Elspeth Orcharton: Setting up new taxes could be a taxing task

The Scottish Government has started to shape the mould for a tax system for Scotland, a system whose first role will be managing and collecting the two recently devolved taxes. The replacements for stamp duty land tax and landfill tax are due to come into effect in Scotland in 2015, so the clock is ticking on getting a system to be operational in time.

The Scottish Government is also aware that how they deal with these taxes may be seen as a test of their capability to establish and operate a tax system fit for the wider tax powers they seek under independence.

Taking shape is the Scottish Government’s own tax agency, Revenue Scotland, which will collect and administer taxes levied by the Scottish Government. Its structure, staffing and accountability is yet to be announced. The option of getting HMRC to administer devolved taxes on the Scottish Government’s behalf was rejected on grounds of cost.

Finance secretary John Swinney claims that Revenue Scotland will be 25 per cent cheaper than HMRC. The cost for her Majesty’s Revenue and Customs (HMRC) to administer existing charges on behalf of the Scottish Government, up to the end of March 2020, was stated to be around £22.2 million, but the cost of the new system would be just over £16.7m.

However, costs are only estimates at this stage with the actual tax payments, process and structure not fully defined. It is not clear if the comparative costs were based on the same set of assumptions. Whether that’s right or not, transparency of costs and progress on the design of a Scottish tax system, are needed before reaching a clear conclusion on the impact.

Rather than get diverted onto different cost assumptions, or views of HMRC’s performance, it is worth thinking about what makes any tax agency, in any country, effective. To be accountable to only one parliament, and to be able to make decisions on alignment to policy objectives of one government only, has some straightforward appeal.

As regards the taxes where powers have already been devolved in full, the replacement for stamp duty land tax on purchases is to be called the Land and Buildings Transaction Tax. Interestingly, the “operational activity” for its collection and returns is to be carried out not by Revenue Scotland but by Registers of Scotland, operator of the land registration laws that govern property ownership in Scotland.

While this has the ambition of using one operating system for two purposes – legal ownership and tax collection – and sounds ideal, the IT systems challenges are still to be dealt with.

So what will Revenue Scotland do in the short-term? It is clear that the fair, efficient operation of any tax system requires a focused compliance and enforcement regime, which works best when it is operated by those with extensive experience and knowledge of their area. Registers of Scotland don’t do this at the moment. So, Revenue Scotland is likely to be in the hot seat.

Revenue Scotland’s first task will be the recruitment of staff with the knowledge of the existing tax provisions. The Scottish Government’s consultation document suggests that while some structural changes will take place, many of the core applications of the current stamp duty land tax will be replicated in the new Scottish land and buildings transaction tax. HMRC in Scotland does not have many such specialists; more exist in the private sector, particularly the legal profession. Headcount and pressures on the public purse might impact on external recruitment but successful implementation will come down to the right people for the right job.

The initial collection powers come into force a year after the independence referendum. Income tax changes will take effect gradually from 2016. As the rest of the income tax system remains controlled by Westminster, HMRC will continue to have responsibility for administering and collecting income tax.

Income tax has a much greater impact on Scottish taxpayers than any tax on relatively infrequent house purchases but the limited powers in the Scotland Act, passed recently, will only allow the Scottish Government to vary the 20 per cent, 40 per cent and 50 per cent tax rates on non-savings income, by 10 per cent. Issues that this difference will raise include employers and pension providers across the UK (not just in Scotland) having to plan ahead for changes in tax rates following the introduction of a Scottish rate of income tax, while at the same time grasping the intricacies of identifying which of their employees or customers is a Scottish taxpayer.

If Revenue Scotland is laying the foundations for the future it is worth bearing in mind that the Scottish Government seeks devolution of further taxes, including corporation tax. Under the powers of the Scotland Act, the Scottish Government could also control air passenger duty.

In an independent Scotland, VAT may be imposed or varied, depending on the membership status of an independent Scotland within the EU.

Capital gains tax and excise duties on alcohol may change. But what is taxed is as relevant as the rate of tax charged.

When revenue generation from tax is to be maintained, any cut in tax collected in one area is likely to be balanced by an increase in tax taken in another. Therefore, in the design of the overall tax system, the impact of any variation of tax rates in Scotland involves more complex analysis than a simple higher or lower approach. Who would pay, and on what, needs a lot of thought, whichever government has control.

• Elspeth Orcharton is director of corporate and international tax at Icas (Institute of Chartered Accountants of Scotland).