THE UK government will hold back more than £400m of benefits currently coming to Scotland if a future SNP government presses ahead with the reform of the council tax, Scotland on Sunday can reveal.
In what triggered a bitter constitutional row last night, Whitehall officials said Scotland would lose out on the UK cash if the Nationalists insisted on creating a new local income tax - a key plank of Alex Salmond and Nicola Sturgeon's election str
ategy.
Instead, Labour said the funds would have to be found from their own £30bn budget, which is used to pay for Scotland's schools, hospitals and public services.
The funds in question currently flow to Scotland as council tax benefit - the rebate offered by the Department for Work and Pensions to help poorer householders with their bills.
By scrapping the council tax, this benefit would also be cancelled. The Nationalists are banking on an equivalent sum being transferred to Scotland to help offset the cost of their new tax.
However, Whitehall sources have now declared that the funds would be kept in Whitehall, leaving the SNP with a huge black hole in its finances.
A well-placed insider at the Department for Work and Pensions said: "We think the idea is risible. Council tax benefit is a national benefit and there is no automatic right of transfer to something else, whatsoever it is. You would have to start from the assumption that you would not get this money."
Scotland on Sunday has also obtained a leaked Scottish Executive briefing document, sent to finance minister Tom McCabe, which shows that ministers in Edinburgh have accepted that the cash will not be heading north.
The document, written by one of McCabe's officials, declares: "From experience with other policy areas we know that we would be unlikely to get this money back from Treasury and would have to make up the shortfall from Scottish Executive funding."
The document adds: "If in Scotland the council tax were replaced by a local income tax, council tax benefit would cease."
The precedent for the case being used by Executive officials is the row over the introduction of free personal care in Scotland in 2001. The introduction of the new right cancelled out another benefit, attendance allowance - worth £25m a year to Scotland. Despite lobbying from the Scottish Executive then, the money saved did not come north.
However, the Nationalists hit back last night, disputing the claims and accusing Labour of scare-mongering about the cost of their proposals. A spokesman said: "Labour is deliberately trying to scare people off about the cost of this as it tries to continue its defence of the unfair council tax. We have raised this issue with the DWP and with the Scottish Executive and we have never been told this is the case."
They said they would continue to pursue Whitehall over the matter. Nevertheless, the dispute will be damaging to their hopes of showing that the local income tax plan is financially viable.
