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Scottish tax: Can meltdown be avoided?

12th Sep 2014
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When Scottish electors cast their votes in the independence referendum on 18 September, a ‘no’ outcome would result in greater devolution of tax powers to Holyrood. By contrast, a ‘yes’ result in support of independence would create the need for an entire new tax system for Scotland, says Donald Drysdale.

The ‘no’ option

A pattern for greater fiscal devolution within the Union has already been set by plans for Land and Buildings Transactions Tax and Scottish Landfill Tax to be administered by Revenue Scotland, while the Scottish rate of income tax will be part of the UK tax regime administered by HMRC.

If this dual approach was extended as other tax powers were devolved, it could neatly balance the benefits of greater devolved powers with the economies of pre-existing UK-wide tax administrative systems. It could also help Revenue Scotland’s capabilities to develop in an orderly fashion over time, while relying on the existing strengths and expertise of HMRC.

The ‘yes’ option

An outcome in favour of independence would create the need for a comprehensive new tax regime for Scotland, with all the attendant administrative paraphernalia this would require. There would be an expectation, at least by those who had voted ‘yes’, that Scotland should achieve meaningful fiscal autonomy at an early date. They might be disappointed, of course.

In its white paper of November 2013 entitled ‘Scotland’s Future: Your Guide to an Independent Scotland’, the Scottish government implied that the way forward after a ‘yes’ vote would be to replicate the UK tax system for a transitional period, with the potential for change in future.

The paper claimed that Scotland would then develop a tax system that was simple, neutral, stable and flexible (the potential conflict between those last two objectives was not addressed). The one-off costs of replicating the UK tax system and then moving to a simpler regime have still not been quantified and remain one of the worrying unknowns in the independence debate.

HMRC and Revenue Scotland

Taxpayers who come into contact with HMRC are only too aware of the administrative shortcomings of the existing UK tax system. Practitioners interacting daily with HMRC share the difficult pressures under which they work and are under no illusions – the tax regime is extraordinarily complex and virtually unworkable.

For years it has been apparent that Westminster MPs create tax laws without understanding their implications. In Edinburgh the situation seems even more acute, since Holyrood and its MSPs have virtually no tax experience and have already enacted new fiscal measures with insufficient debate. Replicating existing UK tax law that wasn’t fully understood in the first place doesn’t exactly sound like a cunning plan. Assuming that MSPs would also wish to flex their newly-won fiscal powers, even greater complexity might ensue.

Scotland’s population is one-tenth that of the UK. HMRC has 60,000 employees UK-wide, while Revenue Scotland employs only 30 permanent staff. In theory an independent Scotland with a fresh start should be in a position to introduce a simpler tax regime that could be administered by a leaner, more efficient tax authority. However, the task of replicating the UK tax system for a transitional period – presumably for several years – and then making fundamental changes on moving to a simpler regime would put enormous pressures on Revenue Scotland and require disproportionately high manpower.

In the meantime Revenue Scotland might be tempted to strengthen its tax expertise by poaching existing HMRC staff currently located in Scotland – of which there are some 8,000 – to administer Scottish taxes. However, this wouldn’t work. HMRC operates specialist UK-wide teams centralised in different locations across the UK. For example, national insurance is administered from Newcastle. Many of HMRC’s personnel north of the border are devoted to narrow processing roles. By contrast, most of HMRC’s senior technical and policy positions are in London – including oil and gas specialists whose expertise Scotland would require.

Perhaps HMRC might be asked to administer some aspects of the new Scottish tax regime for a time as a sub-contractor. By way of illustration, it has already been agreed that HMRC will administer the Scottish rate of income tax which will be set by Holyrood. The Scottish government is to pay some £40m for the necessary IT system, and around £4.5m annual running costs. Assuming that this particular public sector IT project doesn’t go belly-up (as so many of them do), this arrangement might work successfully within the UK following a ‘no’ vote.

Such sharing of responsibilities might not be feasible under independence. After all, divorcing couples are not generally known for their amicability. In reality, Westminster and Holyrood would be obliged to thrash out the best deals for their respective constituents at a time when they would be at loggerheads on a host of other crucial issues.

It may also be useful to ask what incentive there would be for HMRC to undertake such a sub-contract assignment. They are being pressed to reduce manpower, and their personnel are suffering from low morale. If HMRC needed to be incentivised by a highly remunerative contract, then this would be yet another cost forced on the Scots by independence.


Scotland is at a tipping point from which there will be no return. Regardless of the outcome of the referendum, the Scottish Parliament and Revenue Scotland have heavy responsibilities to ensure that the systems for tax administration are robust and cost-effective. It is unclear whether they will meet expectations.

Practitioners whose clients have interests in Scotland are likely to face many uncertainties in coming months, and will need to ensure that they are well informed about new Scottish tax developments as they arise.

Donald Drysdale is series editor of Bloomsbury Professional’s Scottish Tax Series, which aims to provide tax advisers and non-experts with practical and concise information on the Scottish and UK tax rules affecting taxpayers in Scotland.


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