Influential Committee Sets Out New Scottish Tax Powers

UK Prime Minister David Cameron has welcomed long-awaited recommendations from the Smith Commission on the devolution of additional tax powers to the Scottish Parliament.

Cameron established the Commission in the wake of the “no” vote in September’s Scottish independence referendum. He sought to keep Scotland in the UK with promises that Scotland’s tax powers would be expanded.

Chaired by Lord Smith of Kelvin, the Commission was tasked with brokering a cross-party deal on devolution. The Commission’s report was issued on November 27 and sets out the agreement reached between all five of Scotland’s main political parties (Conservative, Green, Labour, Liberal Democrat, and the Scottish National Party).

Under the plans, income tax would remain a shared tax, and both the UK and Scottish Parliaments would share control of the tax. Within this framework, the Scottish Parliament would have the power to set income tax rates and thresholds on the non-savings and non-dividend income of Scottish taxpayers. There would be no restrictions on the thresholds or rates the Scottish Parliament could set.

All other aspects of income tax would remain in the control of the UK Parliament, including the imposition of the annual charge to income tax, the personal allowance, the taxation of savings and dividend income, the ability to introduce and amend tax reliefs, and the definition of income. Westminster would also retain control over all aspects of National Insurance contributions (NICs), inheritance tax, capital gains tax, corporation tax, fuel duty and excise duties, and oil and gas receipts.

The Scottish Government would receive all income paid by Scottish taxpayers on their non-savings and non-dividend income. The Scottish Parliament, Holyrood, would also be given increased borrowing powers, to be agreed with the UK Government, and the Barnett Formula will continue to be used to determine the remaining block grant (the portion of revenues provided by the UK Treasury each year to fund Scottish Government operations). The Scottish and UK Governments would agree new rules on how the grant would be adjusted at, and after, the point at which powers are transferred.

The receipts raised in Scotland by the first ten percentage points of the standard rate of value-added tax, which is currently set at 20 percent, would be assigned to the Scottish Government’s budget. These receipts would be calculated on a verified basis, to be agreed between the UK and Scottish Governments. A corresponding adjustment would be made to the block grant. All other aspects of VAT would remain controlled by the UK Parliament.

The power to charge tax on air passengers leaving Scottish airports would be devolved. The Scottish Government would be free to replace or remove the UK’s Air Passenger Duty regime as it sees fit. If a new tax is introduced, the Scottish Government would have to reimburse the UK Government for any costs incurred in “switching off” APD in Scotland. A corresponding adjustment would also be made to the block grant.

Similar rules would apply to the devolution of the Aggregates Levy. Once the current legal issues in relation to the levy have been resolved, the power to charge tax on the commercial exploitation of aggregate in Scotland would be transferred to the Scottish Parliament. If the Scottish Government choses to replace the Aggregates Levy, it would be required to reimburse the UK Government for any costs incurred, and a corresponding adjustment would be made to the block grant.

The UK and Scottish Governments would work together to avoid double taxation and make administration as simple as possible for taxpayers.

Cameron said, “I’m delighted with what’s been announced, we’re keeping our promises and our United Kingdom together. I always said that a ‘no’ vote didn’t mean no change, indeed, we made a vow of further devolution to Scotland and today we show how we’re keeping that vow to keep that promise. The Scottish Parliament is going to have much more responsibility in terms of spending money but it would also need to be more accountable for how it raises taxes to fund that spending and I think that’s a good thing.”

Draft clauses to translate Smith’s recommendations into legislation will be produced in January 2015.