Tartan tax take two, by Don Peebles

1 Dec 10
Over the past few years Scotland has seen a number of proposals to change its local taxation system, from the ill-fated community charge in the late 1980s to the most recent but equally doomed attempt to introduce a local income tax

Over the past few years Scotland has seen a number of proposals to change its local taxation system from the ill-fated community charge in the late 1980s to the most recent but equally ill-fated attempt to introduce a local income tax by the Scottish Government.

In between all of this, of course, came devolution with the accompanying national tax varying power under the Scotland Act, a power which recently lapsed in practice because of the  Scottish Government’s failure to continue to pay ongoing maintenance costs to HMRC. The justification given was that the power had never been used and was unlikely to be used.

So against these examples of failure comes Scotland’s latest chapter in its taxation history, with the publication of the much awaited Scotland Bill.  The four-part legislation covers the powers of Parliament, ministers and finance. It changes the devolution settlement for Scotland and implements the recommendations set out in the Calman Commission’s final report, Serving Scotland Better: Scotland and the United Kingdom in the 21st Century.  Inevitably much of the interest and debate on the Bill will focus upon the proposed changes to taxation and on the proposed new powers to borrow.

The Bill, which has been introduced by the Conservative and Liberal Democrat coalition, confers new powers onto a Scottish Government which will almost certainly be of a different political persuasion, currently SNP, and itself a minority.  So passing on even more powers to a devolved administration is the further but notable backdrop to the new tax and borrowing powers.

The existing (but unused) power to vary income tax at the basic rate will be abolished and replaced by a power to set a rate of income tax at all rates.  The tax will be paid by ‘Scottish Taxpayers’, a term that is defined at some length in the Bill.  A Scottish Taxpayer, it seems, will be an individual who has a close connection with Scotland and spends more days in Scotland than any other part of the UK.  Somewhat intriguingly the Bill feels the need to prescribe that a day will count when the individual is in Scotland ‘at the end of the day’ .

To accommodate these new powers, UK income tax will be reduced by 10% for Scottish taxpayers and replaced by the income tax set by Scottish ministers and to be paid by Scottish Taxpayers. There will also be a reduction in the funding currently provided by the UK government.

As was widely expected, borrowing powers will be conferred upon Scottish ministers albeit with a statutory ceiling. The Bill enables Scottish ministers to borrow up to £500m from the secretary of state to fund current expenditure shortfalls.  It is, however, the funding of capital expenditure where Scottish ministers will in future feel more empowered.

The Bill proposes that Scottish ministers should be able to borrow to fund capital expenditure from either the secretary of state or from commercial lenders.  This does not mean, however, that the prospect of a Scottish Bond or Scottish Gilt is on the horizon.  The power is for borrowing by way of a loan only with a statutorily prescribed borrowing limit of £2.2bn for capital expenditure. It was, of course, the present SNP minority government that famously considered issuing bonds, only to find that the power did not exist.

So Scottish ministers will have a future total borrowing power of £2.7bn.  Add to this the devolution of stamp duty, land tax and landfill tax, plus responsibility for the collection and management of the taxes, and it is clear that financial powers will be significantly enhanced.

The question of whether these new powers are enough will be the starting point for debate.  The powers fall short of the full fiscal autonomy craved by some but will represent a strengthening of devolution for others. Thereafter, the debate will move to assessing the likely level of reduction in funding from the UK government compared to what the level of the new income tax rate should be.

One aspect of the Bill where the SNP may feel a sense of achievement is the statutory recognition of the term Scottish Government, following the increasing use of that term by the current Scottish administration and others in the public domain. Consequently, the term Scottish Executive is formally replaced with Scottish Government.

Whether Scottish ministers can use the powers as effectively as they have used the name remains to be seen. It will not in fact be seen for some time.  The new legislation will not come into effect until 2015.

Don Peebles is policy and technical manager at CIPFA in Scotland

Did you enjoy this article?