WITH THE Smith Commission expected to focus on earned income, Scots face having to overhaul their finances, writes Jeff Salway
Greater tax controls are at the top of the agenda as the panel charged with considering which new powers should be transferred to Scotland prepares to publish its initial recommendations.
The Smith Commission, headed by Lord Smith of Kelvin, was set up in the wake of the referendum on Scottish independence to look at the additional responsibilities to be devolved from Westminster.
It received over 17,000 responses from the general public and more than 400 from a range of organisations over the five-week consultation period, which ended on 31 October.
The commission will report this week on proposals arising from the consultation and aims to lay down a new draft Scotland Bill by 25 January. The legislation will be implemented following the general election in May.
The proposals being weighed up cover a wide range of areas, including tax, pensions and welfare.
David Ward, tax director at Johnston Carmichael, said: “There is a balance to be struck between the public and political desire to introduce rapid changes and the need for taxpayer certainty and to ensure that the full consequences of any changes are properly thought through.”
While greater tax powers are just one part of the package, they will perhaps be the most significant. Top of the list is income tax, changes to which could have far-reaching implications for individuals, businesses and Scotland’s economic health.
Malcolm Rust, partner at Shepherd and Wedderburn, said: “The key for individuals in all of this will be tax, and in particular the extent to which taxation will be further devolved, the rate of Scottish income tax and the possible application of the new powers to tax bands.”
Any changes will force many Scots to restructure their finances to try to mitigate the impact on their tax bill, he said.
Holyrood has already set out proposals for new property tax rates. Last month it announced plans to replace stamp duty with a new land and buildings transaction tax (LBTT) under which there will be no tax on properties valued below £135,000. A marginal 2 per cent tax will then be charged on residential transactions between £135,000 and £250,000, with a 10 per cent rate on the value over £250,000 and a new rate of 12 per cent on any amount above £1 million. That system will come into force next April.
The biggest question now is the extent to which income tax is devolved. If it isn’t transferred entirely, Scotland will still gain far greater powers in setting bands and rates.
Under the present arrangement, the Scottish Parliament can alter income tax by up to 3p in the pound, although it hasn’t yet taken advantage of this. However, the Scotland Act 2012, taking effect in April 2016, will allow Scotland to raise or lower income tax by up to 10 per cent in relation to the UK levels.
How much further the Scottish government will be able to go will become clearer this week.
“The Scottish Parliament may get new powers to set the bands and, perhaps, personal allowances,” said Ward. “However, it seems unlikely that there would be immediate wholesale changes to the structure of the income tax regime and the administration of the PAYE system is likely to remain within the remit of HMRC.”
While an income tax rise “might appear likely”, he added, Holyrood will need to be careful of increasing the disparity between rates of tax payable by individuals on income versus capital receipts and with the rate of corporation tax.
“The greater the difference, the greater the incentive for tax planning, so that returns could be received in capital form or through companies,” he warned.
The income tax rate on savings is expected to remain unchanged, even if it is devolved.
“To change it would place a significant burden on banks and other deposit takers, who are required to pay interest to their customers after deduction of basic rate income tax,” said Ward.
Different rates and bands on inheritance tax (IHT) and capital gains tax (CGT) could be in the pipeline too, despite potentially serious complications around the devolution of these powers.
“Considering the complexity of the IHT and CGT regimes and their relatively low contribution to the overall tax take from Scottish taxpayers, we would not expect those taxes to be a priority for the devolution of fiscal powers,” said Ward.
Pensions are also expected to remain with Westminster, he added, due to the administrative complexities of a separate pensions regime for Scottish taxpayers.
“More importantly, splitting the funds of public sector pensions between Scotland and the rest of the UK would not seem an attractive proposition,” said Ward. “This is a case where a larger collective pool of taxpayers has clear economic benefits – there is safety in numbers.”
However, the Scottish Government could get access to the VAT raised north of the Border, while air passenger duty, housing benefits (including the so-called bedroom tax) and certain welfare measures are also tipped to come under Holyrood’s remit.
“Other less mainstream areas for devolution include alcohol and tobacco duty, which have raised proportionately higher revenues in Scotland than in the rest of the UK and may be seen as a good target from a political perspective,” said Ward.
With increased tax powers will come new tools for tackling tax-avoidance. The Scottish Parliament has already introduced a Scottish General Anti Avoidance Rule (SGAAR) which will apply to devolved taxes.
Ronnie Ludwig, Edinburgh-based partner at accountants Saffery Champness, said Revenue Scotland looks set to tackle tax avoidance more stringently than HMRC does at present.
“To be caught by HMRC’s GAAR there must be abusive and aggressive avoidance, whereas under the Revenue Scotland proposals there would only have to be avoidance.”
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