The Scots water industry financial watchdog is using public funds to settle thousands of pounds in personal tax issues as a result of spending described as "unacceptable" by auditors, it has emerged.

It can be revealed that the Water Industry Commission for Scotland (WICS) ran up a bill of £8,819 in unpaid UK tax and national insurance contributions dating back to 2018/19 over perks given to staff including leaving lunches and birthday and Christmas gifts.

They included some £5,500 spent on £100 Christmas gift vouchers for each member of staff over two years - 2021/22 and 2022/23 - without any tax being paid.

Auditors have said this exceeded the regulator's delegated limit of £75 for gifts and should have been approved by the Scottish Government but was not.

Because it was a non-salary reward, auditors say it should have been treated as a taxable benefit.

It has emerged that after the intervention of Audit Scotland, and a review by the commission, a tax liability of £8,818 dating back five years has been uncovered.

On Wednesday, it emerged that Alan Sutherland, the chief executive of Scotland’s water regulator quit after Audit Scotland found "unacceptable use" of public funds by senior officials at the water industry watchdog.

Auditors said the WICS needed retrospective approval from the Scottish Government for around £80,000 of spending including £77,350 for the chief operating officer, Michelle Ashford to attend a training course at Harvard Business School in Boston, USA.

READ MORE: Scots water regulator chief quits after row over public funds finding

A Pay As You Earn (PAYE) settlement agreement with HMRC allows an organisation to make one annual payment to cover all tax and national insurance owed in relation to perks like gifts, leaving lunches and other incentive-based awards.

It is understood that in October, the water watchdog paid £3,384 to settle a 2022/23 tax obligation including £1,333 relating to the Christmas gift vouchers.

But it has further emerged that the commission has put in a voluntary disclosure of unpaid tax between 2018/19 and 2021/22 and has estimated a further £5,435 needs to be paid.

It is understood they are still awaiting a taxman response regarding the historic issues.

The Herald: Water industry watchdog rap with  (inset) chief executive Alan Sutherland and chief operating

Audit Scotland has said that due to the commission "not currently demonstrating the highest standards of financial management and propriety in its business activities" it has resulted in "public funds being used to settle what were personal tax costs".

The regulator is funded through a levy on Scottish Water and on retailers that participate in the competitive non-household water market. The size of these levies is set by Scottish Ministers.

Scottish Water operates under an annual borrowing limit set by the Scottish Government. The annual borrowing limit controls the amount by which Scottish Water can increase externally sourced finance.

As at March 31, 2023, government loans totalled £4.5 billion.

Net new borrowing by Scottish Water from the Scottish Government was planned to be to the tune of £196m in 2023/24 to carry out its activities.

The auditors identified "widespread issues" with expense claims being submitted and approved by the WICS without supporting itemised receipts.

The Herald: Taste tip for tap water

The expenses claims exceeding set rates were found to have been submitted and approved without itemised receipts, including by Mr Sutherland. One claim was for a dinner where the cost per head exceeded £200 per person. This, and other claims, included the purchase of alcohol, the audit said.

Audit Scotland said that the the financial management and governance issues found at the commission, which is the economic regulator of Scottish Water, fell "far short of what is expected of a public body".

It said that it was only once the issues were identified and reported by the auditor that retrospective approval was sought and received from the Scottish Government.

The public spending regulator said immediate action was required to address the issues and "promote a culture of best value across the organisation".

The WICS has told auditors that management will "take further advice to establish appropriate rules and procedures" over the identification of taxable benefits to staff.

Auditors say management "will ensure that this advice is implemented in full and ensure adequate arrangements are in place to attribute taxable benefits to relevant staff so that they incur the related income tax and national insurance contributions".

The chief executive was to oversee the move with a view to implement in March, 2024. At the time of the investigation it was still Mr Sutherland who was to take this on.

The Herald:

The commission employs 26 staff and incurred expenditure of £4.036 million during 2022/23 - with 67% relating to staff costs.

It received income of £5.288 million during the year, including levy income of £2.279 million from Scottish Water and £1.718 million from licensed providers, and £1.185 million from international work related to the Scottish Government’s Hydro Nation strategy.

WICS is responsible for determining the level of revenue Scottish Water needs to collect through customer charges in order to deliver the objectives set for it by Scottish Ministers.

It has a duty to determine the ‘lowest reasonable overall cost’ that Scottish Water will have to incur to meet ministers’ environmental, quality and service objectives for the industry.

The post of Water Industry Commissioner for Scotland was created in 1999 and Mr Sutherland was appointed to the role.

His remit was to advise the then Scottish Executive on the charges that the water authorities could and should set for their customers.

After the Water Industry (Scotland) Act (2002) the Commissioner continued in this advisory role, though this time it was the newly formed Scottish Water that he would advise.

Since the Water Services (Scotland) Act (2005) power to shape the future of water provision was with the WICS.

A WICS spokesman said: "WICS is focused on working with Audit Scotland and the Scottish Government to deliver the action plan and don't have any further comment to make. We can confirm that the Chief Executive tendered his resignation earlier this week and this has been accepted."