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ICAS urges step by step approach to devolution

3rd Nov 2014
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Further devolution of income taxes to Scotland should be implemented on a step by step basis to avoid problems in implementation and the risk of unintended consequences, the Institute of Chartered Accountants of Scotland (ICAS) has said in a submission to the Smith Commission.

ICAS said tax powers should only be devolved where they generate benefits that outweigh the costs of setting up those powers.

William Hague, leader of the House of Commons, said at the weekend that there would be no going back on "vows" to Scotland made during the recent independence campaign, the BBC news website reported. Last week tax experts told the Commons Treasury Committee that further devolution would create more complexity, and anti-avoidance legislation would be needed to deal with cross-border issues.

Further devolution of powers over income tax rates and bands could “readily” build on the Scotland Act 2012 powers to be implemented in 2016, ICAS said. But any further devolution of income tax should be implemented on a “step by step” basis.

An Ipsos MORI poll of ICAS members in Scotland found that 68% favoured some further devolution, but views varied as to how much power should be devolved.

The accountancy body’s key messages included a call for the Scottish Parliament to be made more accountable to Scottish taxpayers, better scrutiny of legislation, and the establishment of a Scottish Office of Budget Responsibility.

Income tax

ICAS noted a “general lack of awareness” of the Scottish rate of income tax (SRIT), and recommended an immediate public awareness campaign led by policy makers. “Our members have already expressed concerns about the preparedness of HMRC to operate SRIT fully and effectively from 6 April 2016; we are currently awaiting an update to allay fears in this area,” it said.

The application of different tax rates in different parts of the UK may influence taxpayer behaviour, ICAS observed.

“For instance, if income tax becomes more onerous, taxpayers may seek to convert sources liable to income tax into something else that is liable to, say, corporation tax or capital gains tax. This could be further aggravated if corporation tax rates too were to be lowered.

“Or there could be further demand for tax planning if income tax was devolved but NIC remained reserved. There have been strenuous anti-avoidance measures in recent years to prevent the exploitation of differences between income tax and NICs, which could be re-opened if income tax in some devolved jurisdictions was permitted to diverge.”

Revenue Scotland and Tax Powers Act 2014 introduced a general anti-avoidance rule for fully devolved taxes that is different from the UK general anti-abuse rule and sets out to take a “stronger stance” against avoidance, ICAS said.

“There is a danger, however, in setting the right tone about compliance and public duty if the rules are overly complicated, the law permits different opportunities, and there are confusing messages about anti-avoidance.”

Corporation tax

Devolution of corporation tax would carry “a number of complex cross border complications” for businesses and government, ICAS said. Most respondents did not support full devolution, which would require “an analysis of business profits attributable to each country on a transfer pricing basis for every company in the UK operating across the English-Scottish border would have to be undertaken”.

Writing in Tax Adviser, Deloitte’s head of tax policy Bill Dodwell said it was easy to imagine that companies might look at lower tax rates and wonder how they might access them. “Surely no one really wants a complex transfer pricing system put in place in the UK, which would add to the burdens both for business and for HMRC.”

Treasury Committee inquiry

The House of Commons Treasury Committee will continue its inquiry into  further fiscal and economic devolution to Scotland tomorrow, 4 November, when it is set to hear evidence from witnesses including HMRC’s tax assurance commissioner, Edward Troup, and its deputy director of devolution, Sarah Walker.

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