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Scotland Starts National Debate On Personal Tax Reform

by Jason Gorringe,, London

03 November 2017

The Scottish Government has released a discussion paper on the future role of income tax in Scotland's budget.

Since April of this year, under a tax devolution agreement with the UK Government, the Scottish Parliament has been empowered to set the rates and bands of income tax on earned income, with the money raised from these, together with other devolved tax receipts, assigned directly to the Scottish budget. However, income tax is only partially devolved, and Holyrood does not have control over key aspects of the income tax system – such as the tax base, the tax-free personal allowance, and income tax on savings and dividends.

Scotland's First Minister, Nicola Sturgeon, said that any new income tax policy must meet four key tests, as she called on all political parties to engage in an open debate about tax in Scotland, namely: it should protect low earners, be progressive, proportionate to the ability to pay, and support the economy.

The comments coincide with the publication of a discussion paper examining the role of income tax in Scotland's budget.

Finance Secretary Derek Mackay has written to all parties inviting them to begin cross-party discussions and will host two stakeholder roundtables later this month with business organizations, trade unions, civic society, and tax professionals. Mackay said: "I am seeking a well-informed and considered debate on the use of our powers, recognizing that in a parliament of minorities common ground on tax must be found to secure a budget for Scotland. We have therefore set out alternative approaches for discussion, that we believe could better meet the four tests we have established."

"We will engage in the discussions in an open-minded and constructive manner, and as the paper makes clear, the Chancellor's decisions on overall spending and tax policy for the rest of the UK are still critically important in determining Scottish Government funding, final decisions on tax and spend will be made in the proposed Scottish budget."

Tax and spending decisions for 2018/19 will be published in the Draft Budget on December 14, 2017.

Noting the release of the discussion paper, the Chartered Institute of Taxation said that having control over some parts, but not others, of a complex interacting tax system may limit the Scottish Parliament's ability to maximize the use of its income tax raising powers. The CIOT cautioned policymakers that any substantial changes to Scottish income tax rates and bands had the potential to result in additional complexity for Scottish taxpayers and changes in taxpayer behavior because of the continued interaction between devolved and reserved taxes.

While noting that the potential behavioral impacts of tax changes in Scotland are hard to quantify (with little in the way of recent historical precedent), CIOT has urged members of Scottish Parliament (MSP) to be wary of these potential constraints as they decide on future income tax rates and bands.

Commenting, Moira Kelly, chair of the CIOT Scottish Technical Committee, said: "Despite the devolution of a significant number of tax-raising powers to the Scottish Parliament in recent years, the fact remains that Holyrood's ability to set and raise taxes remains constrained by tax policy decisions taken elsewhere in the UK. These have the potential to influence taxpayer behavior. There are many interesting proposals contained within today's document, which is a very welcome contribution to the debate around Scotland's devolved tax policy options. But even if a political consensus emerges in favor of major changes to income tax in Scotland, these policy decisions cannot be considered in isolation from the wider UK tax regime."

"A markedly different income tax regime north of the border may, for example, incentivize self-employed businesses to incorporate in order to shift their liabilities from higher rates of Scottish income tax to lower rates of UK-wide corporation and dividend taxes. Similarly, in the case of very high earners, it shouldn't be ruled out that those people could choose to relocate to other parts of the UK or elsewhere if significant amounts of tax were at stake."

"Recent history doesn't tell us very much about what the potential impact of these changes may be. When the UK-wide 50p top rate of tax was introduced in 2010, it did not remain in place long, while a long lead in time to its introduction and removal allowed some higher earners to plan their income in advance."

"MSPs must be mindful when exercising their tax raising powers that they do so in a way which recognises and responds to the continuing interaction with the wider UK tax base and the potential impacts on the Scottish Government's budget."

TAGS: Finance | tax | business | mining | interest | budget | United Kingdom | professionals | tax rates | dividends | trade | Tax | Scotland

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