Government Expenditure and Revenue in Scotland

Government Expenditure and Revenue in Scotland

APPENDIX C: TAX RELIEFS AND ALLOWANCES

INTRODUCTION

The government often has a policy choice between providing help through public expenditure or through tax reliefs. In those cases where government provides help through the tax system, the policy leads to a reduction in government revenue, whereas the provision of grant to the private sector is recorded as public expenditure. The effect for the individual or company will, of course, often be similar. The cost of providing tax reliefs is not an explicit element of the detailed arithmetic used to derive the GGBR estimates provided in Section 8, though it is assimilated in these estimates through the revenue calculations. The GGBR estimates are based on the amount of public expenditure received by Scotland and the amount of tax revenue actually raised in Scotland.

Tax reliefs and allowances are not treated as part of public expenditure in the National Accounts and it is correct to exclude them from the GGE estimates. However, they are important considerations when looking at the overall level of assistance provided by government, both nationally and to the different countries of the UK. This appendix provides the latest estimates for three major tax reliefs/exemptions in the housing market: mortgage interest tax reliefs (MIRAS), capital gains tax (CGT) on disposals of the main residence, and the VAT zero-rating of new house construction.

HOUSING TAX RELIEF AND ALLOWANCES
MIRAS
The income tax estimates discussed in Section 7 are calculated after the deduction of the appropriate allowances from an individual's gross income. In this context, MIRAS plays a key role and its geographical distribution has obvious implications for the regional distribution of income tax yields. Estimates of the incidence of MIRAS in Scotland have been made by the Inland Revenue and these are shown in Table 15.

Table 15. Cost of mortgage interest relief (1996-97 prices) and Number of mortgagors, 1992-93 to 1996-97

	1992-93	1993-94	1994-95	1995-96	1996-97
Cost of mortgage interest relief in Scotland, £million (1996-97 prices) ⁽¹⁾	380	320	280	210	180
As a % of UK	6.5	7.0	7.4	7.4	7.5
Number of mortgagors in Scotland (000s) ⁽²	700	720	780	830	840
As a % of UK	7.1	7.2	7.5	7.9	7.9

Notes: 1. Figures rounded to the nearest £10 million.
2. Figures rounded to the nearest 10,000.

Sources: Inland Revenue Statistics 1998, Table 5.3. Figures then adjusted to 1996-97 prices using the adjusted GDP deflator.

The overall cost of mortgage interest relief has declined in recent years. Higher rate relief was abolished in 1991-92 and tax relief was successively restricted to 20 per cent (from the previous 25 per cent) in April 1994 and 15 per cent in April 1995. In addition, interest rates declined substantially over the first half of the 1990s.

Table 15 shows that the number of people with mortgages in Scotland has risen relative to the UK position, reaching 840,000 in 1996-97, a share equivalent to 7.9 per cent. Scotland's share of mortgage interest relief has also grown, from 6.5 per cent in 1992-93 to 7.5 per cent in 1996-97. Despite these increases, in both cases, Scotland's share in 1996-97 remained below its share of the UK population (8.7 per cent).

Table 16 indicates that MIRAS per head, at £35, was about 85 per cent of the GB level in 1996-97. Had Scotland received a population share, the amount of MIRAS in Scotland would have been around £30 million higher. The 1996-97 proportion is higher than the average share which Scotland received over the 16 years to 1996-97 (77 per cent).

Table 16. Housing-related tax reliefs per head, 1996-97 and annual averages for 1981-82 to 1996-97 (at 1996-97 prices)

	1996-97			1981-82 to 1996-97
	Total £m	Per Head £	Index ⁽⁺⁾ GB = 100	Per Head Annual Average £	Index ⁽⁺⁾ Annual Average GB = 100
1. MIRAS ⁽¹⁾
Scotland	180	35	85	79	77
England and Wales	2,190	42	102	104	102
GB	2,370	41	100	102	100

2. CGT Relief ⁽²⁾
Scotland	62	12	115	40	49
England and Wales	538	10	99	85	105
GB	600	11	100	81	100

3. VAT Relief on Newbuild ⁽³⁾
Scotland	114	22	123	18	95
England and Wales	922	18	98	19	100
GB	1,035	18	100	19	100

4. TOTAL
Scotland	356	69	99	137	68
England and Wales	3,650	70	100	208	103
GB	4,005	70	100	202	100

Notes ⁺: Index numbers are based on unrounded figures.
The figures shown are notional. Any changes to tax reliefs would result in changes in behaviour in the housing market.
Sources: 1. Inland Revenue.
2. Inland Revenue and Scottish Office Development Department (SODD) Housing Division Economics Unit.
3. SODD Housing Division Economics Unit.

Other housing tax reliefs
Parallel estimates of capital gains tax relief and of zero-rating of VAT on new house construction can also be made. The former relief, which amounted to an estimated £0.6 billion for GB as a whole in 1996-97, is granted on the sale of most domestic properties and its regional distribution is clearly related to regional turnover in the housing market and regional property prices. CGT relief per head in Scotland is estimated at £12, or 115 per cent of the GB level in 1996-97. The level of CGT relief per head accruing to Scotland in 1996-97 relative to GB was substantially above the annual average experienced during 1981-82 to 1996-97. Over this period, the Scottish level was around half that in GB as a whole.

The zero-rating of VAT on new house construction, worth £1.0 billion in GB as a whole in 1996-97, is related to the regional distribution of new house building and the value of new properties. The level of relief per head in Scotland in 1996-97 was well above that in GB, at £22 compared with £18. However, as with CGT relief, VAT relief per head in Scotland was below the GB level over the longer period from 1981-82 to 1996-97, at 95 per cent of the GB average.

Total level of housing tax reliefs
In summary, as Table 16 illustrates, the total level of housing tax reliefs for GB in 1996-97 was £4 billion. This compares to £3.8 billion in identifiable expenditure on housing in Great Britain in the same year and underlines the importance of support through tax reliefs.

Housing-related tax relief per head in Scotland in 1996-97 is estimated at 99 per cent of the GB level, or around £1 per head of population lower in Scotland than in GB. The figures do show, however, that the 1996-97 amounts are well above the average for the period from 1981-82 to 1996-97. Over this period, the average housing tax relief per head in Scotland was around two-thirds of the GB level, or about £65 lower (at 1996-97 prices) per head in Scotland than in GB (£137, compared with £202).

PENSION RELIEFS
In addition to housing reliefs and allowances, substantial tax relief is granted on the contributions of both employers and employees to occupational pension schemes. In addition, there is tax relief on contributions to personal pension schemes. In 1996-97, these reliefs are estimated at £12.8 billion for the UK.

It would be expected that the regional distribution of these reliefs would reflect regional differences in earnings, employment and participation rates. However, the available data are insufficiently robust to allow estimates of the regional distribution of these reliefs to be made.

APPENDIX C: TAX RELIEFS AND ALLOWANCES

INTRODUCTION

HOUSING TAX RELIEF AND ALLOWANCES

Table 16. Housing-related tax reliefs per head, 1996-97 and annual averages for 1981-82 to 1996-97 (at 1996-97 prices)

Other housing tax reliefs

Total level of housing tax reliefs

PENSION RELIEFS