Bill Jamieson: Tax threat to new powers
IF YOU thought the publication of the command paper on “more powers” has brought clarity to the tax levying and reporting regime, think again.
It’s all about as clear as a plate of dribbled mince. And businesses in Scotland, I fear, have now been put at a disadvantage to their English counterparts. It’s not just the lack of clarity about what lies ahead but the prospect of a tit-for-tat tax war behind two systems.
For what lies ahead is also about a war of competences with every prospect of continuous wrestling between the two governments and a tsunami for business in Scotland.
A smooth, orderly and reasonably predictable tax regime needs clarity as to its operation, simplicity in execution and institutions for the co-ordination of tax systems and the settlement of disputes. Goodwill and compromise will be essential. But judging by the negative response of the SNP administration last week and a highly contentious election ahead, I see little of that on offer.
Detailed negotiations lie ahead as to the working of the new Scotland Act. Already the battle lines are being drawn over the areas in which the SNP hopes to win extra powers for Holyrood and secure important concessions. It has signalled its intention to secure powers over the taxation of savings and investment income – currently reserved to the UK as the giant pension funds and insurance companies have the bulk of their customers outwith Scotland and separate tax rules in Scotland could see a mass flight of policyholders. But this could well result in many entrepreneurs in small businesses and partnerships opting to pay themselves by way of dividend income rather than conventional salary.
Businesses have no objection in principle to more powers for Holyrood – indeed, there are benefits in having policy determined at a local level and by an administration more responsive to Scottish needs. But this presupposes that business organisations will be well represented in negotiations, particularly over the practical application of changes and the extra reporting systems involved.
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There is real apprehension that this will not be the case. Liz Cameron, director and chief executive of Scottish Chambers of Commerce, has stressed the potential risks to the advantages of the single market and voiced concerns over the implications of changes. “Further consideration will be required to determine the practical effects that many of the legislative proposals may have on doing business in Scotland, particularly where these may result in additional burdens or costs. We urge the UK and Scottish governments to put businesses at the heart of this process.”
Wider worries are already being aired. Constitutional experts have raised concerns over the division of responsibilities between the UK and Scottish governments, warning that the draft legislation raises more questions than it answers in several areas.
Take, for example, the concept of “no detriment”, the notion that the actions of one government should not harm another. Professor Michael Keating, director of the Centre for Constitutional Change (CCC), points out that “detriment” could be read more widely to cover tax competition.
“So, if Scotland were to abolish air passenger duty and divert traffic from Newcastle to Edinburgh airport, England might complain about the lost revenue. Wealthy residents could be lured across the Border by different taxes on high incomes. Determining what should count as ‘detriment’ will remain politically contentious and technically complex.”
On tax, CCC colleague Professor Paul Cairney says: “What they have produced is a confusing system providing a complex interplay between reserved and devolved taxes. The result is great confusion about what tax-and-spending decisions we can meaningfully describe as being made by the Scottish Government.”
The Institute and Faculty of Actuaries has lost no time in voicing its anxieties on the draft Scotland Bill. “Having differing tax rates in Scotland versus the remainder of the UK will make a very complex system, especially in terms of tax relief on pensions savings. There is potential for differential tax relief to be a large administrative burden that will need to be borne by employers who have staff working cross-Border. It could also be complicated for individuals, particularly contractors working throughout the UK on a regular basis.”
Tax rules, it adds, could end up being far more complex than currently envisaged. “That complexity costs time and money… When considering further devolution it is important to avoid unintended consequences such as individuals ‘gaming the system’ by declaring residency in the country with the most beneficial tax rates. This could see people with large pension funds transfer between Scotland and the rest of the UK to whichever has the lower marginal rate.”
Are these fears overdone? The latest – and welcome – change of heart by finance minister John Swinney on the rates of the proposed Land and Buildings Transaction Tax are a case in point. Would this rethink have come had not the UK Chancellor George Osborne announced in his Autumn Statement last month a more nuanced reform of stamp duty for England and Wales?
Swinney’s LBTT is on average 2 per cent lower than the rates previously proposed. Some 50 per cent of buyers will now be property tax free. But there is still a yawning gap between the favourable stamp duty rates for the rest of the UK, introduced by Osborne, and the new LBTT rates, payable in Scotland from April this year. Indeed, the new rates will still leave the Scottish tax take on average 27 per cent higher than in the rest of the UK.
The new system relies on 8 per cent of buyers for around 75 per cent of its tax take. “If there is any slowdown at this level”, says Andrew Perratt, Savills’ head of residential property in Scotland, “it will result in a substantial fall in revenue. It seems inevitable that the threshold for the 5 per cent tax band will have to be extended in line with the rest of the UK.”
Holyrood announces a tax change, Westminster proposes another one. Holyrood has a rethink. If this is how it’s going to be across the tax system, little wonder the business community is apprehensive. More practical consideration, please, and less grandstanding.
