Holyrood’s Scotland Bill conference

This is the text of my speech to this morning’s Scotland Bill conference.

Good morning.

I recently resigned as a trustee of Reform Scotland.  Pressure of work and joining the board of the Borders Chamber of Commerce were the main reasons.  I did though also want a break from this debate.

That though has allowed me to take a step back.  What I have noticed is how quickly the debate is now moving.  The term “devo max” is suddenly everywhere.  The debate is not now confined to Scotland.  It has taken a while but London is now taking a real interest.  Then there is Eurozone crisis and the debate over how much fiscal union is needed where you have monetary union.  The analogy between the UK’s relationship with the EU and Scotland’s relationship with the UK is an obvious one.

Back to the small matter of the Scotland Bill.  My interest starts with the fact that I am a lawyer.  I want to know about the legislation.  I want to know how and by whom the tax will be collected.  Is someone asking for a right to vary a tax or to have complete control of a tax.  What about the underlying and connected legislation.  These questions should remind us how complicated devolving powers can be.

I will cover four points today.

  1. The Scotland Bill is Calman minus;
  2. learning from experience and is “HMRC fit for purpose”;
  3. institutions as a missing element of the debate; and finally
  4. there was a better option.

The Scotland Bill is Calman minus.

People forget that the interim Calman report recommended almost no fiscal or tax powers.   The final report contained a small number including the controversial income tax proposal.  The Scotland Bill is meant to be based on the Calman report but what happened to air passenger duty and aggregates levy?

Air passenger duty was not included as it seems to be under constant review; however, the UK Government has indicated that parts of air passenger duty may be devolved to Northern Ireland.

Aggregates levy was not included because of an action raised in the European Courts by a trade body.

We have been told that these minor taxes might be included at a future date.  There is no reason for a delay.  The Scottish element of these taxes should simply be carved out of the relevant UK legislation.  Then leave it up to the Scottish Parliament to decide what to do next.

In addition Calman recommended that 50% of income tax on savings and distributions was to have been assigned to the Scottish Parliament.   Why 50%?  As with the income tax proposal no-one can give any justification for that figure.  This power has been dropped from the Scotland Bill completely.

Then there is the debate over adding additional tax powers to the Scotland Bill.

The previous Scotland Bill committee said that some powers over corporation tax should be included if Northern Ireland is granted any such powers.  Up until recently it looked as if Northern Ireland would soon be getting this power.

The Scottish Government have also produced papers on adding corporation tax, alcohol duty and control over the Crown Estate to the Scotland Bill.

I think it is fair to say that none of these suggested additions have been taken up enthusiastically by the Scottish Secretary.

Some powers might actually be re-reserved such as parts of insolvency and charity law.  The Scottish Parliament is at fault on insolvency by not updating the law.

Instead of arguing about re-reserving part of our charity law why was it not agreed that when OSCR registers a charity it automatically becomes entitled to the various charity tax reliefs.  Presently you also have to make an application to HMRC.  There is a lot of talk about tax simplification.  This was an obvious opportunity missed.

So which tax powers are we left with?

Two minor taxes, SDLT and landfill tax, and an income tax proposal that some commentators think is unworkable.   I will leave it to the accountants and economists to argue back and forth on that one.  That said, as a lawyer I would not start this process with income tax unless you devolve the tax in its entirety.  Only VAT is more complicated.    The longer I have been involved in this debate the less inclined I am to argue for a tax to be shared between parliaments.

The other problem is an eggs and baskets one.   Income tax is just one economic lever albeit a major one.  We have seen what has happened to income tax receipts during the current economic crisis.

Also a right to vary a tax is not much of a power on its own.  What about the underlying law that allows you to create reliefs or vary the tax base. What about connected legislation that affects the tax legislation.  For example for income tax: the tax residency rules or employment legislation.

To change tack for a minute.  What do I like about the Scotland Bill?  The borrowing powers provisions have been improved.   The way the two minor taxes are being devolved makes sense.  They are being carved out of the UK legislation and the Scottish Government are to draft a new Scottish act.  One word of warning on the drafting.  Who is drafting this legislation? What experience do they have in drafting tax law?

I also like the fact that the Scottish Parliament will be able to create new taxes albeit with Treasury approval.

Moving quickly on.  I always think it is a good idea to see how things have been done in the recent past.  What can we learn?  Given the importance of HMRC to this process I also want to discuss whether HMRC is presently fit for purpose.

I will start with HMRC.   I do have quite a bit of sympathy for them just now.  Can you imagine them being told: “I know we are cutting job numbers and your budget.  I know we are already asking you to do a number of new things but can you also deal with the Scotland Bill.”  You can see why HMRC do not treat this matter with much if any enthusiasm.

Is HMRC fit for purpose?  The House of Commons Treasury select committee thinks not.   A further £1.6bn is to be cut from its budget over the next four years.  10,000 more job losses.  Offices are to close.  This is in addition to the cut of approximately 30% in staff numbers and budget since 2004.  I will not even attempt today to answer the question of whether the UK tax system is fit for purpose.

It is though not just staff numbers and budget.   The centralisation of the administration of various taxes is causing problems for us in Scotland.  Two examples.  Birmingham for SDLT.  Nottingham for inheritance tax.

Why is this important?  UK tax law applies English & Welsh legal principles.  Property law and succession law are governed by Scots law.  These can conflict.  In addition, as these taxes are now primarily dealt with in England the amount of Scottish expertise has declined.   One example.  The guidance for SDLT in Scotland had to be written by a sub-committee of the Law Society of Scotland’s tax committee.

Then there is the news that as part of the HMRC cutbacks the Edinburgh Stamp Office is under threat of closure again.  The Trusts and Estates office in Edinburgh is being run down.   I have not heard one Scottish politician ask questions about this.

Now three examples of why I am not confident that this will be done be well.

Remember also that these examples are from a time when HMRC was better staffed and resourced.  Also it is not just HMRC that needs to do better.  The Scottish Government also needs to raise its game.

It has been well documented as to how much of a shambles the introduction of SDLT in Scotland was.   I was at meetings where HMRC openly said they did not realise that Scotland’s property law was different to English 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.

Then there was the proposal for a UK wide planning-gain supplement.  This was also pre-recession and the debate was all about how much should developers contribute.   I remember my first meeting with HMRC and Treasury officials about this.  The meeting started well with me saying: “I hope you make a better job of this than you did with SDLT”.

Again the level of knowledge of Scots law and which powers the Scottish Parliament had was not great.  My 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.  Maybe, maybe not!

This debate went on for many months but finally the proposal in Scotland was dropped.

My third example is I suspect the one you are most familiar with.  The Scottish Government’s local income tax proposal.  I remember being asked about this 2007 SNP manifesto commitment.  I made three points:

  1. Why do you think HMRC will cooperate and work to your deadlines?
  2. What about Council Tax Benefit?  I pointed out that the Treasury have withheld attendance allowance funding since the Scottish Parliament introduced free personal and nursing care.
  3. This proposal relied on the yet unused tax varying powers.  Is 3p in the pound adequate I asked? Is there even a list of Scottish taxpayers?

I was not surprised when the Scottish Government dropped, possibly temporarily, this proposal.

Ironically this proposal will be soon be possible as under the Scotland Bill the tax varying powers are increased and Council Tax benefit powers are likely to be devolved in 2013.   Whether HMRC would cooperate is of course another matter entirely.

Now to institutions.

The Scottish Parliament is going to need an Exchequer.  An Exchequer that ideally combines the functions presently undertaken by HMRC and the Treasury.   Even under the limited powers contained in the Scotland Bill the Scottish Government will need an Exchequer not just a finance department.  Hopefully the Scottish Government is already thinking about this.

Does Scotland need a separate Stamp Office, Registers of Scotland, Trusts and Estates Office and Companies House?  Of course not.  Why not 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.  Just as London is not the UK Edinburgh is not Scotland.  Remember some benefit powers are already to be devolved in 2013.  Why not create a tax and benefits office?

As far as institutions go we pretty much have a blank sheet of paper.  Let’s not waste this once in a lifetime opportunity.

A few final points.

It is all very well for me to criticise the Scotland Bill.  Do I have or rather had I a better option?  Yes I think I did.

When I started looking at the fiscal powers question my starting point was to look at which powers were already devolved.  The starting point for the Calman Commission was very different and much has already been written about that.

The imbalance in the powers of the Scottish Parliament is obvious.  The Scottish Parliament is responsible for 60% of government spending in Scotland but only has control over 7% of all tax raised in Scotland.  That is the starting point for the debate on financial accountability.

The Scottish Parliament had very few economic levers.  It only has two local taxes out of over 20 taxes and duties.

The lack of tax and fiscal powers also affects policy making.  For example the recent debate on alcohol minimum pricing.  I am sure the Scottish Government would prefer to use alcohol duty if it had the power to do so.

So what to do?

Instead of spending so much time trying to devolve income tax I would have firstly devolved the taxes and duties that are closely connected with already devolved areas of responsibility.

Some examples.

  • Property law is devolved but SDLT and the property parts of capital gains tax are not.
  • Succession law is devolved but inheritance tax is not.
  • Environmental law is devolved but the environmental taxes are not.
  • Health is devolved but alcohol and tobacco duties are not.
  • Transport is devolved but transport related taxes are not.

This increases the number of economic levers and would greatly help with joined up policy development.   Almost all of the miscellaneous taxes could be devolved under this option.

I would also give the Scottish Parliament the power to decide which of, and when the miscellaneous taxes and duties are devolved.

The other advantage less commented upon is how this would simplify the taxation system of the rest of the UK as less specific “Scottish” guidance would be required.

The point of how small a percentage of revenue the Scottish Parliament raises is though not resolved.  The Scotland Bill takes us to about a third.  Devolving the majority of the minor taxes takes us to about a quarter.

Only be devolving one or more of the big “5” can this be dealt with.  VAT cannot be devolved.   National Insurance is very closely linked with benefits which is still primarily a UK matter.

That leaves corporation tax, North Sea revenue and income tax.  On balance I would go for corporation tax and North Sea revenue as income tax is so closely linked with national insurance.

On timing I also think that the miscellaneous taxes and duties could be devolved relatively quickly.    The Scottish Parliament could also agree that for a period of up to two years to not change any tax that is devolved.  That would provide a degree of certainty.

Also why does the Scotland Bill not make provision for a tax exemption for our Commonwealth Games and as is already in place for next year’s London Olympics.   Or deal with the fossil fuel levy issue.

Last point.  The Scottish Government should deal directly with the UK Government and in particular HMRC and the Treasury.   The Scotland Office is simply a further complication.

Although this is complicated it is also a great opportunity.  Is the opportunity still there?  I am not sure.  But we would not be Scottish if we did not try to snatch victory from the jaws of defeat right at the last moment.

Thank you.

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