Scottish tax framework debate offers little clues on timetable for future reforms

On March 22, Holyrood’s Finance and Public Administration Committee scrutinised the Scottish Government’s Framework for Tax in an evidence session with Public Finance Minister Tom Arthur and officials.

The framework, published on 16 December alongside a number of other tax policy documents, sets out the principles that will guide the Scottish Government’s approach to tax policy making in the 2021-26 session of parliament.

The session gave MSPs an opportunity to quiz the minister in day-to-day charge of Scotland’s tax system on topics including:

• Improving public engagement on tax
• Tackling tax avoidance
• Income tax challenges
• Local tax reform
• Future tax devolution
• Measuring the framework’s success

MSPs involved in the questioning of the minister were:

• Kenneth Gibson MSP (SNP, Convener of the Finance and Public Administration Committee)
• Daniel Johnson MSP (Labour, Deputy Convener)
• Ross Greer MSP (Green)
• Douglas Lumsden MSP (Conservative)
• John Mason MSP (SNP)
• Liz Smith MSP (Conservative)
• Michelle Thomson (SNP)

This is an edited summary of proceedings. You can read the full transcript of the meeting on the Scottish Parliament website here. A video recording of the session is also available and can be watched here.

Analysis

This was a tough session for the government. The framework may set out the government’s overarching approach to how tax decisions are made in Scotland, but the committee was keen to get into the practical detail of the challenges faced by the devolved tax regime. The session also gave us an indication that long-promised reforms to areas of the tax regime like council tax are still some way off and a sense that, for some MSPs, many of the tougher decisions are being kicked into the long grass. But the Minister and his officials gave a robust defence of the government’s tax policy and they appear intent to cast the net far and wide in their efforts to build better public engagement.

The session

In opening remarks, public finance minister Tom Arthur explained that one of the overall aims of the framework for tax was to provide ‘a fuller explanation of how make tax policy in Scotland’.

He explained that the framework was built on Adam Smith’s principles of proportionality, certainty, convenience and efficiency, underpinned by two further tenets: “a firm approach to tax avoidance” and “communicating clearly on tax and engaging the public on tax policy”, which Arthur described as a “priority” for the Scottish Government.

Improving public engagement on tax

The Scottish Government wants better public discussion of tax. Does it have the right strategy in place, or is it relying on the same old faces?

Committee convener Kenny Gibson (SNP) questioned the extent of the government’s ambition to improve public engagement on tax.

The minister robustly defended the government’s engagement with stakeholders, citing the work undertaken to develop the framework (which included engagement with CIOT and ATT), the recent consultation on plans to reform the Additional Dwelling Supplement (ADS) of Land and Buildings Transaction Tax (LBTT), and the commitment in the SNP – Scottish Green agreement to establish a Citizens’ Assembly on the future of council tax.

Gibson was not satisfied, responding:

“what you have outlined is not really public engagement, is it? It involves stakeholders and people like that. How many will there be at the citizens assembly, for example? A hundred folk?”

But Arthur defended the government position, saying it had taken:

“a balanced approach through detailed engagement with stakeholders, an opportunity for wider public consultation and discussion and, of course, continuous engagement with Parliament, too.”

Tackling tax avoidance

Scotland promised a different approach to tackling tax avoidance but has this been achieved? Ministers and officials were quick to stress that tackling tax avoidance is crucial to the overall performance of the devolved taxes.

Kenneth Gibson noted that when further tax powers for the Scottish Parliament were being considered following the 2014 Scottish Independence referendum, there had been a commitment by ministers to do things “differently from the United Kingdom Parliament” in terms of tackling tax avoidance:

“a principled approach to tax avoidance in contrast to the UK’s position, under which, unless something is specifically addressed in legislation, there is an opportunity for avoidance”.

He queried whether this rhetoric had been turned into action, suggesting that Scotland may be continuing to follow a path similar to the rest of the UK.

Arthur stressed that tackling tax avoidance was embedded in the Scottish Government’s overall approach to tax policy making, telling the committee:

“I would say that we want effective tax policy that does what it says on the tin, and reducing and minimising opportunities for avoidance is a key part of that. How we actually go about minimising avoidance needs detailed input from those who administer and deliver the tax on the ground, because their technical expertise is extremely valuable and important.”

The framework would strengthen this by ensuring the delivery of “effective legislation that, in turn, builds upon the principle of minimising opportunities for avoidance”.

Alex Doig, a Scottish Government official attending alongside the minister, continued:

“good tax policy design starts at the outset, and the aspiration is that, by engaging the tax authority in the process of policy design, you avoid those situations and practices or at least limit the scope for avoidance practices to take place.”

Michelle Thomson (SNP) said that the amount of money lost to the UK through tax avoidance was “a huge concern” and asked how anti-avoidance measures were managed by the Scottish Government.

She expressed mild concern “that we might be saying something nice (about anti-avoidance) but not necessarily translating it into real resource or a real focus”.

Alex Doig explained that there was a “real focus on tax avoidance” within the framework, with government looking to design tax policies “that will reduce the scope for avoidance activity”. He told the committee:

“The framework for tax says that, when policy makers consider tax changes or proposals, the scope for avoidance activity needs to be a primary consideration at the outset of policy design. It is the job of officials and ministers to live and breathe that in relation to specific policies.”

Arthur reiterated the earlier point about avoidance and the tax policy process, saying:

“The issue is hard baked into the process. We do not design and take decisions on tax policy without giving serious and detailed consideration to issues around avoidance”.

Income tax challenges

Retaining high earners and managing Scotland’s transition from oil and gas to renewables represent challenges to the Scottish income tax base. MSPs were sceptical of the ability of the government to get to that point.

Ross Greer (Green) asked whether the government prioritised economic growth over further changes to the income tax regime as a way of increasing revenue. Arthur told the committee that “the key task is to grow our tax base”, but he warned:

“There are limits to what we can do with income tax before we start risking the distortionary effects of behaviour change and potentially losing revenue”.

Liz Smith (Conservative) said that economic growth and productivity had been highlighted by independent bodies such as the Scottish Fiscal Commission as a challenge to Scotland’s tax base. She asked what steps were being taken to protect economic sectors such as the North Sea oil and gas industry, which provide a significant source of income tax revenue.

Tom Arthur said that the challenge highlighted the need for the government to ensure that its economic strategy managed a “just transition” for high-skilled, high-wage workers from hydrocarbons to renewables. Unable to quantify the impact on the North East, Douglas Lumsden (Conservative) suggested that:

“it does not sound as if you know that there will be a steady tax base”.

Kenneth Gibson (SNP) expressed some scepticism around the ability to attract and retain high earners:

“There are 700,000 Scots living and working in England, not to mention those who are overseas. If we are a strong and growing economy, perhaps fewer people would feel the need to move south or overseas.”

He also honed in on the challenges associated with the transition of workers from oil and gas to renewables:

“Some workers might find it easier to move to Saudi Arabia and pay their taxes there if we do not get the highly paid and highly skilled jobs”.

Local tax reform, but when?

With meaningful reform of council tax seemingly unlikely in the short to medium term, MSPs pressed the Public Finance Minister for further detail and accused ministers of kicking the can down the road.

John Mason (SNP) focused his opening remarks on council tax, pressing the minister for a timescale for its replacement and options for further reforms – such as property revaluations – as an interim measure.

Arthur said that the Scottish Government had no plans to undertake a council tax revaluation in advance of the plans agreed with the Scottish Greens to deliver a Citizens’ Assembly on local government finance reform. This, he said, was part of the government’s commitment to providing taxpayers with certainty in the tax regime, something ministers have been keen to stress as the country recovers from the pandemic.

Mason asked:

“Can we have a range at least? I think that most parties in the Parliament are against council tax, so we will need a new tax, which will need primary legislation. I presume that that cannot happen before the next election, but what is in the far distance? Will we definitely have something within 10 years?”

Without pre-empting the outcome of the assembly’s work, he acknowledged that it would consider a range of options from “relatively minor changes to significant and fundamental reform.” Because of this, Arthur said that debates around reform of the existing system of council tax “would go beyond the lifetime of this session of Parliament”.

In a later exchange, Douglas Lumsden (Con) sought clarity on the remit of the assembly. He suggested that its “hands are already tied” because of existing government commitments to support taxpayers through exemptions from business rates and council tax that may preclude these from discussion. Lumsden also suggested that “the can is being kicked down the road” because ministers had been unable to offer specific timelines for reform.

The public finance minister said that the remit of the assembly was still to be determined and reiterated his earlier point that its work would extend beyond the 2021-26 session of parliament. He explained that the government’s commitments to support taxpayers through business and council tax reliefs were for the ‘lifetime of this parliament’ and that “long-standing discussions and debates on local taxation” would take time to resolve, beyond the current parliamentary session.

The committee also looked at the Scottish Government’s approach to Non-Domestic (Business) Rates after a Fraser of Allander Institute study found ‘no evidence’ that a support scheme for small businesses had worked. MSPs also pondered the need to do more to respond to the rise in online shopping.

Ross Greer (Green) described the Fraser of Allander’s conclusion as “alarming”, while both he and Daniel Johnson (Labour) asked how the government intended to respond to the rise of the online economy and its impact on bricks and mortar businesses.

Responding to the Fraser of Allander findings, Arthur told the committee that “absence of evidence is not evidence of absence” and defended the small business bonus scheme, arguing that:

“We know that there is support for the small business bonus scheme. Many of the small businesses that benefited from it value it.”

He explained that the government would be reflecting and responding to the study and that a short-life working group will be convened to carry out this work.

On an online sales tax, Arthur told the committee that the SNP had promised in its manifesto to look at options for such a levy, but that this needed to be considered alongside UK-wide plans for a Digital Sales Tax, which may take precedence. He committed to considering a Scottish-specific tax in the absence of further UK work:

“If the UK Government decides not to legislate on or make progress in this area, we can decide how to take things forward.”

Johnson suggested that the rise in online shopping may necessitate further reform of Business Rates. Arthur said that work was ongoing to implement the final recommendation of 2017’s Barclay Review of Business Rates. He added that many of the recommendations of the UK review of Business Rates – such as the introduction of a business growth accelerator – had already been implemented in Scotland, implying that Holyrood was ahead of the curve.

Future tax devolution

A number of issues were touched upon in relation to further and future tax devolution, with a focus both on the government’s objectives for the upcoming fiscal framework review and longer-term objectives. MSPs also offered their opinions on what might constitute a future package of tax devolution.

John Mason (SNP) asked about the Scottish Government’s position on VAT devolution. Arthur told the committee that the government would like to see VAT powers devolved to Holyrood – along with powers over National Insurance and the remaining aspects of income tax reserved to the UK.

These would form part of the government’s negotiations with the UK Government in the upcoming fiscal framework review, with Arthur adding that VAT devolution – as opposed to assignment – was “now more achievable” since the UK had left the European Union. He added:

“There is an opportunity to look at the full devolution of VAT, and we want that to be considered as part of the fiscal framework review”.

Mason also said that he would like to see income tax and National Insurance merged as part of a process of devolution.

Arthur said it was “too far down the road” to know whether this would be a viable policy for future Scottish Governments to pursue but said that in the more immediate term, the devolution of National Insurance provided an opportunity to “address the marginal rate—the gap between the Scottish higher rate and the UK upper earnings limit”.

[This is a reference to the anomaly that sees Scottish taxpayers charged a marginal rate of tax of 53 per cent (54.25 per cent in the 2022/23 tax year) on the portion of their income falling between the two higher rates of tax because of the misalignment between the upper earnings limit threshold for National Insurance and the lower threshold for the higher rate of Scottish Income Tax].

While acknowledging that discussions around further income tax and National Insurance devolution would be “complex”, Arthur argued that the government’s tax framework “would provide a way to consider any changes and to scrutinise and test proposals”.

Daniel Johnson (Labour) asked whether the devolution of VAT, National Insurance and remaining income tax powers represented the limit of the government’s ambition for further devolution, or whether it would be prepared to pursue control over additional powers, such as corporation tax.

The public finance minister said that the government’s overall objective was to secure control over all aspects of the tax regime in Scotland; his party had identified the devolution of VAT, NI and income tax as priorities for the fiscal framework negotiations. He told the committee that these were the government’s immediate priorities but that “we would, of course” want to explore further and wider control over taxation in the future. A broader basket of taxes, he would later tell the committee, would mean less reliance on income tax receipts.

Kenneth Gibson (SNP) suggested that devolved VAT would be difficult to administer and collect. He suggested that ministers should be looking towards other taxes such as fuel and excise duties which could be:

“a lot less contentious from the point of view of how they are calculated, would be much easier to deliver and would bring in a higher proportion of revenue?”

Arthur said that Gibson’s point illustrated:

“a tension that exists between administrative complexity and policy impact”.

He continued:

“The ability to take decisions on the taxes that I have referred to—especially national insurance and VAT—offers the potential for significant policy impact… My key point is about the issues that we could address if we had powers over national insurance and VAT, examples of which I gave earlier: the marginal rate that exists between the higher Scottish rate and the upper earnings limit, and the implications of VAT for the deposit return scheme and for our work on decarbonising heat in buildings… There are areas where control of those taxes could be impactful”.

Mason then asked about the prospects of introducing “completely new (national) taxes” in Scotland. The public finance minister explained that this could be “challenging” and would require the consent of the UK Parliament. Previous efforts – he cited discussions around the marginal rate of national insurance and VAT and refurbishing properties – had not been successful. Alex Doig explained that the process for introducing new national taxes in Scotland would be “quite lengthy” and would require engagement and legislation at a UK level.

Measuring the framework’s success

MSPs thought that the framework – while laudable – gave little indication of how and when success will be measured.

Michelle Thomson (SNP) described the framework as “unobjectionable” but wanted to know “what specific and measurable difference” it would make towards successful tax policy making. Arthur said that one of the factors would be the extent to which it helped “elevate the public discourse on tax (and) more substantive discussion” (see above).

He also said that he believed the document could be used by “others to bring forward tax policies, whether that be in the Parliament or among the general public and other stakeholders, such as civic Scotland”. He hoped this would lead to “more informed and more reasoned” debate that recognises “the important contribution that tax makes” to society.

Daniel Johnson (Labour) was concerned at the lack of measurable objectives within the document. He picked out the lack of detail around income tax performance as an area of weakness in the framework.

Arthur stressed that the government has taken an open and transparent approach to income tax policy and that issues relating to the performance and management of income tax and the other devolved taxes “exist independently of the framework”. He added that the purpose of the framework was to provide a high-level overview of the government’s approach to tax policy making and to widen this remit would take the document:

“from being a concise high level document that seeks to provide clarity to being quite a dense one, which, ultimately, would not realise its stated purpose.”

Chris Young, CIOT External Relations