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A warm welcome from Glasgow
15 October 2014

Tax devolution has been a major theme of the conference season so it was particularly fitting that Scotland’s largest city provided the stage for the final CIOT / Institute for Fiscal Studies party conference debate on Balancing the Books – tax and spending choices in the next Parliament, which took place at Liberal Democrat conference in Glasgow’s SECC. Douglas Fraser, Business & Economy Editor for BBC Scotland took the Chair whilst the panel featured IFS Director Paul Johnson, CIOT President Anne Fairpo and Ian Swales MP, Co-Chair of the Lib Dem Backbench Treasury Committee.

Mr Fraser set the course for the debate reminding the audience of key Lib Dem tax proposals, most prominently increasing the personal allowance to £12,500 and the introduction of a ‘mansion tax’ on high-value properties.

Paul Johnson was first to speak and after guiding the audience through current tax and spending challenges focused on how the Lib Dems were intending to achieve fiscal consolidation. The Lib Dems have stated they will seek to balance the cyclically-adjusted current budget from 2017-18 onwards. Given that the latest OBR forecasts suggest that the output gap will close in 2018-19, meaning that cyclically-adjusted measures of borrowing are almost exactly the same as headline measures of borrowing in that year, that would leave the party with a similar commitment to Labour, with £28-29 billion of extra borrowing permitted.

Next to speak was Anne Fairpo who suggested that the issue of balancing the books fed into the broader theme of reshaping the state. She emphasised that whilst much media attention concentrated on tax avoidance, tax evasion (activity which is illegal) was a far larger part of the tax gap. Anne focused on three areas of current resonance: BEPS (the Base Erosion and Profit Shifting project dealing with the profit allocation of multinational corporations), tax devolution and self-employment. Ms Fairpo struck a cautionary note on BEPS. She remarked that the impression that the system would result in the UK receiving its ‘fair share’ of tax overlooked the fact that the wording of the rules may mean a quite different reality. The attractiveness of the UK, particularly its low corporation tax rate, could be under threat from the OECD’s flagship project. There would be winners and losers as a result of profit allocation and it could spur significant tax competition. On devolution, Ms Fairpo remarked that this too could lead to tax competition. Finally, the significant rise in self-employment (we are now broadly in line with the EU average), predominantly in the low-skilled sector, was identified as a key reason for the decline in income tax receipts to the Treasury.

Ian Swales offered a less technical and more political perspective. He emphasised the need for fiscal responsibility and opined that debt was increasingly viewed as an inter-generational issue. He felt that there was a moral difference between debt that came as a result of paying for a good such as a motorway that his grandchildren would use and debt accrued as a result of keeping tax rates artificially low. He argued for a further increase in the income tax personal allowance (paid for by lowering the capital gains tax threshold and a crackdown on evasion) in order to reduce inequality. On capital gains tax, Mr Swales remarked that there was a ‘strong’ case for alignment with income tax. On spending, he said the current rate of VAT was about right. He defended the ‘mansion tax’ as an effective, limited way to tax wealth and opposed Conservative proposals to raise the IHT threshold to £1m, arguing it should be kept at £325,000.

Mr Swales was candid about spending challenges and remarked that there was a long way to go; public sector efficiency had to be improved. He reminded the audience that Labour had added a million jobs to the public sector payroll, almost all of which had been taken off by the coalition government without considerable damage to service.

Douglas Fraser quizzed Paul Johnson on balancing the budget at a higher tax rate as the floor was opened for questions. Mr Johnson responded that, technically, the economy can work with a 40% rather than 38% tax take but the more you take in tax the more efficient the system needs to be. He identified capital gains tax and VAT as areas of particular complexity. He lauded the scale of tax cuts pursued by the Government at a time of ‘astonishing austerity’.

In response to the devolution of certain taxes to Scotland and what benefits they may bring, Anne Fairpo remarked that the devolution of CGT and IHT was unlikely to bring in much money though she conceded it may make devolved governments feel ‘more in control’. Mr Johnson agreed and remarked that it would result in significant complexity and that resistance to inheritance tax was growing.

Responding to a question on care for the elderly, Ian Swales made the point that taxing low income people in order to pay for the care of those who were better off so that their children could inherit more was morally indefensible.

Paul Johnson finished his remarks by singling out SDLT as a particularly inefficient tax and arguing that more tax revenue would be raised through a proportional council tax. On income tax, he felt that the distributional effect of the current rise had benefited middle income earners the most. On Lib Dem proposals to further raise the threshold he said the point at which you start to pay income tax had become a ‘totem’ but, in his view, it was ‘clearly better’ to increase the point at which you start to pay national insurance contributions, as this had fallen so far behind the income tax threshold.

James Knell
CIOT External Relations Officer
Wednesday 15th October 2014

Media and Politics
 
Minister pressed on public finances in CIOT-sponsored debate
10 October 2014

‘We have cut more in business taxes in this parliament than in any other parliament over the course of our history’ was the triumphant message delivered to a Conservative conference fringe audience by David Gauke MP. However, the Financial Secretary to the Treasury cautioned that the road to cutting the deficit would see social security make an increasingly substantial contribution. The debate, Balancing the Books, focusing on tax and spending choices facing the next parliament, was jointly held by the Institute for Fiscal Studies (IFS) and the CIOT and took place in Birmingham on September 30th. The event was chaired by the Financial Times’ tax journalist, Vanessa Houlder, and speaking alongside Mr Gauke were Patrick Stevens, Tax Policy Director of the CIOT, and Paul Johnson, IFS Director.

Mr Johnson commenced the debate by guiding the audience through the fiscal landscape, reminding them that the Government remained only halfway to its goal of balancing the books. Responding to Mr Gauke’s warning over welfare, Mr Johnson argued that finding £12 billion (6% of the total) from the social security budget would be a significant challenge, and would still imply cuts of 31% in unprotected departments.

Patrick Stevens focused on addressing three areas likely to alter the tax take: BEPS, self-employment and tax devolution. On BEPS (the OECD’s Base Erosion and Profit-Shifting project designed to amend the rules regarding the taxation of multinational companies), Mr Stevens said that there was wide acceptance that the current system was ‘broke’. BEPS would mean that our corporate tax base was likely to see a slight decrease but whether we would ‘win’ or ‘lose’ was ultimately a matter of opinion. Self-employment had risen markedly, and such individuals tended to pay less in tax and later (they pay less national insurance), meaning that the Treasury was witnessing a decrease in tax receipts. Finally, devolution, a major theme of the conference season, was touched on. Mr Stevens informed the audience that there was an expectation of considerably more tax devolution, particularly in the wake of the Scottish referendum, and that the Scottish Government was already about to get the power to increase or decrease income tax by up to ten per cent. He finished by declaring that it was yet to be seen how tax competition might affect the overall take.

David Gauke focused on his Government’s efforts to reduce the deficit and the part that taxation was playing in that effort. He remarked that the amount now spent on debt interest payments was a very significant sum. Planning for the future, he said that there were significant pressures on the budget; many of the baby boomers would be in nursing homes by the 2030’s and that was a stark argument against Labour proposals to run a current budget surplus, allowing them to borrow an extra £28 billion. Mr Gauke reminded the audience that the Government had focused overwhelmingly on reducing spending rather than tax increases. Indeed, for the first time since 1950, public spending had fallen, by 1.4%. He cited growth as a result of business tax cuts: introduction of the patent box, increased employment allowance and a decrease in corporation tax. He attacked Labour’s 50p top rate of income tax policy in view of the mobility of capital and people. He finished by praising his department’s soon to be sent out personal tax statements which he said would increase HMRC transparency and public knowledge of how taxpayer money is spent.

More than sixty attendees provided a challenging Q&A session for the panel. A representative from the TaxPayers’ Alliance questioned whether it was a sustainable policy to run surplus after surplus until debt was zero. Mr Gauke understood the ‘it’s our money’ logic but noted that we remained a long way from running a surplus.

An audience member asked if Conservative targets to tackle the deficit, with their ‘disproportionate’ focus on cutting welfare, were achievable. Responding, Paul Johnson remarked that he was sceptical about the ring-fencing of pensions and health and there needed to be a more public conversation about how we would pay for them.

Questions also focused on the increased size of central government but Mr Gauke defended his department saying it had decreased its size and increased efficiency. He also commented briefly on the raising of the retirement age which had made the long term fiscal situation less grim that it might otherwise have been.

Finally, the panel were quizzed on devolution. Richard Johnson of Public Finance Magazine asked whether the current system of setting national taxes had anything to recommend it. David Gauke remarked that some taxes were better suited to devolution than others and lauded the devolution of income taxes to Scotland. He said that tax competition could be advantageous in bringing to people’s attention the dangers of wrongheaded taxes. He cautioned against the devolution of corporation tax north of the border as this would result in uncertainty for Scottish businesses. For Paul Johnson, fiscal choice was ultimately about where the decisions came from, reminding the audience that outside of Scotland local government was responsible for only about 20 per cent of spending; the rest came from Whitehall.

James Knell
CIOT External Relations Officer
Friday 10th October 2014

Media and Politics
 
Labour party conference debate a great success
3 October 2014

The joint CIOT and Institute for Fiscal Studies Labour fringe event, Balancing the books – tax and spending choices in the next Parliament, was held in Manchester on September 23rd. The lively debate saw around sixty attendees listening to expert opinion and then partaking in a Q & A discussion. Paul Johnson, IFS Director, began by setting out the overall fiscal situation. Bill Dodwell, CIOT Vice President, discussed the options for tax reform and Chris Leslie, Shadow Chief Secretary to the Treasury, elaborated his party’s position on the key challenges facing the next government. The debate was chaired by Chris Giles, Economics Editor of the Financial Times.

Mr Johnson guided the audience through the fiscal landscape, reminding them that the Government remained only halfway to its goal of balancing the books. He stressed that around £70 billion of the deficit was structural meaning that amount of tax increases or spending cuts would be needed over the next Parliament. Four choices were offered by Mr Johnson: huge additional cuts to public service spending, bigger cuts to social security, smaller cuts to spending and doing more to get debt under control later on and substantial tax rises – not the easiest of sells, politically.

Mr Dodwell touched on corporation tax and the BEPS, the OECD’s Base Erosion and Profit Shifting campaign to tackle international tax avoidance. Current proposals for Scottish income tax were touched upon briefly. Mr Dodwell praised the reduction in corporation tax rates as pro-business but warned against corporation tax devolution as it would incentivise competition between the UK regions.

Next to speak was Chris Leslie MP. He stated that a major challenge would be servicing the rising £1.1 trillion of national debt. He said his party did not see public service cuts as part of an ideological drive to shrink the state and remarked that social benefit would be best felt through the ‘pooling of our taxes’. He spoke about a ‘fair’ approach to deficit reduction and that the extension of the 1% child benefit cap, though politically unpopular, would go some way to closing the fiscal gap (along with nuclear decommissioning amongst other areas). He lauded his zero based review of public finances but said that more concrete proposals on how to plug the gap would be unveiled in the manifesto.

The floor was then opened for questions. Questions on whether the burden of tax should fall more heavily on capital rather than labour and the mansion tax elicited varying responses. Chris Leslie opined that the mansion tax was targeted at people who were ‘particularly asset capital rich’; he remarked that treating property as a commodity was distorting the housing market.

Daisy Srblin of the Fabian Society sought the panel’s thoughts on reform of national insurance. Paul Johnson responded that to combine national insurance with income tax would be good for growth, but politically difficult to implement. Asked their opinions on the lay-off of HMRC staff, Mr Dodwell remarked that staff cuts were not as severe as in some other countries such as Ireland and that the more pressing question was on the replacement of those soon to reach retirement age.

There was also brief discussion on the expansion of BEPS and the reduction in corporate taxation posed by Labour councillor Sam Corbin. Bill argued that corporate taxes were damaging to business growth and all those who depend on the business. He cited Ireland as an example where 15% of the workforce were employed by US multinational subsidiaries who located there because of its low corporation taxes. On BEPS, Paul Johnson was candid in his assessment that it would be challenging to ‘patch up’ the international tax system as it was very difficult to say where profits are made.

Mark Turner of the Urban Institute asked the panel’s thoughts on the Financial Transactions Tax. Paul Johnson forcefully rebuked the need for it. He remarked that we already have a stamp duty on share transactions, which was operationally similar. He remarked that the FTT in its current manifestation was inefficient and was not transparent in terms of who actually pays for it.

James Knell
CIOT External Relations Officer
Friday 3rd October 2014

Media and Politics
 
Balancing the books – CIOT and IFS take tax debate to party conferences
18 September 2014

The Chartered Institute of Taxation (CIOT) and the Institute for Fiscal Studies (IFS) are jointly organising debates at the three main UK-wide party conferences on the theme ‘Balancing the books – tax and spending choices in the next Parliament’. The speakers will discuss the UK fiscal position and the economic challenges facing policy-makers over the next five years.

Shadow Chief Secretary to the Treasury Chris Leslie MP, the man leading Labour’s ‘zero-based’ spending review, will be on the panel for next Tuesday’s debate in Manchester. Newly promoted Financial Secretary David Gauke MP will speak at the Conservative conference in Birmingham the following week. Ian Swales MP from the Lib Dem Treasury Team will be on the Glasgow panel. The politicians will be joined on the panel by Paul Johnson of the IFS and senior CIOT representatives.

As well as politicians, party members and media we are inviting CIOT members, their friends and colleagues to attend these debates. Indeed anyone with an interest in debating tax policy is welcome to attend. Attendance is free of charge and refreshments (wine and hot canapés) will be served. You do not need to register your attendance but will require a party conference pass for the Glasgow event as it takes place in the conference secure zone (no pass is required for the other two).

Further information including timings and venues can be found here.

If you would like any further information or have any queries, please contact jknell@tax.org.uk

We look forward to seeing you there!

James Knell
CIOT External Relations Officer
Thursday 18th September 2014

Media and Politics
 
Scottish independence - tax and the benefits system
15 September 2014

The interaction between the tax and social security benefits systems can result in additional complexity of what are already fairly complex systems, as the two do not operate as a cohesive whole. For example, for many people, a £500 increase in the income tax personal allowance means a fall in their income tax bill of £100. For people who both pay income tax and receive certain means-tested benefits, however, the reduction in their tax bill will lead to them receiving fewer benefits. As an illustration, a Universal Credit claimant who pays tax at the basic rate may only be £35 better off (rather than £100), as a result of a £500 increase in the personal allowance.

Independence opportunities

In the case of independence, the Scottish Government would have a cornucopia of options for reform of the tax and welfare systems and how they interact. For example, they could adopt a holistic approach, designing the tax and welfare systems in tandem and not simply looking at tax policy in isolation. This would help to ensure that both systems work together to achieve overall policy aims. This is indeed the proposed approach of the current Scottish Government in the event of independence. In practical terms, what this should mean is that a change in the tax system which results in slightly higher taxes on all individuals, for example, is accompanied by a change in the welfare system that compensates people on lower incomes, if the overall policy objective is that people on lower incomes should not be made worse off by the tax change.

Independence risks

Alongside the opportunities there would naturally be risks that Scotland would have to be aware of when framing policy.

The starting point for any changes under independence or further devolution will be the current system. Under devolution, there will probably continue to be restrictions on the changes a Scottish Government can make; under independence, although there will in theory be the ability to make the system anew, in practice its complexity and the need for wide consultation, scrutiny and refashioning of IT and administrative systems will place restrictions on the number and speed of changes . There is a risk that if changes are not achieved within the time span of one Parliamentary term, a new Government could change the strategy and mean that the Scottish system is no less complex or no more cohesive than the UK one. You only have to look at how the timetable for the Westminster Government’s introduction of universal credit – a radical reform but far from all-encompassing – has slipped to realise the challenges of serious welfare reform.

Welfare reform is never uncontroversial. The best laid plans of think tanks and policy working groups often come unstuck when confronted with the political challenges of dealing with the losers which nearly every reform (the exceptions being those the Government has the resources to throw money at) creates, let alone the practical challenges of actually implementing changes on the ground. Relatively limited changes – think of the introduction of the bedroom tax / spare room subsidy – are often the most controversial.

Conclusion

If Scotland gets the opportunity to frame policy holistically in relation to personal taxes and the welfare system it would make sense to agree an overarching strategy that successive Parliaments would uphold to ensure an effective and integrated system is developed. Of course that’s easier said than done. Politics has a habit of intervening, and I suspect it will continue to do so, whatever the result of September’s vote.

Moira Kelly, Chair of the CIOT sub-committee on Scottish Taxes
Chartered Institute of Taxation
Monday 15 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.

Media and Politics
 
Scottish Independence and National Insurance contributions
15 September 2014

National Insurance contributions (NIC) can be quite complex, as there are a number of different ‘Classes’ of NIC, depending on whether you are employed or self-employed, and they all have their own allowances, bands and rates. Unlike income tax, you only pay NIC on ‘earned’ income - that is, income from employment (salary or wages) or self-employment (profits). There is also a different starting point for paying NIC compared with income tax (currently £7,956 compared with £10,000). Another key difference is that you pay NIC on your weekly or monthly earnings rather than your annual earnings on which you pay income tax.

Independence opportunities

Independence would offer the opportunity to consider the way income tax and NIC work together. Originally, the decision to build a contributions-based welfare system led to the introduction of NIC. Now, the link between state benefits and NIC is less significant than when NIC started. So, the Scottish Government could consider merging income tax and NIC completely – or at least aligning their rates and reliefs – either of which would represent a major simplification of the tax system. Alternatively they might look at strengthening the link between NIC and state benefits, if there was an objective of moving to a more contributions-based system.

As with income tax the Scottish Government could adjust national insurance rates and reliefs to make the system more or less progressive, to incentivise employment of particular groups (as with the Westminster Government’s decision to abolish NIC paid by employers for most under-21s from next year) or to support businesses in particular sectors or parts of the country (as with the Westminster Government’s employer NIC holiday that applied to new businesses in certain areas of the UK).

Independence risks

Alongside the opportunities there are also risks that Scotland would have to be aware of when framing NIC policy.

As with income tax one of these is that mobile individuals might react to higher Scottish NIC rates by relocating to England. Of course the converse is also true. It is also easy to envisage employers’ NIC (as well as corporation tax) becoming a competitive weapon for a Scottish Government keen to attract mobile businesses north of the border. But again this could cut both ways and Holyrood and Westminster could end up engaged in a race to the bottom to attract business, but with the net result of both Treasuries losing revenue.

While full alignment (or even merger?) of income tax and NIC has much to commend it in terms of simplification it has complex implications. In the UK NIC only applies to earnings, not savings income. Either alignment would result in all income (earnings and savings) being subject to the unified tax or there would need to be different sets of rules for different types of income, undermining some of the simplification objectives. Would pensioners (exempt from NIC) be brought into the net? How would employers’ NIC be treated?

Changing the link between national insurance and benefits also has implications. Weaken the link by making some contributory benefits (eg the state pension and part of the Jobseekers Allowance) residence-based and some recipients may wonder what they paid their NIC for, if non-contributors are suddenly getting these benefits too. If the continuing UK kept the existing system then migrants moving north could receive benefits that migrants moving south would not. Strengthen the link by making more benefits contribution dependent and other perceived unfairnesses could appear.

This is not just an issue in terms of the rest of the UK: the Scottish Government would have to consider interaction with the social security systems in the rest of Europe as mobility extends well beyond the UK these days.

Conclusion

The national insurance system is complex. Simplification and greater integration with income tax are attractive but would throw up problems of their own. In essence the more the Scottish system diverges from that south of the border the more anomalies, apparent unfairnesses and incentives for relocation would emerge.

Moira Kelly, Chair of the CIOT sub-committee on Scottish Taxes
Chartered Institute of Taxation
Friday 12 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.

Media and Politics
 
Scottish independence and income taxes
15 September 2014

Income tax is Government’s biggest revenue raiser. And income tax in Scotland is set for changes, whatever the result of the independence vote.

The Scottish Parliament already has the right – not yet exercised – to vary income tax rates by up to three per cent. From April 2016, this will be broadened into a requirement to set a Scottish rate of income tax (SRIT).

Technically what this means is that the three UK rates of income tax (20%, 40% and 45%) will each fall by 10% for Scottish taxpayers; this will reduce the tax revenues available to Scotland. The Scottish Parliament must then set one rate for the SRIT, which will apply to each tax band, with the money flowing to Scotland. If the SRIT is 10%, Scottish taxpayers will not notice any difference in their rate of income tax and the money flowing in will be the same as it would have been without devolution. If the SRIT were to be raised to 11% the rates would rise to 21%, 41% and 46% respectively and more revenue would be expected to come in. If the SRIT were lowered to 9% the rates would fall to 19%, 39% and 44% with a commensurate fall in revenue. The rates would still be subject to possible change as a result of decisions taken at Westminster. For example if the additional rate were raised from 45p to 50p by a Chancellor at Westminster that would mean a 5p increase in the additional rate for Scottish taxpayers; if the rate had earlier been cut from 45p to 44p as a result of a 1p cut in the SRIT it would go back up to 49p in Scotland.

The SRIT is not a devolved tax, which means that HM Revenue & Customs (HMRC) will administer it in parallel to their administration of UK income tax.

The income tax system is pretty complex. It is not just that there are four different rates (including the untaxed personal allowance), there are numerous reliefs and exemptions, and there are even differences as to how you pay income tax on different types of income.

Independence opportunities

Under devolution the SRIT offers the ability to raise or lower income tax by a substantial amount, but by requiring all rates to be moved up or down together it is a pretty blunt instrument. An independent Scotland would have a much wider set of options. The Scottish Government could set its own allowances, bands and rates. It could alter the types of income subject to tax and the reliefs available.

So, for example, the Scottish Government could decide to increase the additional rate for the highest earners to 50p (as some on the left would like), or abolish it altogether (as some on the right have called for), without having to change rates for the majority. They could decide to increase the personal allowance (the portion of income you pay no income tax on) further or reverse the Westminster Government’s increases. They could alter the point at which people start paying the 40% rate. They could decide to keep the higher personal allowance for pensioners that the Westminster Government is phasing out. They could decide to scrap the right of married couples to transfer part of their allowance between them (due to come in next year) or make it more generous. They could even play around with the different treatments given to different kinds of income, such as the lower rate for interest from savings.

There are also all sorts of changes that could be made to the 445 (yes, really!) reliefs currently available for income tax, as well as potentially the creation of new ones. The biggest of the current reliefs is tax relief on pension contributions. Designed to encourage people to save for their retirement this relief currently costs the Westminster Government a whopping £42 billion a year (including relief of national insurance too). The Westminster Government has been gradually reducing the amount well-off contributors can get relief on. An independent Scotland could continue this trend, reverse it, or change the relief entirely so that all contributions are relieved at the same rate, whether that’s the basic rate (saving the Government a large amount of money) or a higher level (which would boost incentives to save among low and middle earners).

The other 444 reliefs could all be fiddled around with too. Gift aid could be made more or less generous. Exemptions for visiting sportspeople (like the one put in place for the Commonwealth Games) could be widened, or scrapped altogether. New reliefs could be created, to reward and incentivise particular kinds of activity and sectors of the economy. Of course, given the number of reliefs already in place some would argue that the priority should be getting rid of a few of the reliefs already in place before creating any new ones.

Independence risks

There are three kinds of risk the Scottish Government would need to be aware of if reframing the income tax system post-independence: mobility, complexity and revenue loss.

Individuals in the UK are fairly mobile. Some people who currently live and work in Scotland may be able to relocate to England, if Scottish income tax rates are higher than those in England. The converse is also true, however, and different individuals will have differing views over when the tipping point is reached, particularly when one considers other factors, such as family, friends, lifestyle and cost of relocation. In addition, if a higher rate of income tax results in better local services, for example, people may be willing to accept it. This risk would be present in a non-independent Scotland too, if the SRIT is adjusted.

The greater the differences between the Scottish income tax system and the (rest of the) UK the greater the complexity for taxpaying individuals, businesses and the tax authorities themselves. Independence would undoubtedly mean a significant increase in the number of people who have to consider cross-border issues and double taxation, for example people who live (and work) in Scotland, but are employed by a UK employer with a UK payroll. This might result in more taxpayers having to complete personal tax returns for Revenue Scotland and/or HM Revenue & Customs, as well as creating headaches for payroll departments and tax advisers.

The other risk is of course to the Government’s revenues. More generous allowances and reliefs are always tempting but the money usually needs to be made up from somewhere, whether that is increased taxes elsewhere, cuts in spending or higher borrowing.

Conclusion

Under greater devolution or independence, Scotland will have the opportunity to frame more of its own income tax policy in future. But caution is likely to remain the order of the day. The policies of the Westminster Government and the effect of cross-border issues are likely to weigh heavily on the minds of decision makers in Edinburgh.

Moira Kelly, Chair of the CIOT sub-committee on Scottish Taxes
Chartered Institute of Taxation
Thursday 11 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.

Media and Politics
 
Scottish independence and principles in tax
10 September 2014

How do you design a tax system? The Scottish Government has said that it wants its tax system to be based on the principles of the Scottish economist, Adam Smith: these are fairness, certainty, convenience and minimising the compliance burden.

Tax specialists often refer to other principles in addition, such as simplicity, proportionality, effectiveness, presumption against double taxation and neutrality; but these are simply features of the main principles. For example, simplicity is essential to certainty – you cannot expect taxpayers to know their obligations if taxes are over complex.

At the CIOT, we think that when designing tax policy and systems, there are further important features of a good tax system: there must be good public education about how the system works; the system must be coordinated with the rest of government policy – especially the benefits system – and not be drawn up in isolation; there must be a fair balance between the powers of tax collectors and the rights of taxpayers; and the practicalities of dealing with the tax system should be taken into account through consultation and careful parliamentary scrutiny.

Devolution and independence

Opportunities

Independence would afford an opportunity for Scotland to develop a tax system and tax authority that matches these principles. Devolution of taxes offers a similar opportunity, but it is necessarily more piecemeal and only applies to the devolved taxes.

Independence offers the opportunity to design a new system for tax, welfare and employment, by providing full control of all taxation and expenditure levers, tax design, collection and implementation. The Scottish Government would have an opportunity to re-examine the tax framework as a whole and to design a system, if it wished, based upon specific Scottish circumstances, preferences and principles.

Risks

A significant risk is over how to deal with the post-independence regime transition. Currently, the Scottish Government proposes continuing the UK system until it can institute change. It will then make amendments, introduce new laws and repeal old laws as necessary.

An implication of this approach is that once the current UK and Scottish laws were in place, there could be more resistance by taxpayers and tax authority alike to each further change, no matter how gradual. This is because the debate that precedes tax reform tends to focus on winners and losers of a particular tax change rather than considering wider results such as how individuals or groups of taxpayers are treated by the system as a whole. This may prevent the achievement of a tax system that lives up to the principles of Adam Smith.

The Scottish Government would need to develop a clear plan for how it might migrate, over time, towards its own modern Scottish-specific tax system. However, going for a “big bang” birth of a totally new system without trial has its own risks.

The risk of devolution, of course, is that while devolved taxes are dealt with under one framework, the reserved taxes will continue to be dealt with under the UK framework, making it hard for anyone to take a strategic overview of the system.

Conclusion

The Scottish Government has said it wishes to base Scotland’s tax system on the design principles set out by the Fiscal Commission: simplicity, neutrality, stability and flexibility. These align with the principles of Adam Smith. They are sound principles, but there is a tension and therefore a balance will need to be found between some of them. There will also be the inevitable desire any government has to tweak the system to support particular groups (eg families with children) and incentivise particular behaviour (eg environmentally-friendly actions). Whatever their other merits every step in these directions is likely to make the system less neutral and less simple.

The tax system interacts with various other systems, in particular the welfare benefits system. People travel and companies trade beyond national borders. It is essential to take into account all these interactions when developing tax policy and designing a 21st century tax system.

Moira Kelly, Chair of the CIOT sub-committee on Scottish Taxes
Chartered Institute of Taxation
Wednesday 10 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.

Media and Politics
 
Scottish taxation - the referendum and beyond
9 September 2014

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.

Personal taxes

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.

Business taxes

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.

Summary

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.

Further reading

Labour proposals

Conservative proposals

Lib Dem proposals

Media and Politics
 
Finance Act 2014
21 July 2014

Finance Bill 2014 has received Royal Assent and is now Finance Act 2014. The final stage of the Bill passing into law took place on Thursday 17th July.

Among the measures which come into force at Royal Assent are the parts of the Bill relating to follower notices and accelerated payments, and to high risk promoters.

The final text of the Act can be read at http://www.legislation.gov.uk/ukpga/2014/26/contents/enacted/data.htm

Other documents relating to the Bill during its passage can be read at http://services.parliament.uk/bills/2014-15/finance/documents.html

George Crozier
Head of External Relations
21 July 2014

Media and Politics
 

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