Finance Secretary John Swinney
The Scottish Government’s Approach to Taxation
June 7, 2012
In this statement I wish to update Parliament on the Government’s proposals for the future of taxation in Scotland in the context of our economic and constitutional aspirations.
The passage of the Scotland Act means that from April 2015 this Parliament will be empowered to introduce and manage taxes on the purchase or leasing of land and buildings and the disposal of waste to landfill. From April 2016, under current constitutional arrangements, this Parliament will set a partial rate of income tax to be administered and collected by HMRC.
Prior to both of those events we will ask the people of Scotland to support this government’s belief that decisions about Scotland should be made by those who care most about Scotland; the people of Scotland. And that, as a result, this Parliament should hold responsibility for the full range of taxes needed to generate sustainable economic growth and support our public services.
The transfer of powers in the Scotland Act falls significantly short of our ambition for full fiscal autonomy. It does not even match the ambition of Calman, failing to deliver on the Commission’s proposals that Air Passenger Duty and Aggregates Levy should also be devolved.
After these measures are in place, 85% of tax paid in Scotland will remain reserved; this Parliament will exercise responsibility for only 15% of taxes paid in Scotland and only 58% of the revenue spent in Scotland.
Our aspiration for full fiscal responsibility would allow this parliament to design and set all taxes in the interests of stimulating economic growth, supporting the public services of Scotland and building social cohesion and wellbeing.
Our approach to taxation
Since 2007 we have demonstrated an approach to taxation that is equitable and that promotes economic growth. We have put an end to unfair Council tax rises that punished some of the poorest in our society.
In business we have used our responsibilities for non-domestic rates to develop the most competitive environment for business in the UK.
The Scottish Government intends to introduce two new taxes to replace the UK taxes that will cease in Scotland from April 2015: a tax on land and building transactions and a tax on disposal of waste to landfill. I am today launching the consultation on the Land and Buildings Transaction Tax; will consult on a Landfill Tax in the autumn and will follow this with a consultation on tax management provisions later in the year.
As with the entire approach the Government takes and intends to take on taxation, these proposals are firmly founded on principles, Scottish principles, that have stood the test of time. Adam Smith in 1776 in his “Inquiry into the nature and causes of the Wealth of Nations”, set out four maxims with regard to taxes; the burden proportionate to the ability to pay, certainty, convenience and efficiency of collection.
Smith’s maxims allow us to build a system that will meet the needs of a modern, twenty-first century Scotland, grounded on solid foundations. To those four principles this government will add our core purpose of delivering sustainable economic growth for Scotland and meeting the distinctive needs of Scotland.
Proportionate to the ability to pay
This Government has sought to use what responsibility we have on taxation to ensure no one is asked to pay more than they can legitimately afford.
In today’s consultation on the proposed Land and Building Transaction Tax, we continue that approach.
Our consultation signals our preference for a move from the UK’s slab tax approach to a progressive system of taxation where the amount paid is more closely related to the value of the property and therefore to the ability of the individual to pay. At the same time our consultation also indicates a willingness to adjust the threshold at which taxation is levied in order to support those at the lowest end of the market.
We will take the views of the public and tax professionals through our consultation – however to demonstrate the difference taking a progressive approach can bring for those purchasing property in Scotland, the consultation paper illustrates two revenue neutral scenarios, one that would remove the tax charge from all house purchases below £180,000 - significantly benefitting first time buyers - and one that ensures all those purchasing properties under £325,000 would see the tax they pay decrease, bringing benefits to around 95% of the property market.
Those purchasing property at higher values would of course pay more.
We are also consulting on reliefs and exemptions, with proposals for simplifying the present arrangements for SDLT and tailoring exemptions to Scottish needs and policy interests. We are proposing anti-avoidance measures and will be interested to hear views on these. We are also giving thought to the merits of a general anti-avoidance measure and are seeking views throughout our consultation processes on what form this might take.
We have nearly another 3 years to run before the devolved taxes come into force. It would not make sense, nor would it be the practice of any other government, to consult now on tax rates that will apply so far in the future. The examples in the consultation document that I am launching today are therefore illustrative. However, I would expect to propose rates for Parliamentary approval through the annual budget process nearer the time.
We believe it is important to create certainty around the amount of tax that individuals have to pay. To do this we need to consult effectively on our proposals and implement them with care. That is the process that we commence today and which will take a final form in the proposals that we enact.
The UK Government’s recent mismanagement of the North Sea fiscal regime has illustrated the damage that can be caused by a lack of engagement with tax payers. The Chancellor’s decision to increase the tax rate on all North Sea oil fields last year, irrespective of their profitability and without consultation, seriously damaged investor confidence.
Providing certainty about when and how much tax is due is therefore an important guiding principle for our new system.
We will engage with tax payers to provide certainty and ensure that tax changes have been properly thought through and communicated before being introduced.
As is the case for any government, we may at times require to move swiftly to tackle threats of tax evasion and avoidance, or to limit or reduce distortive behaviours. However, wherever possible, we will seek to provide information and clarity about our intentions.
One of the opportunities before us is to create a simple and administratively efficient tax collection system.
Improving ease of payment will contribute to our agenda for economic growth: businesses operating in Scotland tell us that doing this would significantly reduce the tax burden and increase the attractiveness of doing business here.
We will ensure that it is easy to fulfil the obligations of a citizen in Scotland to pay taxes.
We envisage a system that is simple to operate, and “digital first”. While we are basing our system on the principles of Adam Smith, no one should feel that they have to journey back to Smith’s time to pay their taxes.
We will develop appropriate IT systems to ensure that information about Scottish taxes, and ways to pay them, are easily accessible to all, in line with our broader objectives.
Our consultation also proposes a link between payment of tax on property purchases with the provision of land registration documentation to simplify processing and reduce late payment.
It is essential that our tax system should be efficient.
It is received wisdom that taxes paid must be devoted to the running of the country and not consumed in the administration of the system and this is a lesson we will take on board! Scotland will benchmark itself against the international standards to ensure that as little as possible of the revenue raised is spent on the administration of the system. Our approach to collection will not only be right for Scotland it will be the most cost efficient for Scotland.
Meeting the distinctive needs of Scotland and supporting sustainable economic growth
It is in the design of the new system as well as the rates and approach to tax itself that having the responsibility in Scotland, for Scotland, can bring clear benefits. The Scottish taxes will fit our distinctive social context and be expressed in Scots law.
I have given careful thought to the appropriate arrangements for the administration of these taxes, weighing up the considerations of flexibility, cost and risk. In taking forward our proposals for taxation I am determined to ensure we have a system that is fit for purpose, now and in the future.
I have considered carefully the option of paying HMRC to collect taxes on behalf of this Parliament.
In evidence to the Scottish Parliament’s Finance Committee HMRC said of the role they would play:
“If they want to do something that has a very different framework or different rates then we would have to look at the details of what they wanted to do and decide whether it made sense for us to try and adapt our systems to operate that or whether we would need to say it is so different that there’s no point in us trying to operate it.”
Pressed on what would happen if a future Scottish Government sought to amend the tax they said: “in the end it will be up to the management of HMRC to decide if they want to operate it.”
It is clear to me that should we ask HMRC to operate Land and Buildings Transaction Tax on behalf of this Parliament, then the freedom of this parliament to take forward these taxation responsibilities in full could be inhibited. This cannot be right: the very purpose of devolution is to allow the will of the Scottish Parliament to prevail!
We will establish a tax administration function for assessing and collecting both taxes here in Scotland. This function, which I propose to name Revenue Scotland, will be established this year. By 2015, in line with international best practice, it will be operationally independent and its governance enshrined in legislation.
This will enable people in Scotland to judge for themselves the benefit of the Scottish Parliament having responsibility for these issues and will ensure the will of Parliament is delivered.
Revenue Scotland will offer an innovative approach to the collection of taxation. It will work with two firmly established and highly respected organisations: Registers of Scotland to administer the new land and property tax and SEPA to administer disposals to land fill. These partnerships will offer further opportunities for us to customise tax collection arrangements that are specific to the Scottish situation, drawing on the relevant knowledge and expertise within RoS and SEPA to eradicate duplication and deliver greater simplicity.
Our costs for Revenue Scotland are based on the assumption that we will incorporate the changes to the structure of taxation on land and building transactions that I have already set out. It is a sign of the costliness of HMRC that we will both establish Revenue Scotland and implement and collect both of the replacement taxes for less than HMRC would charge us to deliver what they term a “like for like” system with the UK. I estimate that over the period to 2020, start-up and operational costs in pursuing this approach will be at least 25 per cent lower than if I ask HMRC to deliver the status quo.
Through Revenue Scotland we will serve the needs of the people of Scotland at a lower cost than the UK set up and we will deliver a better system more in line with Scotland’s needs.
In due course, Revenue Scotland will oversee the administration of the full range of taxes set by Scottish Ministers. It will become the focus of the expertise in tax administration that we will grow in Scotland.
In contrast, under the Scotland Act it is HMRC who will implement the Scottish Rate of Income Tax. Under current constitutional arrangements that tax will be introduced in 2016 at an estimated cost of £45 million to the Scottish public purse. In establishing Revenue Scotland I and this parliament can exert our influence in order to keep costs to a minimum. As yet, the UK Government has not provided a means for either me or this parliament to keep such a check on HMRC’s costs. That is a matter I will continue to pursue and one in which I hope I will have Parliament’s full support.
Consultation and scrutiny
Aligned with our broad approach and principles, our tax system will also be supported by regular and engaged consultation with taxpayers.
In reaching this point we have already engaged with ICAS, the Law Society of Scotland, the Chartered Institute of Taxation, the Scottish Property Federation and the Council of Mortgage Lenders on the issue of tax on land transaction issues.
To ensure that the views of the taxpayer and expert communities remain embedded in the development of our approach to taxation, we will also establish a Tax Consultation Forum to which representative bodies, networks and organisations with an interest in the tax system can contribute. I will chair this Forum, which will receive updates on the government’s emerging taxation proposals and provide an opportunity for us to engage in regular and active listening to the concerns of industry, interest groups and individuals.
The first meeting of this Forum will take place early in the autumn.
Our work on taxation will also be supported by our recently established Fiscal Commission. This is a panel of eminent international experts who will oversee our proposals for developing a tax system for an independent Scotland. This is part of our broader programme of work in establishing a macroeconomic framework which promotes fiscal responsibility and market confidence in an independent Scotland.
The views of Parliament are also of primary importance. Being able to scrutinise effectively, to manage properly a taxation system are key responsibilities that come with the devolution of taxation. We must work together across party divides to fulfil this function: both in scrutiny of HMRC’s administration of the Scottish Rate of Income Tax and for the devolved taxes.
Scotland should be independent and run all its own taxes
The approach I am outlining represents a strong foundation for the future, and creates the basis for this Parliament to acquire a full range of tax powers.
With full fiscal responsibilities we could tailor policies to match the aspirations of the Scottish people and deliver competitive advantages.
We could change Air Passenger duty, harmonise the tax and benefit systems to create a fairer and simpler regime for people and we could reduce corporate taxation.
We could seek opportunities to simplify the tax system and make it more transparent to reduce compliance and administration costs and use borrowing powers for capital investment.
These are the opportunities opened up by Independence.
This Government is focused on taking forward the powers we have, implementing the powers we are scheduled to receive and preparing the foundations for utilising the full range of powers we require.
By that approach this Government is preparing Scotland effectively for the future.