Having the right processes can promote healthy debate in making the case, or not, for new taxes
By Charlotte Barbour, Director of Taxation
26 April 2021
Reform of tax is never simple but having the right processes in place can help to promote healthy debate and encourage the development of tax legislation that supports wider government and societal objectives.
Charlotte Barbour outlines key features that should be in such a process.
The Scottish Parliament has the ability to introduce new taxes. This power is likely to come under the spotlight as the country recovers from the coronavirus pandemic. To what extent can – and should – these powers be used? Should MSPs focus on building a case for new taxes? Could they make better use of the powers already at their disposal? These choices require proper debate, and a process for ensuring that tax changes work.
What are the options?
The Scottish Parliament’s powers over taxation have grown extensively since 1999. But the social and economic challenges of a global pandemic have tested the limits of its tax and borrowing powers. The consequences of this are likely to include tough debates around the need to raise revenue and support the economy, and the limits to what can be achieved under the devolution settlement.
This is likely to give rise to questions about whether the Scottish Parliament has the right balance of tax powers, or sufficient sources of revenue to support the economic recovery. There are three main ways that the Scottish Parliament can introduce new taxes.
- Local Taxes - the first option is to introduce or reform taxes collected by local authorities, such as council tax and the proposed taxes on car parking and tourism.
- New Scotland-wide taxes - these can be introduced provided that they don’t cover reserved policy areas. These could offer Scotland the opportunity to take a more creative and imaginative approach to introducing new taxes. However, they will require the agreement of the UK Parliament in order to be introduced. The experience of the Welsh Government’s attempts to introduce a vacant land tax has exposed some tensions in this process, which may not make it an easy option.
- Devolve existing UK powers - the third option is for powers over existing, UK wide taxes to be devolved.
These are all political choices. In terms of the practicalities associated with their implementation, the option to create new taxes or devolve existing ones will take time and is unlikely to provide immediate solutions. Agreements need to be reached on whether or not to devolve powers, legislation has to be drafted, scrutinised and approved, and arrangements put in place to ensure that these taxes can be collected.
Even when a power has been devolved, challenges may be encountered that hold up implementation. This has been seen in the cases of air departure tax, aggregates levy and the proposal for VAT assignment.
Local taxes offer more flexibility, but reform won’t be simple
Local taxes currently provide the Scottish Parliament with the greatest flexibility for reform, but the process for their introduction (or reform) isn’t straightforward.
Prior to the pandemic, the Scottish Parliament was in the process of introducing legislation to give councils the power to introduce two new local taxes – the transient visitor levy (or tourist tax) and workplace parking levy. These plans are now on hold. These two new taxes are unlikely to raise significant sums of money, and not all local authorities may choose to introduce them.
Depending on how these are implemented, the money that is raised might be earmarked for specific purposes related to the scope of the tax (such as investment in transport and tourism related infrastructure). From a tax administration perspective, these taxes are also likely to place extra administrative and reporting burdens on businesses and local government. If each local authority is given the ability to adopt a different approach to setting and collecting the tax, the result could be a complicated and disjointed system.
Last minute tax concessions don’t make for good tax policy
From a policy making perspective, the decision to introduce proposals for the workplace parking levy and the transient visitor levy was made in haste, the result of last-minute budget concessions needed to ensure that the Scottish Budget became law. Such an approach does not lead to good tax-policy making because it can result in shortcomings in the tax regime that earlier and better consultation might have helped to avoid.
New taxes deserve full consideration and analysis before any decision is made to introduce them
A formalised tax policy process, supported by reformed structures in the Scottish Parliament and the Scottish Government, could help provide a more strategic approach to evaluating and consulting on new tax proposals before they are introduced.
Such a tax policy process should address the following criteria:
- Identify the purpose and locus of the tax - Is the tax being designed to raise money, encourage behavioural change or to support a different policy aim? Does the tax support wider government objectives (and vice-versa)? Is it possible to easily identify how the tax base or person/transaction being taxed is Scottish or has ties to Scotland?
- Consult early and widely - Ideally, plans for new taxes should be consulted on widely before legislation is introduced. Having a more structured process for introducing and amending tax legislation will also help in this regard.
- The structures of parliament should be fit for purpose - There needs to be a clear process for managing the devolved taxes, from inception to introduction, to maximise scrutiny.
- Do not lose sight of existing tax powers - It is important to consider how new taxes would sit alongside existing devolved taxes, how they interact with both devolved and reserved taxes, whether they are local or national in scope and if they are designed to replace, or complement, existing taxes.
- Collection and compliance should be easy - If people are clear about what they are being asked to pay for, and why, it will help to maximise the revenues that are collected.
ICAS and CIOT have published ‘Building a better tax system’ in which the above points are detailed, with a view to creating a longer-term approach to tax policy making. It is an area that may take on greater significance as debates over how to pay for the cost of the pandemic increase in a post-coronavirus world are discussed.
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