of JSA and ESA that are still reserved through Universal Credit. Indeed, many people will have topped-up their NI contributions in order to secure their pensions. SCVO does not support the devolution of pensions, and therefore, due to the potential confusion and unintended consequences that may arise, we also do not support the devolution of National Insurance. Given the problematic nature of the link between pensions and National Insurance, SCVO seeks greater clarity on how this would work in practice. However, due to its link with income tax, SCVO would support an arrangement for any changes to National Insurance structure and rates to be subject to shared oversight and legislative consent from the parliaments to which income tax is being devolved.

Conclusion

It is clear from the draft clauses and the evidence gathered by the Scottish Parliament’s Devolution Committee that a lot of work will be required to make the current Bill proposals into coherent and effective legislation. In particular, as raised in this briefing SCVO is concerned about the impact of the Bill as it stands on the Gift Aid system. Therefore, we hope to further consideration of this issue as the Bill progresses given its significance to Scotland's third sector.

Contact

Ruchir Shah, Policy Manager Scottish Council for Voluntary Organisations, Mansfield Traquair Centre, 15 Mansfield Place, Edinburgh EH3 6BB Email: ruchir.shah@scvo.scot Tel: 0131 347 6158 Web: www.scvo.scot

About us

The Scottish Council for Voluntary Organisations (SCVO) is the national body representing the third sector. There are over 45,000 voluntary organisations in Scotland involving around 138,000 paid staff and approximately 1.3 million volunteers. The sector manages an income of £4.9 billion. SCVO works in partnership with the third sector in Scotland to advance our shared values and interests. We have over 1,600 members who range from individuals and grassroots groups, to Scotland-wide organisations and intermediary bodies. As the only inclusive representative umbrella organisation for the sector SCVO:

• has the largest Scotland-wide membership from the sector – our members include charities, community groups, social enterprises and voluntary organisations of all shapes and sizes.
• has democratic and accountable governance and membership structures - with an elected board and policy committee from the sector, we are managed by the sector, for the sector.
• brings together organisations and networks connecting across the whole of Scotland.
• SCVO works to support people to take voluntary action to help themselves and others, and to bring about social change.

Further details about SCVO can be found at www.scvo.scot