Key considerations in the devolution revolution
By Justine Riccomini, Head of Tax (Employment and Devolved taxes)
26 January 2023
Justine Riccomini explains what the key considerations are for taxpayers and businesses when tax devolution occurs
The Devolution Revolution
Since the Scotland Act 1998 was passed, we have witnessed a slow but relatively steady devolution of tax powers to Scotland. Wales has followed suit, and now both jurisdictions have a small collection of fully and partially devolved taxes.
ICAS has been at the forefront of the devolution process and maintains excellent relationships with the Scottish Government and Welsh Government, who see the Institute as a trusted stakeholder. ICAS has contributed substantially to the formulation of tax policy and legislation as the devolution processes have taken place. In recent months, the Northern Irish Finance Department issued a consultation entitled “Devolution of more fiscal powers” which ICAS responded to, and which demonstrated that Stormont is considering whether a devolved taxes structure is currently the way to go. Just before Christmas, ICAS also submitted a response to the Scottish Government consultation entitled “Breaking New Ground? Developing a Scottish tax to replace the UK Aggregates Levy” which represents a further step to fully devolve the tax administration and collection powers to Scotland, as originally planned for in 2015.
Lost in the maze
For many citizens of these countries, the move to devolve has been simultaneously liberating and complex. Many support the notion of raising taxes in Scotland, Wales and NI for the benefit of those countries, and having more powers over both how the money is raised and how it is ultimately spent. But there is no doubt that this right is accompanied by the responsibility to understand how it all works and be able to hold those they elect accountable for their decision-making.
Following the money isn’t as easy as it sounds however, because the current devolved processes are governed and administered by a mishmash of UK and devolved government departments, including HM Treasury, HMRC, BEIS. DWP, Welsh, NI and Scottish government departments, Welsh Revenue Authority, NI Finance Department, Revenue Scotland and a plethora of local authorities who deal with locally raised taxes. On top of that, UK-central government funding is pooled before being divided up between the jurisdictions based on the so-called “Block Grant & Barnett Formula” method (see below), which is a way of dividing up the funding based on the headcount and the relative public funding need of each jurisdiction. This formula and method is also overseen by an overarching set of agreements between the UK and each jurisdiction as to how the money filters through.
As such, there is no doubt that for the ordinary man on the street to find out how it all works is a mammoth task – and without being particularly tax- or economics-savvy, it is extremely likely that they might get lost in the maze of opacity.
Scotland’s journey
Taking Scotland as an example, the Scotland Act 2012 simultaneously resulted in handing Scotland more financial powers and increased its funding volatility. After that, the Scotland Act 2016 introduced powers over rates and bands of a partially devolved tax (the non-savings/non-dividend part of Income Tax) and an ‘assigned’ tax – VAT. As such, it was expected that Scotland’s political decisions and economic performance would influence the amount raised; and the Scottish Government would bear any potential benefit or risk relating to those amounts, whilst conferring greater accountability towards its citizens on to the Scottish Parliament.
In 1998, when the Scottish Parliament was established, all revenues were raised by way of central UK taxation, with a proportion being permitted to be spent at local devolved level and this amount consisted of a “block grant”. The Barnett formula (‘Barnett’ being derived from Lord Barnett, the creator of the formula who served as Labour Chief Secretary to the Treasury under Prime Minister James Callaghan in 1978) is a Treasury convention with no legal status which determines how the block grant is adjusted each fiscal year. Put simply, whenever there is a change in public services funding or a departmental budget change takes place in England, ‘Barnett’ allocates a similar amount per capita to each devolved jurisdiction. Therefore, it is vital that accurate-as-possible figures are maintained in relation to the movement of citizens around the UK – for Scotland, it is estimated that around 80,000 people currently move between Scotland and England each year, for example. It is vital to Scotland that HMRC classifies people correctly as “Scottish taxpayers” so that the revenue raised under the banner of Scottish Income Tax (non-savings/non-dividend) can be allocated as fully as possible to the Scottish purse. The outturn figures of actual income tax receipts are on a two-year time lag – so yearly forecasting is estimated by the Scottish Fiscal Commission based on previous years’ outturn and current UK and Scottish Budget statements. The Scottish income tax revenue forecast for 2021-22 was £13.671m according to the Scottish Budget (2022/23).
The Fiscal Framework is the intergovernmental mechanism under which agreement is reached on how the block grant is configured to take account of devolved taxes and expenditure (e.g. certain social security payments). The Fiscal Framework Agreement signed between the UK and Scottish Governments (published 25 February 2016) is currently in the process of being reviewed and updated. It includes mechanisms to make ‘block grant adjustments’ to revise the amount of the block grant (usually termed “Barnett consequentials”), which are additional funding provisions under the UK-Scotland Fiscal Framework agreement whereby if a UK tax measure brings in more money this is proportionately passed on to Scotland under the ‘no detriment’ measure.
Current developments relating to Section 35 Scotland Act 1998
Something which has hit the headlines in recent days is the retained power by the UK Government to make orders under Section 35 of the Scotland Act 1998, which can prevent a Bill passed by the Scottish Parliament from receiving Royal Assent, even though the Bill might be within the legislative competence of the Scottish Parliament. This piece of legislation had almost been forgotten about because it had never been used – but in the last week we have seen it being used to prevent the Gender Recognition Reform (Scotland) Bill from passing into the statute books – something which will be likely to create a lot of debate and possibly even another trip to the Supreme Court.
Section 35 can be used where a Bill contains provisions:
(a) which the Secretary of State has reasonable grounds to believe would be incompatible with any international obligations or the interests of defence or national security, or
(b) which make modifications of the law as it applies to reserved matters and which the Secretary of State has reasonable grounds to believe would have an adverse effect on the operation of the law as it applies to reserved matters.
It is highly unlikely that such measures would ever be taken in respect of a tax bill, but the powers are nevertheless there. Unlikely, because for a national tax matter (such as income tax for example) to be devolved to the Scottish Government in the first place, the UK Government must agree to it. If the UK Government thought that the proposal fell under (b) above, it would likely stop there. Note however that the Scottish Government has the power to formulate legislation to raise local taxes without the UK Government’s consent – examples of this in recent times being the Workplace Parking Licence and the Transient Visitor Levy (a.k.a. tourist tax), which, if implemented, would both be administered and collected by local authorities at their discretion.
Key considerations
An important question which arises with devolved taxes generally is that of transparency and accountability. ICAS produced its unique ‘Public Finances Accountability Guide’ in April 2022 to how the UK and Scottish Governments are held to account for their decisions on public finances, where the money comes from, how it is spent and prioritised, and the results of audits of public accounts.
Clearly, for citizens to make educated decisions about everything from buying property, to working and paying income tax, to who to vote for in the next election, it is vital that they have clear and unequivocal factual information to rely upon which does not contain political spin. it is the responsibility of government at all levels to ensure that the public has access to this so that they can understand how it all works and are able to comply with the demands of the tax legislation and guidance.
Inevitably, devolution leads to added layers of complication and opacity, and the Scottish, Welsh, NI and UK Governments must prioritise the allocation of adequate resource to help the general public and businesses join the dots to see the full picture.
If you wish to contribute to the debate…why not join an ICAS tax committee and bring your expertise straight to the Tax team?
