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Annex D: Partial Regulatory Impact Assessment: Abolition of Council Tax and Introduction of Local Income Tax
Purpose and intended effect
Objectives
1. This Partial Regulatory Impact Assessment focuses on the accompanying consultation's core proposals to abolish council tax and replace it with a system of local income tax. The Scottish Government believes that this is best done by a 3% rate applied to the basic and higher income tax rates and collected by Her Majesty's Revenue and Customs ( HMRC). It is intended that the Scottish Primary legislation to provide for this will be brought before the Scottish Parliament in 2009. The implementation of the proposals will also depend on the timing of UK legislation.
Background
2. The existing system of council tax takes no account of ability to pay, instead allocating taxation liability on the basis of broad notional historical domestic property values. The government believes that this basis for taxation liability is fundamentally unfair and any changes to the existing system, other than abolition, will not address the core issue of ability to pay. However, in the interim period before council tax abolition, the government has reached agreement with local government, through the Convention of Scottish Local Authorities, to freeze the council tax in each local authority at 2007-08 levels. This is intended to reduce the negative impact of the council tax.
Rationale for Government Intervention
3. If there were no government intervention on the current system of council tax, then existing anomalies in the taxation liability of individuals compared with ability to pay would continue.
Scottish Variable Rate
4. Under existing devolved powers, the Scottish Parliament is able to vary income tax by up to 3% - the "Scottish Variable Rate". Under the terms of the Scotland Act, this could only be applied to income taxable at the basic rate. It would not apply to the higher rate tax band. The Government does not propose to use the Scottish Variable Rate ( SVR) to replace the council tax, even though the SVR could, in principle, be introduced relatively quickly. However, the Government believes that earlier preparations made by HMRC for the SVR at the time of devolution should provide a basis for the arrangements that will be needed to implement a local income tax.
Consultation
Within Government
5. We will consult with the Cabinet Office, HM Treasury, Her Majesty's Revenue and Customs ( HMRC), the Department for Work and Pensions ( DWP), the Ministry of Defence ( MOD), the Welsh Assembly Government and the Northern Ireland Executive.
Public Consultation
6. We will publish the findings of our consultation with the public and key stakeholders.
Options
Do Nothing
7. If there were no change to the current system of council tax, then existing anomalies in taxation liability compared with ability to pay would continue, given the regressive nature of the council tax system. This would not accord with the government's aim to make Scotland wealthier and fairer. This would lead to large numbers of those on low incomes continuing to pay a high percentage of their income in council tax charges, leading to individuals having less money to buy many 'essential' goods such as food and fuel, with attendant risks to health. There is a clear risk that some of these individuals will not pay their full council tax liability, which causes problems for local government finance and the funding of local public services. Although those on the lowest incomes are eligible for Council Tax Benefit, the thresholds are low and there are many on relatively low incomes that do not qualify. There is some evidence to suggest that many people do not receive the Council Tax Benefit to which they are entitled.
Reform Council Tax
8. Council tax could be reformed in a number of ways including revaluation, adding new bands or changing the ratio burden between bands. All these methods of reform will alter taxation liability, but none of them will create a link between taxation liability and the ability to pay. There is evidence that changing the ratios or bands will not make the council tax system progressive. This means that no council tax reform will meet the objective of a fairer taxation system. Key high risks with this option are therefore a continuing unfair burden on those on lower incomes and the attendant risks to health and local government funding. Any major change to the council tax system would require Primary legislation and with consultation requirements, would be unlikely to be possible in less than 2 years at the very least. Additionally revaluation may cause uncertainty, increase appeals and cause some difficulty with local authority financial planning.
Locally-Set Local Income Tax
9. Local authorities could be given the power to determine the local income tax rates within their own boundaries. This would create the vital link between taxation liability and ability to pay. However, such a system would be administratively more complex than a single national rate, by potentially requiring employers to adjudicate on where they determined an employee's residence to be and make taxation deductions of up to 33 different amounts (the number could be 33 if there were 32 separate rates set by Scotland's 32 councils in addition to a UK rate). There is a clear and strong risk of undue administrative burden on employers, which threatens economic growth and entrepreneurship.
Alternative Local Taxation Systems
10. There are a number of alternative taxation systems that could be implemented in place of council tax, including Land Value Tax or environmental taxes. The diversity of these taxation systems and the various ways they could be introduced means that it is not possible to provide a full discussion of each option here. The Scottish Government believes that an income tax provides the best link between taxation liability and ability to pay. All other known options are based on factors other than ability to pay and therefore do not achieve our core aim of making the taxation system fairer, by better reflecting ability to pay. Many of these options are untested in Scotland and we currently do not hold sufficient data to examine their risks.
Costs and benefits
Sectors and groups affected
11. These proposals will affect most individuals in Scotland and also employers, including public and private sector organisations. Some charities will also be affected. Further detail on costs and benefits will be collected as part of the consultation process.
Benefits
Individuals
12. Council tax liability will cease for all those domestic home residents or owners who are currently liable for council tax. Taxation liability is complex and related to benefit entitlement and therefore it is difficult to generalise about the impact on individual households based on the principle of ability to pay. However, the local income tax proposed will be more progressive than the existing council tax system, with those who earn more paying more in tax. Annex F contains further more detailed analysis of the impact on individuals.
Charities
13. Many charities owning or occupying domestic properties that are liable for full or partial council tax will have this financial burden removed. It is also possible that there will be some secondary impacts on charities as the taxation regime changes. For example, change to council tax has long been campaigned for by some organisations representing older people. These organisations will now be able to concentrate their resources in other areas of importance to them. Some charities providing welfare support to those on low incomes, may find on their resources alleviated slightly as council tax related poverty is substantively removed.
Public Sector Organisations
14. Local authorities and other public sector organisations who own domestic properties will no longer be liable to pay council tax on properties that are empty or homes of multiple occupation.
15. There will be administrative savings both to Local Authorities and DWP as a consequence of abolishing the council tax and removing the need to administer Council Tax Benefit.
Private Sector Organisations
16. Private sector domestic housing providers will no longer be liable for council tax on empty properties or homes of multiple occupation.
Costs
Individuals
17. All Scottish residents earning more than the personal allowance for UK income tax will become liable for local income tax. Taxation liability is complex and related to benefit entitlement and therefore it is difficult to generalise about the impact on individual households based on the principle of ability to pay. A local income tax based on ability to pay will necessarily base liability on income and those households with a relatively high income will pay more. The Scottish Government believes that this is fair.
18. The government believes that all those with an income above the minimum threshold should be liable for local income tax as a matter of principle. We will gather more information about these impacts as part of the consultation process.
19. Many of those on the lowest incomes are eligible for Council Tax Benefit under the council tax system. Some of those in receipt of full Council Tax Benefit will not earn enough to be liable to pay any local income tax, and so will be no better or worse off as a consequence of the changes.
Charities
20. Businesses with charitable status that do not pay Corporation Tax may be liable for some income tax on their profits, and hence these profits will be subject to the new local income tax. However, charities can claim relief from tax on most income or gains and on profits from some activities.
21. Some of those on relatively higher incomes may experience an additional financial liability and seek advice from certain charities. Change to the taxation regime generally may lead to some individuals seeking advice from advocacy and citizen's advice organisations. Those charities specifically working with those affected by the changes, for example groups that will lose their council tax exemptions, will need to ensure that these changes are understood by those they represent. We will consult these organisations on how we can support them with this.
Public Sector Organisations
22. We will be liaising with UK government departments as to their view on these proposals and how they will be affected. The key departments that will be affected are HMRC and DWP, for collection and benefits respectively. We expect to reimburse HMRC for the collection services they carry out on our behalf. The MoD will also be affected, as special arrangements currently apply for service personnel and council tax.
23. Scottish local authorities will experience a substantive change to their role in local taxation. Under our proposals, they will no longer bill and collect current council tax charges, although some on-going collection of historical council tax debt is likely. This may result in some reorganisation at local authority level.
24. The Scottish Assessors will no longer be required to maintain an up to date council tax list in its current form and we are currently considering whether an alternate domestic property value record will be required.
25. Other public sector organisations that own domestic properties or assist individuals with day-to-day living will be affected in various ways. Public sector organisations that employ staff will be required to change their payroll processes to collect local income tax. We will be collecting more information on these impacts as part of the consultation process.
Private Sector Organisations
26. Private businesses that do not pay Corporation Tax will pay income tax on their profits. Local income tax will therefore be levied on their profits over the personal threshold. The impact on this change in the taxation regime will depend on individual council tax liability and individual income/profits. Some private enterprises will be required to change their payroll processes to collect local income tax. Some may raise wages to compensate employees for the increase in income tax.
Small/Micro Firms Impact Test
27. The Scottish Government is committed to ensuring that there is a fair business environment where all firms are not subject to undue administrative burden. This is a key reason why we propose using existing HMRC systems to introduce and administer local income tax.
Legal Aid Impact Test
28. It is anticipated that these proposals will be implemented in liaison with HMRC, utilising existing appeals practices as far as possible. We will work with HMRC to identify any new procedures or rights of appeal and their impact on Legal Aid.
"Test Run" of business forms
29. We will work with HMRC to ensure that any new forms introduced are "test run" with business organisations to make sure they are as clear, simple and easy to complete as possible.
Competition assessment
30. We are not aware of any impact of our proposals on competition, as it is our intention that all administration is co-ordinated by HMRC, but we will continue to gather information on this aspect of our proposals as part of the consultation.
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