JUSTICE Secretary Kenny MacAskill has admitted to MSPs that he has lost the battle with the Treasury to maintain the VAT-free status of the new single police and fire services.

He called the decision "unjustifiable and manifestly unfair". It means the Scottish Police Authority and its sister body, the Scottish Fire and Rescue Service, will lose more than £25 million a year to the Treasury, although the Government claims that even with this the unified services will save £1.7 billion over 15 years.

Last night, the Scottish Police Federation called the decision "nothing short of a scandal and a sign of utter contempt for the Scottish Parliament".

Mr MacAskill told Holyrood's Justice Committee: "I can confirm that, after extensive discussion, HM Treasury has rejected our request that SFRS and the Scottish Police Authority would be able to recover VAT.

"That will mean that the SPA and SFRS will be the only police and fire and rescue authorities in the UK that are unable to recover VAT. Indeed, we understand that following reforms in England and Wales, the new Police Commissioners will be entitled to recover VAT.

"That is manifestly unfair and amounts to a combined annual cost to the Scottish Fire and Police Authorities of around £25m."

The rationale was "in stark contrast to the view taken in relation to Academy Schools in England", for which the Treasury enacted legislation to ensure that they could recover VAT.

Roddy Robertson of the Fire Brigades Union said: "This tax grab will rob the fire service of millions of pounds and could lead to cuts in frontline services."

The Treasury insists that the Scottish Government knew all along that their model for service reform would lead to the loss of VAT exemption and was factored into their costings.

A spokeswoman said: “The UK Government has worked with the Scottish Government to explore whether an element of local funding could be incorporated into the reforms to enable the police and fire service to continue to receive VAT refunds but the Scottish Government has chosen to stick with their original plans.”