Although I wrote this over six months ago, and some of the figures are out of date, the points made still apply.

Introduction

It is important in the context of the wider independence debate to remind ourselves how the UK Government, its institutions and its supporters in Scotland have reacted to the idea of devolving substantial tax powers to the Scottish Parliament.  The UK Government of whatever colour know that if they lose the tax powers debate they lose Scotland.

It is often forgotten that there were two votes in the 1997 referendum.  The first was for the establishment of a Scottish Parliament and the second for the Scottish Parliament to have tax-varying powers.  74.3% voted in favour of a Scottish Parliament and 63.5% in favour of tax-varying powers.

My renewed interest in Scotland’s constitutional debate, and in particular the tax and fiscal powers debate, began on my return from the USA in 2000.  Serious tax powers were not even considered in 1997.  The Scottish Parliament simply gained control of the matters that were for the most part already controlled by the Scotland Office despite the vote in favour of tax-varying powers in the referendum.

The view I adopted then, articulated in a number of articles, was that it was relatively easy to improve the administration of tax in Scotland.  Although these articles generated a great deal of comment nothing happened.  I also around that time accepted an invitation to join the tax committee of the Law Society of Scotland. Serious tax powers for the Scottish Parliament were still not on the political agenda.  That led me and a few others to set up the think tank, Reform Scotland which gave us the chance to add some substance to this debate.

A Brief History of Tax in Scotland in Recent Times

The Scottish Parliament was given control over the two local authority taxes: council tax and business rates.   It was also given partial control over income tax.  The Scottish Parliament is responsible for approximately 60% of government spending in Scotland but only has control over, and again approximately, 7% of all tax raised in Scotland.  The income tax power was never used and even the ability to use it lapsed a number of years ago. A great deal was made of the income tax power at the time of the 1997 referendum.  This included having a specific question devoted to it.

There were no significant developments on tax powers for the Scottish Parliament until the Liberal Democrat “Steel Commission” report was published in March 2006.  Even though the report did not receive a great deal of publicity at the time of publication it was generally well received.  This report shows how far the Liberal Democrats have retreated on devolving substantial tax powers for the Scottish Parliament.  I will come back to this point.

The real game changer happened in 2007 when the SNP become the largest party in the Scottish Parliament and formed a minority government.  The response of the Labour, Liberal Democrat and Conservative parties was the “Commission on Scottish Devolution”, more commonly referred to as “Calman”.  Why did they do this?  These parties felt they had to be seen to doing something.  They thought the SNP victory was a blip and that there was nothing really to worry about.  Normal service will be resumed in 2011.  The remit of Calman was also clear:  “… to secure the position of Scotland within the United Kingdom”.

The first Reform Scotland “fiscal powers” report was published in November 2008.  The report got a great deal of coverage.  The authors, including myself, looked at this issue from the position of the present constitutional arrangement i.e. a devolved parliament.  Our proposal was that the Scottish Parliament should be given the tax powers to enable it to raise approximately the amount it spends.   Under this proposal control over the vast majority of taxes would have been devolved to the Scottish Parliament.

In contrast to the Reform Scotland report was Calman’s interim report published in December 2008.  This report made no specific recommendations regarding tax powers and was  probably an effort to test the water.  The difference now was that there was something to compare Calman with.

Calman’s final report was published in June 2009.   The report appeared to offer as little as they thought they could concede.  It included four miscellaneous taxes (Stamp Duty land Tax, landfill tax, aggregates levy and air passenger duty) and a very restricted income tax proposal.  Calman’s membership, which included Iain McMillan of CBI Scotland, meant this was the most likely outcome.  The main report even suggested that a number of powers including parts of Scottish charity law be re-reserved. Reform Scotland updated its “fiscal powers” report in October 2009 to take account of Calman.

The reaction of the UK Labour Government and then the coalition Government to the Calman proposals was particularly telling.  They could not even countenance legislating for the powers recommended by Calman.  This involved what I then termed  “Calman minus”.  The coalition Government’s Scotland Bill was published in November 2010 and only included two minor taxes (Stamp Duty Land Tax and landfill tax) and partial control of the income tax bands.  The arguments put forward for not including the two other minor taxes are revealing.  Air passenger duty was not included as it was under review and aggregates levy was omitted because it was subject to a European court action by a trade body.  The recommendation that 50% of income tax on savings and distributions was to have been assigned to the Scottish Parliament had simply been dropped.

In response to the coalition Government’s Scotland Bill the Scottish Government produced papers on adding excise duty, corporation tax and control over the Crown Estate to the Scotland Bill.  I think it is fair to say that none of these suggestions were taken up enthusiastically by the UK Government.  In addition the UK Government ignored recommendations made by both the present and previous Scottish Parliament Scotland Bill Committees (chaired by Wendy Alexander MSP and Linda Fabiani MSP respectively) and even Westminster’s Scottish Affairs Committee for including some or all of these powers.   Reform Scotland’s third fiscal powers report, “Devolution Plus”, was published in September 2011, of which I was again one of the authors.  There were two main changes.  Control over income tax was to be given entirely to Holyrood and the devolving of substantial welfare powers to the Scottish Parliament was recommended.

The Devo Plus campaign was formally launched in February 2012 and its fiscal powers proposal is based on the Devolution Plus paper produced by Reform Scotland.  Devo Plus was set up by Reform Scotland, although it is not supported by everyone associated with Reform Scotland, and includes representatives of each of the main unionist parties.  Neither the Devolution Plus paper or the Devo Plus campaign has had any discernible effect on the Scotland Act 2012 which received Royal Assent in July 2012.  The latest devolution paper is called “devo more” and it is from The Institute for Public Policy Research and was published in January 2013.  This proposal does not go nearly as far as “devo plus” and only goes slightly further than the Scotland Act 2012.

The Wider Context

It is worth noting that Westminster has already refused to devolve control of a range of taxes, duties and charges to the Scottish Parliament.  Those listed below are the main taxes but there are a number of others.  In bold are the additional powers the Liberal Democrats would devolve under its “Home Rule and Community Rule Commission”. The figures in italics are mostly from the “Government Expenditure & Revenue Scotland 2010-11” (GERS).  The figures are included to give an idea as to the level of revenue produced by a particular tax and are a number of millions of pounds.

1. Full control over income tax including the underlying law dealing with reliefs etc (some additional powers but not complete control)  10,634
2. National insurance contributions  8,018
3. Corporation tax (assignation of revenue only)  3,114
4. North Sea revenue  7,951
5. Fuel duties  2,339
6. Capital gains tax (partial control only)  244
7. Inheritance tax (to be devolved)  159
8. Other stamp duties – stamp duty and SDRT on shares (estimated)  265 
9. Tobacco duties  985
10. Alcohol duties  (includes spirit, wine, beer and cider duties)  895  
11. Betting and gaming duties  113
12. Air passenger duty (even though included in Calman) (not clear if to be completely devolved)  183
13. Insurance premium tax  210
14. Climate change levy  61
15. Aggregates levy (even though included in Calman) (not clear if to be completely devolved)  54
16. Vehicle excise duty  470
17. Bank levy  (estimate as no separate Scottish figure)  200
18. Licence fee receipts  325
19. Crown Estate revenue  (not clear if to be completely devolved)  10
20. VAT cannot be devolved but VAT revenue could be assigned  8,560 

Taxes devolved or being devolved under Scotland Act 2012

1. Income tax (still only partial control over tax bands and will cost Scottish Parliament millions of pounds a year to administer even if not used)  (estimated partial control over)  5,000

2. Council tax  1,986

3. Business rates  1,891

4. Stamp duty land tax (Scottish Parliament control by April 2015)  330 

5. Landfill tax (Scottish Parliament control by April 2015)  99  

The Scotland Act 2012 also does not resolve the imbalance between the amount the Scottish Parliament is responsible for spending and which it raises.  The Scotland Act 2012 only takes us to about a third.

Likelihood of additional powers being devolved if Scotland votes ‘No’

Let us begin our examination with the Liberal Democrats who published their “Home Rule and Community Rule Commission’s report: ‘Federalism: the best future for Scotland’” in October 2012.  There are a number of problems with this report.  The first is the likelihood of the Liberal Democrats being part of and having a major influence in a future UK Government.  At best the Liberal Democrats will again be a junior partner in a UK coalition government.  Even if they were to persuade the senior party to implement their plans the Scottish Parliament would not see any new powers until at best 2020.

Then there is the accusation: why should anyone take the Liberal Democrats seriously on devolving substantial tax powers to the Scottish Parliament?  The Liberal Democrats are in power just now at the UK level but have had remarkably little impact on the coalition in this area: all we have is “Calman minus”.  The Scotland Act 2012 does not even devolve control of the Crown Estate in Scotland to the Scottish Parliament even though the Liberal Democrats have campaigned on this issue for many years. Then there is the report itself.  The report barely goes beyond Calman.  Inheritance tax is to be devolved and also some parts of capital gains tax and possibly control over the Crown Estate.

The Liberal Democrats have historically been willing to go further than the other main UK parties on devolving powers to the Scottish Parliament.  The Steel Commission for example goes much further.  What this report shows is that the Liberal Democrats are moving away from devolving substantial tax powers to the Scottish Parliament.

Scottish Labour has a “further devolution commission”.  There is little prospect of this commission coming up with a proposal close to “devo max” or even “devo plus”.  The UK Labour Government’s response to Calman did not go any further than the UK coalition Government’s recent Scotland Act.  The fact that the leader of the ‘No’ campaign, Alistair Darling, refuses to say anything constructive on this issue suggests that the UK Labour Party will only even consider devolving substantial tax powers if forced to do so.  Then there is the Conservative Party.  The idea of a “Constitutional Convention” is questionable.  The Conservatives have consistently adopted a policy of prevarication, kicking the matter into the longest of long grass for another generation.

In her much trailed speech, Scottish Tory leader Ruth Davidson promised no new tax or fiscal powers, no timetable for even considering the issue and no confirmation that she had moved on from saying that corporation tax and welfare powers should not be devolved.  That is what Davidson said as recently as October 2012.  All that has been hinted at is that they will consider setting up a new commission to examine the devolution of more powers to the Scottish Parliament.

No second question

The campaign for a “second question” to be included on the ballot paper in 2014 failed.  So what does that mean for those arguing for “devo max” and “devo plus”.  Devo Plus did not argue for a second question and its supporters have confirmed that they think Scotland should vote ‘No’.  They also think that Westminster will devolve substantial tax powers to Scotland if Scotland votes ‘No’.  This is not a realistic position to take.  Calman only existed because Scotland elected an SNP Government.  If Scotland votes ‘No’ in the referendum the Unionists will simply assume the pressure is off.  It is not surprising that the Devo Plus campaign has failed to gain any traction.  It is also not surprising that people like Jim McColl who support “devo max” have declared that they will vote ‘Yes’.

Arguments put forward against a Scottish tax system

So how have the opponents of substantial tax powers for the Scottish Parliament been able to ensure that substantial tax powers are not devolved to the Scottish Parliament?  A template can be seen from Calman, what might be called the “Calman doctrine”.  Make a huge fuss about having someone look at the issue, take your time, offer as little as possible, exaggerate any problems, minimise or ignore any advantages and ensure HMRC and HM Treasury remain in control.   It seems that HMRC and HM Treasury cannot help but react negatively to any policy proposed by the Scottish Parliament that deviates from or impinges on reserved matters.  An example of this was how HM Treasury withheld attendance allowance funding when the Scottish Parliament introduced free personal and nursing care.  Another example was the reaction when the Scottish Government proposed and then set up the Scottish Futures Trust.  And yet a further example was the reaction from both HM Treasury and HMRC when the Scottish Government wanted to introduce a local income tax.

Memo to Treasury and HMRC: Scotland has its own legal system

It has been well documented as to how much of a shambles the introduction of Stamp Duty Land Tax (SDLT) in Scotland was. HMRC admitted that they did not realise that Scottish property law was different to English and Welsh property law.  They also made it clear that they did not have time to change the legislation.  “Don’t worry we will have plenty of time to sort things out later”, they said.  The only reason that SDLT worked in Scotland was due to the goodwill and pragmatism of the Scottish legal community.  This experience confirms the lack of awareness and interest in Scotland and its institutions.  Even though the UK does not have a unitary legal system, the UK tax system uses English & Welsh legal principles.  This occasionally causes problems, for example where the underlying law, Scots law, differs from the law of England and Wales.  For example in some succession or charity matters.

It is not just the lack of awareness of Scots law, but the centralisation in England of the administration of certain taxes that has caused problems for us in Scotland.  Two examples:  Birmingham for SDLT and Nottingham for inheritance tax.  The centralisation of the administration of these taxes has meant increasing problems with getting expert advice on particular Scottish legal issues.  In addition the Edinburgh Stamp Office has been under constant threat of closure and the Trusts and Estates office in Edinburgh is being run down.

Then there was the proposal for a UK wide planning-gain supplement.  Before the recession the debate was all about how much developers should contribute.  Again the level of knowledge of Scots law and the extent of the powers held by the Scottish Parliament was disappointing.  The main argument against a UK planning-gain supplement was a simple one.  This was a matter for the Scottish Parliament as planning and housing are devolved matters, a point so obvious that they said it had never occurred to them.  This debate went on for many months but finally the proposal in Scotland was dropped.

There was also the Scottish Government’s local income tax proposal.  It was unclear why anyone expected HMRC to cooperate and work to Scottish Government deadlines.  The attitude of the UK Government and its institutions meant there was little likelihood of this proposal being implemented.  This should not have come as a surprise as HM Treasury had withheld attendance allowance funding since the Scottish Parliament introduced free personal and nursing care.

What about Northern Ireland?

A similar pattern emerges when considering VAT and the proposed new Scottish national police and fire services.  These forces will have an annual VAT bill of approximately £30m.  Under the current structure police and fire services are treated like local authorities and are exempt from VAT.  However on merger they may be subject to VAT.  HM Treasury has rejected the Scottish Government’s request that these new bodies should be able to recover VAT.  It has of course been pointed out to HM Treasury that the Police Service of Northern Ireland is exempt from VAT.

The “just because it happens in Northern Ireland” is not likely to work with HMRC and HM Treasury.  Northern Ireland already has borrowing and welfare powers.  Anyone involved in the Scotland Act deliberations knows how hard HM Treasury resisted calls for borrowing powers to be included.  They succeeded in ensuring that only restricted powers be included.  Welfare powers were simply not even considered.  It does not seem to matter that Northern Ireland is also to get partial control over air passenger duty and also possibly corporation tax although not any time soon.  Nick Clegg has indicated that the UK Government will not devolve corporation tax to Northern Ireland in the short term due to the “knock-on effects” in Scotland.

The argument does not just stop with Northern Ireland.  The Scottish construction sector would like to see a reduction in VAT for building repairs and renovations.  The UK Government has so far refused this request notwithstanding that it allows a similar reduction in the Isle of Man.

This would complicate the tax system 

The UK has one of the most complicated tax systems in the world.  Each UK Budget adds further complications.  Tax simplification is simply not taken seriously by the UK Government.   A Scottish tax system could actually simplify the UK system though this is rarely considered.  As mentioned above, the UK does not have a unitary legal system.  Therefore a Scottish tax system would simplify the system for the rest of the UK.  For example, when SDLT is devolved there will be no need for the guidance and forms to explain the differences in Scotland due to our different system of property law.   The same applies for inheritance tax guidance and forms.

This also applies to Scottish charity law.   As previously mentioned, Calman recommended re-reserving parts of charity law.  A more sensible proposal would have been to agree that when the Office of the Scottish Charity Regulator (OSCR) registers a charity it automatically becomes entitled to the tax reliefs associated with charitable status.  At present, to gain charitable status and the various tax benefits it is necessary to apply to OSCR and HMRC.  There may be a lot of talk about tax simplification but an obvious opportunity was missed.

Tax competition is bad

The argument that tax competition within the UK is bad is made fairly regularly.  Gordon Brown made this claim again last year.  He claimed devolving tax powers to the Scottish Parliament automatically means a “race to the bottom” for tax rates and in particular business tax rates.  One major problem with this statement is that tax competition already exists.  Not just within the European Union but throughout the world.  Why is the UK Government reducing the rate of corporation tax to 20% by 2015?  In short, to ensure competitiveness.  Why does the UK Government object to a Financial Transaction Tax?  Because it thinks it will affect the competitiveness of the City of London.

Always stay in control

Tax reliefs are just as important as tax rates to businesses.  Business does not just consider the headline rate of tax when deciding where to locate.  Many other factors are analysed, and not just tax.  The underlying law that allows for the creation of reliefs or to vary the tax base as well as connected legislation that affects the tax legislation, for example the tax residency rules or employment legislation for income tax.   This makes the case for a tax being devolved in its entirety.   On its own, the ability to vary a rate of tax is not much of a power.  By not devolving a tax in its entirety, control is retained.  That is why the Scottish Parliament is not being given complete control of income tax.  The argument that any such changes would be in breach of EU “state aid” rules used to be a favourite of the opponents of substantial tax powers until the European Court of Justice ruled that tax powers can be devolved if certain conditions are met.  These conditions are easily met.

Westminster always knows best

The UK Government does not consult the Scottish Government or Parliament on issues such as whether to introduce a Financial Transaction Tax.  Westminster would not think twice about amending the income tax legislation without consulting the Scottish Parliament.  It is no coincidence that HM Treasury is opening an office in Scotland with a “Head of Scotland Analysis and Stakeholders Engagement”, in other words someone to argue against independence.   The appointment, only runs to the end of 2014.

What could have been done?

Westminster could have relatively easily devolved substantial tax powers to the Scottish Parliament but it did not want to.  A number of taxes are closely associated with the responsibilities already devolved to the Scottish Parliament which would have given the Scottish Parliament a substantial number of economic levers and the chance to develop policy more effectively.

Below are some examples.:

• Property law is devolved but SDLT (not until 2015) and the property parts of capital gains tax are not.
• Succession law is devolved but inheritance tax is not.
• Environmental law is devolved but environmental taxes are not.
• Health is devolved but alcohol and tobacco duties are not.
• Transport is devolved but transport related taxes are not.

Much could have been done during the last few years if even some of these powers had resided with the Scottish Parliament.

It will cost too much 

The Scottish Government recently announced the creation of Revenue Scotland.   Revenue Scotland will be responsible for collecting the two miscellaneous taxes being devolved.   The Scottish Government is in no doubt that Revenue Scotland will be able to administer the two new Scottish taxes at a lower cost than HMRC.  Those arguing against substantial tax powers for the Scottish Parliament disagreed with this.  That is all the more surprising given the problems HMRC are having with matters such as tax avoidance and tax evasion just now.

The Scottish Parliament will need an Exchequer that ideally combines the functions presently undertaken by HMRC and HM Treasury. During the Calman deliberations, it was claimed by the Scotland Office that the cost of administering a separate Scottish tax system would be the same as the present UK system. In short, absolute nonsense.  Scotland does not need a separate Stamp Office, Registers of Scotland, Trusts and Estates Office and Companies House.  It could create a one stop shop to combine these and other government tax, legal and registration services.   By doing this we could also have sub-offices throughout Scotland, just as London is not the UK, Edinburgh is not Scotland.

Conclusion

If Scotland votes ‘No’ we will not see substantial tax powers devolved to the Scottish Parliament.  The actions of those arguing against such powers speaks for itself.  Creating a Scottish tax system is a once in a generation chance to create a simpler and more progressive tax system.  Scotland literally has a blank sheet of paper.  Let us not waste this opportunity.

James Aitken