The Inheritance Tax Manual has now been updated. All the changes relate to the Finance Act 2013. The updates can be found here.
HMRC has also published updated forms IHT400, IHT419 and IHT400 notes. The forms and guidance notes have also been updated because of the Finance Act 2013. The new forms and notes can be found here.
For those interested in American estate and inheritance taxes this blog from the Wall Street Journal gives an excellent summary of the position in each state.
“Nineteen states and the District of Columbia, home to just over one-third of the U.S. population, levy an estate tax on the assets of people who die or an inheritance tax on heirs receiving assets. Maryland and New Jersey have both, although each allows offsets to prevent double taxation.”
The blog can be found here.
This is the talk I gave to the Law Society of Scotland private client update seminar in Stirling earlier today. If you would like a copy of the slides please email me.
Thank you Bill for that introduction. Good morning everyone.
I was in fact a trainee in Bill’s old firm. I begin my traineeship in 1993. Thinking back, the world, and of course the legal world, was a lot different. I had a computer on my desk although calling it a computer might be stretching things. No email. The day’s mail was delivered to your desk. No mobile phone and certainly no BlackBerry. No social media and a lot less hassle from marketing people. Happy days.
So to this morning’s talk. Why you need to know about digital assets.
I have a lot to cover in about 45 minutes. There will though be some time for questions at the end. A copy of my talk will also be sent to all delegates.
So what will I cover this morning?
SLIDE 2
I will start with some background and in particular the growing importance of digital assets to our and our clients personal and working lives.
I will then look at some of the issues associated with digital assets.
Next I will look at how different providers of digital assets and in particular social media providers deal with these issues.
I will also outline some practical guidance when dealing with digital assets.
Lastly, I will provide a few thoughts on the future. Always a dangerous thing to do but nonetheless good fun.
As a matter of interest, and just by a show of hands, how many of you are already dealing with digital asset issues?
For example: have any of you had trouble finding an online bank account, or tried to close down a LinkedIn account or memorialize a Facebook page?
I would like to start with a general point. Digital assets may be a relatively new phenomenon but in my opinion do not present us with completely new issues but rather old issues repackaged.
Although often talked about negatively, there are a huge number of positive aspects to the digital world we now live in. Many of which are obvious. The negative aspects are also sadly familiar to us. Whether it be fraud or bullying.
Now for some background.
SLIDE 3
There is no doubt of the growing importance of digital assets to us and our clients in both our personal and working lives.
For example. How did you find out about this event? How did you book your place here? How did you pay for it? Will you be tweeting about it? Will you blog about it? Will you take the chance to catch up with friends by text or email or update your Facebook page whilst listening to today’s talks?
So what are digital assets?
Digital assets broadly fall into two categories:
There is a though a lot of overlap.
SLIDE 4
For the first category, in an earlier age we would have kept these items in a more solid form. Our letters, photographs, diaries and videos have been replaced by their virtual equivalents. Even those items which were created in a more solid form are now often put into a digital format.
The slide shows just a few examples. The list is potentially endless as more and more are created. We are not just talking about Scottish, UK or US sites but sites from almost every country in the world.
To be clear, it is the content that we are primarily interested in and not the fact that our clients may have used certain online accounts. It is this content created that our clients are likely to want to pass on to their family members and friends. The involvement of a third party provider such as Twitter is the complicating factor here. I will come back to this point.
The second category were also once held in another form.
SLIDE 5
Whether it is banking, savings accounts, online investment portfolios and share trading accounts, online shopping or betting and gaming accounts, most of us have an online financial presence in one form or another.
Most tax returns are now filed online. It is rare to be involved in an executry where there is not an online bank account.
Then there are our email accounts, work and personal. A great deal of personal information may be contained within these emails and also the attached files.
As someone who grew up in the Borders in the 1970’s and 80’s I see what once was regarded as science fiction is now the norm.
I have a twitter account, a LinkedIn account and I blog. Most of my banking, work and personal, is done online. I have two email accounts. I use Skype for business meetings and for catching up with family and friends. This is I suspect the same for many of you here today.
I can also remember saying I would never use many of these accounts. I said exactly that to my business partner when he set up a Twitter account for me. And now almost 3,000 tweets later!
The average person it is claimed now has more than 10 online accounts, including social media, shopping and bank accounts. These obviously contain a great deal of personal information and have value whether it is financial or sentimental.
It is thought that 2 or 3 billion people now have some form of online presence. That clearly must effect what we need to do as private client lawyers.
As I have already said, the importance of these assets to the way we live our lives and also how we work is obvious. Can we imagine no emails, online banking or Facebook?
For example my own firm. I do not think we would have set up Legal Knowledge Scotland in the pre-digital age. Digital assets are hugely important to my own firm. We sell a large number of styles online. The client accesses them online and pays for them online.
Already I suspect some of the issues that we need to address are becoming obvious.
SLIDE 6
So what are these issues?
Let’s start with awareness. Do our clients even know they have digital assets? Even if they are aware it may not matter to them. Might it only matter to them once the issues are explained to them? Let’s not forgot that relatively few people in Scotland have Wills.
Even if your client has some awareness, is it likely that they will have considered how their executor will know which digital assets they have? If everything is done online and possibly by email there might not be a paper trail for an executor or family member to follow.
Do we know what happens to social media accounts and the associated content when someone dies or becomes incapacitated?
Are they always closed down? No.
Can the content always be recovered? No.
A great deal of content cannot be recovered and even if it could have been a deadline may have been missed.
How many people actually know that they don’t own the music in their iTunes account or the books in their Kindle collection? They only have a lifetime licence. The small print specifies that these rights terminate on death and are not transferable even if accessed on a device owned by someone else. This could come as a shock to a user who has spent a considerable amount of time and money building up their music or book collection. You may remember Bruce Willis being mentioned in this context. Sadly that story seems to have been misreported.
Is your client aware of how he might protect his digital content? I will come back to this point.
The fact that our working and personal lives seem to merge more and more raises another issue.
Where does one use end and the other begin? I suspect many of you have a work email account and also possibly a work twitter account. What about your LinkedIn account? Is that your account or your firm’s?
What happens if you die or become incapacitated or even move jobs? Even though these are likely to be primarily work accounts they may also contain personal information and content.
Then there is privacy. Are there things that our clients would prefer not to be widely known even on death? Yes there often are. This is also not a new issue.
A former colleague recently told me about a matter she had to deal with. She was working on an executry and the deceased was married at the time of his death. She came across evidence that he was using an online dating account.
She decided to use some discretion and did not make an issue of this as she did not see this account as an asset nor was any money owed or due.
Do you think she should also have contacted the provider and asked that the profile be removed from the site? I will leave you to think about that.
What about this situation?
A friend told me recently that he had seen the profile of a colleague on an online business networking site. This person had died several years before, but the profile was still there unaltered. Presumably, the deceased’s family was unaware of the site or had been unable to remove it.
I do not know if this was something the executor tried to deal with or simply that it did not occur to anyone. The point is that my friend found this upsetting. This could also potentially cause distress for family members. Again something to think about.
Similar issues might arise if you come across online gaming accounts or pornography accounts. As I have said, these are not new issues for solicitors and executors to deal with.
This is not about us making judgements as to what is and what is not appropriate. This is about us finding out what our clients want us to do with their online accounts on death. Without instructions this makes the task much more difficult.
The information we come across may also not just effect the deceased’s reputation. As I mentioned at the beginning of this talk there are many negative aspects of the digital world. Information in the wrong hands can lead to fraud, identity theft, blackmail and cyber bullying. That is another reason why it will be important for many of our clients to think about this issue.
Our clients may also have virtual pets, virtual farms, virtual relationships or virtual games characters.
Two examples. “Second Life” players adopt a new identity and can move around, work and socialise in a computer generated environment.
“Virtual Farm” is a farm and time management game. You choose your crops, till your ground, water your fields, harvest your plants and sell your goods.
You come across so many amazing stories when you research these type of virtual assets. I will only mention one this morning.
You may remember reading about a jilted Japanese woman being arrested for “murdering” an avatar in an online role-playing game after it divorced her character. She was charged with illegal access onto a computer and manipulating electronic data. As I said, what was once science fiction.
What if anything can be done with these particular type of virtual assets on death? The terms and conditions of use are obviously very important. That said, the law as yet does not have a complete answer to that question. These assets do though have value, and if something is valued – whether financially or sentimentally – people will want to pass them on to their family and friends.
With all this in mind, would an executor even know where to start? When I say executor I also mean a solicitor acting for an executor.
SLIDE 7
Let’s remind ourselves what executors are generally expected to do?
We all know that an executor goes beyond what I have just said as they also administer the estate and deal with numerous other matters.
An executor will of course need to deal with the deceased’s digital financial accounts and is likely to be used to doing so.
Financial institutions will typically require sight of a death certificate plus Confirmation before releasing the funds. They will also usually require proof of an executor’s identity. This also applies to newer types of financial accounts such as eBay or PayPal.
What though of the deceased’s social media accounts?
How much time and effort should an executor put in to tracing the deceased’s social media accounts? Should any effort at all be made to trace these accounts?
Remember much of the content may not be retrievable and cannot therefore be passed on. Also many accounts are simply closed after a certain period of non-use. Some common sense needs to be applied.
It may be that one particular family member wishes to deal with the deceased’s social media accounts. That said, an executor must be kept informed of what they are doing.
In any case it may be that an executor only finds out about these accounts from a family member or friend.
That begs the question. Should an executor as a matter of course google the deceased’s name and see what comes up? HR people already do this.
The deceased will also have agreed to certain “terms” for using each account. Also remember that these terms keep changing and each provider’s terms are different.
What about when the executor knows about these accounts? What if the executor also knows the deceased’s passwords?
As we know executors do not automatically have access to and control of the deceased’s assets on death. There is a process that needs to be followed.
Is there a temptation to access these accounts if you have the password? Of course there is. There may be a concern that content could be lost. That said the terms of use should not be ignored and in almost all cases the provider should be contacted before accessing the account.
To be clear, an executor accessing an online account using the deceased’s username and password could be committing a criminal offence of “unauthorised access” under the Computer Misuse Act 1990.
I am sure most executors do not want to be involved in a dispute as to whether they had permission to access an online account.
SLIDE 8
For example these are Facebook’s terms:
2. You will not transfer your account (including any Page or application you administer) to anyone without first getting our written permission.
These are clear many are not.
If a family member tells you that they are going to, or possibly already have, accessed the deceased’s digital accounts then you need to tell them they may have breached the “terms of use” and possibly broken the law. The best option is always to contact the provider first and check to see what can and cannot be done.
Now briefly a few comments on incapacity.
The procedures to follow when dealing with financial accounts and also digital financial accounts are well established.
One new issue might be that access is made using the person’s password and without informing, for example, the bank in question. That should not be done. The bank should be informed that someone is acting under a Power of Attorney. I would also recommend that you specifically ask the bank whether you can continue to use the same password.
What though of social media accounts? The rules relating to social media accounts are not as clear.
Before I discuss social media accounts in this context it is worth saying that I am sure in most cases, when someone has lost capacity, what happens to their social media accounts is not likely to be the main issue that needs to be dealt with.
One example of where it might be an issue is if someone is posting abusive messages on an online account such as Facebook or Twitter.
The first issue is that the Attorney, if there is a Power of Attorney in place, should again not just access these type of online accounts. Firstly look at the Power of Attorney and see if it has the power to do what you think needs to be done.
Even if an Attorney does think he has the power to do what needs to be done, I would still recommend that he check the terms of the account and contacts the provider. Although given how complicated some of these terms can be, it is probably easier to just contact the provider.
If there is a Power of Attorney in place many social media providers have procedures to have the account closed or suspended.
Not all though.
Again it may be that a family member will be tempted to deal with this issue themselves as they have access to the person’s password. Then again how many people share these passwords with family members? The issues that I have already mentioned regarding unauthorised access apply here as well.
If there is no Power of Attorney you would have to contact the provider to see what can be done and what they require you to provide them. If that fails you might need a court order and possibly not a Scottish court order.
So how do the main digital companies deal with these issues?
SLIDE 9
Each digital service provider has different procedures for closing a deceased’s account or releasing content.
Normally they will request proof of death such as a death certificate or a link to a published obituary, as well as proof of the executor or family member’s relationship to the deceased user.
Helpfully most of the providers I have looked at have their contact details on their main pages. Most of them now also display fairly prominently some guidance on these issues.
I will now look in more detail at a few of the main providers.
Let’s start with Facebook. Facebook gives two options: delete the profile or set up a memorial page. If memorialised, the user’s personal information will be removed, and no one can log on to the account, but the user’s “wall” will remain and existing friends and family can leave messages.
Twitter will deactivate an account only after receiving proof of a user’s death, such as a link to an online obituary. Twitter will also help families to recover an archive of the user’s public tweets.
LinkedIn will close an account if they receive proof of death.
YouTube allows an heir or attorney control of the account and all of the content if certain conditions are met.
Flickr stores billions of images and has a strict digital death policy where upon receiving a copy of a death certificate they will permanently delete all of the deceased’s accounts and associated content. However, arrangements may be made by an executor to keep paying for the subscription if they wish to keep the content. This may not be necessary if the deceased kept a backup on memory card or CD.
There are almost as many email procedures as email providers. Google and Gmail will provide account information to family members at their discretion. Microsoft have a next of kin process. Others such as Yahoo are quite clear in that they will honour the user’s privacy and not release any record of email exchanges without a court order. You may remember reading about how the father of an American soldier killed in Afghanistan tried to gain access to the emails he had sent his son.
There are of course lots more. I have only mentioned a few.
Things are also getting slightly easier.
Almost all providers now accept the need for procedures on death. The procedures are also becoming easier to use and even more importantly many providers are now asking the user what they want to happen to their content on death. I will come back to this point nearer the end of this talk.
SLIDE 10
So what should we be doing?
First things first. It is not an issue that should be ignored nor do I think it is being ignored.
Let’s start with Wills.
A Will is only as good as the questions asked and the information received. How we therefore approach taking instructions for a Will is very important.
Often we send a Will questionnaire to a client about the Will they want us to prepare or update. This gives them an idea of the issues that we want to discuss before meeting with them. Digital assets should of course be mentioned in the questionnaire.
Some of the issues that you might want to mention include how important it is to make their executor aware of their digital financial accounts. It is obviously much easier for an executor to know of a bank account where you have actual bank statements or a passbook.
You may also want to point out that if the executor has to spend a lot of time looking for their digital assets this means the executry might cost more and their beneficiaries might receive less.
You might also want to find out if they have they considered keeping an inventory of their digital assets. If they already have such an inventory, or will do so in the future, advise them not to keep a note of their account numbers and passwords in the same place.
What of their social media accounts. Do they know that some content cannot be retrieved? Have they taken steps to ensure that it is not lost?
For example, the deceased may have used a digital asset service.
These store digital content for a fee. Think of an online safe opened on death.
Other services allow you to store online details of digital accounts and passwords. A so called “digital beneficiary” is named who will be given access to all this information on the death of the account holder.
There is of course the obvious need to make someone aware that they have used these type of services.
What about the social media accounts that continue to exist even on death and the distress that could be caused to relatives and friends of the deceased. Do they want these accounts closed?
You may also want to ask them if they want specific digital content to go to specific people.
If your client does not want to leave specific digital assets to named beneficiaries in their Will they will simply be dealt with under the residue clause.
Physical assets such as kindles or computers are dealt with in the usual way. Remember it is the content held on these types of assets that should not be ignored and particularly where a third party provider is involved.
It is not really practical to list the digital assets, and in particular the more personal digital assets, within a Will. How would this be kept up to date?
If tempted to leave digital information in a Will and some of the information changes a codicil would be required.
I would not recommend putting account names and the passwords into a Will. This is likely to breach the bank’s conditions. The Will also becomes a public document.
Although an informal writing is preferable to leaving a list of digital accounts in a Will, mainly because the list can be kept up to date without having to continuously update the Will, the client has to ensure that on death the informal writing will be found and passed to the executor.
Alternatively, and like the majority of Scots, the client may wish to do nothing. If so a file note is required.
Now a few quick points on disputes.
I am sure many people in this room have had to deal with disputes between beneficiaries. These disputes are as often as not over small personal items that have a great deal of sentimental value. This could just as easily apply to digital assets.
One issue that has already resulted in disputes is where one family member wants a Facebook memorial page and another does not.
Another is where a partner leaves a law firm and there are restrictions as to how and when clients can be contacted. What if the partner leaving has a LinkedIn account and uses it to stay in touch with his clients? I know of a number of law firms that are trying to ensure that the LinkedIn account remains in its control in this situation.
Valuation of these assets could also be an issue and lead to disputes. It is not clear how to even start valuing many of these assets and in particular assets such as virtual games characters.
As mentioned, there may also be a dispute as to who had the right to access an online account after the user’s death. This might not just be between family members but between an executor and a digital beneficiary.
So to recap what do we and our clients need to think about doing.
There is a need to plan our digital afterlife by keeping a running inventory of our accounts and ensuring it’s kept in a safe place.
Content such as photographs need to backed up and legal advice needs to be taken if we have particularly valuable online assets.
And it is crucial that we let someone know of the digital asset planning we have undertaken so that these valuable or sentimental assets aren’t simply lost.
Before I finish a few thoughts on what the future might hold.
It is usually a dangerous endeavour to predict what might happen but in this case, certainly in the short term, it seems clear.
Awareness of digital assets will continue to increase as more of our lives become digitalised. More articles will be written and talks given. I also suspect there will be more high profile news stories surrounding these issues.
That means solicitors will have to be prepared to answer questions associated with digital assets.
This will happen in a number of ways. We will update our Will and executry checklists and our styles. We will produce help sheets and more information for our websites. We will also become more comfortable talking about these issues. We may also review our terms of business to be clearer as to what we will and not deal with.
What though of the companies providing these services.
The companies providing these services will continue to update their own procedures.
More of these companies will start to ask what the user wants to happen to the account and content if they die or become incapacitated. That will hopefully remove some of the issues that an executor has to deal with.
Given the fact that most of the companies I have mentioned today are headquartered in the USA, and in particularly California, it is only to be expected that the US is already looking at the issue of a uniform approach to their terms and conditions when an account holder dies.
The US Uniform Law Commission is looking at giving authority to the next of kin to access, manage, distribute, copy and delete digital assets.
These companies will also continue to be pressed to update their policies on bullying, stalking, privacy and security.
More companies will specialise in tracing digital assets and retrieving the content. For a fee of course.
More companies will also specialise in “tidying up” a person’s digital legacy. Again for a fee.
More people will pay companies to store their digital content.
Closer to home the Scottish Government will I am sure update its publications such as: “What to do after a death in Scotland” to make mention of some of the issues associated with digital assets. The Crown Office, OPG Scotland, The Law Society of Scotland and HMRC will continue to issue guidance.
It will become more common to name a digital beneficiary in our Wills.
It will become common to specifically state that the executor should deal with social media accounts.
Powers of Attorney powers will specifically refer to social media accounts.
There will be more disputes as to who had and who did not have the right to access online accounts.
Our Wills may also change. Can you imagine a digital Will with an inventory section that can be updated easily online and with links to specific instructions you have given to different service providers.
Again something to ponder.
Thank you.
Questions.
Although I wrote this over six months ago, and some of the figures are out of date, the points made still apply.
Introduction
It is important in the context of the wider independence debate to remind ourselves how the UK Government, its institutions and its supporters in Scotland have reacted to the idea of devolving substantial tax powers to the Scottish Parliament. The UK Government of whatever colour know that if they lose the tax powers debate they lose Scotland.
It is often forgotten that there were two votes in the 1997 referendum. The first was for the establishment of a Scottish Parliament and the second for the Scottish Parliament to have tax-varying powers. 74.3% voted in favour of a Scottish Parliament and 63.5% in favour of tax-varying powers.
My renewed interest in Scotland’s constitutional debate, and in particular the tax and fiscal powers debate, began on my return from the USA in 2000. Serious tax powers were not even considered in 1997. The Scottish Parliament simply gained control of the matters that were for the most part already controlled by the Scotland Office despite the vote in favour of tax-varying powers in the referendum.
The view I adopted then, articulated in a number of articles, was that it was relatively easy to improve the administration of tax in Scotland. Although these articles generated a great deal of comment nothing happened. I also around that time accepted an invitation to join the tax committee of the Law Society of Scotland. Serious tax powers for the Scottish Parliament were still not on the political agenda. That led me and a few others to set up the think tank, Reform Scotland which gave us the chance to add some substance to this debate.
A Brief History of Tax in Scotland in Recent Times
The Scottish Parliament was given control over the two local authority taxes: council tax and business rates. It was also given partial control over income tax. The Scottish Parliament is responsible for approximately 60% of government spending in Scotland but only has control over, and again approximately, 7% of all tax raised in Scotland. The income tax power was never used and even the ability to use it lapsed a number of years ago. A great deal was made of the income tax power at the time of the 1997 referendum. This included having a specific question devoted to it.
There were no significant developments on tax powers for the Scottish Parliament until the Liberal Democrat “Steel Commission” report was published in March 2006. Even though the report did not receive a great deal of publicity at the time of publication it was generally well received. This report shows how far the Liberal Democrats have retreated on devolving substantial tax powers for the Scottish Parliament. I will come back to this point.
The real game changer happened in 2007 when the SNP become the largest party in the Scottish Parliament and formed a minority government. The response of the Labour, Liberal Democrat and Conservative parties was the “Commission on Scottish Devolution”, more commonly referred to as “Calman”. Why did they do this? These parties felt they had to be seen to doing something. They thought the SNP victory was a blip and that there was nothing really to worry about. Normal service will be resumed in 2011. The remit of Calman was also clear: “… to secure the position of Scotland within the United Kingdom”.
The first Reform Scotland “fiscal powers” report was published in November 2008. The report got a great deal of coverage. The authors, including myself, looked at this issue from the position of the present constitutional arrangement i.e. a devolved parliament. Our proposal was that the Scottish Parliament should be given the tax powers to enable it to raise approximately the amount it spends. Under this proposal control over the vast majority of taxes would have been devolved to the Scottish Parliament.
In contrast to the Reform Scotland report was Calman’s interim report published in December 2008. This report made no specific recommendations regarding tax powers and was probably an effort to test the water. The difference now was that there was something to compare Calman with.
Calman’s final report was published in June 2009. The report appeared to offer as little as they thought they could concede. It included four miscellaneous taxes (Stamp Duty land Tax, landfill tax, aggregates levy and air passenger duty) and a very restricted income tax proposal. Calman’s membership, which included Iain McMillan of CBI Scotland, meant this was the most likely outcome. The main report even suggested that a number of powers including parts of Scottish charity law be re-reserved. Reform Scotland updated its “fiscal powers” report in October 2009 to take account of Calman.
The reaction of the UK Labour Government and then the coalition Government to the Calman proposals was particularly telling. They could not even countenance legislating for the powers recommended by Calman. This involved what I then termed “Calman minus”. The coalition Government’s Scotland Bill was published in November 2010 and only included two minor taxes (Stamp Duty Land Tax and landfill tax) and partial control of the income tax bands. The arguments put forward for not including the two other minor taxes are revealing. Air passenger duty was not included as it was under review and aggregates levy was omitted because it was subject to a European court action by a trade body. The recommendation that 50% of income tax on savings and distributions was to have been assigned to the Scottish Parliament had simply been dropped.
In response to the coalition Government’s Scotland Bill the Scottish Government produced papers on adding excise duty, corporation tax and control over the Crown Estate to the Scotland Bill. I think it is fair to say that none of these suggestions were taken up enthusiastically by the UK Government. In addition the UK Government ignored recommendations made by both the present and previous Scottish Parliament Scotland Bill Committees (chaired by Wendy Alexander MSP and Linda Fabiani MSP respectively) and even Westminster’s Scottish Affairs Committee for including some or all of these powers. Reform Scotland’s third fiscal powers report, “Devolution Plus”, was published in September 2011, of which I was again one of the authors. There were two main changes. Control over income tax was to be given entirely to Holyrood and the devolving of substantial welfare powers to the Scottish Parliament was recommended.
The Devo Plus campaign was formally launched in February 2012 and its fiscal powers proposal is based on the Devolution Plus paper produced by Reform Scotland. Devo Plus was set up by Reform Scotland, although it is not supported by everyone associated with Reform Scotland, and includes representatives of each of the main unionist parties. Neither the Devolution Plus paper or the Devo Plus campaign has had any discernible effect on the Scotland Act 2012 which received Royal Assent in July 2012. The latest devolution paper is called “devo more” and it is from The Institute for Public Policy Research and was published in January 2013. This proposal does not go nearly as far as “devo plus” and only goes slightly further than the Scotland Act 2012.
The Wider Context
It is worth noting that Westminster has already refused to devolve control of a range of taxes, duties and charges to the Scottish Parliament. Those listed below are the main taxes but there are a number of others. In bold are the additional powers the Liberal Democrats would devolve under its “Home Rule and Community Rule Commission”. The figures in italics are mostly from the “Government Expenditure & Revenue Scotland 2010-11” (GERS). The figures are included to give an idea as to the level of revenue produced by a particular tax and are a number of millions of pounds.
Taxes devolved or being devolved under Scotland Act 2012
1. Income tax (still only partial control over tax bands and will cost Scottish Parliament millions of pounds a year to administer even if not used) (estimated partial control over) 5,000
2. Council tax 1,986
3. Business rates 1,891
4. Stamp duty land tax (Scottish Parliament control by April 2015) 330
5. Landfill tax (Scottish Parliament control by April 2015) 99
The Scotland Act 2012 also does not resolve the imbalance between the amount the Scottish Parliament is responsible for spending and which it raises. The Scotland Act 2012 only takes us to about a third.
Likelihood of additional powers being devolved if Scotland votes ‘No’
Let us begin our examination with the Liberal Democrats who published their “Home Rule and Community Rule Commission’s report: ‘Federalism: the best future for Scotland’” in October 2012. There are a number of problems with this report. The first is the likelihood of the Liberal Democrats being part of and having a major influence in a future UK Government. At best the Liberal Democrats will again be a junior partner in a UK coalition government. Even if they were to persuade the senior party to implement their plans the Scottish Parliament would not see any new powers until at best 2020.
Then there is the accusation: why should anyone take the Liberal Democrats seriously on devolving substantial tax powers to the Scottish Parliament? The Liberal Democrats are in power just now at the UK level but have had remarkably little impact on the coalition in this area: all we have is “Calman minus”. The Scotland Act 2012 does not even devolve control of the Crown Estate in Scotland to the Scottish Parliament even though the Liberal Democrats have campaigned on this issue for many years. Then there is the report itself. The report barely goes beyond Calman. Inheritance tax is to be devolved and also some parts of capital gains tax and possibly control over the Crown Estate.
The Liberal Democrats have historically been willing to go further than the other main UK parties on devolving powers to the Scottish Parliament. The Steel Commission for example goes much further. What this report shows is that the Liberal Democrats are moving away from devolving substantial tax powers to the Scottish Parliament.
Scottish Labour has a “further devolution commission”. There is little prospect of this commission coming up with a proposal close to “devo max” or even “devo plus”. The UK Labour Government’s response to Calman did not go any further than the UK coalition Government’s recent Scotland Act. The fact that the leader of the ‘No’ campaign, Alistair Darling, refuses to say anything constructive on this issue suggests that the UK Labour Party will only even consider devolving substantial tax powers if forced to do so. Then there is the Conservative Party. The idea of a “Constitutional Convention” is questionable. The Conservatives have consistently adopted a policy of prevarication, kicking the matter into the longest of long grass for another generation.
In her much trailed speech, Scottish Tory leader Ruth Davidson promised no new tax or fiscal powers, no timetable for even considering the issue and no confirmation that she had moved on from saying that corporation tax and welfare powers should not be devolved. That is what Davidson said as recently as October 2012. All that has been hinted at is that they will consider setting up a new commission to examine the devolution of more powers to the Scottish Parliament.
No second question
The campaign for a “second question” to be included on the ballot paper in 2014 failed. So what does that mean for those arguing for “devo max” and “devo plus”. Devo Plus did not argue for a second question and its supporters have confirmed that they think Scotland should vote ‘No’. They also think that Westminster will devolve substantial tax powers to Scotland if Scotland votes ‘No’. This is not a realistic position to take. Calman only existed because Scotland elected an SNP Government. If Scotland votes ‘No’ in the referendum the Unionists will simply assume the pressure is off. It is not surprising that the Devo Plus campaign has failed to gain any traction. It is also not surprising that people like Jim McColl who support “devo max” have declared that they will vote ‘Yes’.
Arguments put forward against a Scottish tax system
So how have the opponents of substantial tax powers for the Scottish Parliament been able to ensure that substantial tax powers are not devolved to the Scottish Parliament? A template can be seen from Calman, what might be called the “Calman doctrine”. Make a huge fuss about having someone look at the issue, take your time, offer as little as possible, exaggerate any problems, minimise or ignore any advantages and ensure HMRC and HM Treasury remain in control. It seems that HMRC and HM Treasury cannot help but react negatively to any policy proposed by the Scottish Parliament that deviates from or impinges on reserved matters. An example of this was how HM Treasury withheld attendance allowance funding when the Scottish Parliament introduced free personal and nursing care. Another example was the reaction when the Scottish Government proposed and then set up the Scottish Futures Trust. And yet a further example was the reaction from both HM Treasury and HMRC when the Scottish Government wanted to introduce a local income tax.
Memo to Treasury and HMRC: Scotland has its own legal system
It has been well documented as to how much of a shambles the introduction of Stamp Duty Land Tax (SDLT) in Scotland was. HMRC admitted that they did not realise that Scottish property law was different to English and Welsh property law. They also made it clear that they did not have time to change the legislation. “Don’t worry we will have plenty of time to sort things out later”, they said. The only reason that SDLT worked in Scotland was due to the goodwill and pragmatism of the Scottish legal community. This experience confirms the lack of awareness and interest in Scotland and its institutions. Even though the UK does not have a unitary legal system, the UK tax system uses English & Welsh legal principles. This occasionally causes problems, for example where the underlying law, Scots law, differs from the law of England and Wales. For example in some succession or charity matters.
It is not just the lack of awareness of Scots law, but the centralisation in England of the administration of certain taxes that has caused problems for us in Scotland. Two examples: Birmingham for SDLT and Nottingham for inheritance tax. The centralisation of the administration of these taxes has meant increasing problems with getting expert advice on particular Scottish legal issues. In addition the Edinburgh Stamp Office has been under constant threat of closure and the Trusts and Estates office in Edinburgh is being run down.
Then there was the proposal for a UK wide planning-gain supplement. Before the recession the debate was all about how much developers should contribute. Again the level of knowledge of Scots law and the extent of the powers held by the Scottish Parliament was disappointing. The main argument against a UK planning-gain supplement was a simple one. This was a matter for the Scottish Parliament as planning and housing are devolved matters, a point so obvious that they said it had never occurred to them. This debate went on for many months but finally the proposal in Scotland was dropped.
There was also the Scottish Government’s local income tax proposal. It was unclear why anyone expected HMRC to cooperate and work to Scottish Government deadlines. The attitude of the UK Government and its institutions meant there was little likelihood of this proposal being implemented. This should not have come as a surprise as HM Treasury had withheld attendance allowance funding since the Scottish Parliament introduced free personal and nursing care.
What about Northern Ireland?
A similar pattern emerges when considering VAT and the proposed new Scottish national police and fire services. These forces will have an annual VAT bill of approximately £30m. Under the current structure police and fire services are treated like local authorities and are exempt from VAT. However on merger they may be subject to VAT. HM Treasury has rejected the Scottish Government’s request that these new bodies should be able to recover VAT. It has of course been pointed out to HM Treasury that the Police Service of Northern Ireland is exempt from VAT.
The “just because it happens in Northern Ireland” is not likely to work with HMRC and HM Treasury. Northern Ireland already has borrowing and welfare powers. Anyone involved in the Scotland Act deliberations knows how hard HM Treasury resisted calls for borrowing powers to be included. They succeeded in ensuring that only restricted powers be included. Welfare powers were simply not even considered. It does not seem to matter that Northern Ireland is also to get partial control over air passenger duty and also possibly corporation tax although not any time soon. Nick Clegg has indicated that the UK Government will not devolve corporation tax to Northern Ireland in the short term due to the “knock-on effects” in Scotland.
The argument does not just stop with Northern Ireland. The Scottish construction sector would like to see a reduction in VAT for building repairs and renovations. The UK Government has so far refused this request notwithstanding that it allows a similar reduction in the Isle of Man.
This would complicate the tax system
The UK has one of the most complicated tax systems in the world. Each UK Budget adds further complications. Tax simplification is simply not taken seriously by the UK Government. A Scottish tax system could actually simplify the UK system though this is rarely considered. As mentioned above, the UK does not have a unitary legal system. Therefore a Scottish tax system would simplify the system for the rest of the UK. For example, when SDLT is devolved there will be no need for the guidance and forms to explain the differences in Scotland due to our different system of property law. The same applies for inheritance tax guidance and forms.
This also applies to Scottish charity law. As previously mentioned, Calman recommended re-reserving parts of charity law. A more sensible proposal would have been to agree that when the Office of the Scottish Charity Regulator (OSCR) registers a charity it automatically becomes entitled to the tax reliefs associated with charitable status. At present, to gain charitable status and the various tax benefits it is necessary to apply to OSCR and HMRC. There may be a lot of talk about tax simplification but an obvious opportunity was missed.
Tax competition is bad
The argument that tax competition within the UK is bad is made fairly regularly. Gordon Brown made this claim again last year. He claimed devolving tax powers to the Scottish Parliament automatically means a “race to the bottom” for tax rates and in particular business tax rates. One major problem with this statement is that tax competition already exists. Not just within the European Union but throughout the world. Why is the UK Government reducing the rate of corporation tax to 20% by 2015? In short, to ensure competitiveness. Why does the UK Government object to a Financial Transaction Tax? Because it thinks it will affect the competitiveness of the City of London.
Always stay in control
Tax reliefs are just as important as tax rates to businesses. Business does not just consider the headline rate of tax when deciding where to locate. Many other factors are analysed, and not just tax. The underlying law that allows for the creation of reliefs or to vary the tax base as well as connected legislation that affects the tax legislation, for example the tax residency rules or employment legislation for income tax. This makes the case for a tax being devolved in its entirety. On its own, the ability to vary a rate of tax is not much of a power. By not devolving a tax in its entirety, control is retained. That is why the Scottish Parliament is not being given complete control of income tax. The argument that any such changes would be in breach of EU “state aid” rules used to be a favourite of the opponents of substantial tax powers until the European Court of Justice ruled that tax powers can be devolved if certain conditions are met. These conditions are easily met.
Westminster always knows best
The UK Government does not consult the Scottish Government or Parliament on issues such as whether to introduce a Financial Transaction Tax. Westminster would not think twice about amending the income tax legislation without consulting the Scottish Parliament. It is no coincidence that HM Treasury is opening an office in Scotland with a “Head of Scotland Analysis and Stakeholders Engagement”, in other words someone to argue against independence. The appointment, only runs to the end of 2014.
What could have been done?
Westminster could have relatively easily devolved substantial tax powers to the Scottish Parliament but it did not want to. A number of taxes are closely associated with the responsibilities already devolved to the Scottish Parliament which would have given the Scottish Parliament a substantial number of economic levers and the chance to develop policy more effectively.
Below are some examples.:
Much could have been done during the last few years if even some of these powers had resided with the Scottish Parliament.
It will cost too much
The Scottish Government recently announced the creation of Revenue Scotland. Revenue Scotland will be responsible for collecting the two miscellaneous taxes being devolved. The Scottish Government is in no doubt that Revenue Scotland will be able to administer the two new Scottish taxes at a lower cost than HMRC. Those arguing against substantial tax powers for the Scottish Parliament disagreed with this. That is all the more surprising given the problems HMRC are having with matters such as tax avoidance and tax evasion just now.
The Scottish Parliament will need an Exchequer that ideally combines the functions presently undertaken by HMRC and HM Treasury. During the Calman deliberations, it was claimed by the Scotland Office that the cost of administering a separate Scottish tax system would be the same as the present UK system. In short, absolute nonsense. Scotland does not need a separate Stamp Office, Registers of Scotland, Trusts and Estates Office and Companies House. It could create a one stop shop to combine these and other government tax, legal and registration services. By doing this we could also have sub-offices throughout Scotland, just as London is not the UK, Edinburgh is not Scotland.
Conclusion
If Scotland votes ‘No’ we will not see substantial tax powers devolved to the Scottish Parliament. The actions of those arguing against such powers speaks for itself. Creating a Scottish tax system is a once in a generation chance to create a simpler and more progressive tax system. Scotland literally has a blank sheet of paper. Let us not waste this opportunity.
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“7 October 2013
Power of Attorney (PoA) Update – Manual Submissions
There is currently a 13 week waiting period before your PoA can be processed and returned to you. This week we will be working on PoAs received on and around 8th July 2013.
If there is a genuine urgency, we will expedite the registration of a PoA ‘on cause shown’. We ask that people respect this service and only use it in cases of true urgency to avoid defeating its purpose.”
More on this can be fund here and Electronic Power of Attorney submission (EPOAR) here. EPOAR is proving to be very successful and is being looked at enviously by practitioners in the rest of the UK.
“As a result of customer feedback, HMRC has updated several areas of charity guidance.
New and updated publications include:
More on this can be found here.
I have updated this blog again after being reminded of what David Cameron has said on this issue and also to make greater reference to the welfare powers part of this debate. Two quotes from an article in the Scotsman sum up the position nicely:
“Scots have been warned a substantial increase in financial powers for Holyrood is not an option if Scotland wants to remain in the United Kingdom.”
“The sources said a unified tax and benefits system across the UK, was at the “heart” of a single country, and could not be devolved to Scotland.”
Has anything changed since these comments were made? It appears not. Neither the Conservative, or Labour or the Liberal Democrat parties are proposing anything that comes even close to what is proposed by ‘devo plus’ let alone ‘devo max’.
Add to this the recent comments from Kenneth Calman, chair of the Calman Commission, and it is clear nothing has changed. Calman is proposing yet another UK Commission of Scotland votes ‘NO’. More on this can be found here and here. The implications for those still arguing for “devo plus” or “devo max” are obvious.
Now to the welfare powers debate. Both Michael Moore and Ruth Davidson have suggested that some relatively minor welfare powers might be devolved to the Scottish Parliament if Scotland votes ‘NO’. Both have ruled out devolving substantial welfare powers.
This is in stark contrast to the position taken by the Scottish Council for Voluntary Organisations. The SCVO have stated that Scotland needs a separate welfare system from the rest of the UK regardless of the result of next year’s referendum. This is an extremely important contribution given recent comments from those on the ‘NO’ side. More on this can found here.
Although the Scottish Conservatives now appear to be moving towards arguing for the devolving of further tax powers there is as as yet no firm proposal from them.
Listed below are the taxes, duties and charges that Westminster has so far refused to pass control to the Scottish Parliament.
In bold are the additional powers the Liberal Democrats are putting forward for devolving. This information is from its “Home Rule Commission” published in October 2012.
In red are the additional powers the Scottish Labour party might argue for devolving. I say “might” as its report is an “interim” report only.
The figures are mostly from the “Government Expenditure & Revenue Scotland 2011-12” (GERS). The figures are included to give an idea as to the level of revenue produced by a particular tax and are a number of millions of pounds.
Taxes already devolved to be devolved under Scotland Act 2012
The Scotland Act 2012 also does not resolve the imbalance between the amount the Scottish Parliament is responsible for spending and which it raises. The Scotland Act 2012 only takes us to about a third.
HMRC’s guidance for completing paper Stamp Duty Land Tax returns has been updated. The updated guidance can be found here.
Where to start. Given it is now just over a year to the referendum that seems a suitable place to start.
There is increasing discussion, mostly criticism, concerning the failure of the ‘NO’ campaign to come up with a credible proposal for substantial additional powers for the Scottish Parliament. That said, the likelihood of a joint proposal from the ‘NO’ side is extremely unlikely. Some want powers removed from Scotland in the event of a ‘NO’ vote. Some do not want any more powers devolved to Scotland and insist that in any case that is a decision for the whole of the UK. Even those who argue for greater powers for the Scottish Parliament are only arguing for three or four relatively minor tax powers. Two of my earlier bogs on this issue outline the proposals in more detail and also how these extremely modest proposals would not take effect for at least a decade. These blogs: “Tax powers so far refused by Westminster” can be found here and “Likely timescale for additional Scottish tax and fiscal powers” can be found here. Substantial welfare powers are of course not even being considered by the Unionist parties.
A good example of how few powers are being considered can be found in this interview of Michael Moore. The article on this can be found here. It is worth noting that this is the view of the Liberal Democrats supposedly the strongest advocate of increasing the powers of the Scottish Parliament.
Another factor of this debate that as yet is not being widely commented upon are the anomalies that can arise under devolution. Take for example inheritance tax. Inheritance tax is controlled by Westminster but succession law and social care are controlled by Holyrood. Does that make any sense? Of course not. With this in mind please see the following article from the Scotsman which can be found here.
Now to specifically Scottish tax matters.
A “Revenue Scotland and Tax Powers Bill” will establish a new authority for the collection of devolved taxes from 2015. The First Minister described this as a “historic step”, but also just a “first-step” – since Scotland would still only collect 15% of all taxation revenue and the Parliament would remain a “spending chamber rather than a revenue raising chamber”. More on this can be found here. This is an important landmark in the creation of a Scottish tax system.
No-one I suspect was surprised at this announcement. “Scottish and Welsh red meat levy bodies are unlikely to recoup levy money lost when animals are slaughtered in England, UK farm minister David Heath has said.” More on this can be found here. This type of argument, in short Westminster knows best, has of course been made many times before. Some matters where this argument has been used include: fossil fuel levy, attendance allowance, VAT and the new Scottish police and fire services, energy transmission charges, mobile phone coverage, delivery charges and local income tax. The UK Government’s attitude to relatively minor issues such as the so called “meat levy” simply adds to the doubt that the UK Government will act in a positive way to calls for further powers to be devolved in the event of a ‘NO’ vote.
The Scottish Parliament’s Finance Committee has welcomed proposed new legislation which will see Scotland take responsibility from the UK Government for landfill tax. The Committee also welcomed proposals to impose landfill tax on unauthorised disposals to landfill following the identification of illegal sites and to increase the credit limit on contributions to the Landfill Communities Fund, which provides funding for community or environmental projects in areas affected by landfill sites. More on this can be found here.
Now to the “bedroom tax” or to give it it’s Sunday name, “spare room subsidy”.
Social housing residents affected by the UK Government’s “bedroom tax” may be able to appeal depending on the size of their spare room, after a tribunal ruled the size of a room has to be taken into account when imposing the controversial policy.
The UK Government has played down the implications of the ruling. A spokeswoman for the Department of Work and Pensions said: “It is simply not affordable to pay housing benefit for people to have spare rooms, and our reforms in the social sector mean families receive help for the number of bedrooms they need, and these are exactly the same rules as in the private sector.” Meanwhile, a United Nations special investigator has described the bedroom tax as a “shocking” policy which could constitute a violation of the human right to adequate housing.
More on this from the Scotsman can be found here and the Guardian here. This policy, it is argued, shows the widening gap on welfare matters between Holyrood and Westminster.
Now to the tax avoidance debate. Let’s start with some irony. An adviser to HMRC has had to resign as a result of an investigation by the BBC. The irony is the BBC’s own attitude to severance payments and tax avoidance schemes involving its own staff. More on this can be found here.
Further evidence as to how we are definitely not “all in this together”. Top civil servants are having some tax paid using public money, a newspaper investigation has revealed. More on this can be found here.
And finally on tax avoidance. “It is not possible to construe a director’s duty to promote the success of the company as constituting a positive duty to avoid tax.” The legal advice quoted may well turn out to be one of most important contributions to the tax avoidance debate. More on this can be found here.
Now to matters further afield.
In response to a question asked in the Spanish parliament, the Spanish Government was obliged to disclose the amount of unpaid tax owed by professional football clubs in the country’s top two divisions. The sum was a staggering €663,876,441 (about £575m). More on this can be found here.
The number of Americans renouncing their US citizenship has jumped by a factor of six in 2013, according to official figures. The reason is generally accepted as the difficulties caused to expatriates by the soon-to-be-active “Foreign Account Tax Compliance Act”, in conjunction with the USA’s extra-territorial taxation system. More on this can be found here.
