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Questions Raised Over UK Tax Devolution

by Robert Lee, Tax-News.com, London

23 November 2012


A major new report has recommended the devolution of tax and borrowing powers to Wales, but research into the future operation of the devolved Scottish tax system has shown that administering devolved powers will be no easy task.

The Commission on Devolution in Wales, also known as the Silk Commission after its chairman Paul Silk, has published a report proposing comprehensive changes to Wales's financial powers. The commission was set up by the Secretary of State for Wales in October, 2011, and was asked to consider the Welsh Assembly's current financial powers in relation to taxation and borrowing.

The report, "Empowerment and Responsibility: Financial Powers to strengthen Wales", makes 33 recommendations which, if implemented, will increase the financial accountability of the National Assembly for Wales and make it responsible for determining a proportion of its own budget for the first time. In particular, it proposes to give Wales its own tax and borrowing system, which would ensure that around one quarter of devolved spending in Wales would be determined by taxes decided in Wales (including Council Tax and Business Rates).

The devolution would begin with the smaller yielding taxes. Landfill tax and stamp duty tax would be fully devolved under the report's recommendations. There is a precedent for such devolution, as the recent Scotland Act 2012 has provided the Scottish government with powers over these duties. The commission also hopes to see the full devolution of the aggregates levy and business rates, along with Air Passenger Duty for long-haul flights initially, with future full devolution if possible. The Welsh government would also have increased power to introduce levies reflecting Welsh priorities under the plans.

The proposals are also designed to make the Welsh government responsible for funding a material amount of the money it spends, thereby improving financial accountability. Responsibility for income tax would be shared between the Welsh Assembly and the Westminster parliament, and the Welsh government would be able to vary income tax rates within the UK income tax structure. In addition, the transfer of income tax powers would be conditional upon resolving the issues of fair funding in a way that is agreed by both the Welsh and UK governments, and income tax devolution should be subject to a referendum. In a nod to the ongoing row over corporate tax devolution to Scotland and the prolonged debate over a comparable measure for Northern Ireland, the report suggests that corporation tax should not be devolved to Wales unless it is devolved elsewhere.

Responding to the report, Secretary of State for Wales David Jones said that he would consider its recommendations with colleagues and respond formally in due course. Chief Secretary to the Treasury, Danny Alexander also pledged to work with the Welsh government and all parties in the Welsh assembly to deliver an ambitious outcome that best meets the needs of the people of Wales.

The Silk report comes as the Institute of Chartered Accountants of Scotland (ICAS) has issued a paper warning of the potential complications of a devolved tax regime. In its report, "Scotland's Tax Future: The Practicalities of Tax Devolution", ICAS urges that the Scottish government get to grips quickly with its tax system for its devolved tax powers. The government, led by the Scottish National Party (SNP) is also warned by ICAS that if it gets its wish and Scotland becomes independent, designing a tax system for Scotland will potentially be "massive, complex and expensive."

Irrespective of the 2014 referendum on independence, the Scottish government will, under the Scotland Act 2012, have the power to change the Scottish rate of income tax. Stamp duty land tax and landfill tax have also been devolved, as has the power to create new taxes. ICAS, in its paper, "Scotland's Tax Future: The Practicalities of Tax Devolution", says that the government must create a system that provides an easy taxpayer experience which will encourage taxpayer compliance and the generation of revenues. ICAS advises that taxpayer profiling will be a vital start to understanding how any changes in allowances, tax structures, reliefs or rates will impact on total tax paid.

When it comes to the administration of taxpayer information, ICAS is concerned that HM Revenue and Customs (HMRC) may not have access to the same tax data from Revenue Scotland in relation to disposals of land under the proposed land and buildings transaction tax regime. It warns that without this data, Scotland could become a place for sale proceeds to hide from HMRC. According to Elspeth Orcharton, director of corporate and international tax at ICAS, "This raises some serious points of policy and principle to be determined by the Scottish Parliament over the next year in relation to information sharing powers and the nature of international tax cooperation."

The resolution of taxpayer disputes will also be crucial to the success of the devolution, Orcharton said. She explained, "The volume of tax disputes between taxpayers and the tax administration will depend on the quality and clarity of the tax legislation enacted, the organizational culture established in Revenue Scotland, and its clear accountability. Decisions on tax matters are as important as other areas of the justice system, and processes and provisions need to be written into the legislation."

These considerations aside, ICAS believes that the most complex issues would arise from any future independence. For instance, ICAS notes that the Westminster parliament may not wish to give up its control over or entitlement to tax deferrals, and will therefore either need to develop a mechanism for tracking delayed liabilities so that they are paid back to the UK, or levy the tax as an exit tax. However, an exit tax isn't currently possible between European Union states, so a resolution of Scotland's position in the European Union would be a key factor in this.

"Scottish taxpayers should expect to pay the cost of changeover, although in the absence of any independence settlement, estimate of tax revenue needed to be raised, tax system shape, or taxpayer base, it is impossible at this stage to know what the tax position of any Scot would be. The extent of work needed to achieve changeover will be massive, the taxpayer's role will also be to pay for it," Orcharton concluded.

TAGS: tax | business | tax avoidance | corporation tax | United Kingdom | legislation | tax rates | stamp duty | tax reform | exit tax | individual income tax

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