Likely timescale for additional Scottish tax and fiscal powers

I  have been asked a number of times recently to comment on a likely timescale for additional tax and fiscal powers if Scotland votes ‘NO’ in September 2014.

Estimating a likely timescale is not that difficult a task.  It may though be a pointless task if as is likely this issue is for all intents and purposes ignored by Westminster.

Recent delays to the devolving of additional fiscal powers to both Northern Ireland and Wales give an indication of the sense of priority these matters even now are given at Westminster. Add to this the background of the 2015 UK General Election and the debate surrounding the UK’s membership of the European Union.  This means that the likelihood of Westminster devoting anything more than a token amount of time and effort to yet another debate on which tax and fiscal powers to, or more realistically not to, devolve to the Scottish Parliament cannot be high.

The debate for additional powers is also not going to be all one way.  Those arguing for additional powers after a ‘NO’ vote will also have to counter those calling for powers to be removed from the Scottish Parliament or even that the Scottish Parliament be abolished.

That said, one recent example does gives us some idea of how long these things take.

  • SNP win May 2007 Scottish General Election
  • Calman Commission set up December 2007
  • Interim report published December 2008
  • Main report published June 2009
  • 2010 UK General Election and change of government resulted in a review of the matter
  • Scotland Act May 2012
  • Powers to be devolved in April 2015 and 2016

So 8 or 9 years and that is where very few powers were being devolved and there was a large amount of consensus between the main UK parties.

8 or 9 years may though be unduly optimistic.  Calman was set up within six months of the SNP’s victory. Would something similar be set up so quickly in the event of a ‘NO’ vote given how close the next UK General Election was?  I suspect not.  That means any additional powers are not likely to be in the control of the Scottish Parliament for at least a decade.

Also worth remembering that three of the six tax powers recommended by Calman were omitted from the Scotland Act 2012.

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Another few weeks in “tax land”

Where to start with so much happening in “tax land” just now.

Let’s start with the increasing interest by the UK and other governments in offshore tax havens and in particular the creation of “beneficial ownership registers”.  The issue here is that it is often very difficult to find out who the actual owner of an asset is.  The “legal owner”, the name stated on a land register or a share register, may be different to the so-called beneficial owner, the person who actually benefits from the asset in question.  This distinction can also be of use when trying to avoid tax and in particular hiding ownership and/or benefit from a particular tax authority.

This issue was on the agenda at the recent G8 summit in Northern Ireland.  Partial agreement was reached but it is not clear if trusts as well as companies will be included, which countries will actually set up these registers, who will have access to these registers and how long this is going to take.  More on the “Loch Erne Declaration” from the BBC news website can be found here.

There is no shortage of ideas surrounding tax these days. For example, Justin King, the chief executive of Sainsbury’s, has called on the UK Government to follow the US by introducing a “marketplace fairness tax” for online retailers and predicted that the need to revamp the corporate tax system will be a battleground at the next election.  More on this from the Telegraph can be found here.

Google only seems to be in the news these days when its tax affairs are being discussed.  The House of Common’s Public Accounts Committee has called on HMRC to fully investigate Google’s tax arrangements in a report critical of the company’s corporation tax avoidance. More on this from the Scotsman can be found here.

Ed Miliband and George Osborne have traded charges of hypocrisy over party funding as it emerged that Labour had received a donation of shares from TV shopping channel magnate John Mills. Mr Mills admitted he had given the party shares rather than cash because it was “tax efficient”. Labour suggested the Chancellor’s involvement in the matter was hypocritical, given the Tories’ own efforts to seek donations that avoided tax. More on this from the Guardian can be found here.

Now to the ever increasing range of Scottish taxes, charges and duties.  Scotland is to follow the Republic of Ireland, Wales and and Northern Ireland in introducing a charge on plastic bags.  The charge is to be 5p and the funds are to go to good causes.  Regulations will be introduced in the Scottish Parliament in time for businesses to start charging by October 2014. The information released so far seems sensible and well thought out and in particular the effort to reduce any burden on small businesses is to be welcomed.  More on this can be found here.                                                                                 

More than half-a-million Scots are in danger of being worse off when the Scottish Parliament gains new powers over income tax because the current system would not allow them to claim tax relief on their private ­pensions.  More on this from the Scotsman can be found here.  This simply confirms how ill thought out the Scotland Act’s income tax proposal is.  Dividing control of a tax between two legislatures is rarely sensible or workable.

Now to the Scottish Conservatives and their never ending debate on further powers for the Scottish Parliament.  Coverage of their recent conference was dominated by the differences of opinion on this issue within the Scottish Conservative party.  More on this can be found from the Scotsman here and the Telegraph here.

The Scottish Green party is urging the Scottish Government to be bolder on land reform and to look at measures including land value tax.  I agree that this is something that needs to be looked at.  More on this can be found here.

When I read stories such as this I know that tax simplification is never going to happen.  David Cameron has said that married couples are to be given a tax break in the near future.  The tax break will be worth up to £150.  The income tax legislation is already complicated enough and, given the state of HMRC just now, I can guess its  private reaction to ideas such as this.  More on this from the Telegraph can be found here.

I wonder what the rest of Scotland thinks of this suggestion.  If Edinburgh’s £776m tram system is to have any chance of making even a small profit over the next fifteen years a tax concession will be required.  It is claimed that a large part of somehthing called the “sinking-fund” might be tax deductible but the City of Edinburgh Council has confirmed that it has not yet made approaches to HMRC to confirm that this is indeed the case.  More on this can be found in the Times of 27 June.

Now to matters slightly further afield.  The European Commission has published its plans to require EU member states to automatically exchange information about all forms of taxpayers’ income including dividends and capital gains, as well as the bank balances of all EU residents.  This is further evidence of the increasing role the EU is playing, and intends to play, in tax and financial matters.  More on this can be found here.

In addition, Italy, Belgium, Greece, Poland and Finland’s Aland Islands have failed to implement the European administrative co-operation directive, which requires member states to automatically exchange information on their residents’ taxable income. The implementation deadline expired six months ago, and the European Commission says it will take the countries to the European Court of Justice if they persist in ignoring the directive, which is soon to be extended to cover other types of income.   More on this from Reuters can be found here.

Taxpayers have brought litigation against the Canada Revenue Agency’s use of its general anti-avoidance rule (GAAR) on 52 occasions since it was introduced, and won exactly half of them, according to new CRA figures. Three-quarters of the litigated cases turned on whether there was misuse or abuse of the GAAR or another statute.  More on this can be found here.  This is of particular interest given that we will soon have a UK GAAR.

Now to the USA and back to the “beneficial ownership” issue.  The US President’s office has promised to introduce comprehensive legislation requiring the disclosure of beneficial ownership information, which currently does not exist in the US either at state or federal level. The promise is part of an action plan issued after last week’s G8 summit.   More on this from STEP can be found here.

The US Supreme Court has held that the surviving spouse of a same-sex marriage must be granted the spousal estate tax exemption, despite provisions of the Federal “Defense of Marriage Act” restricting federal benefits to traditional mixed-sex couples.  More on this from STEP can be found here.

Lastly to Cyprus.  An expert commission appointed by Cyprus’s central bank has concluded that its financial centre can only survive if it is reformed to be less dependent on tax breaks for clients in particular countries, with strictly and visibly enforced anti-money laundering controls, and able to offer an international standard of wealth management services.  More on this from STEP can be found here.

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Scottish Labour’s Devolution Commission’s Interim Report

There were few surprises arising from the publication of Scottish Labour’s Devolution Commission’s interim report.

The starting point for these commissions is always the same.  They look around for reasons why a particular power should not be devolved.  They do not look at what could be achieved by control of that power being passed to the Scottish Parliament.

The main problem that I have with this report is that we have heard all this before and in fact quite recently.  The Calman Commission taught all of us with an interest in seeing the creation of a Scottish tax system how its opponents behave.   I like to call this 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.”

Calman also taught us that even if a report is produced and its recommendations are accepted not all of those recommendations actually make it to a Scotland Act.  That is why the Scotland Act 2012 is called “Calman minus”.

The absence of common sense is also a problem.  Why not look at which powers are already devolved and then devolve the areas of taxation most closely connected to these already devolved powers.  For example inheritance tax and succession law, tobacco and alcohol duties and health and vehicle excise duty and transport.  This would greatly help the development of policy and at the same time provide the Scottish Parliament with a serious number of economic levers.

Simplification for both the UK tax system and the new Scottish tax system is not even considered.

So what does report say?

The main taxes other than income tax are quickly dealt with and also the largest area of law not yet devolved, welfare.  The report rules out devolving National Insurance and with it any control of the welfare state, corporation tax and North Sea revenue.  That immediately restricts what can be done.    As VAT can only be devolved if Scotland becomes independent, of the 5 major sources of revenue, that only leaves income tax.

The report is quite clear and does not recommend devolving complete control of income tax.  At most it recommends devolving control of the rates, thresholds and allowances.  Almost all of the underlying law that governs how income tax is charged, or the type of reliefs, or the collection rules or who pays and when would not be devolved.   That means that income tax would have two masters.  As with the Scotland Act income tax proposal this is a recipe for disaster.

The report then looks at a number of minor taxes and uses a number of the “usual suspect” reasons as to why they should not be devolved.  They generally do not say that a particular minor tax should not be devolved but rather there is an “issue”.   The main issues are “concerns about avoidance” and “subject to EU law”.  This covers fuel duties, tobacco duties, alcohol duties, stamp duties other than SDLT which is already being devolved, insurance premium tax, betting and gaming duties, most of capital gains tax and a number of other minor taxes on income and wealth.  It is not clear what is proposed regarding climate change levy. Revenue from our TV licences and the National Lottery are simply described as “not relevant”.

So, along with slightly more control of income tax, what is left?  Possibly air passenger duty and aggregates levy as recommended by Calman but not included in the Scotland Act, possibly vehicle excise duty, possibly part of capital gains tax, possibly inheritance tax and possibly control of the Crown Estate.  The recommendations are not that dissimilar to the Liberal Democrat Home Rule Commission proposal.  Please see my earlier blog on this which can be found here.

The conclusion is simple.  The vast majority of tax revenue and taxes will remain controlled by the UK Government.   In any case, the response from a number of Labour MPs to the interim report tells us all we need to know as to the likelihood of these relatively minor proposals being enacted.

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A feeling of déjà vu in “tax land”

Just as the weather in Scotland likes to tease us, so do the Tories over tax powers for the Scottish Parliament.  You can sense the nervousness growing in those opposing substantial tax and fiscal powers for the Scottish Parliament.  They feel that need to be saying something substantial but they just don’t know what to say.  They think that a hint of something substantial will be enough.

Look how the Liberal Democrats talked up their recent ‘Home Rule Commission’ report and the amount of power being devolved under Scotland Act 2012.  The reality as usual being very different.  My earlier blog on this can be found here.

So what have the Tories been saying, or rather hinting at?  Ruth Davidson has announced that yet another group will examine the existing devolution settlement in order to set out a clear alternative to independence in next year’s referendum.  A “clear alternative to independence”, I think not more a clear case of déjà vu.  More on this from the Scotsman can be found here.

The UK Government’s nervousness on the devolving of tax powers is not confined to Scotland.  The negative reaction it has received to one particular announcement shows how difficult a position it is now in.  The recent move to put off the decision to devolve corporation tax to Northern Ireland has not gone down well.  Peter Robinson, Northern Ireland’s First Minister said he had told the Prime Minister: “What, effectively, you are saying to the people of Scotland is that if you want more fiscal autonomy than you have at the present time, the only way to have it is through independence.”  More on this from the Herald can be found here.

Now to HMRC.  So much is happening with them just now it is difficult to keep up.

HMRC has announced that it is postponing payroll reforms for small businesses that require businesses to send real time information to HMRC amid fears that small businesses are unprepared for the changes.  More on this from the Financial Times can be found here.

The House of Commons Public Accounts Committee has also criticised HMRC target of answering 80% of tax enquiry calls within 5 minutes as “unambitious and woefully inadequate”.  It also found that Britons waste £136m a year attempting to get through to HMRC, with about 20 million of the 79 million calls received by HMRC going unanswered each year, despite spending £900m on improving customer service.  HMRC’s premium rate phone lines are also to be replaced.  Phone company Cable and Wireless is making a profit of about £1m a year from callers to HMRC’s 0845 enquiry numbers, according to a report by the House of Commons Public Accounts Committee.  The lines are to be replaced with cheaper 03 numbers. More on this from the BBC news website can be found here.

HMRC is also to close all of its 281 Enquiry Centres, which gave face-to-face help to 2.5 million people with tax queries last year.  The closures in 2014 by HMRC, which aim to save £13m a year, are expected to add 2 million extra calls to phone lines while also putting 1,300 jobs at risk, though the authority aims to deploy these staff elsewhere.  HMRC aim is to replace the Enquiry Centres with interviews in a range of convenient locations.  This might include a person’s own home or business.  We shall see.  More on this from the BBC news website can be found here.  The matter of how we deal with tax enquiries is an issue that we in Scotland also need to look at as we create a Scottish tax system.

Now to attempts by the UK Government to reduce tax avoidance.

A tax loophole that allows firms to escape £100m a year in National Insurance will be closed under a new scheme targeting offshore payroll services.  From April 2014 the UK government will prevent employers avoiding National Insurance Contributions by paying their staff through an offshore intermediary.  It estimates that at least 100,000 workers are now being employed through an offshore agency, often without their knowledge, losing tax contributions of £100m a year.  More on this from the BBC News website can be found here.  The question is: why has it taken so long to try and put a stop to this.

The number of UK-resident non-domiciles has fallen by almost a fifth since the “remittance basis charge” was introduced in 2008.  Non-doms can elect to pay tax on UK income alone and keep their overseas income out of the UK tax net.  But if they elect to use this system long-term, they must pay the annual remittance basis charge after seven years of residence. The charge starts at £30,000 and increases to £50,000 after 12 years of residence.  More on this from the STEP journal can be found here.

HMRC is to launch a campaign aimed at people who have failed to declare capital gains on the sale of a second home, possibly going back many years.  This is yet another long overdue measure.  More on this from the STEP journal can be here.

The Charity Commission for England & Wales has been criticised by the House of Commons Public Accounts Committee for failing to provide more substantial oversight of the sector after 50 organisations were found to be using charity rules to avoid tax.  More on this from the Telegraph can be found here.

Now to matters slightly further afield.

Let’s start with Cyprus and yet another banking disaster.  After much wrangling, Bank of Cyprus depositors with more than €100,000 could now lose up to 60% of their savings.  The original proposal was a one-off levy of up to 10% to be imposed on all bank accounts held on the island.  More on this from the BBC news website can be found here.

The UK should withhold extra aid to Pakistan unless the country does more to gather taxes from its wealthier citizens and tackle corruption, the House of Commons International Development Select Committee has suggested.  The UK Government is planning to increase the amount of aid to Pakistan to £446m by 2015 and the Chairman of the Committee, has said that it is a question of “how justified it is to increase [aid] at a time when [the] wealthiest people in Pakistan are paying little or no tax”.  More on this from the BBC news website can be found here.

Now to France.  President Hollande has announced that French companies will be taxed at 75% on any salaries they pay over €1m.  His original plan for a 75% top rate of income tax on individuals was struck out by the constitutional court earlier this year.  More on this from the Guardian can be found here.

Let’s end with a story from China.  According to reports, China’s property market has been thrown into turmoil by the announcement that capital gains tax on residential property is to be raised to 20%.  At the moment, the seller of a residential property pays between 1 and 2% of the total sale price. Officially, gains from selling second homes have been taxable for several years, but the tax has not been strictly enforced.  The measure is one of several just issued by the People’s Republic State Council in an effort to cool off the booming housing market.  More on this from the STEP journal can be found here.

One last thing.  Congratulations to Ryan Mania.  An absolute fantastic achievement today on winning the Grand National.  Another reminder of just how great it is to be from the Scottish Borders.


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