Introduction of local income tax 'may be unconstitutional'

Professor Richard Kerley, of Queen Margaret University, said the proposal could become mired in a legal wrangle as it was far from clear whether the Scottish Government was actually allowed to bring it in.

His comments are the latest in a series of blows to the Scottish Government's plans for a local income tax (LIT), which were introduced by the finance secretary a week ago.

The plans were derided by Labour and the Tories, the business community and some unions for being unfair and for failing to tax those living on unearned income. Mr Swinney was subsequently warned he was facing a financial black hole of up to 1 billion in his plans.

It also emerged over the weekend that some of Scotland's most successful business people would see their tax bills go up from a few thousand pounds to more than 100,000 – which might persuade some to leave Scotland.

Prof Kerley, who produced the national report paving the way for proportional representation in local government eight years ago, said that he had studied the Scotland Act and it was "unclear" whether it allowed the Scottish Government to bring in a national tax of this nature.

He said the devolution settlement was clear that the Scottish Government could use the so-called "tartan tax", and could raise the basic rate of income tax by 3p in the pound.

However, if ministers invoked the tartan tax, they would only be able to levy it on the basic rate of income tax, not the higher rate, as they want to, costing them about 500 million a year in revenue.

Prof Kerley said: "The way this has been presented, with specific reference to a rise of 3p in income tax, has led some people to believe they might be trying to introduce the tartan tax. There is no dispute that the parliament can do that, but there would be problems – they would not be able to tax at the higher rate, for instance."

Prof Kerley said the Scotland Act appeared to indicate any tax change had to be gradual, and ministers were not allowed to bring in a huge change in one move.

He explained: "There seems to be a schedule saying you cannot make big changes to tax year-on-year. If I was (a high earner] and saw my tax bill go up from 2,391 under the council tax to 117,000 under LIT, I might reasonably say that is a penal levy of tax take, it's not right and I will challenge that."

Mr Swinney has insisted he is not trying to levy the tartan tax, and intends to use the provisions in the Scotland Act over local government finance to bring in LIT.

But Prof Kerley said that, if this were the case, the Scotland Act was not clear on whether this was allowed. This is because the Act refers to local taxation and specifically mentions only changes to the council tax and business rates.

He said there appeared to be no provision in the Act for the introduction of a new national tax to raise money for local government. "I am surprised this is being done the way it is because it clearly presents the potential for legal challenge," he said.

Prof Kerley added that he did not think Her Majesty's Revenue and Customs (HMRC) could refuse to collect the tax, but said the Scotland Act would probably have to be changed to allow it to do so. He said the Treasury would expect a compensation payment from the Scottish Government to allow HMRC to be used in this way.

Any disputes over the implementation of the Scotland Act should be resolved by the Privy Council or, in the case of financial disputes, by the Treasury – which is unlikely to favour the Scottish Government.

A spokesman for the Scottish Government said ministers were confident the Scotland Act gave them control over local government finance, allowing them to change the way local taxes are levied and collected.

However, David McLetchie, for the Scottish Tories, said: "There is substantial room to argue that this tax is not competent. This should be explored in the consultation process, but there is no mention of it in the consultation paper."