Business Wary Of Devolving Tax Powers To Scotland

by Jason Gorringe, Tax-News.com, London

23 June 2009

The Scottish arm of the Confederation of British Industry (CBI) has issued a cautious response to a report on devolving more power from London to Scotland, particularly in the area of taxation.

Following the publication of the recommendations of the Commission on Scottish Devolution (Calman Commission) on June 15, the Chairman of CBI Scotland, David Thorburn said that the study “is undoubtedly a very good and thorough piece of work.” But on tax, the recommendations go further than the CBI is prepared to support.

“The tax powers of the Scottish Parliament will be significantly increased and there will be no upper limit to the Scottish rate of income tax that may be charged,” he noted. “Moreover, employers’ PAYE compliance costs will be increased throughout the UK.”

The Scottish Parliament already has the power to vary the basic rate of income tax in Scotland by plus or minus 3 pence in the pound (the ‘Scottish Variable Rate’). If used to the full this could change the Scottish Budget by a little over GBP1bn, compared with total spending of around GBP30bn. But there is no obligation on the Scottish Parliament to make a tax decision. If it does nothing at all it will get its annual budget from the UK Parliament just the same. “No other UK level of government is like that,” observed the report “and our expert advisors found the funding of most regional governments worldwide had some transparent connection to tax receipts.”

The report went on to state:

“We have looked at alternative mechanisms through which the Scottish Budget might be funded. There are three main ways it might be done. The first is a grant paid from central taxation, as now. This can be used to make sure that the distribution is fair across the different parts of the UK."

“The second is to assign a share of the proceeds of some taxes raised in Scotland to the Scottish Parliament, for example some of VAT. This can promote efficiency, as it links the budget of the Scottish Parliament to the fortunes of the Scottish economy. But it has disadvantages too: it would make the amount of money the Scottish Parliament gets less predictable from year to year, and the Parliament would be unable to alter tax rates to help manage this uncertainty. Assignment would add risk to the Scottish Budget, especially at a time of economic difficulty.”

“The third mechanism is to devolve some tax powers to the Scottish Parliament so that it can, put simply, decide whether to increase tax and spend more, or decrease it and spend less. That provides financial accountability, but has to be balanced with efficiency and equity.”

The report recommended several taxes which should be devolved because they tax items which are “less mobile,” and so are unlikely to cause significant economic distortions. They include Stamp Duty on property transactions, the Aggregates Levy, Landfill Tax and Air Passenger Duty. “These also provide useful additional fiscal levers to the Scottish Parliament,” the report noted.

The Commission also recommended that the Scottish Parliament should be able to determine a “Scottish rate” of income tax applying to all rates, but should not be able to change the difference between the rates. This would apply also to tax on income from savings and distributions, although it acknowledged that this latter proposal presents “practical problems,” namely that most of this tax is collected at source by banks and building societies at the same rate for all savings accounts, and sent directly to the tax authorities. The report suggests that instead of a separate “Scottish rate” of income tax on savings, the yield for this tax could be shared between the Scottish Parliament and the UK Parliament according to a formula, without any scope for the Scottish Parliament to decide on the tax rate.

The principal business taxes, such as corporation tax, will remain reserved and continue to be applied uniformly across the UK, a recommendation that Thorburn said was “most welcome.” Nonetheless, he cautioned that now is not the time to implement such sweeping changes to the Scottish tax and legal system.

"The UK economy is currently in deep recession and this is not the right time to implement these changes. If the UK Government and the Scottish Parliament accept Calman’s proposals, it will be vital that implementation is carried out at a time when the economy is more stable and business is better placed to afford the costs involved. Any changes will also need to be phased in with great care,” he said.

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