Government Expenditure and Revenue Scotland 2006-2007

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4 PUBLIC SECTOR REVENUE

Introduction

This chapter provides detailed estimates of Scottish public sector revenue. Chapter 5 discusses the treatment of North Sea revenue in detail; the focus of this chapter is on non-North Sea elements of public sector revenue.

The majority of public sector revenue payable by Scottish residents and enterprises is collected at the UK level. Generally it is not possible to identify the proportion of that revenue receivable from Scotland. GERS therefore uses a number of different methodologies to apportion revenue to Scotland. These methods are discussed in Appendix A and on the detailed revenue methodology paper on the GERS website 13.

For certain revenue sources, there are theoretical and practical challenges in determining an appropriate share to allocate to Scotland. In some cases, a variety of methodologies could be applied, each leading to different estimates of public sector revenue in Scotland. GERS makes use of the best data sources and methodologies available and therefore represents as accurate a reflection of public sector revenue in Scotland as is currently possible. The effect that any change to the revenue estimates contained in this chapter would have on the estimate of total public sector revenue due to alternative methodologies is discussed in Appendix A. The appendix highlights that there are only a small number of taxes for which variations in the proportion assigned to Scotland will significantly impact on the estimate of total public sector revenue in Scotland.

Estimated Revenue 2006-07

Table 4.1 highlights estimated public sector revenue for Scotland and the outturn data for the UK in 2006-07. The contribution of each element of taxation to the total estimated tax yield in Scotland, and the proportion of UK revenue raised in Scotland, are also included in the table.

On the basis of the assumptions and methodologies described in this report, in 2006-07, total public sector non-North Sea current revenue in Scotland was £42.4 billion. This is equivalent to 8.3 per cent of UK total non-North Sea current revenue.

Table 4.1: Current Revenue: Scotland 2006-07

Scotland

UK

Scotland as % of UK non-North Sea revenue

£ million

% of total non-North Sea revenue

£ million

Income tax

10,338

24.4%

141,142

7.3%

Corporation tax (excl North Sea)

3,019

7.1%

37,156

8.1%

Capital gains tax

308

0.7%

3,812

8.1%

Other taxes on income and wealth

248

0.6%

2,992

8.3%

National insurance contributions

7,464

17.6%

90,976

8.2%

VAT

7,449

17.6%

87,728

8.5%

Fuel duties

1,958

4.6%

23,585

8.3%

Stamp duties

686

1.6%

13,393

5.1%

Tobacco duties

981

2.3%

8,146

12.0%

Alcohol duties

768

1.8%

7,914

9.7%

Betting and gaming and duties

95

0.2%

961

9.9%

Air passenger duty

94

0.2%

1,112

8.4%

Insurance premium tax

195

0.5%

2,305

8.4%

Landfill tax

75

0.2%

825

9.1%

Climate change levy

73

0.2%

696

10.4%

Aggregates levy

50

0.1%

324

15.3%

Inheritance tax

228

0.5%

3,618

6.3%

Vehicle excise duty

400

0.9%

5,139

7.8%

Non-domestic rates 1

1,833

4.3%

19,904

9.2%

Council tax

1,812

4.3%

22,340

8.1%

Other taxes and royalties 2

492

1.2%

5,965

8.2%

Interest and dividends

628

1.5%

6,318

9.9%

Gross operating surplus

2,757

6.5%

22,452

12.3%

Rent and other current transfers

403

1.0%

1,812

22.2%

Total current revenue (excluding North Sea revenue)

42,353

100.0%

510,615

8.3%

North Sea revenue 3

Per capita share

766

9,075

Geographical share

7,563

9,075

Total current revenue (including North Sea revenue)

Per capita share

43,119

519,690

Geographical share

49,915

519,690

1. Excludes non-domestic rates that local authorities pay themselves
2. Although this group includes some 14 separate revenues (see detailed methodology paper on the GERS website) the two largest - TV Licences and National Lottery Distribution Fund - account for 77% (£379 million) of this estimate for Scotland.
3. A full discussion of North Sea revenue is provided in Chapter 5.

Income tax is the single largest source of public sector revenue in Scotland. In 2006-07, income tax revenue was estimated at £10.3 billion - approximately a quarter of all public sector revenue in Scotland (excluding revenues from the North Sea). Scotland is estimated to have accounted for 7.3% of UK income tax receipts in 2006-07, slightly lower than its share of the UK population and GVA (excluding North Sea) 14. Scottish income tax revenue is estimated on the basis of residence of the tax-payer. Box 4.1 discusses the reasoning behind this approach.

Box 4.1: Income Tax

Income tax is a tax payable on income. Taxpayers' income is assessed for income tax according to a prescribed order; (i) non-savings income, (ii) savings income (not dividends) and (iii) dividends. Each individual is entitled to a 'personal tax allowance' on which no income tax is liable.

There are two apportionment methodologies that can be used to estimate income tax revenue for Scotland:

  • Residence based - this approach apportions income tax to the region in which an individual lives.
  • Workplace based - this approach apportions income tax to the region in which an individual works.

GERS adopts the residence based approach to estimate income tax receipts in Scotland. This method is considered best practice and is consistent with the guidance recommended in international standards on Regional Accounts (see ESA95 paragraph 13.11). The approach is also used by HM Revenue and Customs to assess income tax in their regional analyses. While the distinction between work and residence based measures may have important implications for income tax estimates in some UK regions, such as London and South East England, as there is only a small degree of cross-Scottish border travel from residence to employment location, the effect will not be significant.

National insurance contributions represented the second largest revenue source in Scotland, an estimated £7.5 billion in 2006-07 - 17.6 per cent of total non-North Sea revenues. A similar proportion of revenue was collected from Value Added Tax ( VAT).

Corporation tax revenue (excluding that from the North Sea) was estimated at £3.0 billion in Scotland during 2006-07, 7.1 per cent of total non-North Sea current revenue collected in Scotland. Conceptual difficulties and a lack of data make it difficult to estimate corporation tax revenue for Scotland. The estimate of Scottish corporation tax should be treated with caution.

The allocation of corporation tax revenue raises an important methodological issue of whether to apportion revenue based on where profits are generated or by the location of the parent company's headquarters. In GERS, corporation tax revenue is allocated on the basis of the profits generated in Scotland. A full discussion of corporation tax revenue is presented in Box 4.2 and in the detailed revenue methodology paper on the GERS website.

After these four main categories (and gross operating surplus which accounted for 6.5% of total non-North Sea revenue), every other type of tax each accounted for less than 5 per cent of total non-North Sea revenue in Scotland in 2006-07. Together, council tax and non-domestic rates raised £3.6 billion (8.6 per cent of total non-North Sea revenue) while fuel duties raised £2.0 billion.

The Scottish share of total UK revenue for a particular tax varies according to the particular tax being estimated. For income tax, the Scottish percentage was slightly less than both a per capita share and a GVA share. For national insurance contributions and corporation tax (excluding North Sea), the Scottish percentages were slightly less than a per capita share but in line with a GVA share. For VAT the Scottish percentage was also broadly in line with a per capita share. In contrast, revenue from duties on alcohol and tobacco were considerably higher than Scotland's share of the UK population or GVA.

The estimated Scottish share of revenue from stamp duties was considerably lower than both a GVA share and a pre capita share. This is largely explained by the lower value of asset sales relative to other parts of the UK, and in particular London and the South East.

Environmental taxes, such as aggregates levy, climate change levy and landfill tax contribute relatively small amounts of revenue to the overall fiscal envelope in Scotland and the UK. However in 2006-07, Scotland contributed a relatively high share to the overall UK total tax take of these environmental taxes.

Box 4.2: Corporation Tax

Corporation tax is a tax on a company's taxable income or profits. The rate of corporation tax is fixed for each financial year. Certain activities such as capital investment and research and development expenditure are subject to various forms of tax relief.

GERS estimates corporation tax revenue for Scotland on the basis of profits generated in Scotland and not on the basis of where companies' headquarters are located. Therefore, companies with headquarters in Scotland contribute directly to Scottish corporation tax revenue via profits collected only from operations within Scotland. Similarly, companies with headquarters outwith Scotland contribute to Scottish corporation tax revenue via the profits raised from their operations within Scotland.

In practice, corporation tax is paid to the fiscal jurisdictions within which such profits were raised. Companies operating across national boundaries are subject to double taxation relief ( DTR). Applying this methodology to regional UK fiscal accounts would imply that the profits of companies headquartered in Scotland, but deemed to have 'permanent establishments' elsewhere in the UK, would be subject to this relief. Global profits earned by Scottish companies outside the UK are typically already subject to such agreements.

GERS uses the ONS's Regional Accounts estimates of profits less holding gains of public and private corporations to apportion corporation tax revenue to Scotland (it excludes 'mixed income profits' from self-employment businesses that are classified in the household sector in National Accounts). Holding gains are an adjustment relating to the changing prices of assets held.

The Regional Accounts allocate corporations' (excluding partnerships) gross trading profits to regions according to wage and salary data used to estimate regional compensation of employees' and estimates of profits for the manufacturing industry from ONS's Annual Business Inquiry. Profits from the extraction of offshore oil and gas are considered extra-regio.

Profits data from the Regional Accounts are considered the most appropriate published source of information with which to estimate Scotland's share of corporation tax revenue. Whilst there are some considerations, detailed below, the approach is considered to be the most appropriate using national statistics, and leads to an estimate broadly consistent with Scotland's GVA share.

  • Using the current methodology, non- UK earnings taxed abroad but subject to additional top up taxation by the UK Government when repatriated are allocated across the UK according to a company's onshore local activities. It could be argued that such earnings should be allocated to company headquarters. However, information at such a disaggregated level is currently not available and would be counter to the approach taken to estimate economic statistics such as GDP.
  • The corporation tax base extends beyond operating surpluses and includes non-trading activities and capital allowances. The current methodology proxies total corporation tax revenue solely on the basis of operating surpluses.

Work is ongoing in an attempt to address these issues.

While future modifications will be adopted where appropriate, many of the issues outlined above arise as a direct consequence of the current constitutional, legal and financial framework in which the UK and Scotland currently operate. The approach adopted is considered to be robust.

Estimated Revenue: Scotland and the UK, 2002-03 to 2006-07

Table 4.2 shows estimated current revenue in Scotland and the UK between 2002-03 and 2006-07.

In general, current non-North Sea revenue in Scotland and the UK are estimated to have grown at broadly the same rate: in Scotland by 29.7 per cent since 2002-03 whilst in the UK by 30.6 per cent in nominal terms.

In general, tax revenue in Scotland and the UK are estimated to have followed similar patterns of growth between 2002-03 and 2006-07. Income tax revenue in Scotland grew by 30.2 per cent in nominal terms between 2002-03 and 2006-07 compared to growth of 27.8 per cent at the UK level, while VAT rose by 30.2 per cent in Scotland and 27.0 per cent in the UK. National insurance contributions increased by approximately 43 per cent in both Scotland and the UK. This significant increase is reflective of the higher contribution rates introduced in 2003-04.

Among some of the smaller taxes, there was greater variation in the growth rates between Scotland and the UK. The greatest variation was in aggregates levy where Scottish revenue rose considerably faster than the UK average. In contrast, other taxes and royalties and other taxes on income and wealth increased faster in the UK than they did in Scotland.

Table 4.2: Current Revenue: Scotland 2002-03 to 2006-07

(£ million)

Scotland

UK

2002-03

2003-04

2004-05

2005-06

2006-07

2002-03

2003-04

2004-05

2005-06

2006-07

Income tax

7,940

8,224

8,792

9,577

10,338

110,407

112,356

121,617

130,754

141,142

Corporation tax (excl North Sea)

2,063

2,008

2,389

2,753

3,019

25,544

24,928

29,652

33,960

37,156

Capital gains tax

128

178

183

245

308

1,596

2,225

2,278

3,041

3,812

Other taxes on income and wealth

94

146

160

210

248

1,009

1,651

1,727

2,498

2,992

National insurance contributions

5,210

6,128

6,581

7,001

7,464

63,529

75,148

80,923

85,335

90,976

VAT

5,723

6,329

6,711

6,876

7,449

69,087

76,638

79,978

81,496

87,728

Fuel duties

1,795

1,866

1,922

1,939

1,958

22,147

22,786

23,313

23,438

23,585

Stamp duties

403

390

473

584

686

7,549

7,544

8,966

10,918

13,393

Tobacco duties

1,021

1,007

1,102

1,021

981

8,046

8,092

8,113

7,952

8,146

Alcohol duties

681

675

728

745

768

7,382

7,610

7,889

7,876

7,914

Betting and gaming and duties

97

89

90

89

95

977

898

876

884

961

Air passenger duty

69

68

74

77

94

804

799

872

906

1,112

Insurance premium tax

187

196

200

199

195

2,189

2,313

2,353

2,347

2,305

Landfill tax

50

59

63

69

75

545

636

673

753

825

Climate change levy

84

83

77

76

73

813

816

750

741

696

Aggregates levy

41

48

49

50

50

293

341

326

323

324

Inheritance tax

142

155

165

198

228

2,370

2,521

2,931

3,276

3,618

Vehicle excise duty

327

356

365

390

400

4,336

4,689

4,737

4,950

5,139

Non-domestic rates

1,625

1,621

1,723

1,831

1,833

17,522

17,358

17,802

18,798

19,904

Council tax

1,459

1,532

1,615

1,720

1,812

16,802

18,903

20,194

21,226

22,340

Other taxes and royalties

483

502

539

467

492

5,073

5,404

5,710

5,652

5,965

Interest and dividends

446

452

594

675

628

4,505

4,573

6,011

6,813

6,318

Gross operating surplus

2,205

2,244

2,276

2,647

2,757

16,779

18,161

18,358

21,135

22,452

Rent and other current transfers

391

402

394

417

403

1,821

1,813

1,814

1,816

1,812

Total current revenue (excluding North Sea revenue)

32,664

34,760

37,263

39,854

42,353

391,125

418,203

447,863

476,888

510,615

North Sea revenue

Per capita share

434

364

440

821

766

5,097

4,284

5,183

9,702

9,075

Geographical share

4,232

3,522

4,328

8,130

7,563

5,097

4,284

5,183

9,702

9,075

Total current revenue (including North Sea revenue)

Per capita share

33,098

35,124

37,703

40,675

43,119

396,222

422,487

453,046

486,590

519,690

Geographical share

36,896

38,282

41,591

47,985

49,915

396,222

422,487

453,046

486,590

519,690

Box 4.3: VAT & Excise Duty

Value Added Tax ( VAT) and excise duties are the principal elements of indirect taxation ( i.e. taxes on products) in the UK.

VAT is charged on the final consumption of certain goods and services and is levied at 17.5% of the purchase price, though a reduced rate of 5% is levied on some items. Alcohol excise duty is a flat-rate duty on alcoholic beverages while tobacco duty is a combination of flat rate duty and an ad valorem tax charged on cigarettes, cigars and loose tobacco. Any revisions to VAT and excise duties are announced during UK Budget and Pre-Budget ( PBR) reports.

Two alternative apportionment methodologies can be applied to VAT and excise duties.

  • Consumption based approach - apportioning VAT and excise duty to the region in which the good was consumed.
  • Production based approach - apportioning VAT and excise duty to the region in which the good was produced.

In GERS, VAT and excise duty estimates for Scotland are based on the consumption approach. This is appropriate as the burden of the duty is borne by the final consumer rather than the producer. This is considered best practice as within a system of regional fiscal accounts, the VAT liability 'sticks' when the item is purchased by the final consumer. The location of production is of no relevance.

Tobacco and alcohol duties are only collected if the product is consumed in the UK. If the product is exported, the producer receives export relief. For example, while duty is levied on Scotch Whisky when it leaves a bonded warehouse, in reality it is only collected if the whisky is consumed in the UK. Consequently, the ultimate payer of the duty is the UK consumer of the product.

Therefore, GERS estimates duty collected from Scotch Whisky based upon the level of whisky consumption in Scotland, even though Scotch Whisky is only produced in Scotland. Similarly, the estimate of tobacco duty collected in Scotland is based upon the level of consumption of tobacco products in Scotland, even though most tobacco goods are produced outside Scotland.

Table 4.3 shows estimates of Scotland's share of UK revenue for five key taxes between 2002-03 and 2006-07. Over this period, Scotland's share of UK revenue has remained relatively stable.

In 2002-03, total non-North Sea current revenue in Scotland accounted for 8.4 per cent of UK non-North Sea revenue while in 2006-07 the corresponding figure was 8.3 per cent. Both figures are broadly in line with Scotland's share of UK population. Scotland's share of UK income tax and VAT revenue increased over this period but this was offset by a decline in Scotland's share of both local authority revenue and the 'other revenue' categories.

Table 4.3: Non-North Sea Current Revenue: Scotland/ UK Share 2002-03 to 2006-07

(per cent of UK revenue)

2002-03

2003-04

2004-05

2005-06

2006-07

Income tax

7.2%

7.3%

7.2%

7.3%

7.3%

Corporation tax (excluding North Sea revenue)

8.1%

8.1%

8.1%

8.1%

8.1%

Value added tax

8.3%

8.3%

8.4%

8.4%

8.5%

National Insurance contributions

8.2%

8.2%

8.1%

8.2%

8.2%

Local authority revenue 1

9.0%

8.7%

8.8%

8.9%

8.6%

All other revenue

9.8%

9.6%

9.7%

9.6%

9.4%

Total non-North Sea current revenue

8.4%

8.3%

8.3%

8.4%

8.3%

1. Includes council tax and non-domestic rates only 15

Box 4.4: Scottish Water

One of the largest contributors to UK public corporations' gross operating surplus ( GOS) is Scottish Water. The equivalent water companies in England and in Wales have been privatised. In Northern Ireland, water services are currently part of the public sector, but classified central government rather than public corporation.

In previous GERS reports, the GOS of UK public corporations was allocated to Scotland using a GVA share (excluding extra-regio). This, however, made no adjustment for the major contribution made by Scottish Water.

In this edition of GERS, the GOS for Scottish Water and other public corporations that only operate in Scotland have been fully assigned to Scotland. For those public corporations operating solely in England, Wales or Northern Ireland, Scotland has not been assigned any share of their GOS. For those that operate on a UK basis, a share of their GOS has generally been allocated to Scotland on the basis of the relevant industry GVA.

A more detailed discussion of GOS (and the other elements of GOS) is provided in the detailed revenue methodology paper on the GERS website.

Revenue Estimate of Public Corporations' Gross Operating Surplus: Scotland 2002-03 to 2006-07

( £ million)

2002-03

2003-04

2004-05

2005-06

2006-07

Previous method ( GVA share)

553

612

594

760

814

New method as described above

1,088

1,069

1,074

1,350

1,361

Of which Scottish Water

433

518

539

595

595