On Thursday 18th September the people of Scotland will vote on whether to become an independent country. In the run up to the vote the CIOT will be blogging about what the tax implications of a yes or a no vote might be and how they might affect people who live and work in Scotland. This series will cover the main taxes, including income tax, National Insurance, corporation tax and VAT amongst others, providing a practical insight into how they might be applied and what their effects are likely to be. This first article looks at what is on offer from the unionist parties in the event of a no vote.
Á la carte or set menu?
If Scotland votes ‘yes’ next week that will clearly be a momentous decision and the expectation will be that huge changes are on the way in pretty much every aspect of Scottish governance, including the tax system. Less recognised is that substantial changes – in tax in particular – are set to take place even if Scotland votes to remain within the UK.
Legislation has already been passed to devolve Landfill Tax to Scotland and to replace Stamp Duty Land Tax with a Scottish Land and Buildings Transaction Tax, both from April 2015. These will be administered by a Scottish tax authority, Revenue Scotland, which has already been established in statute. A separate Scottish tax tribunal will hear appeals in relation to devolved taxes. A Scottish ‘general anti-avoidance rule’, or GAAR, more restrictive than its UK counterpart (also a GAAR, but a ‘general anti-abuse rule’), will be applied. Additionally, while income tax would continue to be administered by HMRC, from April 2016 a new Scottish rate of income tax would be introduced, giving the Scottish Parliament the power to raise or lower income tax rates by up to 10p in the pound, though only in lock step, moving all three current rates by the same amount. Council tax and business rates are already fully devolved to Scotland.
However it appears that these changes, introduced by the UK Parliament’s Scotland Act 2012 and a number of subsequent Acts of the Scottish Parliament, would not be the end of the story. The three unionist UK parties have all promised greater tax (and other) powers if Scots vote against independence. On Sunday UK Chancellor George Osborne declared: “You will see in the next few days a plan of action to give more powers to Scotland: more tax powers, more spending powers, more plans for powers over the welfare state.” Those hoping for an actual list of powers to be devolved will have to be patient though, as the plan of action is a schedule for agreeing which powers will be devolved rather than the list of powers itself. There will be a consultation through the autumn leading to a white paper in January.
So we will have to wait and see what emerges (and of course this will only happen if Scots vote ‘no’ on the 18th). Nevertheless, by looking at the declared starting point – the separate proposals now on the table from the three main UK parties – we can gain some idea of the likely direction of further tax changes.
Income tax is our biggest national revenue raiser, generating about a quarter of all tax receipts across the UK. As mentioned above the Scottish Parliament already has some income tax powers, and further changes have already been legislated for. But these only apply to varying the three existing rates (20p, 40p and 45p), and require all three rates to be changed in lock step (ie. all three rates need to be changed together).
All three main UK parties have announced their intention to further devolve income tax to varying degrees. Labour proposes increasing the maximum variation allowed from 10p to 15p, and also proposes new Scottish Progressive Rates of Income Tax, so that the Scottish Parliament can increase – but not reduce – the rates of tax in the higher (40p) and additional (45p) bands, giving them the option of restoring the 50p rate for top earners. Under this arrangement Scots would only be able to cut the 45p rate if the basic rate was cut as well.
The Conservatives and Lib Dems would go further, both proposing that Scotland should be allowed to vary the different income tax rates independently and also set the size of the various income tax bands. However setting the size of the personal allowance would be reserved to Westminster, allowances and reliefs more generally (including rules on tax relief for pension contributions) would remain a Westminster prerogative and the administration of income tax would remain the responsibility of HMRC. Additionally both parties propose that tax rates on income generated from savings and investments would be reserved to Westminster to protect the single market in financial services across the UK.
The other big tax levied on income is National Insurance. The unionist parties have stated that while National Insurance could be devolved in theory, the transfer of the tax would be unsuitable due to its association with welfare spending on pensions and other benefits, neither of which have been proposed by the unionist parties for devolution (though the Conservatives have floated giving Holyrood ‘more responsibility’ on cash benefits such as housing benefit and attendance allowance which are closely related to devolved policy areas).
The Liberal Democrats are alone among the three parties in wanting Capital Gains Tax and Inheritance Tax devolved. The party proposes that Scottish rates of CGT would be payable by Scottish taxpayers, irrespective of the location of the capital gain, and everyone domiciled or deemed to be domiciled in Scotland would pay the Scottish Inheritance Tax on their estates. Labour had been sympathetic to devolving CGT but its Devolution Commission report in March 2014 concluded that it should remain reserved, as a result of potential administrative complexities and the potential for tax avoidance. Labour also opposes devolving IHT. The Conservatives have similarly rejected the prospect of devolving the two taxes, saying that they have low-visibility and a low-yield in Scotland.
All three parties are wary of devolving excise duties. They all oppose devolution of alcohol and tobacco duties, citing the potential to increase illegal trafficking between different parts of the UK (the Conservative case), that it would create economic distortions (Labour) and EU rules and other technical arrangements (Lib Dems). Devolution of fuel duty is also broadly opposed, though Labour express support for the idea of derogation to allow a lower rate of fuel duty to be charged in some remote rural areas (presumably allowing Holyrood to take further what has already been introduced by Westminster), and also acknowledge the possibility of assignment of revenue from fuel duty in Scotland if various obstacles can be overcome. Labour had considered devolving Vehicle Excise Duty but have since rejected this. Labour also explicitly reject devolving Insurance Premium Tax and betting and gaming duties (the other two parties have not mentioned these and are therefore presumably also opposed to their devolution).
The one duty that has some support for devolution is Air Passenger Duty. Both Conservatives and Liberal Democrats support devolving APD while Labour takes a more open position, saying that devolution should not be progressed until further consideration has been given to the environmental impact and how else the tax might be reformed.
All three UK parties have ruled out the devolution of corporation tax. The Conservatives argue that a separate rate would be uneconomical to collect on a small scale and would not generate a reliable yield (indeed they say it is the least suitable of all taxes for devolution). Labour have said differential rates of corporation tax within the UK would be uneconomical and incite a ‘race to the bottom’ in UK taxation. The Lib Dems think that variable rates within the UK would encourage negative economic behaviours. However, the Lib Dems also stated that they would be in favour of assigning corporate receipts generated in Scotland in order to provide an incentive to improve the economic position of Scotland, add to the overall Scottish tax take, and reduce reliance on an equalising payment from the UK government.
There is similarly little support for devolving powers over the taxation of North Sea oil and gas (which is dealt with by a distinct tax regime). Labour’s report explains that while it would be technically possible to devolve oil revenues, doing so would push Scottish finances towards a ‘fiscal cliff’ and place the future of Scottish public services at unacceptable risk. Conservatives and Lib Dems are also opposed, though the Lib Dems add that consideration should be given to the establishment of an oil fund, when the deficit situation has been brought under control, allocating the proceeds to the benefit of Scotland, England, Wales and Northern Ireland on federal principles.
VAT is the second biggest revenue raiser from Scottish taxpayers. However EU rules require all member states to apply a common rate of VAT within their jurisdictions, ruling out its devolution. Both the Conservatives and Labour suggest that, but for this, it would be a good candidate for full or partial devolution. EU rules do not prevent assignment of Scottish VAT revenues, however. The Conservatives propose ‘serious examination’ of the case for a share of VAT receipts raised in
Scotland being assigned to the Scottish Parliament, saying Scottish Ministers would get the benefit of any increase in economic activity in Scotland and would thereby reap a fiscal reward were their economic policies to prove effective. Labour can see the case for assignment, but ultimately come down against it believing it would import a high degree of risk and volatility into the Scottish Budget, without providing any tools to manage that risk.
The Westminster Government has already legislated for the devolution of the Aggregates Levy to the Scottish Parliament and has committed to devolve the levy to the Scottish Parliament when EU state aid clearance has been given. This has cross-party support. There is no identifiable support for the devolution of another ‘green tax’, the Climate Change Levy, to Scotland. Labour argues that creating a separate Scottish climate change tax system and schedule would result in economic distortions. The other two parties do not mention the tax.
In conclusion, based on the published recommendations (links below) of the three main UK parties, any consultation on further tax devolution in the event of a ‘no’ vote on the 18th is likely to focus around personal taxation, and income tax in particular. There is some support for devolving Air Passenger Duty, and to a lesser extent Capital Gains Tax and Inheritance Tax. A key part of the debate is likely to be whether there can be greater assignment of the revenues from particular taxes in Scotland and, if so, which taxes. There appears to be little support for devolution of additional business taxes to Scotland.
George Crozier, Head of External Relations
Matthew Oliver, External Relations Officer
Chartered Institute of Taxation
Tuesday 9 September 2014
NB. The CIOT is a strictly non-partisan organisation and is strictly neutral in the referendum campaign. This posting is intended to inform and nothing within it should be interpreted as advocating or opposing any of the options mentioned. We are pleased to have been closely involved in discussions on the devolution of tax powers, working with both the Westminster and Scottish Governments, regardless of their political complexions, to assist them at a technical level in the implementation of their objectives.
Lib Dem proposals