Scotland’s devolved taxes: A never-ending story

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Scottish political parties may find it hard to convince voters about their tax policies, suggests Donald Drysdale, if the ground rules for further devolution remain unclear.

What is devolved already?

The Scotland Act 1998 gave the Scottish Parliament power from 1999 over income tax, business rates and council tax. Holyrood was able to vary the basic rate of income tax on Scottish taxpayers by up to 3% either side of the UK basic rate but this power, known as the Scottish Variable Rate (SVR), was never used.

The Scotland Act 2012 gave Holyrood wider powers over income tax and certain land taxes. It introduced the Scottish rate of income tax (SRIT), which will be implemented on 6 April 2016 and administered by HMRC. Each of the UK basic, higher and additional rates of income tax on non-savings non-dividend income of those defined by statute as Scottish taxpayers will be cut by 10%. The Scottish Parliament may then substitute a new SRIT rate for that reduction, allowing the effective basic, higher and additional rates to be reduced by up to 10% or increased by any amount without limit.

On 1 April 2015 Stamp Duty Land Tax (SDLT) and Landfill Tax were replaced in Scotland by Land and Buildings Transaction Tax (LBTT) and Scottish Landfill Tax (SLfT). LBTT pioneered a new progressive rate structure, which SDLT now mimics following abolition of the old ‘slab’ structure. LBTT resembles SDLT, including a 3% supplement on additional residential properties from 1 April 2016, but the rates and other aspects of the rules differ. SLfT remains similar to Landfill Tax in the rest of the UK. LBTT and SLfT are administered by Scotland’s own tax authority, Revenue Scotland.

What further devolution is proposed?

Before the independence referendum in September 2014, each of the three largest political parties at Westminster wooed the Scots with additional devolved powers if they voted to remain in the UK – which they did. In November 2014 the Smith Commission, on which all five main parties at Holyrood were represented, published its recommendations on this further devolution.

It was recommended that income tax would remain shared between the UK and Scottish Parliaments, administered by HMRC, but with Holyrood having wide control over rates and thresholds applied to non-savings non-dividend income of Scottish taxpayers. The first 10% of standard rate VAT raised in Scotland would be assigned to the Scottish budget – later extended also to the first 2.5% of reduced rate VAT. Air Passenger Duty would be devolved, and Aggregates Levy would be devolved once certain legal issues had been resolved. In addition, Holyrood would have limited powers over some aspects of Universal Credit and certain other state benefits.

Scotland’s fiscal framework

Smith recommended that Scotland’s fiscal framework be updated to encompass several elements including the funding of the Scottish budget, planning, management and scrutiny of public revenues and spending, mechanisms for adjusting the Scottish block grant, borrowing powers and cash reserve, fiscal rules and independent fiscal institutions.

It had been expected that this new fiscal framework would have been agreed by early this month, but it is the subject of prolonged negotiations still taking place behind closed doors between the UK and Scottish governments.

Meanwhile a recent report on ‘Revising Scotland’s fiscal framework’ from the House of Commons Scottish Affairs Committee explains in helpful detail why the fiscal framework is needed to set and coordinate Scotland’s sustainable fiscal policy. This will require fiscal rules – for example, constraints on fiscal policy, typically by setting limits on borrowing and/or debt – and fiscal institutions responsible for overseeing fiscal policy decisions.

The further devolution proposed will double Holyrood’s direct revenues to £16bn, while adding £5bn more in assigned VAT revenues – together comprising more than half the Scottish government’s annual budget. Holyrood will also assume the Scotland-specific fiscal risks associated with its revenues, including volatility. To manage these effectively, Holyrood will need greater borrowing powers. Agreeing those powers is a key element of the negotiations on revising the fiscal framework.

The block grant from Westminster is Scotland’s other main source of funding. When taxes are devolved to Holyrood, receipts are paid directly into the Scottish budget and the block grant is reduced by the amount of revenue forgone by the UK government. Both governments must agree how to calculate that initial reduction – without detriment to Scotland or the rest of the UK. They must also agree how to index this adjustment over time to ensure that it is not eroded by inflation and economic growth, and in a way that is fair to taxpayers across the UK.

The Scotland Bill 2015-16

The Scotland Bill is draft UK legislation intended to devolve further powers and responsibilities to the Scottish Parliament in accordance with the Smith proposals. It has been substantially amended by the House of Commons, but not in respect of tax matters.

Back in November 2015 a report entitled ‘A Fracturing Union? The Implications of Financial Devolution to Scotland’ from the House of Lords Select Committee on Economic Affairs expressed concern that the bill had gone through the commons without MPs having any details of a revised fiscal framework for Scotland. The bill is now awaiting its committee stage in the House of Lords, where further debate has been postponed until the outcome of current negotiations on the fiscal framework are known.

The Holyrood elections

Elections to the Scottish Parliament will take place on 5 May. Parties may wish to campaign on issues relating to tax policies, but could find it hard to convince voters if both the legislation on further devolution and the revised fiscal framework are still unfinished business.

Donald Drysdale of Taxing Words is a freelance author and series editor of Bloomsbury Professional's Scottish tax list.

Donald Drysdale
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19th Feb 2016 11:03

Scrap the lot
Let's just get rid of the divisive North British Regional Council and all this nonsense. We are a single country and the taxes should be the same across the whole country.

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19th Feb 2016 12:07

It's more ways to waste money.

The costs incurred by devolution of taxes, and any additional administrative costs borne by rUK should be deducted from Scotlands share.

It's too easy to demand this, that, and the other, when other people are bearing the major cost of it all.

I also disagree with governments here, regional governments here and there, more governments in the EU. It's just a waste and it increases conflict and discontent, rather than reducing it. The only winners are the politicians who get paid handsomely for wasting taxpayers money.

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19th Feb 2016 14:25

The SNP are poison.

They based their economy based on oil prices. Look at the oil prices now. And they still have the audacity to make outrageous demands.

I really wish they had voted out. At least then we wouldn’t have had to fund them gaining independence through the backdoor.

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19th Feb 2016 14:38

Glad we didnt vote yes
If we had voted yes I would have had to move as I only want to live in Britain, not the independent republic of Brigadoon.

You're right about the seps though CC.

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19th Feb 2016 14:56

the next elections for Holyrood
Mark the high water mark for the SNP its all downhill after that

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19th Feb 2016 15:00

I was wondering ....

The SNP say if the UK EU referendum votes us out of the EU, and the Scots want to stay in, then the SNP will want a veto.

I wondered what would happen if the Scots votes swung the balance to remain in the EU but the rest of the UK (or parts of it) had a majority leave vote, would the SNP be happy for England to also have a veto?

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19th Feb 2016 15:28

Comedy Gold

ShirleyM wrote:

The SNP say if the UK EU referendum votes us out of the EU, and the Scots want to stay in, then the SNP will want a veto.

I wondered what would happen if the Scots votes swung the balance to remain in the EU but the rest of the UK (or parts of it) had a majority leave vote, would the SNP be happy for England to also have a veto?

 

Negotiations with the Scots are a one way street!

The SNP are self-destructing and have created a lot of resentment.

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20th Feb 2016 14:55

Salmond's "logic" is flawed

ShirleyM wrote:

The SNP say if the UK EU referendum votes us out of the EU, and the Scots want to stay in, then the SNP will want a veto.

I wondered what would happen if the Scots votes swung the balance to remain in the EU but the rest of the UK (or parts of it) had a majority leave vote, would the SNP be happy for England to also have a veto?

 

I saw Alex Salmond on TV this morning trying to make this argument. I wish the reporter had asked him what his attitude would be to the Isle of Skye, or Orkney if they voted to leave?  What about Cornwall, or Yorkshire - would they have a veto if they voted differently to the rest of the UK?  Maybe the village of Upper Codswallop (population 12) should have a veto too? 

What Salmond cannot understand (or doesn't want to understand) is that Scotland voted to stay part of the UK, and that means accepting what the majority of the 65 million British want, not what one section of 3 million Scots want.  

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20th Feb 2016 15:28

Very good comment.

T Reece-Evans wrote:

ShirleyM wrote:

The SNP say if the UK EU referendum votes us out of the EU, and the Scots want to stay in, then the SNP will want a veto.

I wondered what would happen if the Scots votes swung the balance to remain in the EU but the rest of the UK (or parts of it) had a majority leave vote, would the SNP be happy for England to also have a veto?

 

I saw Alex Salmond on TV this morning trying to make this argument. I wish the reporter had asked him what his attitude would be to the Isle of Skye, or Orkney if they voted to leave?  What about Cornwall, or Yorkshire - would they have a veto if they voted differently to the rest of the UK?  Maybe the village of Upper Codswallop (population 12) should have a veto too? 

What Salmond cannot understand (or doesn't want to understand) is that Scotland voted to stay part of the UK, and that means accepting what the majority of the 65 million British want, not what one section of 3 million Scots want.  

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19th Feb 2016 15:24

to go off topic - again
I am more concerned with the effects of a brexit on the island of Ireland

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19th Feb 2016 15:35

Carnmores

That could be interesting. We export a lot to Ireland.

I think the benefits of exiting and then being able to do our own trade deals outweigh any negatives.

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20th Feb 2016 14:25

Hhhmmmm
The reason the UK government were prepared to go extreme lengths to keep Scotland in the union was due to the fact it was about to vote to leave. The consequences of a Scottish YES vote would have had a major ecomomic impact on the rest of the UK not to mention the reduced influence on the international stage.

The scottish people wanted to stay part of the UK but with greater fiscal powers and greater autonomity. The SNP govermnet have rightly or wrongly been mandated by the Scottish people to negotiate the strongest possible deal for the Scottish people.

The EU question will be voted for by up to 60 million people. If we stay in it wont be because up to 4 million eligible Scottish voters wanted it, but due to the fact that possibly 25 million other UK voters wanted it. Equally if the majority of Scots, welsh & Irish vote no but all English voters vote YES then we leave. This is what happens in a democracy...... We go with the majority regardless of what invisible border they happen to identify with on our Isles.

I personally think that more localised decision making is the way forward, a united states of great Britain model. Isnt the in out EU vote partly about retaining more localised power rather than being dictated too by others........... Scotland has had devolved powers in many key areas since 2007 and these negotions are a further strenghtening of these powers.

Very good and interesting article. Thank you

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10th Mar 2016 17:17

Rest of UK subsidising Scotland

So basically, Scottish people will pay less tax, but get more money to run their local devolved services......

How does this fit in with the ideal that Scotland wants to be more independent?

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11th Mar 2016 09:28

Is it true ....

That Scottish MP's voted on the Sunday Trading laws, and swung the vote, even though the laws do not affect Scotland?

If so, it smacks of hypocrisy.

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11th Mar 2016 17:37

yes it is true , some say they went back on a previous agreement

their answer was that a change in the law would affect the current rights of sunday workers in Scotland who presently get a premium rate  and that would likely be lost if the change went through ergo they were protecting their sunday workers ( typically no mention was made of those workers who might like to work and  earn on sunday but now cannot)

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11th Mar 2016 17:45

Sadly, it's true

And today they're blaming "Westminster" (SNP code for 'them English $%^&*(s) for the shortfall there would be up here.  Funny, I thought it was down to oil being $100 a barrell less than the Great Salmondo said it would be by now.

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12th Mar 2016 19:29

and they are at it again

reports today suggest that Sturgeon is whipping it up again  , much as i dislike her she is a consumate politician

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