Following the Barclay Review and a subsequent consultation, the Scottish Government is moving forward with the Non-Domestic Rates (Scotland) Bill. The Bill is currently at stage 1 of the legislative process (scrutinising the general principles of the Bill) and the call for evidence recently closed.

In relation to the third sector, arguably the most controversial change is the removal of the eligibility from mainstream independent schools to claim charitable relief from non-domestic rates.

In our response to the call for evidence, we opined that we believe there is insufficient justification for independent schools to be singled out as the only type of charity to have non-domestic rates relief denied under the Bill, contrary to a long-standing approach by previous governments and parliaments that charities should all be treated equally for tax purposes. This argument against what will essentially create a two-tier system in Scotland is shared by the Office of the Scottish Charity Regulator (OSCR).

Charity Tax Commission report

Against this background, I reviewed the Charity Tax Commission’s recent report titled ‘Reforming Charity Taxation – towards a stronger civil society’. In a nutshell, the National Council for Voluntary Organisations (NCVO) commissioned a review of the tax reliefs available to charities, and the Commission concentrated on the three reliefs which together make up the greatest value: Gift Aid, VAT and (spoiler alert) non-domestic rates.

The report was accompanied by a research report containing the Commission’s statistics on tax reliefs; HMRC charity tax statistics for 2017/2018 show that non-domestic rates resulted in just over £2.1 billion of tax relief for charities, making up approximately 38% of the total £5.1 billion of reliefs. It is the greatest relief received by charities, especially when you compare it to Gift Aid, which made up approximately 23%.

Ignoring the fact that non-domestic rates is a devolved issue in the UK, and the limited information obtained by the Commission related only to English local authorities, the report made some interesting points:

  • Unsurprisingly, charities in the education sector benefit the most, with the average relief at £86,000 per charity, the caveat being that independent schools often have large grounds which somewhat skews that statistic.
  • Property and property-related costs are commonly the second greatest expenditure for charities, after salary costs.
  • Compared to other tax reliefs, the administration and processing of non-domestic rates is considered relatively straight forward and not cumbersome or onerous for charities.
  • The lack of consistency evidenced by local authorities in their criteria when applying the discretionary element of the relief creates unnecessary, and arguably avoidable, problems.
  • Some charities are forced to choose between benefiting from the relief or setting up a wholly-owned trading subsidiary to comply with the trading rules and losing the rates relief.

The Commission made the following recommendations:

  1. consult on extending non-domestic rates relief to wholly-owned charities trading subsidiaries as they believe it ‘runs counter to the spirit of rate relief legislation and is an unintended consequence of the charity trading subsidiary model’; and
  2. provide clearer guidance and a standardised application process for rates relief, particularly in relation to the discretionary element of the relief.

Looking to the future

As I was reading the Commission’s report, the idea for this article struck me. However, to my equal delight and dismay, the Commission made the points for me in section 2 of the report! Arguing that a long-term review of non-domestic rates relief is required, the Commission noted that educational charities (ie independent schools) generally benefit most from non-domestic rates relief: ‘this finding will inevitably fuel the continuing debate around what constitutes charitable activity and what causes are deserving of tax reliefs. This is illustrated by current moves by the Scottish and Welsh Governments to review rates relief for private schools.’

The Commission also said (here is the kicker):

It is our opinion that if certain activities are not deemed to be charitable, steps should be taken to modify charity law, rather than create exemptions. In other words, if the real issue is whether these organisations should be charities in the first place, this would be better addressed by amending the charity test conducted by the Charity Commission, rather than subjecting certain charities to a financial penalty. Further, there is a danger that facilitating the creation of a two-tier charity sector by withdrawing rates relief for certain organisations could potentially damage the charity ‘brand’.

In the event that non-domestic rate relief is extended to trading subsidiaries of parent charities, the removal of the relief from independent schools becomes even more of an anomaly and would underline the creation of the two-tier charity system in Scotland. However, any change to the status of trading subsidiaries is not in the immediate future; by the time it comes into force (if it ever does), the Non-Domestic Rates (Scotland) Bill will be an Act, we will have different classes of charity for rates purposes and we might be consulting on amendments to the Scottish charity test.

Further help

If you have queries about how non-domestic rates might affect you or your charity, contact our Charity Law team at or call us on 0131 228 8111.