CIOT in the spotlight as Scottish Parliament conducts pre-Budget scrutiny

10 Nov 2020

The Scottish Parliament’s Finance and Constitution Committee took evidence from John Cullinane, CIOT’s director of public policy and Charlotte Barbour, director of taxation with the Institute of Chartered Accountants of Scotland (ICAS) last week (4 November 2020) as part of their scrutiny of the 2021-22 Scottish Budget.

You can watch a video of the session (starting from 10:53:09) on the Scottish Parliament website by clicking here. The official report of proceedings can also be found on the Scottish Parliament’s website here.


As a result of the 2017 Budget Process Review Group, the Scottish Parliament’s committees undertake a period of pre-Budget scrutiny in advance of the publication of the Scottish Budget.

In recent years, the government has published its tax and spending plans in December but this year, and for the second year in a row, the precise date of the Budget has been cast into doubt as a result of the UK Government’s decision to postpone the 2019 and 2020 UK Budgets.

The CIOT has highlighted the challenges this presents for both the Scottish Parliament and the Scottish Government. Last December, Alexander Garden, the chair of the CIOT’s Scottish Technical Committee, wrote a comment article for the Scottish edition of The Times, Election will leave MSPs scrambling to set a budget, outlining some of the problems that can be encountered when trying to set a budget before Westminster.

Despite these delays, the Finance and Constitution Committee has pressed ahead with its pre-Budget scrutiny. It has already taken evidence on devolved tax forecasts from the Scottish Fiscal Commission and is expected to conclude its scrutiny prior to the Christmas recess.

The evidence session

The tax topics explored during the session included tax priorities for the 2021-22 Scottish Budget, improvements to Holyrood’s tax policy making processes, business rates, Coronavirus tax support measures, and public awareness and understanding of devolved taxation.

Tax priorities for the Budget and the impact of the pandemic

Murdo Fraser (Conservative) began the session by asking the panellists for their tax priorities in the upcoming (2021-22) Scottish Budget.

Charlotte Barbour said that: ‘There is a need to support the economy, because our long-term aim must be to grow the tax base—to have more taxpayers and to ensure that they are paid better—as that is the way to contribute to the desire to spend.’

She said that MSPs should provide a long-term, strategic picture of the direction of tax to help provide businesses with more certainty. Barbour noted that the level of the (UK-wide) personal allowance would have ‘one of the most important impacts’ on the scope of the Scottish tax base.

John Cullinane spoke to issues around the personal allowance too, adding: ‘there is an increasing question mark as to whether the tendency to increase the personal allowance is well targeted – it also costs a lot of revenue – which might come to the fore after Covid.’

He also said: ‘It’s difficult to translate that into what the Scottish Government might do with its powers’ and suggested that they will need to consider, when setting their tax policy, the impact of Scottish tax changes on households: ‘In making a careful balance, the Scottish Government needs to consider what, in practice, the impact will be on households, bearing in mind the automatic set-offs that will come about through the credit system, particularly for lower-paid people.’

Fraser then turned towards the temporary changes that have been made to Land and Buildings Transaction Tax (LBTT) as a result of the pandemic.

For reference, these changes are; a temporary increase in the threshold for paying LBTT from £145,000 to £250,000 and an extension to the timeframe for claiming a refund of the Additional Dwelling Supplement (ADS) from 18 to 36 months for eligible transactions that took place between 24 September 2018 and 24 March 2020.

Fraser asked whether the temporary increase to the threshold for paying Land and Buildings Transaction Tax (LBTT) should be extended beyond next March and for the panelists’ views on the effectiveness of the policy.

John Cullinane said: ‘The Scottish Government will probably need to keep that policy under review, as will the UK Government, both because of fairness and to try to stimulate the market, which become more of a concern in March.’

He continued: ‘Anecdotally, there have been a lot more signs of activity in the property market throughout the UK. Indeed, some industry bodies are lobbying at UK level for the stamp duty holiday to be extended, and they are actually giving the reason that some practitioners might find it hard to cope with getting everything through by the time that the temporary arrangements expire.’

Cullinane suggested that this implied that the policy had had an impact but that it would be ‘quite a difficult balance to strike’ in deciding whether or not to extend the measures.

Charlotte Barbour spoke to issues around the ADS and explained that there would likely be a lot of focus around the extended timeframe for claiming a refund of the Additional Dwelling Supplement.

She told the committee: ‘The real issue with ADS is that it tends to be a really emotive tax and probably causes more grief than you would expect, relative to the importance of the amount of money that it raises and the number of people who it affects.’

This led to a more general observation about the prominence of LBTT in the devolved tax debate: ‘because LBTT is the main tax devolved to Scotland…changes to it speak more loudly than changes to stamp duty land tax in the rest of the UK can do, simply because it is one of the biggest taxes for which Scotland has full responsibility. For that reason, it needs to be handled carefully.’

Later in the session, John Mason (SNP) wanted to know whether there was scope to increase Scottish income tax and whether there was evidence of people changing their behaviours in order to avoid paying higher rates of tax.

Both Barbour and Cullinane would explain that it is hard to quantify behavioural change, but pointed towards certain categories of taxpayer that MSPs may wish to focus their efforts onMaking Tax.

Charlotte Barbour said: ‘We do not have any hard-and-fast evidence on that (behavioural change). I know that a lot of people have looked for that evidence, but it is really difficult to tell. There is more to life than just tax, and it is hard to know whether tax in isolation drives people’s behaviour.’

John Cullinane added: ‘We know that there are behavioural effects, but we do not know the extent of them.’

Barbour suggested that the rise of homeworking as a result of the pandemic may present future tax issues and in particular, for ‘people who are in the £50,000 salary bracket, because their income tax is significantly more expensive in Scotland than it is south of the border’ (because of the mismatch between the Scottish higher rate of income tax and the upper earnings limit for National Insurance).

Later in the meeting, Conservative MSP Dean Lockhart would return to the question of homeworking, asking whether the existing rules of residence (for Scottish Income Tax) were ‘fit for purpose in this new environment’. John Cullinane said that it was ‘too early to start using expressions like “fit for purpose”, but it is clearly an issue that will need to be reviewed.’ He went on: ‘The new situation will create more flexibility for people and it is bound to be something that Governments look at, but it is very difficult to see right now exactly how that will go.’

Charlotte Barbour suggested that a further factor to be considered in respect of behaviour change would involve those who already live in Scotland and those who may be looking to relocate to Scotland, and whether tax divergence would impact their decisions to stay or move.

On the subject of the potential for income tax rises, John Cullinane suggested that there was limited room for manoeuvre in the Scottish Budget to raise taxes. He told John Mason: ‘the room for manoeuvre is very tight in the short term because of the way that the UK and Scottish decisions interact’. He gave the example of the interactions between income tax and National Insurance (NI) rates (that have left some Scottish earners with a marginal tax rate of 53 per cent due to the lower threshold for Scottish higher rate tax and the NI upper earnings limit).

Alasdair Allan (SNP) asked if there was sufficient information available to determine the impact on the public finances of the pandemic. Both Cullinane and Barbour acknowledged the challenges of obtaining real-time data and suggested that the continued roll out of the Making Tax Digital programme offered opportunities for obtaining clearer, up to date information on tax receipts. John Cullinane said: ‘The more digitalisation that you can get into the system, the more hope there is for more reliable data coming out earlier.’

Tax policy processes

Jackie Baillie (Labour) asked about the recommendations from CIOT and ICAS that the Scottish Parliament consider introducing a dedicated tax committee and annual Scottish Finance Bill, asking the panelists about the importance of reviewing Holyrood’s decision making structures for tax.

John Cullinane said he understood that the Scottish Parliament and Scottish Government’s ongoing efforts to review the tax policy process were unlikely to conclude prior to next year’s Scottish Parliament elections.

He said to Baillie: ‘We do not want to be unrealistic in the current environment, but nevertheless we think that a new tax policy legislative process is important. As the framework is negotiated for more powers for Scotland, it is all the more important for Scotland to be seen to be managing and scrutinising well the changes to the management of the powers that it has.’

Cullinane also used his response to talk to the evidence that the CIOT has obtained through opinion polls conducted in 2018 and 2019 into Scottish taxpayer awareness. He said this ‘is not just a Scottish problem, though, as understanding of all sorts of tax matters is low throughout the UK’. This was a point that Charlotte Barbour highlighted too, making reference to a recent survey carried out by Deloitte on personal knowledge of the UK tax system.

Cullinane concluded: ‘People need to be able to understand what decisions are coming from where and what the rationale is for those decisions and the context in which they were made. Effective democracy in controlling tax powers requires the best tax processes.’

Charlotte Barbour set out some of the limitations in the current tax setting processes and the need to improve the parliament’s ability to make technical changes to tax legislation to ensure that they work as intended: ‘There is no mechanism by which to make those changes, some of which are quite technical and complicated, so they tend to be put to one side as if they are not important. However, for my money, anything that impacts on how much a taxpayer has to pay is hugely important and should be addressed promptly. We need to have a regular process for that.’

Jackie Baillie also asked the panelists whether it would be preferable to publish the Scottish Budget before or after the UK Budget. Charlotte Barbour described the choice as a catch-22 situation. John Cullinane suggested that going before Westminster would help to ‘give as much information as you can about political intention and explain some of the parameters that you foresee that might make you have to change things.’

Public awareness

John Mason (SNP) asked whether Scots understood how the devolved tax system worked. John Cullinane said: ‘I think that people understand at a general level…however when you get below that level to anything in more detail, it becomes very difficult.’

He specifically pointed to the CIOT’s 2019 survey of public awareness and understanding, which showed just 26 per cent of the Scottish public surveyed could correctly identify Scottish Income Tax as a shared responsibility of Holyrood and Westminster (a fall from the year previously when the survey was first conducted). Mason acknowledged that this appeared to be a concern, saying: ‘It concerns me quite a lot that that figure on understanding had fallen.’

Charlotte Barbour said that taxation was ‘very poorly understood’ across the UK, but that it was ‘important for people to understand what they are contributing.’ She added that the Scottish Government had done an ‘excellent job’ of communicating its changes to income tax in 2017 and that: ‘I also think that the presentation of tax by the wider range of stakeholders could perhaps be better informed. For instance, in the media, folk home in on income tax rates and very little else.’

Alexander Burnett (Conservative) wanted to know what the panelists would do to improve public awareness if they were first minister for the day.

John Cullinane said that he would try to set out the opportunities and constraints of the current devolved tax regime. Charlotte Barbour said that she would like to see the government more clearly communicate the contribution that the devolved taxes make to society and the need for everyone to contribute. She also said that it would be important to make sure that people understand the trade-offs between tax changes and the impact on public spending, so that they know the implications of raising or freezing tax rates.

Non-domestic rates

Jackie Baillie asked about the impact to businesses of delaying the Non-Domestic (Business) Rates revaluation to 2023. Both Barbour and Cullinane acknowledged that any delays to the process and future reforms would lead to winners and losers. In response to further questions from committee convener Bruce Crawford (SNP) and Alex Rowley (Labour) Cullinane said that there was a need to ensure more frequent rates revaluations, but that this could be more difficult for businesses trying to recover from the COVID-19 pandemic. He also spoke briefly to anecdotal evidence of the business rates appeals process in England to provide examples of the challenges associated with revaluation.

The Finance and Constitution Committee will conclude its pre-Budget scrutiny on 18 November when it takes evidence from the Cabinet Secretary for Finance, Kate Forbes. Following the UK Spending Review on 25 November, we will have a clearer picture of how and when the Scottish Government intends to bring its Budget to Parliament, the last before next May’s elections to the Scottish Parliament.

By Chris Young.