Warning over division of Smith Commission powers

The cross-party Smith Commission meets in Edinburgh. Picture: PA

MSPs were today warned that flagship proposals to hand some taxes to the Scottish Parliament - and leave others at Westminster - is a recipe for conflict between the Scottish and UK Governments.

And Scots will be left in the dark over which taxes are Scottish, according to tax chiefs who warned it is “very difficult to pull apart” UK taxes.

The UK Government last month published legislation to enact the recent Smith agreement on more powers over tax and welfare for Scotland.

It followed `the vow’ made the main pro-union party leaders in the final days of the referendum campaign to devolve sweeping new powers to Scotland after a No vote.

Economist Professor Anton Muscatelli, the principal of Glasgow University, told Holyrood’s devolution committee that he had concerns about the deal.

“It reserves, for example, the personal allowance, it reserves national insurance contributions and one of the big issues is around in work benefits.

“And by reserving universal credit, it does mean the whole interaction between welfare payments and low pay and income taxation is therefore not brought into play.

“I do think that will create and potentially lead to tensions going forward - so how that is managed within future legislation will be hugely important.”

National insurance

Prof Muscatelli said national insurance is part of the “overall tax structure” and Scotland’s budget would effectively be cut if this is lowered UK-wide.

“By not devolving national insurance, I think it creates the potential for conflict and it will impact on the Scottish tax base.”

Similarly, if the UK Government cuts the personal allowance - a tax hike - Scotland could respond by introducing a zero tax rate to cover such a change and effectively wipe this out.

But Prof Muscatelli said: “It would force Scotland’s hand - and this where it gets a bit messy by not devolving the personal allowance.”

He said it would have been better to devolve “all income tax and employment income to Scotland.”

Charlotte Barbour, Head of Taxation, at the Institute of Chartered Accountants in Scotland (ICAS) said the package offers a “variety of different taxes” to Holyrood.

Under the deal Scotland will get control over income tax bands - but not the personal allowance or national insurance. Air passenger duty and the Aggregates Levy will be devolved, while Holyrood will be “assigned” half of VAT revenues raised in Scotland. But there will be significant “joint responsibilities” with Westminster still in control of HMRC - the UK taxman.

“Scottish powers will have to interact with that and mesh together as well as going into the welfare side of it,” she said.

“One of the issues that come out of that is that I’m not sure that a lot of people amongst the public have a full understanding of what Scottish taxes are.”

Ms Barbour said: “I think it’s very difficult to pull any one part of the UK taxes apart - it leads to these kind of set ups as to whether national insurance and income tax goes together.”

The tax expert said this meant limits on Holyrood’s ability to push any through meaningful change in policy because income tax is “shared and over and above that interacts with other taxes.”

She said; “I don’t think there’s a lot of scope to radically change what you’ve got here.”