The Scottish Public Sector – What next after the Scottish Elections?

Against the backdrop of a post-Brexit and post-Pandemic landscape, the 2021 Scottish Elections have taken on a very different emphasis. Looking at the manifestos of the five main political parties, not unsurprisingly, in addition to the inevitable consideration of Scotland’s Future; “Recovery” and “Rebuild” are the key themes. I have considered these manifestos from the viewpoint of their impact on the Scottish Public Sector.

Obviously, the constitutional question is are most of the policies for Scotland’s “Future” focus. A second independence referendum would potentially change the shape of public sector in Scotland quite significantly. However, as that is an issue for after a “Yes” vote, it is something we can park for the present.

Social Housing

In the year in which the COP26 climate conference is to be held in Glasgow, the environment and the move to net zero green targets are other “Future” aspects which feature prominently in the manifestos. One of the key green initiatives is decarbonising the heating of homes across Scotland. Implementation of this strategy will impact on Housing Associations and Local Authorities.

In addition, looking at the “Rebuild” element of the manifestos, there is a recognition across all parties of the need to increase the number of affordable and social housing units in the next parliament. Again, the development of significant volumes of affordable housing will impact on Scotland’s social housing sector.

National Infrastructure

In addition to housing infrastructure, there are significant commitments to other elements of the national infrastructure; from broadband to Scotland’s roads and railway networks. Whether it is bringing rail services into public ownership, the creation of a National Infrastructure Company or upgrading Scotland’s transport infrastructure, each of the manifestos promise actions which will impact on different sections of the Public Sector.

National Care Service

Following the publication of the Feeley Report in February, the case for a National Care Service is being taken up by three of the five parties and, as there is likely to be a majority of the MSPs coming from parties that support a National Care Service, it is almost certain that this is an initiative that will move forward in the next few years.

Throughout my career in VAT in Scotland, I have seen structural changes designed to improve service delivery across the Public Sector. In some cases, the taxation implications of these changes are recognised and, where possible, addressed in legislative changes.  However, all too frequently, concerns about the loss of a beneficial VAT or tax status are not fully addressed leaving agencies in Scotland in a poorer VAT recovery position than their counterparts elsewhere in the UK. Consequently, in my view, it is the proposal to create a National Care Service that is likely to have the greatest impact on the Public Sector.

NHS Scotland and Local Authorities

 The formation of the Integration Joint Boards (IJB) following the Public Bodies (Joint Working) (Scotland) Act 2014 brought the NHS in Scotland together with the Local Authorities to better plan the approach to adult social care.  However, as the IJBs are not commissioning bodies, the impact on delivery was limited and the delivery of these care services was largely unchanged.

For Local Authorities, this involved the same mixture of in-house provision and the direct commissioning of services from the private and voluntary sectors.  Increasingly, a significant element of the welfare services provided by these external providers is subject to VAT.

As a Section 33 body for VAT purposes, for local authorities, any VAT incurred on the provision of these adult social care services was fully recoverable.  Consequently, whilst these services are commissioned by Local Authorities, it is neutral whether they are delivered in-house or outsourced to external providers, VAT is not a cost to the provision of these services.  Providers across the UK have taken advantage of the Local Authority’s beneficial VAT position to restructure their services in a more VAT efficient manner.

Cost Implications for nationally funded bodies

One thing we know from previous examples where local provision through Local Authorities is consolidated into national delivery through a national body; any VAT benefit available to Local Authorities does not necessarily transfer to the newly formed national body.  Whether it was Scottish Environment Protection Agency assuming responsibility for the functions exercised formerly by the River Purification Boards in 1996 or, more recently, the creation of the Scottish Police and Scottish Fire and Rescue Service in 2013, the loss of Section 33 status can have significant cost implications for nationally funded bodies.

After lengthy lobbying, the Police and Fire services were subsequently added to the list of Section 33 Bodies in 2018. Whatever the service delivery improvements that may arise from the National Care Service, attention would be needed to ensure that a similar loss of VAT recovery does not arise as a result of the commissioning of these services being passed to the IJBs or direct to a National Care Service.  Losing VAT recovery would potentially make the provision of social care in Scotland on occasions 20% more expensive than similar services elsewhere in the UK.

As the result of the election on May 6th becomes clearer, the need for the taxation implications of policies such as the creation of a National Care Service needs to be fully considered. From my experience of negotiating the original agreement with HMRC for the VAT recovery mechanism for NHS bodies and local authorities as a result of the integration of social care budgets, the earlier that any necessary discussions with HM Treasury and HMRC commences, the better.

If you have any questions or would like to find out more information, please get in touch with  Alistair Duncan or your usual AAB contact.

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