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Scottish tax rates will add complexity, MPs told

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29th Oct 2014
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Further devolution of taxes to Scotland will create more complexity and anti-avoidance legislation will be needed to deal with cross-border issues, tax experts have told MPs.

The House of Commons Treasury Committee launched an inquiry last week into proposals for further fiscal and economic devolution in Scotland.

Chas Roy-Chowdhury, head of taxation at ACCA, told committee chairman Andrew Tyrie yesterday that changes in tax rates would create “uncertainty, complexity, and anti-avoidance [legislation]”.

Tyrie asked: “Avoidance? You think we may end up with less revenue?”

“Anti-avoidance measures need to be taken, yes,” Roy-Chowdhury said.

Alok Sharma MP asked: “What you’re saying is that [changes in tax rates are] going to turn the tax code even more of a dog’s dinner than it is now, but isn’t greater complexity effectively the price we’re going to have to pay for devolution?”

“Yes,” Roy-Chowdhury said. Complexity would arise to the extent that taxes were varied. “If there is the opportunity for arbitrage between tax rates, then clearly there needs to be anti-avoidance around that and so greater complexity ... There will be issues, but at the end of the day it probably comes down to a political decision.”

Patrick Stevens, tax policy director at the Chartered Institute of Taxation, said: “The more that is devolved, the greater the complexity that arises ... Any changes in the tax system, where you have two countries with a border that is very easy to cross, will always lead to changes in behaviour.”

Frank Haskew, head of the ICAEW Tax Faculty, told the committee: “Whenever you create a boundary in tax you create opportunities for potential arbitrage or mis-reporting. That [England-Scotland] boundary doesn’t exist at the moment.”

Income tax and NICs

Asked about the impact of tax devolution on the possibility of a merger between income tax and national insurance contributions, Haskew said it was already recognised that such a merger at the UK level would be “fraught with difficulty”.

Trying to devolve NICs, which were “intrinsically linked” to state benefits, would be a difficult task.

Roy-Chowdhury said a variation in income tax rates would make any alignment of tax and NICs that might have happened “very difficult”.

Lorry drivers

Jesse Norman MP asked how easy it would be for HMRC to identify “Scottish taxpayers”.

HMRC did not seem to think there would be a huge problem in that respect, Roy-Chowdhury said. “They need to get employers to flag [their employees’ situation]. But I think are instances, for example lorry drivers going to and fro, people living in England but working in Scotland … there are more difficulties than perhaps we are thinking of at the moment. We’ll start seeing some of those problem areas coming in if [the Scottish rate of income tax] starts, as planned, in 2016.”

Norman noted that the Scottish rate would apply to salaries paid by English-resident companies to employees who were Scottish taxpayers.

Stevens suggested that “far more” self-assessment tax returns could be required, for people with a “mish-mash of different sorts of income”. Speaking to the Telegraph after the hearing, he predicted that “hundreds of thousands” of Britons may have to start filling out forms under the new arrangements, the paper reported.

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