Devolved Scottish tax powers must be managed carefully, say advisers

Devolved Scottish tax powers must be managed carefully, say advisers

Devolved taxation powers to Scotland could distort economy if managed poorly, but advisers praise pragmatism of move

THE DEVOLUTION of further tax powers to Holyrood has drawn a varied, but broadly positive response from the profession, despite a tinge of concern over the civil service’s workload.

When David Cameron promised Holyrood greater practical powers if Scots voted to remain in the UK, there was understandably a large section of commentators who suggested the move was rash and ill-thought out. After all, it very much smacks of a bargaining move rather than a long-term pledge developed over a period of months or years.

And yet the suggestion that Edinburgh will be able to set its own income tax rates and bands, along with more minor levies such as Air Passenger duty has been described as “pragmatic” by the CIoT, while ICAS praised the “brave path” taken by Lord Smith’s commission in its recommendations.

Of course, in issues such as this, the biggest task for those determining the outcome is balancing politics and practicality. The integrity of the UK – both as a market and a country – is, it goes without saying, paramount in all this.

And so, introducing additional complexity in the form of differing rates and tax bands does not, at least at first glance do a lot to help that cause. Not least, as the ICAEW rightly points out, in the context of the “parlous state” of public finances.

Despite those hurdles, it’s widely accepted – as ACCA acknowledge – the devolution of the powers creates a clear responsibility for spending and will give a greater perceived link between taxation and representation. That said, there is the possibility any stimulus it gives Scotland’s economy could distort fortunes in the north of England – by far Scotland’s biggest trading partner.

Managing the further devolution of powers will also require an expanded civil service and increased resource for HMRC at a time when the department is shrinking dramatically, with 14 office closures due in the coming months.

As yet, Number 10, the Treasury and HMRC are yet to hammer out the finer points of how the new powers will be administered, and further guidance will be issued in due course.

One possibility is that Revenue Scotland, which administered taxes already fully devolved in the 2012 Scotland Act including Stamp Duty Land Tax and Landfill Tax, will extend its jurisdiction, but what form that would take has yet to be determined.

The point at which that happens does, though, seem to be a long way in the future given that it has yet to hit 40 employees and is not yet in the business of collection – instead resolving disputes and conducting investigations.

Not only that, but its jurisdiction is solely over fully-devolved taxes, which income tax is not and will not be – power over bands and rates isn’t the same as full devolution. As such, it seems likely that the levy will be run through PAYE.

Another practicality to consider is exactly who will pay what rate. On a basic level, a Scottish taxpayer is set to be defined by where one lives and not place of work. On a more technical level, that will come down to spending half the year or more in Scotland in order to qualify as a Scottish taxpayer. The administration of reliefs in investments such as pensions is likely to become something of a knot, with that power remaining in Westminster. As such, a smooth interaction between the two systems is something that will have to be achieved quickly.

There is still some time in which to address the bulk of those concerns, with the final of the powers coming in in time for the 2016 Scottish Parliament elections, but it’s imperative to address them early if they are to prove effective.

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