The challenges of managing a partly devolved income tax regime were the focus of CIOT’s fifth successive event at an SNP conference. Titled ‘Tax at Twenty’, the event provided delegates with the chance to hear from a panel comprised of politicians, a tax expert and a pollster tasked with reviewing the evolution of Scotland’s devolved tax journey twenty years on from its inception.
This is the second event held by CIOT in 2019 to consider the devolution of taxes to the Scottish Parliament. A link to the first of these - held in partnership with ICAS - can be found here.
(Pictured left to right are: John Cullinane (CIOT), Tom Arthur MSP, Rachel Watson (Scottish Daily Mail), Kirsty Blackman MP and Mark Diffley (Mark Diffley Consultancy and Research))
The fringe meeting was held at the recently opened The Event Complex Aberdeen and was chaired by the Scottish Daily Mail’s deputy political editor, Rachel Watson. Joining her on the panel were John Cullinane, CIOT tax policy director, Mark Diffley, founder of Mark Diffley Consulting and Research and SNP politicians Kirsty Blackman MP and Tom Arthur MSP, representing the views of Westminster and Holyrood respectively.
In opening remarks, John Cullinane noted that this was the fifth year that CIOT had hosted an event at SNP conference. Turning to the topic at hand, he described the coherence of the devolved tax regime as the biggest challenge facing the Scottish Parliament. He said that there had been a slow start in acquiring and then using the country’s devolved taxes, but that the last five years in particular had seen a range of powers over tax take effect.
He welcomed the consultative and engaging approach that the Scottish Government had taken to the setting of tax policy. He said that the UK didn’t provide a particularly difficult benchmark to follow, but the fact that Edinburgh had grasped the opportunity to engage and consult had been welcomed by the tax profession.
On the issue of coherence being the biggest challenge, Cullinane highlighted a number of ways in which the partial devolution of tax powers could cause difficulties for Scotland, noting too that governments should focus on coherence as well as quantity. Although he acknowledged that this was not a uniquely Scottish issue, he noted that some small business owners could ‘quite naturally’ decide to incorporate their businesses in order to pay corporation tax and avoid higher rates of income tax. These taxes would therefore be collected at Westminster and present a challenge to the devolved Scottish tax base.
Cullinane noted the challenges of the anomalous 53 per cent marginal rate of tax resulting from the misalignment between the Scottish higher rate of income tax and the upper earnings limit for National Insurance. If divergence continues to grow in the months ahead this issue is likely to grow in salience.
In spite of these challenges, there were also examples of Scotland and the rest of the UK reacting to each other’s policies. In the case of Land and Buildings Transaction Tax, this was evident in the Westminster government following Holyrood’s lead in abolishing the slab system for its property transactions tax in favour of a more progressive system, and in Holyrood following the UK in introducing additional charges on owners of second and subsequent properties (the Additional Dwelling Supplement).
Cullinane concluded by noting that, even if Scotland were to become independent, it was likely that these dynamics would continue, albeit in different political contexts.
Tom Arthur MSP, a member of the Scottish Parliament’s Finance and Constitution Committee and panellist at the CIOT/ICAS ‘Big Tax Debate’ in March, described the devolution of tax-setting powers to the Scottish Parliament as piecemeal and reactive. He said these had been the result of decisions taken at Westminster to ‘stem the tide of nationalism and sate the appetite for further devolution’. He suggested that this had resulted in a tax system lacking in coherence and which presented a number of legal and political challenges, a point Cullinane had also made.
Arthur drew attention to ongoing legal issues around the devolution of Aggregates Levy and the devolved replacement for Air Passenger Duty – Air Departure Tax, a tax power that has remained in the departure lounge following state-aid concerns over the continuation of a tax discount on flights departing from airports in the Scottish highlands and islands. He also expressed concern over the assignation of a proportion of VAT revenues to the Scottish Parliament, describing the power as ‘incomplete’ and lacking verifiable data that can enable parliament to accurately understand the amount of VAT being generated in Scotland.
Arthur also acknowledged the anomalous 53 per cent marginal tax rate highlighted by Cullinane and suggested that it raised the question of whether NICs should be devolved and/or merged with the income tax regime.
He also voiced concerns over the opacity and complexity of the fiscal framework, the mechanism for managing the relationship between Scotland’s devolved tax-setting powers and revenues directly assigned by the UK Government (the block grant). He said that the opaqueness of the framework raised questions around its transparency and accountability. Arthur also called for the Scottish Parliament to have greater borrowing powers to help manage the budget risks posed by the fiscal framework, which is scheduled to be reviewed in 2021.
Reflecting on her experiences as a veteran of the Westminster Finance Bill processes and as the first female politician to lead on economic issues for her party in the House of Commons, Kirsty Blackman MP said that there was a lot that Holyrood could learn not to do from Westminster, at least when it comes to debating tax legislation.
Blackman spoke of her frustration at an ‘archaic’ Westminster process that stymied debate and constrained scrutiny. In particular, she highlighted the inability of MPs on the Finance Bill committee to take oral evidence from external experts and the government’s failure to table ‘amendment of the law’ resolutions, thus restricting the ability of opposition and backbench MPs to table amendments to legislation.
Blackman told the CIOT’s fringe event that sitting on the committee of MPs considering the Customs Bill in 2018 had made her realise quite how beneficial expert evidence sessions were and how much was lost by not taking them for the Finance Bill, thus shutting external experts such as CIOT out of the Finance Bill process. She acknowledged that organisations could provide written evidence, but said that this still constrained the ability of MPs to ask questions and probe ideas. She reiterated her commitment to making the case for external expert bodies such as the CIOT to have the ability to provide evidence to MPs during their consideration of the Finance Bill, hinting that she may once again try to amend the agenda of the next Finance Bill committee to allow this to take place.
Mark Diffley reflected on the findings of the CIOT’s latest poll of Scottish public awareness and understanding of devolved taxes. He noted that despite the changes of recent years, the public remain largely unaware of the intricacies of the devolved tax regime.
He identified four emerging themes from the 2018 and 2019 surveys. These were:
- Awareness of Scottish Taxpayer Status and where respective tax powers lie is low, and has fallen compared with 2018
- Scots find the tax system in Scotland and between Scotland and the rest of the UK hard to understand and need more information
- The majority of people who pay income tax think that the amount they pay has gone up in recent years
- There is broad support for Scottish government to have tax raising powers though the public is split on whether there should be national or more local rates
There was time for four questions from the audience. The first mooted the idea of getting additional tax revenue from the Scottish whisky industry, perhaps through an ‘industrial water levy’. Tom Arthur said the industry already generates a lot of money but it goes to the UK government in corporation tax. He emphasised the need for rigour in the process for identifying possible new taxes. John Cullinane used the example of the whisky industry to discuss how taxes on profits work internationally. Taxing rights are based on where value is generated, he said, which means the UK gains from sales of Scottish whisky around the world.
Responding to the polling data about the need for greater understanding of tax powers, a tax adviser who is a sole practitioner observed that lots of his clients could do their own tax returns but don’t want to. John Cullinane said that people care enormously about tax so it is beneficial if they have some understanding of how the system works.
A third questioner suggested it was time to reconsider how we fund local government. Nothing seems to have moved on this, he said, posing the question: why has it taken so long? Channelling Winston Churchill Tom Arthur observed that council tax was the worst form of local taxation, apart from all the others! John Cullinane commented that some areas are richer than others, which complicated local taxation. You can redistribute between areas but this is often controversial, he added.
The final question was on environmental taxation. The questioner noted that the workplace parking levy had been introduced to help the environment, but they had spoken to a person who would be happier if the money raised from it was directly put into green projects. Can we do this, they asked. Tom Arthur said local government has the power on this tax and how to spend the proceeds. There has to be a demonstration of how it helps to deliver a local transport strategy, he added. Broadening the discussion John Cullinane noted that the biggest green tax was fuel duty. The good news was that electric cars are coming. The bad news is – ‘how will we replace the revenue?’