Bill Dodwell and John Macintosh (Deloitte) examine the further devolution of tax powers to Scotland.
hat’s happened?
he Scottish independence referendum has resulted in a victory for the ‘Better Together’ campaign. Part of its appeal to the Scottish voters involved a 12 point plan articulated by former Prime Minister Gordon Brown for transferring more powers from Westminster to the Scottish Parliament. It includes: ‘Further devolution of tax powers, particularly in the sphere of income tax.’
Haven’t some taxes already been devolved to Scotland?
es. The most significant tax is business rates, which raises about £2bn. Council tax is also a local tax, which raises just under £2bn. In 2015, Scotland takes control of stamp duty land tax (SDLT) and landfill tax, which together raise about £150m. Land and buildings transactions tax will take over from SDLT and is notable for two innovations: it will abandon the longstanding ‘slab’ basis in favour of a progressive system (with as yet unannounced rates, expected in October); and it will be collected by the Scottish Land Registry (Registers of Scotland) under the supervision of Revenue Scotland. However, whilst Scotland has some freedom in designing the taxes that replace the UK taxes, it may only legislate in the areas allocated to it. Thus, for example, Scotland has made choices in the design of its replacement for SDLT, but it could not introduce a land value tax in its place.
What about income tax?
In April 2016, there will be a Scottish rate of income tax (SRIT). Strictly, this isn’t a devolved tax, although the revenue implications are similar. From April 2016, each of the UK rates of income tax will be reduced by 10 pence and replaced by the SRIT. The SRIT does not allow the Scottish government to choose the thresholds or to impose different tax rates at different levels. If the SRIT is set at, say, 9 pence, the rates of tax in Scotland would become 19%, 39% and 44%. The SRIT applies only to income from employment, self-employment and pensions. Investment income remains subject to the general UK rates. Westminster will also continue to set the personal allowance and define the tax base. The tax will continue to be collected by HMRC, which will need to notify employers and annuity payers who are liable to the SRIT. A Scottish taxpayer is an individual who is resident in the UK and then has his or her main residence in Scotland. For the majority, this will be easy to determine; however, those who move between Scotland and other parts of the UK may need to wait until the end of the tax year before their status can be determined.
Are there any further requirements regarding devolution of taxes?
Devolving tax to any individual part of a country runs into the requirements of EU law, in the form of the Azores case (Portugal v Commission (C-88/03)). There must be a separate administration, which is clearly met in the case of Scotland, Wales and Northern Ireland. The individual country must bear the risk of its decisions. Consequently, the Scottish budget must be reduced by the taxes allocated to it. Should the Scottish Parliament choose to reduce tax, it must also reduce spending or at least take on borrowing. Equally, should the Parliament increase taxation, the additional revenues generated will remain with it.
What are the main political parties proposing?
The Scottish Labour party, Conservatives and LibDems all formed commissions to consider taxation. They all recommended that Scotland should be given greater control over the taxes that finance Scottish spending, with the minimum being control over taxes that raise about 40% of devolved spending. The three main taxes in the UK are, of course, income tax, national insurance and VAT.
Each party proposes greater control by Scotland over income tax. The Conservatives and LibDems would allocate control over both rates and thresholds. However, Labour proposes that Westminster should retain control over thresholds, but that Scotland should be granted the ability to increase (but not decrease) the higher rate and additional rate of income tax.
All parties would leave control over the tax base and personal allowance with Westminster and would also leave Westminster to set the tax rates for investment income – as with the current SRIT. The reason for leaving investment income with Westminster is presumably that huge complexity would be introduced for banks and other deposit takers and for HMRC were the basic rate to differ.
It is not possible to have different rates of VAT within a country under EU law, so it is not possible to pass control of VAT to Scotland. Nonetheless, some of the parties favour allocating VAT receipts from Scotland to the Scottish parliament. Discerning exactly what those receipts are would be challenging.
None of the parties favour passing control over corporation tax to Scotland. This surely makes sense within the UK. Allowing different rates would encourage tax-motivated transactions, creating huge complexity and no doubt reducing the size of the overall UK cake. There are better ways to incentivise investments.
National insurance is also perceived as too linked to the welfare system to be capable of being passed to Scotland (or indeed to the other countries within the UK). There seems to be widespread acceptance that the UK needs to keep a single welfare system, which requires the support of national insurance. Perhaps if NIC and tax were ever to be merged, that might change.
Final thoughts?
The apparent speed with which it is desired to reach a conclusion on devolving powers will surely encourage a relatively simple settlement. HMRC systems are an important part of this, together with employer payroll systems. It will be important to give as much notice as possible so that systems are ready.
Bill Dodwell and John Macintosh (Deloitte) examine the further devolution of tax powers to Scotland.
hat’s happened?
he Scottish independence referendum has resulted in a victory for the ‘Better Together’ campaign. Part of its appeal to the Scottish voters involved a 12 point plan articulated by former Prime Minister Gordon Brown for transferring more powers from Westminster to the Scottish Parliament. It includes: ‘Further devolution of tax powers, particularly in the sphere of income tax.’
Haven’t some taxes already been devolved to Scotland?
es. The most significant tax is business rates, which raises about £2bn. Council tax is also a local tax, which raises just under £2bn. In 2015, Scotland takes control of stamp duty land tax (SDLT) and landfill tax, which together raise about £150m. Land and buildings transactions tax will take over from SDLT and is notable for two innovations: it will abandon the longstanding ‘slab’ basis in favour of a progressive system (with as yet unannounced rates, expected in October); and it will be collected by the Scottish Land Registry (Registers of Scotland) under the supervision of Revenue Scotland. However, whilst Scotland has some freedom in designing the taxes that replace the UK taxes, it may only legislate in the areas allocated to it. Thus, for example, Scotland has made choices in the design of its replacement for SDLT, but it could not introduce a land value tax in its place.
What about income tax?
In April 2016, there will be a Scottish rate of income tax (SRIT). Strictly, this isn’t a devolved tax, although the revenue implications are similar. From April 2016, each of the UK rates of income tax will be reduced by 10 pence and replaced by the SRIT. The SRIT does not allow the Scottish government to choose the thresholds or to impose different tax rates at different levels. If the SRIT is set at, say, 9 pence, the rates of tax in Scotland would become 19%, 39% and 44%. The SRIT applies only to income from employment, self-employment and pensions. Investment income remains subject to the general UK rates. Westminster will also continue to set the personal allowance and define the tax base. The tax will continue to be collected by HMRC, which will need to notify employers and annuity payers who are liable to the SRIT. A Scottish taxpayer is an individual who is resident in the UK and then has his or her main residence in Scotland. For the majority, this will be easy to determine; however, those who move between Scotland and other parts of the UK may need to wait until the end of the tax year before their status can be determined.
Are there any further requirements regarding devolution of taxes?
Devolving tax to any individual part of a country runs into the requirements of EU law, in the form of the Azores case (Portugal v Commission (C-88/03)). There must be a separate administration, which is clearly met in the case of Scotland, Wales and Northern Ireland. The individual country must bear the risk of its decisions. Consequently, the Scottish budget must be reduced by the taxes allocated to it. Should the Scottish Parliament choose to reduce tax, it must also reduce spending or at least take on borrowing. Equally, should the Parliament increase taxation, the additional revenues generated will remain with it.
What are the main political parties proposing?
The Scottish Labour party, Conservatives and LibDems all formed commissions to consider taxation. They all recommended that Scotland should be given greater control over the taxes that finance Scottish spending, with the minimum being control over taxes that raise about 40% of devolved spending. The three main taxes in the UK are, of course, income tax, national insurance and VAT.
Each party proposes greater control by Scotland over income tax. The Conservatives and LibDems would allocate control over both rates and thresholds. However, Labour proposes that Westminster should retain control over thresholds, but that Scotland should be granted the ability to increase (but not decrease) the higher rate and additional rate of income tax.
All parties would leave control over the tax base and personal allowance with Westminster and would also leave Westminster to set the tax rates for investment income – as with the current SRIT. The reason for leaving investment income with Westminster is presumably that huge complexity would be introduced for banks and other deposit takers and for HMRC were the basic rate to differ.
It is not possible to have different rates of VAT within a country under EU law, so it is not possible to pass control of VAT to Scotland. Nonetheless, some of the parties favour allocating VAT receipts from Scotland to the Scottish parliament. Discerning exactly what those receipts are would be challenging.
None of the parties favour passing control over corporation tax to Scotland. This surely makes sense within the UK. Allowing different rates would encourage tax-motivated transactions, creating huge complexity and no doubt reducing the size of the overall UK cake. There are better ways to incentivise investments.
National insurance is also perceived as too linked to the welfare system to be capable of being passed to Scotland (or indeed to the other countries within the UK). There seems to be widespread acceptance that the UK needs to keep a single welfare system, which requires the support of national insurance. Perhaps if NIC and tax were ever to be merged, that might change.
Final thoughts?
The apparent speed with which it is desired to reach a conclusion on devolving powers will surely encourage a relatively simple settlement. HMRC systems are an important part of this, together with employer payroll systems. It will be important to give as much notice as possible so that systems are ready.
