Tax accountability: a product of devolution

Scottish Parliament
Donald-Drysdale By Donald Drysdale for ICAS

11 January 2017

Governments don’t like hypothecated taxes, explains Donald Drysdale, but devolution inevitably matches public spending more closely with tax revenues.

Peace tax

Just over a century ago, at the height of World War One, Britain became the first nation in the world to recognise the rights of conscientious objectors.  The Military Service Act 1916 simultaneously claimed the right to force men to die for their country while also granting them the legal right of conscientious objection.

For taxpayers who conscientiously object to paying taxes for military purposes, House of Commons private members’ bills in 1993, 1998 and 2016 (one of them by the now Shadow Chancellor John McDonnell) sought in vain to allow them to register their objection and divert an appropriate portion of their taxes.  It would have been paid into a non-military fund for the promotion of international peace and understanding.

Such sentiments have been echoed elsewhere.  For example, the US Senate has received proposals for a Peace Tax Fund Act with similar objectives, but didn’t enact this.  There’s no indication that the idea of a peace tax has ever been actively considered by any UK government.

Tax hypothecation

Ring-fencing specific tax receipts and allocating them to a peace fund would be an example of a ‘hypothecated tax’ – that is, one where revenues are partly or wholly set aside for a particular purpose rather than for general government funding.  Television licence fees paid to the fund that finances the BBC are also an example of tax hypothecation.

The UK tax system has shied away from hypothecation.  Taxpayers have called for it in some cases, but successive governments have opposed it on grounds that spending priorities should not be determined by the way money is raised.  Nevertheless there have been times when governments have deliberately linked tax increases with new spending commitments, largely to gain political support.

Research shows that taxpayers may be more willing to pay additional taxes where the extra burden is earmarked for what they see as ‘good’ purposes such as health or education, rather than purposes seen as arguably less deserving such as defence or government administration.  However, politicians dislike the straight-jacket which hypothecated taxes impose.

Examples of hypothecation

Setting aside for a moment the suggested peace tax that might never materialise, there have been several instances where UK taxes have strayed towards hypothecation.

An oft-quoted example is the ‘road fund’, established in 1920 to pay for building and maintaining the nation’s road network.  This was originally funded from vehicle excise duty. In practice the fund, which was never fully spent, gained notoriety because it was frequently raided for other purposes.  Following criticism from Chancellor Winston Churchill in 1926, this ear-marked fund ceased in 1937 and since then the roads have been paid for from general taxation.  Nonetheless, many of us still describe vehicle excise duty as ‘road tax’.

Calls for renewed hypothecation of taxes on motorists persist today – from opposing factions.  Motoring organisations want to see these taxes used exclusively to maintain and improve the roads, while others believe that the taxes on private road-users should be spent on improving public transport.

In response to demands for hypothecated taxes to fund the National Health Service, a number of different possibilities have been examined over the years: a flat rate or graduated health tax; a form of social insurance through an NHS fund; a consumption tax on goods and services; and an apportionment of income tax.  None of these was considered appropriate. In spite of the serious pressures now facing the NHS, specific taxes are unlikely to be earmarked to meet its operating costs because that could risk leaving this crucial service vulnerable to fluctuating revenues.

For an illustration, consider National Insurance contributions (NICs), which are spent mostly on social security benefits.  This creates a mirage of hypothecation which tends to make NICs politically acceptable to taxpayers – because they believe NICs are spent on something ‘good’ – but it would lead to absurd results.  If NICs were truly hypothecated, spending on benefits would be cut during recessions and increased during booms.  This is exactly the opposite of what’s needed, so the peaks and troughs must be smoothed from general taxation.

Green taxes

Environmental taxes are a relatively new phenomenon.  Given the international targets to reduce greenhouse gas emissions, such taxes are designed as much to achieve behavioural change as to raise revenues.  Research shows that public acceptance of green taxes might be enhanced by earmarking the revenues they raise and spending these on measures to reduce emissions.

On the other hand, as green taxes assume greater importance there are strong arguments in favour of treating them in the same way as general taxation.  This allows their revenues (and more) to be spent on environmental protection where appropriate, but also enables governments to use them to benefit the wider economy.

Annual tax summaries

Since tax year 2013/14, each individual UK taxpayer has had access to an annual tax summary, confirming how much income tax and NICs they have paid in the year. HMRC’s online tax calculator (intermittently available here depending on their website’s performance) provides this information and, for those with sufficiently sharp eyesight to decipher a confusing 15-colour pie chart, it also shows how their total tax contribution has been spent.

The tax calculator can provide an estimate of this information for the current tax year 2016/17.  It can’t do so yet for 2017/18, and presumably won’t be updated until after the Spring Budget of 8 March at the very earliest.


Although HMRC’s tax calculator can estimate income tax and NICs for 2016/17 and even quantify (for Scottish taxpayers) the Scottish element of the income tax liability, its analysis of public spending appears suspect.

Now that the Scottish rate of income tax applies, half the income tax for 2016/17 on every Scottish taxpayer’s earnings or pension goes to Holyrood, while Westminster retains the balance of income tax and NICs. For 2017/18, as a result of the new income tax powers introduced by Scotland Act 2016, Holyrood will control all income tax revenues from the non-savings non-dividend income of Scottish taxpayers.

HMRC’s breakdown of spending for 2016/17 gives no indication of this complex sharing of tax revenues and allocation of spending responsibilities.  It fails to explain whether the analysis recognises that certain functions such as housing, education and health are devolved. It therefore leaves Scottish taxpayers uncertain whether they are being given a fair estimate of what their tax has funded, or simply fobbed off with a broad-based UK-wide picture.

In a sense, devolution creates a new partial form of hypothecation for all taxpayers UK-wide. Taxes levied by Westminster finance reserved functions, including the payment of block grants to the devolved administrations.  Devolved taxes fund expenditure under the direct control of the devolved administrations.   It is important that this is clearly explained to the taxpaying public.

Scottish taxpayers, and in due course their Welsh and Northern Irish counterparts, may find satisfaction in the fact that devolved tax revenues are earmarked (in the widest possible sense) for spending that’s controlled locally.  But they also face the risk which hypothecation brings – that any shortfall in tax revenues will be felt locally.

Article supplied by Taxing Words Ltd


  • Tax

Previous Page