Devolution is being undertaken piece-meal and inconsistently. The link with funding and the ever changing broader UK-tax system presents the devolved governments with some major challenges: the Scottish LBTT rate structure is being looked at again at this late stage following the surprise change to the SDLT slab structure. The scope for avoidance and double taxation will depend critically upon the quality of the information exchanged between the various revenue authorities and how tightly the legislation is drawn. Tax practitioners will need to closely monitor the impact of developments upon commercial structures.
Before considering some of the issues arising from the various proposals regarding the intended devolution of the tax system, it is essential to appreciate devolution in its broader context. In simple terms, devolution is the process of decentralisation that has the laudable aim of putting power closer to the individual citizen (for a useful guide, see www.bit.ly/1DQaPLp).
The key issue with UK tax devolution is that it not being applied consistently. At one extreme, the entire process is being devolved, whilst at the other it is simply little more than an exercise in statistics. Where the entire process is being devolved, there will be some scope for both avoidance and double taxation – so much will depend upon how tightly the legislation is drawn and the quality of the information exchanged between the various revenue authorities.
It is important to be clear as to both the restricted nature of the powers devolved and the funding that is provided to the devolved administrations as a block grant. The interaction between funding and the devolved powers has caused, and will undoubtedly continue to cause tensions. There are, for example, significant differences as regards the funding of public services which are still paid for by all UK taxpayers under the terms of the so called ‘Barnett formula’. This ‘convention’ results in major differences in the funding of public services, as follows:
Whilst devolution has some features in common with federal arrangements, there are many differences. The most important of these is that the UK Parliament remains sovereign in law and can still legislate for Scotland, Wales and Northern Ireland. It is to be noted, and this matter is increasingly coming under scrutiny, that England is outside the devolution arrangements and the nature of devolved powers varies between Scotland, Wales and Northern Ireland. The key differences are as follows:
The UK tax system is, as many have observed, one of the most complex in the world. Having evolved over centuries, it comprises a range of taxes, each with its own very specific features as regards basis, reliefs and administration. The interaction between these taxes makes categorisation problematic: for example, what is the nature of the ATED? It is a response to perceived SDLT avoidance and is managed by Stamp Taxes, but whilst SDLT is being devolved, ATED is not. On a detailed level, there are numerous cross-references in the tax code to legislation applicable to taxes that are conceptually quite distinct but, from which, definitions are drawn. A common issue arising is in determining a connected person transaction. For SDLT, and for the Scottish equivalent (land and buildings transaction tax (LBTT)), it is necessary to refer to the CTA 2010.
There will be financial implications for both taxpayers and the revenue authorities: the impact of devolving taxes will, crucially, depend upon exactly what and how the tax is devolved.
Corporation tax: It has been claimed (based on the corporation tax rate of 26%) that, for Scotland, a 3% cut in the headline rate of corporation tax, proposed ‘in part to resist the gravitational pull of London’, could ‘boost employment by 27,000 jobs’ in the long term. The counter argument is that corporation tax should not be devolved in order to avoid a ‘race to the bottom’.
Unsurprisingly, one of the eye-catching comments in the Autumn Statement is (at para 1.103):
‘The government recognises the strongly held arguments for devolving corporation tax rate-setting powers to Northern Ireland, including its land border with the very low corporation tax environment in the Republic of Ireland ... In practical terms, further work by HMRC and HM Treasury has concluded that this proposal could be implemented, provided that the Northern Ireland Executive is able to manage the financial implications.’
The reference to land borders in the context of devolving a tax which depends upon the ‘residence’ status of the taxpayer or the existence of a permanent establishment is rather odd. If all that is envisaged is an ability to set the rate of corporation tax, the role of any local tax revenue authority is likely to be extremely limited, as significant input would continue to be required from HMRC as regards the application of the myriad anti-avoidance rules.
Income tax: It would appear that political considerations have lead to the conclusion that only some facets of income taxation should be devolved. In particular, it has been concluded that control over the scope of taxation should remain with Westminster but that rates and thresholds (other than the personal allowance) could, to varying degrees, be devolved.
From April 2016, the Scottish Parliament will be asked to set a Scottish rate of income tax, to replace a 10p reduction from each band of UK income tax in respect of some income sources. Subject to the outcome of a referendum in Wales, the Welsh government will also be able to set new Welsh rates for each band of income tax that would replace a reduction in the rate of UK income tax.
The Scottish rate of income tax will be paid by Scottish taxpayers, who are to be defined as UK taxpayers that are either resident in Scotland or whose closest connection is with Scotland. It will be levied on non-savings, non-dividend income (i.e. earnings from employment, self-employment, pension income, foreign income, taxable benefits and income from property).
The range of income sources is such that tax liabilities for a particular year would include tax to be collected under both PAYE and self-assessment. There will clearly be issues as regards the provision of information to determine the connection test, the quantum of income and the collection of tax. In the OBR paper it is noted that, in the run up to the devolution of the Scottish rate of income tax, HMRC will be able to identify each individual taxpayer as Scottish or not, and flag them appropriately on its PAYE and self-assessment systems. How well this works out will be of interest to many.
SDLT/LBTT: In some respects the taxation of property transactions should be the easiest to devolve: the location of the property is readily identifiable and difficult to change. In practice, however, difficulties arise due to the nature of the business structure adopted, the wide range of commercial property interests and complex funding issues.
From April 2015, SDLT and landfill tax will be fully devolved to Scotland in the form of LBTT. The availability of its own land registration process should make compliance easier to monitor.
Whilst it is not surprising that the structure of LBTT follows that of SDLT, it is disappointing that many of the problems identified during 11 years of experience of SDLT have not been addressed. In particular nothing of note has been done to deal with the problems that arise with the use of income sharing ratios for partnership transactions. More generally, whilst the problematic notional transactions imputed by FA 2003 ss 75A–75C, are not replicated, a possible land rich company charge is included as is a general anti-avoidance rule. It is possible that changes will be made to the structure of the tax once it is clearer whether there is likely to be any adverse behavioural responses but it is difficult not to conclude that an opportunity has been missed to help create a better tax system.
What the imminent introduction of the LBTT has done is to prompt what appears to be a politically motivated reform to the UK SDLT tax system: on 4 December 2014, the UK SDLT regime moved from a ‘slab’ to a ‘slice’ system as regards residential property transactions. Consequently, in Scotland, this move will be followed by the move to the LBTT, with its different rate structure, in April 2015.
The Wales Act 2014 provides for the full devolution of SDLT from April 2018. Whilst it is very early in the process, significant progress has been made in analysing the potential issues in relation to both the scope of the charge to tax and its management. To its credit, the Welsh government is examining at an early stage the changes that could be made.
Landfill tax: Landfill tax will be fully devolved to the Scottish government in April 2015, and the Wales Act 2014 provides for landfill tax to be fully devolved to the Welsh government from April 2018. As noted by the OBR, there is no directly available data on the Scottish or Welsh share of landfill tax, since landfill operators provide data returns that cover sites throughout the UK.
Aggregates levy: The government has committed to keeping the devolution of aggregates levy to Scotland and Wales under review. It intends, subject to the resolution of a legal challenge in the European courts, to devolve this tax in the future but, in the interim, the Treasury will assign aggregates levy receipts to Scotland and Wales.
Air passenger duty (APD): Whilst the power to set APD rates on direct long-haul flights was devolved to the Northern Ireland Assembly (NIA) in FA 2012, HMRC continues to administer the tax on behalf of the NIA. Administratively, as regards the operators of the aircraft, the impact of devolution is indiscernible.
National insurance: There appears to be a consensus view amongst the political parties that NICs should not be devolved.
VAT: It has also been observed that devolution of VAT is ‘not possible’ – although a reassignment of VAT receipts could be achieved – because ‘VAT must be levied at a single rate for each particular good or service and that rate must apply across the territory of a member state’.
It has been suggested by the Smith Commission that 10 percentage points of VAT revenues raised in Scotland should be ringfenced for Scottish government.
Capital gains tax and inheritance tax: There is no consensus as regards capital gains tax and inheritance tax.
At this point, one is reminded of the observations of Tam Dalyell who, in debates on the West Lothian question (HC Debates, 14 November 1977, vol 939 col 122), observed the ‘basic design fault in the steering of the devolutionary coach which will cause it to crash into the side of the road before it has gone a hundred miles.’
