Police Scotland, overspending and VAT – UPDATED

There’s been a bit of a furore this week about funding for Police Scotland.  First an SNP amendment to the Finance Bill which would have exempted Scotland’s centralised emergency services from VAT was defeated in the Commons; then the following day the Police Scotland finance report was released which gave details of a projected £25m overspend for 2015/16.

Predictably, all sides of the political debate have tried to make hay over this but detail was very light on the ground so I decided to take a look at the reports themselves and thought that providing some factual background may be as useful to others as it was to me.

Before I go any further, I’d just like to say that I’m not trying to make any comment on the performance of Police Scotland, nor the necessity or success of the centralisation programme.  Nor am I suggesting that Scotland’s emergency services should be liable for VAT.  Quite the opposite.  This post is aimed purely at fact-checking the claims that have been made.

The first thing to clear up, then, is that the VAT bill has absolutely nothing to do with the overspend.  Exemption from VAT would not free up any revenue budget for Police Scotland because the Scottish Government reimburse the VAT through a separate pot.

(NOTE – please see Addendum 2 at the bottom of this post for some discussion on use of term “exemption”)

The £25m overspend comes from “Revenue Budget”; at £985m it is the vast majority of the force’s budget. There is also a Capital Budget and a Reform Budget, the latter containing a £25.5m allocation for VAT funding.  So far this year, the Scottish Government have approved a virement of £16.9m from the Reform Budget – £8.9m to Revenue and £8m to Capital.

Revenue funding

The net impact on both Revenue and Capital budgets from VAT is therefore £0.  In other words, the Revenue Budget overspend would be exactly the same if Police Scotland was VAT exempt.  VAT does not contribute, nevermind cause, the overspend.

Frankly, I think the Scottish Government should get some credit for this.. They’ve identified that their choice has placed an additional burden on the Police and chosen to remove that burden by stumping up the cash.  Fair play.

Of course, no-one in the Scottish Government is accepting that it was their choice that has brought about this VAT bill.  Instead, they are blaming… you guessed it, Westminster.

This from Drew Hendry being a fairly typical response from the automaton Twitter accounts on Monday night:

Drew Hendry

Drew’s tweet is factually correct.  Our emergency services will be the only ones paying VAT. (EDIT – I was wrong, this is not true. See addendum below)  Of course, it might be sensible to understand why.

In 2013, Scotland’s 8 police forces were unified into one centralised Police Scotland, ostensibly as part of a necessary cost-saving reform but also in keeping with the SNP’s centralising philosophy.  The 8 regional forces had been exempt from VAT, along with every other police force in the UK, as they qualified for an s33 exemption.  This allows local authorities to reclaim VAT in an arrangement that has existed since VAT was introduced in 1973.

When the SNP proposed the centralisation reform, they entered discussions with the Treasury about VAT exemption.  That correspondence was released after a Freedom of Information request by UNISON (on appeal) and can be found here.  It is very clear, from both this correspondence and later discussions with the Treasury that the Scottish Government were more than aware of the VAT implications of the reform.

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The above excerpts from the correspondence and further letters from David Gauke, Exchequer Secretary to the Treasury, are very clear.  The VAT exemption was set up to prevent local taxation from paying national taxes.  As Police Scotland would not be funded from local taxation, this exemption clearly does not apply.  The Scottish Government appear to have simply been unwilling to amend their reforms to re-qualify for the exemption.

UNISON even suggested an alternative arrangement which would still see one unified force created:

The Scottish Government has held out the prospect of resolving the VAT exemption throughout the Bill process. It turns out that they knew at the outset that this would not be the case.

UNISON has argued that you could have a single police force established as local government joint board, funded through a precept and retain s33 status. Of course that would mean less direct ministerial influence over the police, but it would strengthen local democratic accountability.


But why should they change their plans?  After all, the Police Service of Northern Ireland (PSNI) receives an s33 exemption from VAT and they’re a national force, right?


The Scottish Government Cabinet Secretary for Justice there.  Of course, you might have expected him to have read the SPICe report to the Audit Committee on police reform which explained this in detail.


So the reason that PSNI are VAT exempt is that “central government” spending in Northern Ireland is treated as local authority spending and therefore meets the s99 exemption criteria; they trade this off for a 2.5% reduction to block grant increases.  So they do pay for it, it just comes off the top line rather than the bottom.  Odd that Mr Matheson failed to tell you that.

(I’m still looking into the National Crime Agency (NCA) exemption but it’s difficult to find details.  Any assistance would be greatly appreciated – EDIT: I found it, please see addendum below)

So we know the SNP were pre-warned that the unified force would not be VAT-exempt, that early discussions with the Treasury confirmed these warnings and that they refused to alter the funding arrangements to re-qualify.  Perhaps they believed that political pressure would tell and the Treasury would fold…

Of course, they could have just looked at recent case history and the Treasury’s hardline stance when the National Crime Squad sought a similar exemption.  The Treasury helpfully brought this to the SNP’s attention in their early correspondence.


“… strict enforcement… strict enforcement…”

So the SNP knew that a centralised force would not meet s33 criteria and that the Treasury would not only enforce this criteria but that they had a history of sticking to their guns… and being backed up by the courts.

And yet they decided to continue with the centralisation regardless.  That’s fine.  That’s their prerogative as a government.  They need to make tough decisions.  Perhaps they believed that centralisation would lead to cost savings that would eclipse the VAT bill (it has).

Were I being mischievous, though, I may suggest that a £25m VAT bill is a small price to pay for centralised ministerial control of the police force and a side order of grievance fodder for the nationalist cause is just a juicy added bonus…

Whether for grievance mongering or to throw a smokescreen over what could be perceived as a Scottish Government failure to control Police Scotland’s budget, it’s clear that the SNP are seeking to absolve themselves of any blame for this VAT debacle.  Personally, I’d like to see the Treasury find a way to dig the Scottish Government out of this mess; or at the very least provide a better justification for refusing an exemption.

A desire not to set a precedent for other public bodies to claim VAT exemptions is all well and good.  There may even be an EU regulation consideration as 0.3% of VAT receipts go to pay for the EU.  Some clarity would be appreciated as there are certainly dissenting voices with articles like this one suggesting that “the criteria are inevitably somewhat elastic”.

It should be clear, however, that the loss of the VAT exemption was a risk that was patently clear to the SNP before they embarked on their centralisation, a risk that was more likely to be realised than not and a risk for which a mitigation was offered.  It was a risk that the SNP were willing to take and one for which they should take their not-insignificant share of responsibility instead of, yet again, attempting to blame Westminster for their own shortcomings.


ADDENDUM – 14th November 2015

Two additions to the original article above: first, the reason for the NCA exemption and second, some further developments including reference to other services which are not VAT exempt.

At the time of writing the original article, I couldn’t find the reason for the NCA exemption, referenced by Scottish Government Cabinet Secretary for Justice Michael Matheson as one of the comparators for Police Scotland’s lack of exemption.  After a lot of wasted time, I’ve finally tracked down the reason for that exemption:


So “in general… input tax is not recoverable” but there are some elements for which refunds can be recouped under the Contracting Out Services exemption.  I had a quick look but it doesn’t seem possible from the publicly available data to ascertain how much, in cash terms, was refunded to the NCA.

So the SNP’s two great examples of the injustice done to Police Scotland are the Police Service of Northern Ireland, which receives a 2.5% reduction to its block grant to offset the VAT exemption (incidentally £25.5m anticipated VAT from a £985m Police Scotland revenue budget is 2.58%); and the National Crime Agency which “in general” cannot recover VAT.  In other words, neither comparison holds water.

Still, if you wanted to be pedantic, this tweet from the SNP on 12th November would be, strictly speaking, factually correct.

SNP lie

Except that no, actually, it’s not accurate.  Not at all.

For a start, it’s not the “Tory government” which charges VAT, it’s HMRC; but sophistry aside the crux of the argument is also incorrect.  Police Scotland is not the only force in Scotland, nevermind the UK, which pays VAT.  Which others?

Well there’s the British Transport Police…


… and the Ministry of Defence Police Force…


… and the Civil Nuclear Police Authority…


So at least three and I suspect that were I to really try then I would find more in the same boat.

There are two conclusions we can draw from that:

  1. The SNP are either lying or mistaken to the point of incompetent ignorance when they claim that Police Scotland is “the only force in the UK” which is charged VAT
  2. These forces are three further pieces of evidence the SNP should have been aware of when embarking on their centralisation programme in this manner – further evidence that the Treasury would apply the rules as they told them they were going to.

Either they did know that the VAT exemption would be refused or they should have known.

Was it simply a display of Salmond’s hubris – expecting that the Treasury was simply bluffing or, dare I say it, scaremongering?  Or was it more calculated – that the Treasury’s refusal could be used to generate more anti-union grievance?  You can make up your own mind about that; for now it is sufficient to establish a few facts in the face of the SNP’s misinformation.


ADDENDUM 2 – 15th November 2015

Throughout the post above, I have used the layperson’s term of “VAT exemption”.  After posting the update yesterday, I was advised that this is not the technically correct term to use.  My thanks, therefore, to Heather Self, tax partner at Pinsent Masons, who brought this to my attention and even suggested this helpful link which provides full detail of public body VAT recovery written with all the appropriate legal jargon.

I have left the original text in the post partly because I think most lay-people like me will understand the intent and partly because I’m too lazy to go back and change it all 🙂

Nevertheless, I am grateful to Heather for the bringing this to my attention and would welcome any similar clarifications or corrections from subject matter experts.


6 thoughts on “Police Scotland, overspending and VAT – UPDATED

  1. Conscientious research as ever, Fraser – and I am confident I get the broad currents of the drift.

    It may be me, but for once in this blog of crytal and jewels, I found the detail of the reading quite hard work: the undercurrents, the cross-currents, the eddies and hidden depths (and hidden shallows, in places). My difficulty began quite early, at “… because the Scottish Government reimburse the VAT through a separate pot.”

    Now, the multiple detail complexity is not a function of your writing, as far as I can tell, but reflects the unusually layered nature of the issue, and what one might call its “complex financial and political arrangements”.

    Alternatively, I might just be having a “dense day”, and I should stop knitting my brow, and try again tomorrow! :o)

    In any case, many thanks from me for your continuing dedicated work:

    a) in bringing such important issues to light;
    b) in giving them due study and careful reflection; and
    c) in bodying forth the results in well-wrought, rationally sound prose and, even at (this reader’s) worst, an overall clarity of argument and conclusions!


    1. Thanks Peter. Perhaps I can clarify.

      The Police Scotland budget is split into three elements – the Revenue Budget which pays for the day-to-day spending you’d expect; the Capital Budget which pays for new infrastructure; and the Reform Budget which is a unique budget that creates a pot of money for expenditure required by the move from 8 forces to 1.

      Police Scotland can only use the money in the Reform Budget by making an application to the Scottish Government to transfer a requested amount into either the Revenue or Capital budgets for specific items. Within this Reform Budget there is a £25.5m pot for VAT charges. So the allocation is completely separate to the Revenue and Capital budgets.

      The report states that the Revenue budget is anticipating a £25m overspend and, as you can see from the table in the article, there is a £0 net impact of VAT on that budget as it is completely reimbursed from the Reform budget.

      Now, if the Reform budget didn’t exist or there wasn’t a necessity to include a £25.5m VAT allocation in it, it is possible that the Scottish Government would just add that sum to the Police’s Revenue budget. But given that there hasn’t been a sub-£200m underspend since the SNP came to power and they could choose to take this money from elsewhere anyway, I don’t think that argument holds much water.


  2. That helps clarity over the funding-related shemozzle, Fraser – thanks!

    It raises the political aspect of the whole shebang higher, too.

    When a government – with an overall majority – could, but doesn’t exercise its powers, and wherever those powers may be uncertain or are untested, fails to take purposive, transparent initiatives; and instead, too often prefers to snipe, whine and deflect accountability to anywhere and/or anyone but itself (that is, positions itself like a guerilla militia, fighting to the last drop of its people’s blood on behalf of a horribly oppressed minority, rather than assume the role of a government that is – or should be – responsible for the wellbeing of the nation it is elected to serve), there’s something slightly rotten.

    Or not slightly.

    (“cryStal”, in my previous post, obviously …)


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