The Scottish Government

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To: Director, Scottish Federation of Housing Associations
Chief Executive, Scottish Homes
All Registered Housing Associations in Scotland

19 December 2000

Dear Sir/Madam

PROPOSALS TO PHASE OUT SECTION 54 (TAX RELIEF) GRANT PAID TO HOUSING ASSOCIATIONS IN SCOTLAND

Purpose

1. This consultation paper sets out, and invites comments on, options for the phasing out of tax relief grant (TRG) paid to housing associations under Section 54 of the Housing Act 1988. The paper also sets out Ministers' decision to repeal section 55 of the 1988 Act.

2. Responses are sought by 19 February 2001 and these should be sent to Mr Kenneth McKenzie at the address shown in paragraph 14.

Who is affected?

3. Housing associations who claim or expect to claim tax relief grant from Scottish Homes under section 54 of the Housing Act 1988 will be affected.

Background

4. Tax relief grant is paid to housing associations under section 54 of the Housing Act 1988. Its purpose is to assist non-charitable associations with corporation tax liability incurred on operating surpluses on eligible activities. Although payment of the grant is discretionary, Scottish Ministers (and previously the Secretary of State) have so far exercised this discretion by paying grant in respect of eligible claims. Scottish Homes acts on behalf of Ministers in administering and paying this grant to housing associations.

5. Scottish Ministers believe that, in general, housing associations are now in a sufficiently strong financial position to operate without special tax concessions. Liability to corporation tax arises in direct proportion to operating surpluses. The larger the surplus, the larger the tax liability and the larger the tax relief grant paid to the association. With the need to focus on priorities in public expenditure, Scottish Ministers find it difficult to justify continuing to subsidise associations that are capable of meeting their own liabilities. In England and Wales, the decision was taken some time ago to phase out tax relief grant: from this year, 2000/01, no grant will be paid.

6. Ministers acknowledge, of course, that housing associations need surpluses to keep rents down, meet the costs of repairs to stock and provide security for private lenders. Equally, diverting resources to paying TRG reduces the amount available for Scottish Homes to devote to its own development funding programme, the main beneficiaries of which are housing associations. It is also the case that the removal of tax relief grant would introduce further transparency into the resource consumption of housing associations and should encourage them to consider how they use and account for their surpluses, and what steps they might take to reduce their tax liability.

7. Ministers have decided therefore that tax relief grant shall be phased out in respect of tax liability arising from 1 April 2002. The purpose of this consultation is to seek views on the manner and speed with which the phasing out should take place.

Proposals for change

8. Scottish Ministers are clear that the basis of the phasing out should be seen to be fair, equitable and soundly based. The decision to defer the start of the phasing out until April 2002 means that housing associations will have well over a year in which to plan for the change. In addition, the gradual reduction, along the lines of one of the options set out below, as opposed to immediate abolition should also help ease the transition for associations.

9. Views are sought on the following options being considered by Ministers:

9.1 Phase Out in Equal Steps

Ministers would determine an agreed level of grant contribution from Scottish Homes which would reduce as we move towards complete abolition. For example: -

Grant in respect of tax liability for the period 01.04.01 - 31.03.02 - 100%

Grant in respect of tax liability for the period 01.04.02 - 31.03.03 - 75%

Grant in respect of tax liability for the period 01.04.03 - 31.03.04 - 50%

Grant in respect of tax liability for the period 01.04.04 - 31.03.05 - 25%

Grant in respect of tax liability from 01.04.05 - 0%

For associations who do not have a March year end, profits and tax therein will be relieved on a pro rata basis.

9.2 Sliding Capped Scale

As a variation to the above, and with the aim of assisting smaller Associations, an underpinning limit could be set reducing progressively on the basis of fixed percentages as illustrated below:-

For the period 01.04.01 - 31.03.02: 100%

For the period 01.04.02 - 31.03.03: 75% of the first 50,000, then 50% of the rest

For the period 01.04.03 - 31.03.04: 75% of the first 25,000, then 25% of the rest

For the period 01.04.04 - 31.03.05: 50% of the first 15,000, then 10% of the rest From 01.04.05 - 0%

10. Tax relief grant payments for the financial year 2001-02 in respect of tax incurred in previous years will continue unchanged.

11. Associations will need to review their accounts and financial position in the light of these proposals to reduce and ultimately to abolish tax relief grant. In particular, they need to review their liability to Income and Corporation Tax and consider possible means by which future grant claims might be reduced.

12. One possible approach to be considered is a change to charitable status where this is legally possible. Many housing associations already operate under charitable status, and further advice on this is available from Scottish Homes. However, they will have to consider whether a move to charitable status might place restrictions on the sorts of activities an association can undertake.

Housing (Scotland) Bill

13. The Housing (Scotland) Bill, which is also being published today, will allow the repeal of Section 54, from a date set by Ministers. The Bill will also provide for the repeal of Section 55 of the Housing Act 1988. This section lays a requirement on housing associations to maintain separate records in relation to the surplus rental income derived from certain, defined properties. In light of representations made to them by the SFHA, Ministers have decided that Section 55 should be repealed with effect from the start of financial year 2001/02, thereby reducing the administrative burden on housing associations.

Deadline for responses

14. Views are invited by 19 February 2001 on the 2 options set out on paragraph 9. These should be sent to:

Mr Kenneth McKenzie
The Scottish Executive Development Department
Area 1-G
Victoria Quay
Edinburgh

Telephone 0131-244 5514
EH6 6QQ Fax: 0131 244 5529

Email: kenneth.mckenzie@scotland.gsi.gov.uk

15. After considering the views received, Ministers will consider whether to proceed with either of the 2 options described above, or to use some other method of phasing out the current arrangements. The final decision of Ministers will be communicated to all those to whom this paper is being sent.

Confidentiality

16. In accordance with Scottish Executive practice, in order to help inform debate on this issue, the Department will assume that responses may be made public, and will make copies available to anyone who wishes to see them. Copies of responses will be supplied on request (at a charge designed to cover costs). If respondents wish their reply to be kept confidential, they should indicate this clearly in their response. Such requests for confidentiality will be respected, but the Scottish Executive will identify that a response has been received from a particular organisation or individual.

Yours faithfully

James Hynd
Development Department
Housing Division 3