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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
 
Cross-border tax experts appointed
2 July 2014

Tax barristers Jonathan Schwarz (Temple Tax Chambers) and Jeremy Woolf (Pump Court Tax Chambers) have been appointed as CIOT representative and alternate on a new European Commission "Group of experts on removing tax problems facing individuals who are active across borders within the EU".

The Commission have set up the expert group to identify tax problems facing individuals who are active across borders within the EU and good practices that could remove or at least reduce those problems. The group will bring together stakeholders to look principally at elements of direct taxation that may affect an individual’s cross-border activity in the Single Market. Personal income taxation and inheritance taxation will be particularly focused on. However, if need be, the group may also look at other taxes that affect the mobility of persons, such as the taxation of vehicles and the taxation of e-commerce.

The group will first meet on September 9th and the work of the group is scheduled to last till the end of the year. Other members of the group are not currently known but it was expected there would only be around 20 members of the group in total from across the EU, primarily drawn from the arenas of tax, business, academia and wider civil society.

George Crozier
Head of External Relations
2 July 2014

Media and Politics
 
Finance Bill 2014 Committee of Whole House debates
19 May 2014

This is the second of a series of reports on the progress of this year's Finance Bill, as it goes through its various parliamentary stages.

This report covers the two days of committee of whole House debate. As previously noted, these reports focus on the aspects of the debates most relevant to the CIOT and our members, which is primarily the technical elements of the Bill, although the reports will aim to give a flavour of the main issues debated, which will often be more political.

A note on the stages the Finance Bill goes through appears here.
Links to the various debates are available here.

Overview

Committee stage is the stage of a Bill’s passage when it gets (in theory at least) detailed clause-by-clause analysis by MPs. Most Finance Bill 2014 clauses will be debated by a standing committee of 35 MPs ‘upstairs’ in a committee room, starting from April 29th. However the opposition gets a chance to choose a small number of clauses (generally the most contentious or those that help them make an important political point) to be debated in ‘Committee of the whole House’, ie. on the floor of the Commons. This year these were corporation tax rates, income tax rates, childcare, the transferable tax allowance for married couples, the bank levy and air passenger duty. Predictably all government clauses in these areas were approved and all opposition amendments and new clauses were rejected, with no noticeable rebellions.

Day One: Tuesday 8th April

Day one of the Committee Stage focused on corporation tax rates, income tax rates and childcare

Clauses 5 to 7 and Schedule 1– Corporation tax rate

Shadow Exchequer Secretary, Shabana Mahmood, tabled an amendment proposing a review of the next year’s cut to the main rate of corporation tax with a particular focus on the impact on businesses with fewer than 50 employees and whether alternative measures would benefit them more. Although a number of Labour members conceded that there were some benefits to be gained from the corporation tax cut, Mahmood claimed that it was mainly helping a minority of the largest corporations and said that a reversal back to 21% would be implemented if Labour attained power, in order to fund a business rates freeze and then cut.

Coalition members sharply criticised Labour policy to reverse to the cut in corporation tax and strongly rejected the need for a review. Conservative John Redwood led the attack, claiming that the policy would cause significant damage to those businesses which were benefiting from the CT cut. Priti Patel (Con) said that Labour’s corporation tax policy was a cynical attempt to pit small and big businesses against each other. Nigel Mills (Con) pointed out that in any case corporation tax was unlikely to be cut further than 20%, since if it was lower than the basic-rate income tax, it would create ‘interesting’ tax-planning opportunities.

Summing up, Exchequer Secretary David Gauke said that clauses 5 to 7 of the Bill provided further evidence that the Government were continuing to make progress towards the delivery of a simpler and more competitive tax regime. The minister said that, next year, this section of the Bill would be far simpler, thanks to the unification of the small profits rate and the main rate of corporation tax, as had been recommended by the Office of Tax Simplification. Gauke added that, for those outside the ring-fence regime, it would mean the end of the complex marginal relief system that currently captures 45,000 companies. It would also enable the Government to abolish the complex “associated companies” rules and replace them with a much simpler rule based on 51% ownership of a firm (which is what schedule 1 does). He noted that the CIOT had welcomed the abolition of the “associated companies” rules when this was announced.

Labour’s amendment was defeated 288 to 219. Clauses 5 to 7, and schedule 1, were agreed to.

Clause 1 – Income tax charge, rates, basic rate limit and personal allowance for 2014-15

Plaid Cymru’s Jonathan Edwards led debate on this clause, after tabling a new clause which would have required the Chancellor to publish a report on the impact of setting the additional rate of income tax at 50 per cent. Edwards claimed that the cut to 45p had disproportionately benefited the wealthy and this argument was repeated by others from the opposition benches during what was a highly politically charged debate. Edwards explained that the reason both the nationalists and Labour had tabled calls for a review of the policy was because parliamentary rules do not allow anyone other than the Government to propose legislation altering tax rates (known as financial initiative of the Crown).

Ian Swales (Lib Dem) reminded members of other measures the Coalition had implemented to increase tax revenue from the wealthy including the personal allowance withdrawal and capital gains tax measures. Sheila Gilmore (Lab) said that the Government’s tax changes had done little to improve the lot of the working poor. Leading for the opposition, Shabana Mahmood quoted statistics from the Government which showed that the Treasury lost £3billion as a result of reducing the rate from 50 to 45p in her support of the amendment.

Winding up the debate for the Government, David Gauke rejected the nationalist new clause and Labour’s amendment on the grounds that it would be illogical and unfair to reintroduce a tax rate that was ‘ineffective at raising revenue from high earners’ and that would end up making ordinary taxpayers pay more and risk damaging growth. The nationalist new clause proposing a review of the additional rate was defeated 295 to 231, and Labour’s amendment calling for the same thing was defeated 296 to 231. Clause 1 was passed.

New Clause 1 – Childcare provision

Labour’s Catherine McKinnell (Shadow Exchequer Secretary) proposed a new clause on childcare provisions which would require a review of the ways in which changes to the tax and childcare system could be used to increase the affordability of childcare. Labour’s rationale was that the Government has not adequately combatted the rising cost of childcare for working parents. She called on the Government to extend the free childcare that is available for three to four-year-olds. Lorely Burt (Lib Dem) reminded the Shadow Minister that the Government had announced in the Budget that the tax-free child care cost cap would be raised to £10,000. McKinnell responded that families where both parents work would be £2,073 a year worse off and that the raise would disproportionately benefit the wealthy.

Meg Hillier (Lab) said that the study proposed by Labour’s new clause could investigate how to support quality through a tax voucher system. She noted that childcare in Denmark is free for families on the lowest incomes: “the subsidy is tapered, depending on the family income - in this country, it would need to be done sensibly through the tax and tax credit systems - which means that three quarters, 76%, of Danish women are working”.

Nicky Morgan (in her final speech as Economic Secretary before her promotion the following day), dismissed the need for a review; the Government was committed to full flexibility and that could be realised through the provisions of tax-free child care, she said. Morgan re-emphasised that the Government had increased the child tax credit to £3,265 a year and touted other taxation measures aimed at easing the cost of living including the increase in the personal income tax allowance and the freeze in council tax. Labour’s new clause was defeated 286 to 226.

Day Two: Wednesday 9th April

Day two of the Committee Stage focused on the transferable tax allowance, the bank levy and air passenger duty.

Clause 11 - Tax relief for married couples and civil partners (transferable tax allowance)

This measure will allow someone earning below the personal allowance to transfer £1,050 of their allowance to their spouse or civil partner in the first year (provided that spouse or civil partner is themselves a basic rate taxpayer), with effect from April 2015. Labour oppose this policy, as do the Liberal Democrats, with the coalition agreement stating that the party’s MPs can abstain on the proposal.

Labour’s Shadow Economic Secretary, Catherine McKinnell, proposed an amendment calling for a review of the impact of the relief, and an assessment of alternative tax reliefs that would benefit a much greater number of families. She argued that the allowance was perverse and unfair, a poorly targeted use of resources and overly complex. The current proposals would, she said, offer tax benefit to only a third of married couples. It would exclude married couples and civil partners on the very lowest incomes where both spouses earn below the income tax personal allowance, couples where both spouses have incomes higher than the personal allowance, and couples where either spouse pays the higher rate or the additional 45% rate. Men would benefit from the policy more than women, she said. McKinnell cited representations from the Low Incomes Tax Reform Group when commenting on the need to make the allowance accessible. LITRG were pressing to ensure that a claim for the marriage tax allowance can be made on paper, as well as online, and for the claim/election process to be made as simple as possible – “preferably a joint election rather than separate claim and election.”

Conservative MPs defended the relief. Tim Loughton argued that in 13 years of power, Labour did ‘nothing’ to support the institution of marriage. Stewart Jackson said that the clause ‘may not yet be worth a huge amount, but it is of seminal importance in supporting marriage in the tax system’. David Burrowes refuted Labour’s claim that the Government want to ‘hive off men against women’, saying that recipient households would benefit as a household rather than on an individual basis. Other Conservative MPs also commented throughout the debate that the policy was a ‘start’ in the right direction, stating an aspiration to extend the transferable allowance to more married couples as time goes on. Responding to the debate, David Gauke, Exchequer Secretary, accepted that the 1.8 million couples in which both partners are non-taxpayers would not benefit from the relief. However, he said, “It is worth pointing out that since 2010 about 350,000 couples have become non-taxpayers because we have taken them out of income tax. It is impossible to provide an income tax cut for people who do not pay income tax.”

Labour’s proposal to amend the Bill failed 276-217. The clause was then approved 279-214.

Clause 112 - Bank levy (and debate on a bank payroll tax)

The Opposition, led by Shadow Financial Secretary Cathy Jamieson, proposed a new clause calling for a review of the feasibility of reintroducing a bank payroll tax (specifically on bankers’ bonuses), and of whether the additional revenue could be used to fund a job guarantee scheme for people in long-term unemployment (Labour’s policy). Jamieson also moved an amendment which would compel the Government to produce a report specifically detailing all the tax receipts (including corporation tax, the bank levy and bank payroll tax) received from banks since 2010.

Turning to the bank levy, Jamieson argued that given the ‘consistent failure’ of the Government’s levy to raise the projected amounts, it would appear not only that the Government have miscalculated its behavioural impact upon banks, but they have failed to accurately predict the impact on the banks of their cuts to corporation tax. Labour have labelled this the ‘secret tax cut’ for banks. Jamieson explained that Labour would increase the bank levy to raise an additional £800 million a year, in order to fund an expansion of free child care places for working parents of three and four-year-olds to 25 hours a week.

From the backbenches David Mowat (Con) expressed surprise that the Labour Party appeared to be concerned with variable pay but not with fixed pay: “Labour Members appear to be quite sanguine about a pay level of £2 million a year, but not about a pay level that consists of a £1 million basic salary and a £1 million bonus. That strikes me as rather odd.” Winding up the debate David Gauke said that there was no need for the Government to produce a separate report on the tax receipts from banks as HMRC already published annual statistics on PAYE, the bank levy, corporation tax and bank payroll tax receipts from the banking sector. Responding to Labour’s proposal of a repeat of the bankers bonus tax, he pointed out that the then Chancellor Alistair Darling had said in 2009 that the bonus tax should be a one-off.

Labour’s bank payroll tax new clause failed by 293 votes to 219. The amendment proposing a report on tax receipts from banking fell by 286 votes to 217.

Clauses 72-74 - Air passenger duty

Jonathan Edwards of Plaid Cymru moved a new clause and new schedule proposing the devolution of air passenger duty (APD) to the Welsh Assembly. He said that APD devolution was an essential part of the recommendations of the Silk Commission (the cross party UK Government commission on devolution in Wales). He argued that the Westminster government has ‘cherry picked’ its favoured recommendations and it had been a slap in the face for Wales when it was omitted from the Wales Bill, which is currently progressing through Parliament. Edwards argued that the devolution of the tax would increase Wales’ ability to attract long-haul flights and also significantly improve its competitiveness as a regional economy. Angus MacNeil of the SNP explained that the Scottish Government aim to reduce APD by 50% within the first term of an independent Parliament, and to abolish it completely when circumstances allow, with a proposal for a straight reduction in bands. He proposed amending the Bill to allow for the devolution of APD on flights to all destinations.

Henry Smith (Con) stated that he would love to see the abolition of APD, saying that the rate is uncompetitive, with only Chad charging more than the UK. David Rutley (Con) spoke in support of government policy, arguing that it was right and fair that the Government had brought private jets into the scope of APD. From the Labour frontbench, Catherine McKinnell said that Labour remains to be convinced of the merits of devolving APD.

Responding to the debate for the Government, David Gauke said that the devolution of duty for Northern Ireland was in specific response to Northern Ireland’s unique circumstances. It shares a land border with Ireland, leading to a risk of flights relocating from one part of the shared land mass to another. The Government recognised that risk and acted to ensure that Northern Ireland was not disadvantaged. He argued that variable rates within the mainland of the UK could create the same market distortions which Northern Ireland sought to prevent.

Plaid Cymru’s proposal to amend the Bill failed by 9 votes to 254. The SNP proposal was not voted on. The Government’s clauses were approved.

George Crozier
CIOT Head of External Relations
Monday 19 May 2014

Media and Politics
 

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