The Scotland Bill, What Is It?
It’s been described by the coalition as the “biggest transfer of fiscal power to Scotland since the creation of the United Kingdom”. The legislation is aimed at transferring control of some powers from Westminster to Holyrood, including some tax changing authority.
Local taxation
The recent results of the Scottish Parliamentary election has brought into focus issues relating to the tax raising powers at Holyrood, namely the new Scotland Bill. In most respects this Bill simply makes minor and uncontroversial adjustments to the terms of the original devolution settlement. However, it does contain proposals related to income tax. The Scottish Parliament, in fact, already has limited powers over income tax. These powers are to set a “Scottish variable rate” (SVR) but have never been used. There was, however, a political fuss when it recently emerged that the Scottish Government had chosen not to pay HMR C to keep up to date the administrative arrangements that are needed to activate the SVR.
Scottish rate of income tax
The proposal is to grant the Scottish Parliament the power to set a single rate. The starting point would be the rates set at Westminster - currently 20%, 40% and 50%. Ten percentage points would be deducted from each of these rates, and then the level set by the Scottish parliament would be added, giving the Scottish taxpayers rates. There will be no ability to increase the rates of tax on higher earners while decreasing it for the lower paid. If income tax rates are to be increased it will be across the board and likewise for any decrease. Furthermore, the proposal would not allow the Scottish Parliament to amend in any way the general structure of income tax, nor to change personal allowances or other features of the tax system.
Corporation tax
The Scotland Bill will not give local control on the taxation of companies nor influence oil taxation. The Treasury is currently considering corporation tax in Northern Ireland where the devolved government is competing against much lower rates payable in the Republic of Ireland. It remains to be seen where this process will lead. Practical aspects The detailed definition of a Scottish taxpayer will become important if these powers are activated. There will be a significant number of individuals who own houses both in Scotland and elsewhere, or who move to or from Scotland within a year. Finally, there would be significant practical issues for the PAYE system. Employers and pension payers would need to separately identify Scottish taxpayers, and HMRC would need to revamp their systems to cope.
Conclusion
The extent of Scottish tax powers is likely to be the subject of much future political debate. The earliest that the proposed power could be used is 2016. But we should all recognise that individuals and businesses would face greater costs and paperwork, if these powers were utilised. For more detail on the Scotland Bill, visit http://services.parliamentuk/bills/2010-11/scotland.html or www.scotlandoffice.gov.uk
Alternatively, we have produced a short briefing on the act. If you would like to view this briefing, please click here.