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A Scottish approach to taxation

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In Scotland, there will be two budget events this autumn: the UK Budget and the Scottish Budget. Some of the discussion around Scottish taxes is that they tend to be closely aligned with their UK counterparts (e.g. LBTT and SDLT), so it is interesting that the Scottish Parliament’s Finance and Constitution Committee is conducting an inquiry into a ‘Scottish approach to taxation’. This inquiry commenced in 2016 with a call for evidence, which was followed by a further call, but it has yet to report. It would be helpful, however, to have the Committee’s views to guide the next budget. 
The aim was to open up a conversation in relation to the tax raising powers in Scotland following the Scotland Acts of 2012 and 2016. Part of this was to ask stakeholders about implementing a devolved tax regime in Scotland that aligns with the four ‘Adam Smith’ principles to: 
  • be proportionate to the ability to pay;
  • provide certainty to the taxpayer;
  • provide convenience/ease of payment, and;
  • be efficient.
Underpinning the ‘Scottish approach’ by the four Adam Smith principles may prove more difficult that it seems at first glance. Assessing whether a tax is proportionate to the ability to pay, or efficient, is not necessarily possible for air departure tax or indeed for land and buildings transaction tax. In terms of Scottish income tax, the Scottish Parliament can only provide a degree of certainty over rates and bands, but it does not control the other aspects, such as the definition of the tax base or personal allowances. 
A 2016 academic paper by Cairney, Russell & St Denny describes the ‘Scottish approach’, a term which first arose in 1999, as referring to its ‘distinctive way to make and implement policy’. The paper stresses that the Scottish government should not fall into the trap of ongoing negative comparison with the UK government in order to present itself in a favourable light; this is simply too easy. Instead, it should undertake a critical analysis of its own actions and policymaking processes on a rolling basis. 
Questions were posed by the Committee about the approach to Scottish taxation, and whether this could differ from that of the rest of the UK. If so, should there be concerns about whether that might create scope for avoidance and behavioural change? It is a wide ranging ‘blue sky’ inquiry.
The notion of implementing a different policy or being innovative in creating new ways of raising revenue streams must be tempting for any Parliament which has been bestowed with extended powers. However, there is one potential difficulty in changing Scottish income tax, which is a partly devolved tax, because it remains intertwined with UK taxes. Whilst the Scottish economy could flourish as a result of being radically different from the rest of the UK, it could be that additional tax receipts flow to the UK rather than Scotland if those taxes are raised from reserved (non-devolved) sources. 
At the heart of this is the question: would different Scottish rates and bands of income tax lead to behavioural change on the part of Scottish taxpayers? A second call for evidence was issued in March 2017 and oral evidence was also taken. The second call for evidence concerned itself primarily with a concern regarding the rationale behind incorporations, ‘off-payroll’ working and the intermediaries legislation, and how Scottish income tax policies might interact. 
More broadly, contributors to the inquiry have noted that ‘success’ in a taxation context should be identified as high collection rates, high levels of compliance and the ability by businesses and individuals alike to plan their affairs and invest with confidence. No taxpayer wants unexpected changes or ‘vanity project’ policies. Clarity of purpose and prioritisation of goals must be set out.
It is important for taxes to remain simple, stable and certain; a five year ‘roadmap’ would lend itself to this. The Scottish Budget process would also gain stability from having a set of terms of reference relating to revenue raising.
The consideration of how Scotland positions itself with the rest of the UK and with the rest of the world is important. Scotland must decide what it wishes to become: is it to be an attractive tax regime, competing with the rest of the UK? Cross-border relations may deteriorate and a message of uncertainty may be projected to businesses which wish to work across jurisdictions. 
Issue: 1367
Categories: In brief