Controversial proposals to reform Scotland’s business rates are expected to get the go-ahead from ministers.
A review led by former Royal Bank of Scotland chair Ken Barclay recommends scrapping rates for nurseries but making private schools and council-owned sports and leisure centres start paying.
But the plan sparked warnings that the viability of the city council’s arms-length organisation Edinburgh Leisure would be at risk.
The review follows widespread concern about the impact of a revaluation – the first since 2010 – earlier this year. In February, the Scottish Government was forced to announce an extra £44.6 million package of business rate reliefs for the hospitality sector and office premises in the north-east.
Mr Barclay said: “We have highlighted unfair advantages gained by anomalies within the system, and of those who deliberately avoid payment of tax. Neither is fair.”
He said the proposed measures were essential for the rates system to remain credible for ratepayers and 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.”
Finance Secretary Derek Mackay promised a “swift” response from the Scottish Government. He said: “This report offers recommendations for reform of the system to make it work better for ratepayers across Scotland while ensuring that the contribution they make to important local services is maintained.”
Labour welcomed the proposed relief for nurseries but said making rates payable on leisure centres would impose another burden on hard-pressed councils.
A city council spokesman said: “We have noted the recommendations contained in the Barclay Review and await the Scottish Government’s response.”
Universities could be forced to pay rates when they use venues commercially or let out accommodation outside term time.
The review said they should keep their rates relief in general because of their role supporting economic growth through education and innovation.
But it said universities competed with hotels and hospitality businesses without paying business rates.
“For fairness and equity, these commercial elements of the university should be liable for rates where they compete with the private sector.”
Edinburgh University said it already paid business rates on several properties which were used wholly for commercial activity.
A Universities Scotland spokesman said: “At this stage it would be difficult to assess the potential impact of these proposals but it’s important to remember that the long-term sustainability of some events spaces and halls of residences is predicated on commercial revenue outside of term-time.”
Nurseries say it will be “wonderful” news if the proposal to give them 100 per cent relief from business rates is accepted.
The Barclay Review says the recommendation comes as a bid to make childcare more affordable and help parents back to work.
After the revaluation earlier this year, the Evening News told how the City and Little City nurseries in Morningside faced a 55 per cent increase in their rates bill from around £42,000 to over £65,000.
Manager Kelly Culbard warned at the time that prices would have to rise as a result.
Today, Iain Finnie, owner of Links Nurseries Ltd, which includes City and Little City, welcomed the Barclay recommendation.
“If they implement this recommendation it’s wonderful news,” he said.
“It’s a huge burden. I have had to put the increased cost onto childcare.
“We should have increased it by six per cent, but we had to minimise it to four per cent.
“Next year we have the workplace pension in place and the increase in the minimum wage, but the good news is that if this relief was introduced we would not need to have an increase in next year.”
The review says the introduction of 100 per cent relief should happen as soon as next year and would cost around £7 million per year.
The report says: “We believe that one of the most important ways to supporting economic growth is ensuring that the workforce is supported by convenient, affordable and accessible childcare.
“This applies to carers of young children across the public, private and third sectors.
“Although rates are only one overhead for this sector, we believe a reduction in the rates burden may help enable more of the workforce to return to work after starting a family.”
It adds that the 100 per cent relief should be evaluated after three years to ensure that benefits of the relief have been felt, including by parents and carers.
The Capital’s council-owned leisure service could face a cash crisis with plans to end business rates relief for local authority arms-length organisations.
Edinburgh Leisure, which runs more than 30 sports centres and swimming pools across the city, would be landed with a bill for millions of pounds under the rates reform proposals.
And city Tories today warned the move threatened the business viability of the organisation.
The Barclay Review says the use of arms-length organisations (ALEOs) is “tax avoidance” and should be stopped.
It says: “If the council itself were still providing a service directly, it would pay rates, but by creating an ALEO rates relief becomes available and the cost of that relief is then met by the Scottish Government. This allows councils to gain additional funding from the Scottish Government outwith the usual funding arrangements.”
The report says the current arrangement also creates unfair competition, with rate-paying private gyms competing with rates-free ALEO facilities.
“On the grounds of fairness, we believe there should be a ‘level playing field’ and council ALEOs should no longer be able to abuse the system.”
But Tory group finance spokesman Graham Hutchison said the plan to remove rates relief from Edinburgh Leisure was a “major concern”.
He said: “The report talks about unfair competition, but at the same time there is a presumption the council has a duty to deliver leisure facilities to its citizens. There has to be some kind of balance there to allow that to happen. Any change to the status of Edinburgh Leisure in terms of business rates jeopardises its ability to operate as a viable business.”
The proposals would also affect East Lothian’s arms-length organisation Enjoy Leisure.
June Peebles, chief executive of Edinburgh Leisure, said: “The priority for Edinburgh Leisure is to keep abreast of developments and discuss with the council.”
Small business leaders are delighted with the recommendation of a one-year pause before rates rises take effect after properties have been improved or expanded.
They also welcomed the proposed 12-month rates break for new properties.
Gordon Henderson, of the Federation of Small Businesses in Scotland, said the report had taken on board many concerns which they had aired.
“A lot of what we asked for is in there,” he said. “We spent years highlighting the problems businesses raised with us about improvements to property.”
The report describes the measure as a Business Growth Accelerator.
Mr Henderson said: “The government is looking for ways to encourage small businesses to go for growth and create jobs for the future. One of the things you can do is stop disincentives.
“At the moment if you have a small industrial unit and you decide to make some green improvements – put solar panels on top and a windmill at the back – your business rates will go through the roof. Or if a small restaurant adds an extension to create a new dining room, it will cost a fortune but your rates bill will triple.
“This proposal will give some incentive to businesses to invest that money, grow the business, create jobs and you will get a year to trade before your rates are affected. It’s a grace period.
Mr Henderson said rates were the second biggest bill for businesses after employment costs and he welcomed the plan for more frequent revaluations.
Rateable values are currently meant to be reviewed every five years, but the latest revaluation was delayed twice.
“Having a three-yearly revaluation will allow business rates to reflect better what is happening in the market,” said Mr Henderson.
Fees at private schools are likely to increase if the independent education sector is stripped of its business rates exemption.
The review points out that as charities, independent schools benefit from reduced or zero rates bills while state schools do not qualify for any relief
and normally do pay rates.
It says: “This is unfair and that inequality should end by removing eligibility for charity relief from all independent schools.”
The report said independent schools would still retain charitable status and other benefits would continue to flow from that.
Cameron Wyllie, principal of George Heriot’s, where fees are around £12,000 a year, said he believed state schools ought to be given rates relief too.
But he said: “It seems a slightly artificial distinction to say you should retain charitable status but lose charitable relief on business rates. That’s an ugly half-way house.”
He said if Heriot’s had to pay business rates it would be “burdensome” on the school’s budget.
And he continued: “The result would be one of two things – fees going up, which has the effect of making private schools more ‘elitist’, or our free and subsidised places for children from poorer backgrounds would become more limited.”