CIOT gives evidence on incorporation as part of Scottish tax inquiry

24 Jul 2017

John Cullinane, CIOT Tax Policy Director, gave evidence to the Finance and Constitution Committee of the Scottish Parliament last week as part of its enquiry into a Scottish approach to taxation.

Also invited to provide evidence were Charlotte Barbour, Director of Taxation at ICAS, Alex Cobham, Chief Executive of the Tax Justice Network and Professor Richard Murphy, Director of Tax Research UK.

During the session, the CIOT were invited to comment on areas including recent trends in incorporation (the principal focus of this evidence session).

However, the discussions also focused on areas including the devolution of income tax powers to the Scottish Parliament and the overall principles underpinning the Scottish Government‚ s approach to taxation, the future of national insurance, the ‚ gig economy‚ and the fiscal framework.

Excerpts of the debate are included below. A link to the official report of the committee‚ s meeting can be accessed by clicking here.


SNP MSP Maree Todd referred to recent upward trends in incorporation. She enquired as to whether there was any evidence suggesting this trend would continue or whether it was levelling off.

In response, John Cullinane said that data from the Office for Budget Responsibility (OBR) pointed towards this trend increasing. He noted that these trends were not Scottish-specific but, over time, the devolution and divergence of partial aspects of taxation to the Scottish Parliament could complicate the situation further in future years.

Nevertheless, the issue of incorporation was a challenging one for policy makers, as evidenced by changes to the dividend allowance and the Chancellor‚ s announcement ‚ then reversal - of proposed changes to National Insurance Contributions (NICs) for the self-employed.

Charlotte Barbour said that for many, incorporations would continue to be attractive ‚ because it is cheaper to operate that way‚ . However, she also stressed that Parliament should not overemphasise this as an issue for two reasons: an overwhelming majority of taxpayers in Scotland were paid as employees and ‚ it is just not that easy just to step out of employment and become self-employed or a company‚ .

SNP MSP Ivan McKee and Green MSP Patrick Harvie posed further questions on the enforcement of IR35 rules and the ability of the Scottish Government to disincentivise incorporation (respectively).

Responding for CIOT, John Cullinane said that the UK public sector now had a very strong set of rules in place to tackle tax avoidance but that government should provide a clear sense of direction and improve public understanding and awareness of the tax system. Responding to Patrick Harvie, he said it could prove problematic to develop a Scottish specific solution as the parliament had control over a small proportion of the overall tax system. However, attempting to level the playing field for incorporation and non-incorporation could act as a disincentive.

Conservative MSP Liam Kerr suggested that there was an underlying perception that incorporation was used as a means of tax avoidance rather than as a means of modelling their skill sets or their business needs. Asked whether there was any way to understand the motivations for incorporating, Mr Cullinane said it was difficult to pin down people‚ s motivations. But he added, ‚ we would probably find it was a bit of a mixture‚ .

Regardless, Mr Cullinane said that there is enough evidence to show that incorporation is an issue for the tax base that will require action from government.

Income tax devolution

Maree Todd MSP asked about the limits of the Scottish Parliament‚ s new powers over income tax. In response, John Cullinane noted that Scotland had control over rates and bands of income tax, but that it lacked power over corporation or dividend tax. This meant that decisions, such as incorporation, could be dependent on policy decisions taken on either side of the Anglo-Scottish border.

Pressed by Scottish Conservative MSP Murdo Fraser on whether the Scottish Government‚ s decision to pursue a lower threshold for higher rate income tax payers would result in increased incorporation, Mr Cullinane said that it would be difficult to pinpoint whether tax changes alone would result in significant behavioural change, at least in the short term.

Fiscal framework

Both Willie Coffey MSP (SNP) and Bruce Crawford MSP (SNP, committee convener) asked if it was possible to quantify the impact on the fiscal framework of incorporation. While Charlotte Barbour emphasised that it could prove difficult to calculate owing to the complexities of the framework, John Cullinane was not drawn on the constitutional issues around the bill. Rather, he reiterated the CIOT‚ s concerns over the lack of consultation and engagement associated with budget decisions and the need to improve public awareness and understanding.

National insurance

Murdo Fraser MSP reckoned that the Chancellor‚ s decision to cancel increases in the National Insurance contributions for the self-employed had exposed the limits politically of seeking to address the issue of incorporation.

John Cullinane reflected that Philip Hammond‚ s proposal was ‚ tiny compared with the size of the (fiscal) imbalance‚ he was seeking to address and suggested that the much greater issue was that of employer NI contributions, which amount to around 13% of an employer‚ s wage bill.

Reflecting more widely on the announcement, he added that this had been the latest in a long line of surprise budget measures lacking public scrutiny and debate. ‚ People can accept unpopular or difficult things‚ he said, ‚ but they need to understand the reasons‚ . Effective public engagement and participation had been a key recommendation of the recent Better Budgets report published by the CIOT, Institute for Fiscal Studies (IFS) and Institute for Government.

The ‚ gig economy‚

Conservative MSP Adam Tomkins asked about employment market trends, the increase in the so-called gig economy and the implications for the tax system. John Cullinane said the job of the tax system was to accommodate employment market trends, not determine whether this was a bad thing.

He said greater public debate on the issue was needed to understand how the tax system could better reflect changing employment patterns, something Charlotte Barbour said the OTS and IFS had been investigating, alongside the ongoing review of employment practices being carried out by Matthew Taylor of the Royal Society of Arts (RSA).