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A Scottish approach to taxation

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14th Oct 2016
Tax writers and lecturers
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It’s not often that there’s the chance to design a tax system from scratch, but north of the border, there have been rumblings about just that.

Is there scope for a fundamentally different approach to taxation in Scotland? This was one of the questions put in July, when the Scottish government made a call for evidence on the future of taxation in Scotland.

The consultation closed on 30 September, and we now have replies.

Four principles

A degree of devolution in tax follows in the wake of the Scotland Act 2012 and 2016. The point of the consultation exercise was to start at ground level and ask what sort of tax system Scotland should have.

With a nod to Adam Smith, that Kirkcaldy-born son of a comptroller of customs, the Scottish government suggests setting out four principles for its tax policy. They are that taxation should:

  • Be proportionate to the ability to pay
  • Provide certainty to the taxpayer
  • Provide convenience/ease of payment
  • Be efficient

To which one might add a fifth principle, of fairness or tax justice; suggested by, among others, the Chartered Institute of Public Finance and Accountancy, the Poverty Alliance and the New Policy Institute and the Public & Commercial Services Union (IPC).

Consultation questions

There were seven more specific issues up for consultation:

  • How to use the four principles to underpin tax policy
  • How current and proposed tax regimes match up to the four principles
  • If there is scope for something fundamentally different
  • If future tax changes should be ring-fenced
  • If potential behavioural responses limit options for tax changes
  • If HMRC administration limits the scope for change
  • If there any other administrative limitations to the emergence of a Scottish tax system

The response

Respondents varying from ICAS, ICAEW, CIOT, LITRG, ATT and the Law Society of Scotland, to the Scottish Human Rights Commission, the Church of Scotland and UNISON, all had their say.

Around 40 responses were received from a diverse mix of tax and accountancy professionals, trade unions, academics, local authorities and members of the public. The level of response was high, according to CIOT, which undertook a survey of its members in Scotland.

The view from Scotland

ICAS was one of many voices sounding a note of realism. Acknowledging that the Scottish Parliament has the “power to take a fundamentally different approach” to taxation, ICAS suggested that the practical outworking of this could be “dramatic and unpredictable.”

Among other comments, ICAS called for a five-year roadmap setting out policy objectives. It was also noted that this might “discourage politicians from indulging in eyecatching changes.”

Principle to practice

While the CIOT, LITRG and ATT all approved the four principles, there was debate as to whether they could be translated into practice. Only 24.1% of their respondents considered that the principles were achievable, 34% being of the opposite view and 41% undecided.

And even the principles themselves have been up for debate.

With “the emphasis on a ‘fairer Scotland’ over recent years, it is surprising that the principles suggested for Scottish taxation do not mention fairness,” the Poverty Alliance and the New Policy Institute said in their submission.

According to the CIOT, the principles may need the protection of incorporation in a written constitution to escape being at “the mercy of the government of the day.”

The IPC response is noteworthy, it being the largest union representing HMRC employees beneath SCS grade in Scotland. Its call for better resourcing and staffing, and a robust approach to tax evasion (away from the tendency to “prosecute small fry”), would be echoed by many practitioners.

Pulling different ways

One practical problem is that potentially, the four principles can act like horses pulling different ways.

Policy objective one: Be proportionate to the ability to pay – so we might favour a lower rate of income tax for those on lower income, balanced by a higher rate for those with more income?

But policy objective two: Providing certainty to the taxpayer, can conflict with objective one.

But there is no certainty for the wealthy individual with four homes, or the migrant worker with no fixed abode. Under the new system, an additional night in Gretna could be all it takes to change your rate of income tax from Scottish to UK bands: from Holyrood bands ‘favouring’ the lower paid, to a Westminster style raising the higher rate band.

Sky’s the limit

But with such an open starting point for the consultation, the sky was, potentially, the limit. And there are certainly some radical suggestions out there.

Respondents suggested household based taxation, land value taxation, a shift towards local taxation, a tax on derelict land and property, making taxation of high net worth individuals more transparent, calls for more effective management of tax reliefs, using tax for social justice and to promote human rights.

The potential for a different legal approach in Scotland with principle-driven legislation was also raised.

Revenue raising

With growing devolution, the finance committee noted that “the structure of devolved public finance will shift from a focus upon expenditure to consideration of revenue-raising and the principles which should underpin it.”

At once this brings in the subject of new taxes, avoidance and taxpayer behaviour. These were topics all touched on by respondents.

ICAS noted, for instance, “If income tax becomes more expensive taxpayers may seek to convert sources liable to income tax into something else that is liable to, say, corporation tax or capital gains tax. Both CT and CGT are reserved taxes so any increase in receipts will flow to Westminster.”

Taxpayer behaviour

Well might the double-edged sword of taxpayer behaviour be mentioned.

Remember the American War of Independence and the brick tax raised to pay for it? The solution was obvious: Use bigger bricks.

There was also the tax on printed wallpaper - which gave a boost to stencils as an art form. Tax on printed paper? Hang plain paper and paint the pattern on afterwards.

And now, as ICAS points out, we are potentially dealing with taxpayer behaviour in two ‘different’ tax jurisdictions.

“If neighbouring jurisdictions introduce a relief that is competitive, does Scotland need to do likewise to protect commercial opportunities (e.g. LBTT/SDLT seeding relief)? This needs to be analysed in relation to the overall strategy… international tax avoidance behaviours would potentially appear within the rUK for the first time.”

A brick wall?

And with the Scottish government consultation, we do seem to reach a brick wall - whatever the size of the bricks.

Has Scotland yet enough devolved power to bring radical change? As things stand, simply having a separate tax system only increases complexity.

Currently fully-devolved taxes give only very limited scope for radical innovation.

What’s different?

Land and buildings transactions tax (LBTT) does differ from stamp duty land tax: but is it radically different, or administratively different? There are two sets of rules which are almost the same; but with sufficient difference to mean that you can’t be quite confident of the rules on the other side of the border. 

Looking forwards, Scottish rate of income tax is likely to change, becoming different from the rest of the UK.

Then we have capital gains: Not a devolved tax, so UK rates and bands apply. So for individuals with capital gains, we potentially have two ‘higher rate’ tax calculations north of the border. One on rUK rates, to establish which rate of CGT to use (as these are based on rUK income tax bands); and a second for Scottish income tax purposes – using Scottish income tax bands.

Measuring up

This is where the ICAS suggestion of measurable objectives as well as high level principles fits in. There has to be some practical yardstick.

Otherwise how can we measure our progress – and hold to account governments who might just be making life more complex - under the banner of the conflicting principles of proportionality, certainty, convenience and efficiency?

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