ICAS joins forces with CIOT to call for review of the Scottish tax system
Ahead of the Scottish Budget on 19 December, the Chartered Institute of Taxation (CIOT) and Institute of Chartered Accountants of Scotland (ICAS) are calling on the Scottish and UK governments to use the tenth anniversary of the Smith Commission next year to review the implementation of Scotland’s devolved tax powers.
The tax and accountancy bodies have collaborated on a new paper1, Building a Better Tax System: Progress Report, reviewing the development of Scotland’s tax regime in the first half of the 2021-26 Scottish Parliament.
The organisations write that clarity on the status of the devolved replacement for UK Air Passenger Duty (Air Departure Tax), in addition to proposals to assign half of VAT revenues raised in Scotland directly to the Scottish Budget, would ‘provide certainty and transparency’ about the future role they will play in Scotland’s devolved tax mix.
Both proposals were put on hold in 2019 over concerns about their introduction and no firm timetable has been given for their introduction2. In recent weeks, both Holyrood’s Finance and Public Administration Committee and the Scottish Government have highlighted the risks posed by the policy of VAT assignment3.
If the issues surrounding implementation of these proposals are insurmountable, CIOT and ICAS would like to see a statement made to parliament confirming as much.
CIOT and ICAS have recommended that the Scottish Government find ways of improving public understanding of Holyrood’s tax responsibilities, expressing concern that income tax divergence has created a more complicated tax system that is harder for taxpayers to understand and engage with4.
The organisations have also called on the Scottish Parliament and Scottish Government to work together to review how tax decisions are examined at Holyrood, following the decision of the Finance and Public Administration Committee to end its participation in the Devolved Taxes Legislation Working Group (DTLWG) in January 20235.
They write that; “the issues that the group (DTLWG) was set up to consider, such as a lack of parliamentary time for tax scrutiny, the need for legislation to be regularly reviewed and kept up to date, and the ability to consult with outside experts, remain.”
Chris Thorpe, CIOT Technical Officer, said:
“The introduction of Air Departure Tax and VAT assignment have both proved difficult to implement, despite the best efforts of those involved.
“Both the Scottish and UK governments should use 2024, the tenth anniversary of the Smith Commission next year as a milestone to take stock of the tax powers that it helped to deliver to work out whether these challenges can be overcome.
“It may well be that these issues are insurmountable, and if it is the case they cannot be resolved for good reason, then both governments should say as much.
“Doing so would give taxpayers greater certainty about their future role in the devolved tax mix.”
Sharon Blain, convener of the ICAS Devolved Taxes Committee added:
“More effort is needed to effectively communicate how the devolved tax system works, so taxpayers can understand their rights and responsibilities.
“One of the ways we think this can be improved is by making tax decisions more visible in the Scottish political calendar, so voters can see where and how decisions are made, not just the headlines. This is arguably even more important if Scottish taxes are going to diverge further from the rest of the UK.
“The Scottish Government and Parliament should restart their work reviewing the processes for making and amending tax legislation. It is disappointing that the work that was underway before the pandemic stalled.
“The issues that impact scrutiny such as parliamentary time constraints and the lack of a regular finance bill remain. With the increased need to keep legislation up to date regularly and the desire of all stakeholders to allow time for proper consultation and evaluation, improvements would be beneficial.
“There is still time in this session of parliament for the key players to get round the table and find solutions”.
1. See Building a Better Tax System: Progress report for the full report.
2. Air Departure Tax was put on hold in 2019 due to state aid concerns with the exemption for Highlands and Islands’ flights. The proposal to assign half the VAT receipts raised in Scotland directly to the Scottish Budget was also put on hold over concerns about the methodology used to calculate Scotland’s share of VAT receipts.
3. At an evidence session on VAT assignment held by the Scottish Parliament’s Finance and Public Administration Committee on 14 November, committee convener Kenneth Gibson said: “There is no enthusiasm certainly for (VAT) assignment anyway… if we, as a finance committee, with the unanimous support of our witnesses and across the political parties, are saying that assignment should no longer be looked at, that is a very strong message that we are sending to the Scottish Government on this.
In evidence to the committee on 21 November, Finance Secretary Shona Robison said in response to a question from Gibson on VAT assignment: “I am very clear that the uncertainty associated with the proposed approach to VAT assignment, along with your point about no additional fiscal or policy powers being granted to manage it, is an inherent and currently unmanageable risk t the Scottish budget.”
4. In the paper, CIOT and ICAS state:
“Divergence has created an income tax system in Scotland that is more complicated and harder to understand. Notionally, the adoption of a starter rate of tax means that Scottish taxpayers with income below £27,850 pay slightly less income tax than those in other parts of the UK with the same earned income. The maximum impact of this difference is minimal - £21.62 per year, or 41p per week.
“Some examples of complications include the application of certain tax reliefs, such as those associated with pension and Gift Aid contributions. One of the most striking differences relates to the National Insurance treatment of Scots with earnings between the Scottish and UK higher rate income tax thresholds. The use of bands based on single pounds, rather than rounded to the nearest £10 makes it impossible to appreciate easily when different tax rates apply.
“The fact that income tax rates and bands for savings income and dividends remains reserved to the UK Parliament means a disjointed approach for Scottish residents. These complexities mean it is more difficult for Scottish taxpayers to easily understand their tax affairs where different sources of income are taxed differently. They also lead to additional costs for HMRC in administering the system and these are borne by the Scottish Government.”
5. See: Devolved Taxes Legislation Working Group (Gov.scot). This group was set up in 2019 to take forward recommendations aimed at improving tax scrutiny made by the Budget Process Review Group. It included officials from the Scottish Government, Scottish Parliament, Revenue Scotland and outside tax experts. Both CIOT and ICAS were represented on the group.
Correspondence between the Scottish Government and Scottish Parliament on the issue of the Devolved Taxes Legislation Working Group can be found here: