Scottish taxes: A challenge facing Holyrood’s new Finance Secretary
Donald Drysdale ponders the tax challenges ahead for Scotland’s new Cabinet Secretary for Finance and the Constitution.
Following Scotland’s general election on 5 May, a minority Scottish National Party administration has been elected in Edinburgh. First Minister Nicola Sturgeon has been reappointed and has reshuffled her cabinet. Having lost the slender working majority enjoyed previously, but with a stated intention not to enter into any formal coalition, the SNP will have to gang warily on certain sensitive party political issues.
The absence of a governing majority can be no bad thing for any country, if it creates the need for consensus and thus leads to decisions being reached by negotiation and persuasion. However, there are wide differences among the stated tax objectives of the different political parties represented at Holyrood.
The recent adjustment to the balance of power in the Scottish Parliament has come at an interesting time, when the transfer of additional powers from Westminster to Holyrood is beginning to gather momentum.
The Scotland Act 2016 received Royal Assent on 23 March 2016, and under it certain powers have been devolved with effect from 23 May. These include:
- Consumer advocacy and advice
- Equal opportunities legislation
- Control of high street fixed odds betting terminals
- Preventing parking on pavements
- Policing of Scottish railways
- Speed limits on roads in Scotland
- Traffic signs
- Influence over Ofcom, Ofgem and the Northern Lighthouse Board
- Full control of railway franchising in Scotland
Other powers are to be devolved at dates to be appointed, including:
- New government borrowing powers and limits thereon.
- Co-operation with the Office for Budget Responsibility.
- Destination of fines, forfeitures and fixed penalties.
- The licensing of onshore petroleum operations, including fracking.
- Fuel poverty support schemes and energy company emission targets.
- Decommissioning of offshore renewable energy developments.
Tax and welfare powers
The Scotland Act 2016 will also transfer further tax and welfare powers from the UK government to Scotland. By April 2018 Holyrood will have wider powers over income tax rates and thresholds, air passenger duty, aggregates levy, certain welfare benefits and related benefit sanctions and tribunals.
The implementation of the Scottish rate of income tax on 6 April 2016 has altered the way the Scottish government is funded, but this has proved a non-event for taxpayers because the rates have kept in line with those elsewhere in the UK. By contrast, changes of greater significance are likely from 6 April 2017, when Holyrood will acquire unlimited power to set the income tax rates and tax bands applying to the non-savings non-dividend income of Scottish taxpayers.
Scotland will also assume responsibility for tax on the carriage of passengers by air from airports in Scotland. This is expected to take effect from 1 April 2018, with Holyrood introducing its own variant of air passenger duty. The SNP have said it would like to cut the tax rate, but other political parties disagree.
The Scotland Act 2016 will also give Holyrood control over certain aspects of several welfare and housing-related benefits, disability living allowance, personal independence payment, attendance allowance and carer's allowance. These, amounting to only about 15% of welfare benefits paid in Scotland, are so intertwined with reserved welfare benefits that the scope for substantial reform in Scotland may be limited.
Income tax and capital gains tax
Derek Mackay, who has been given part of John Swinney’s former role and is now cabinet secretary for finance and the constitution, will oversee Holyrood’s new tax powers. He will have the difficult task of introducing the extended income tax powers in a meaningful way. He may be keen not to confuse taxpaying voters nor disincentivise wealth creators in an economy in which unemployment is already higher than across the UK as a whole.
The Scottish income tax regime will be far from straightforward. The rates and thresholds set by Westminster for the rest of the UK, including the savings allowance and dividend allowance, will still apply to savings and dividend income of Scottish taxpayers. The Westminster income tax thresholds will also determine the capital gains tax rates paid by Scottish taxpayers.
Scots with earned income and either investment income or capital gains will have to prepare two separate tax computations each year – one based on Scottish income tax rates and thresholds for their earnings or pensions, the other based on Westminster rates and thresholds for their investment income and capital gains.
Arguably, such complexities might be acceptable when PAYE and self-assessment tax returns are all processed online, and when tax calculations are performed digitally as if by magic. However, it is scarcely appropriate in a supposedly fair society to foist taxpayers with a regime that is so complicated most of them would need professional advice simply to check that they’ve paid the right amount of tax.
Could things be simplified?
By accepting that some measure of fiscal devolution is appropriate, the UK has created a scenario in which its tax regime will inevitably become more complicated. We are already well down that road.
As I explained when writing about efforts to move towards aligning income tax and national insurance, there is a natural conflict that makes it impracticable to align two taxes where one is devolved and the other is reserved.
Scottish earners and pensioners could be in for a bumpy ride, with combined marginal rates of income tax and national insurance that are alternately progressive and regressive. For example, the effective combined rates on employment earnings in excess of the personal allowance in the rest of the UK might progress through 32%, then 42%, and then 47%, while in Scotland under SNP rule the equivalent pattern might be 12%, 32%, 52%, then 42%, and then 47%.
It will be a challenge for Derek Mackay to make constructive use of Scotland’s new income tax powers without allowing the personal tax regime north of the border to become incomprehensible to most Scots. On reflection, perhaps John Swinney will be thankful that he moved on when he did.
Article supplied by Taxing Words Ltd