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CHAPTER SIX: WHO SHOULD PAY?

EXEMPTIONS AND DISCOUNTS

6.1 The Scottish Government proposes that there should not be any exemptions or discounts other than personal allowances. The consultation document explains that the current system of discounts and exemptions under UK income tax leads to appeals and disputes and adds to bureaucracy and cost. The document also states that "We believe that any person earning enough to become liable for a local income tax should make a contribution". Respondents were asked whether they thought there should be any exemptions or discounts.

Chart 6.1
Question 6 - In your view, do you think that there should be any special exemptions or discounts from a local income tax?

Base: Individuals (418)

Individual responses

6.2 As can be seen in chart 6.1, half (50%) of the 418 individuals responding via the consultation questionnaire felt that there should not be any discounts or exemptions. Just under a third (31%) said that there should be some discounts or exemptions and a fairly high proportion (18%) said they did not know or did not reply. Those in the 18 to 34 age range were more likely (51%) and those in the 65 and over age range were least likely (23%) to say there should be discounts. Those who reported a health condition were slightly more likely to support exemptions or discounts (38%) than those without a health condition (31%).

6.3 The 31% who indicated that they thought there should be exemptions or discounts (131 respondents) were then asked "If yes, please state what for and share with us any thoughts on how you think these might be funded." While 11% simply stated that they did not agree with the concept of local income tax for anyone, responses also produced a wide range of ideas and the following list shows those groups of people mentioned by 5 or more respondents as being those who should be exempt or have discounts:

• pensioners (24%);
• disabled/ those with long term illness (15%);
• low paid/ low income/ low earners (13%);
• families/ households with children (11%);
• students (9%);
• specified professions e.g. armed services/ those support community (8%);
• those not full time resident in Scotland (5%);
• sole/ single housing occupants (5%);
• those on benefits (5%).

6.4 Respondents also put forward some ideas as to how exemptions or discounts could be funded and these included the following (again, mentioned by 5 or more respondents):

• adjusting local income tax rates (6%);
• applying local income tax to other areas e.g. 2 ^nd homes, private pensions, investment income etc. (4%);
• more tax on those with higher incomes (4%);
• from other public funds (4%).

6.5 Of those respondents answering with free-flowing commentary, 4 responded to the concept of special exemptions; 3 disagreed with any exemptions although one did ponder whether students would be liable for payment of local income tax. The other respondent unequivocally argued that working students be exempted from the tax.

Organisational responses

6.6 Only a very small number of organisations (6 of the 86 who responded to the consultation) provided comments agreeing with the reasoning set out in the consultation document for not allowing discounts or exemptions (3 local government organisation, 2 tax, pay or finance organisations and one representative group). A local government organisation commented:

"Introducing any type of exemption or discount has the potential to complicate the system and once an allowance has been made for one category of taxpayers, pressure can come from other categories. For this reason and the fact that the local income tax should be based on ability to pay there should be no special exemptions or discounts."

6.7 One tax, pay or finance respondent also noted:

"Accepting the full range of personal allowances could avoid the need for special exemptions and discounts satisfying certainty of liability and simplicity of calculation per Tenet 2 and Tenet 3."

The case for discounts and exemptions

6.8 In contrast, the qualitative analysis of organisational responses revealed that a number of organisations consider there should be special exemptions or discounts from a local income tax to those individuals who currently receive council tax benefits (either directly or indirectly) who would not have a corresponding income tax benefit.

6.9 The following groups of individuals were specifically mentioned by organisations:

• students (mentioned by 3 student organisations, 3 local government organisations, one political organisation and one representative group);
• Scottish families receiving tax credits (mentioned by 2 representative groups, one local government organisation, one legal and one political organisation);
• older people/ pensioners (mentioned by 2 equality and one local government organisation);
• adult children temporarily living with parents (mentioned by one legal organisation and one retail/ business );
• disabled people/ disabled tax payers in employment (mentioned by one legal organisation);
• clergy e.g. living in tied houses (mentioned by one other organisation);
• carers (mentioned by one representative group);
• migrant workers (mentioned by one representative group).

6.10 A tax, pay or finance organisation raised the issue of individuals who do not normally live in Scotland but who may occasionally be asked by their companies to work here, perhaps on a secondment basis. They suggested:

"In this context it may be worth considering a one year transitional relief for new arrivals into Scotland. If no LIT is due for the first year of residence in Scotland this would reduce the burden on individuals and employers of having to consider LIT in situations when residence in Scotland is neither predictable nor regular"

6.11 As shown above, a small number of organisations were of the view that students should receive special exemptions or discounts. This issue was the main focus of the response from one student organisation. The general consensus was that local income tax brings a new and potentially significant financial burden to students' earnings - a group who currently receive discounts/ exemptions from council tax. It is recognised that students often struggle to afford the cost of studying under the level of financial aid they receive at present.

6.12 A small number of organisations also felt that Scottish families receiving tax credits should also receive special exemptions or discounts. One tax, pay or finance organisation maintained:

"The risk that the income of some Scottish families receiving tax credits may be adversely affected by the introduction of local income tax and there is a need for the Scottish Government to address this issue."

DEFINITION OF A SCOTTISH TAXPAYER

6.13 Proposals state that local income tax would be paid by everyone defined as a Scottish taxpayer under the definition already contained in the Scotland Act. Local income tax would, therefore, apply to anyone whose main home is in Scotland and used as a residence and/or where the number of days a person spends in Scotland equals the number spent elsewhere in the UK. Question seven asked "Do you agree that a Scottish taxpayer should be defined using the definition already contained in the Scotland Act?" and chart 6.2 shows the responses from the 418 individuals who replied to the consultation questions.

Chart 6.2
Question 7 - Do you agree that a Scottish taxpayer should be defined using the definition already contained in the Scotland Act?

Base: Individuals (418)

Individual responses

6.14 The majority of individual respondents were in favour (64%) of retaining the definition already contained in the Scotland Act. While 11% disagreed, a large number (25%) said 'don't know' or did not provide an answer.

6.15 Those who disagreed (46 individuals; 11%) were then asked "If you disagree, how would you propose residency be defined?" and the following ideas were put forward by 5 or more respondents:

• anyone owning property in Scotland (17% of those who disagreed);
• anyone living/ working in Scotland for more than half the year (13%).

6.16 In addition, 13% again commented that they were opposed to the idea of local income tax, while 11% mentioned areas where they felt inequalities might arise e.g. armed forces on overseas deployment or temporary residents. Fifteen percent commented on potential problems that might arise and mentioned issues such as false residency claims, the possibility of a 'brain drain' or problems with record keeping.

6.17 Turning to the free-flowing comments from individual respondents, 2 out of 12 addressed how to define the Scottish taxpayer; one response detailed the complexities of residency and queried the liability of mobile and peripatetic workers, whilst the other suggested some form of alternative definition aiming to combine the terms of the Scotland Act with HMRC records specifying main residences.

Organisational responses

6.18 Twenty-six organisations gave direct answers to the question on the definition of a Scottish taxpayer; only one 'other' organisation said that should not be the definition already contained in the Scotland Act.

6.19 Amongst organisations commenting on this issue there was widespread agreement that this definition is suitable. Those who agreed with the definition, however, also raised some concerns over:

• possible avoidance of local income tax;
• the need for adjustments to the definition;
• increased bureaucracy;
• the need for further investigation/ clarification;
• legal interpretation.

Avoidance of local income tax

6.20 Six organisations were concerned that the definition could be abused as a means of avoiding tax. This comprised 2 local government organisations, 2 tax, pay or finance, one legal and one representative group.

6.21 Two organisations stated that there could be instances where Scottish taxpayers may register their address in an area more favourable to tax rates (e.g. south of the border) as a means of tax avoidance and that this would be very difficult to police and lead to inconsistency or perceived unfairness.

Need for adjustments to the definition

6.22 In terms of adjustments, while one legal organisation agreed it would be sensible to use the definition already contained in the Scotland Act, they also believed it is important to note that this would give rise to some difficulties in relation to establishing residence for tax purposes.

Bureaucracy

6.23 In relation to bureaucracy, one retail/ business organisation stated "While acknowledging that for most people it will be perfectly clear whether they are Scottish Taxpayers or not, there will be significant additional administrative burden in determining the not-so-clear cases."

Further investigation/ clarification

6.24 According to one local government and one tax, pay or finance organisation, the definition is fundamental to the basis for the new tax and more detailed proposals and further investigation and clarification would be required before a categorical response could be given.

Legal interpretation

6.25 In respect of legal interpretation, one local government organisation noted:

"At first sight, these terms [i.e. "closest connection with Scotland"] may seem clear to a layman but, if Community Charges and Electoral Registration experiences are indicative, they will give rise to disputes over their exact legal interpretation in many individual cases. There may well be considerable litigation in this area."

Fluctuating residency

6.26 Twelve organisations highlighted the difficulties which may arise with the proposed definition in relation to individuals who live in England but work in Scotland (or vice versa), or whose place of residence fluctuates.

6.27 Seven local government organisations and one tax, pay or finance organisation advised that a register will need to be established and maintained which provides an accurate record of residency. It was unclear to organisations, however, whether or not HMRC will undertake this work. Groups of people mentioned by organisations as falling into these categories include oil workers, sales people, students and migrant workers.

Need for a second home register

6.28 Four organisations also suggested that a second homes register would be necessary to contain details of all dwellings, especially in relation to those who are not located in Scotland. The taxation of second homes will be discussed in more detail in chapter 10 as part of question 20 and 21.

Property tax

6.29 One local government organisation simply stated that tax based on property is easier to administer and collect (and results in higher collection rates) than a local tax on individuals.

TRANSITIONAL ARRANGEMENTS

6.30 The consultation indicates that under local income tax many households will pay less than under council tax, but there will be some who will pay more. Transitional arrangements, where higher payments are phased in, could make the change easier for this group of tax payers but would be costly to implement. In addition, the consultation document notes the Scottish Government feels the "current council tax system is fundamentally unfair, and transitional arrangements will just continue this unfairness." For this reason transitional arrangements are not included in the proposals. The consultation asked whether respondents felt that there should be transitional arrangements.

Chart 6.3
Question 8 - In your view, should transitional arrangements for individuals apply?

Base: Individuals (418)

Individual responses

6.31 Chart 6.3 shows that the majority of individuals (55%) did not see the need for transitional arrangements. Fifteen percent said that there should be transitional arrangements and a large number (30%) said they did not know or did not respond. Respondents in the age range 55-64 were least likely to support transitional arrangements, with just 7% in favour compared to at least 12% in other age ranges.

6.32 Those who agreed (63 or 15%) were then asked "If yes, please give your reasons and provide comments on how you think transitional arrangements should be funded". Thirteen percent of these respondents merely commented that they disagreed with the concept of a local income tax. The following comments were made by 5 or more respondents:

• the need for time for adjustments (25% of those who felt that transitional arrangements should apply);
• the need for transitional arrangements due to potential large impact (24%);
• the need for a lead in period or gradual introduction (16%).

6.33 There were few proposals for funding transitional arrangements with the following made by 2 or more respondents:

• cut salaries of civil servants/ government officials (5% of those who felt that transitional arrangements should apply);
• greater efficiency in public services (3%).

6.34 Two of the 12 free-flowing respondents chose to respond to this question and both agreed that transitional arrangements were not necessary, though their reasons differed. One response identified potential complications wherein some earners have variable income over certain periods, whilst the other argued that no meaningful comparison between the tax payable under current arrangements and that proposed for a local income tax is possible.

Organisational responses

6.35 Five organisations (2 each from local government and 'other' and one from tax, pay or finance) stated that there should be transitional arrangements. Seventeen said there should not and this included 11 local government and 6 'other' organisations.

6.36 The qualitative responses received from organisations revealed polarised views. Whilst some organisations were in favour of transitional arrangements others disagreed with this approach; these differing views are described in the following paragraphs.

In favour of transitional arrangements

6.37 Of those organisations who are in favour of transitional arrangements (4 tax, pay or finance organisations, 2 local government organisations and one representative group) one, from local government noted:

"[This organisation] has identified that significant number of households (around 21%) would experience increases to their tax liability under the proposals. The Council therefore agrees with the Burt report that transitional arrangements should be established to prevent a significant initial impact on households following any change to the structure of local taxation."

6.38 One representative group was concerned about the impact of local income tax in terms of affecting 'carer households' and one tax, pay or finance organisation felt that middle income families, particularly those with more than 2 wage earners, might be particularly badly hit.

6.39 All these organisations felt that transitional arrangements would assist these groups of individuals to adapt to local income tax. Indeed, one local government organisation noted:

"Given the fairness basis on which introduction of the local income tax is being proposed, it can be argued that there should be transitional arrangements to phase in the increased burden for those taxpayers who find themselves in the position of being worse off."

Opposed to transitional arrangements

6.40 Eight organisations were not in favour of transitional arrangements because they would be complex due to the totally different tax regimes and would also place a major administrative burden on employers and the collection authority. Transitional arrangements represent exceptions to the general rule and would be difficult to justify in terms of benefits (5 local government, 2 tax, pay or finance and one political).

6.41 Three local government organisations maintained transitional arrangements would be difficult to apply in a fair and transparent manner.

6.42 Finally, one tax, pay or finance organisation suggested:

"Rather than overly complex transitional arrangements, we would suggest clear advance notification of the commencement date of local income tax, of the rate to be charged and how it will be collected from tax payers."

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