UK: Scotland’s Future: Devolved Tax Powers

Last Updated: 17 October 2014
Article by Deloitte LLP

Most Read Contributor in UK, August 2017

In the run up to the referendum on Scottish independence, the three main UK political parties pledged to devolve further powers to Scotland.  While the detail behind these new powers is awaited, it is worth remembering that the Scotland Act 2012 provided more powers to the Scottish Parliament, including devolution of some taxes, which will come into force from as early as next year.

Haven't some taxes already been devolved to Scotland, and will there be any changes in the near future?

In April 2015 Scotland takes control of Stamp Duty Land Tax (SDLT) and Landfill Tax. SDLT is replaced by Land and Buildings Transactions Tax (LBTT) and is notable for two innovations: it will abandon the long-standing 'slab' basis for a progressive system and it will be collected by the Registers of Scotland under the supervision of Revenue Scotland. On Thursday 9 October , the Scottish Government announced the proposed rates for Land and Buildings Transaction Tax (LBTT). You can find more detail on this here.

A Landfill Tax specific to Scotland will also be effective from April 2015 and will be collected by the Scottish Environmental Protection Agency.

What about income tax?

From April 2016 there will be a Scottish rate of income tax (SRIT) levied on Scottish taxpayers. From then, each of the UK rates of income tax will be reduced by 10 pence and replaced by the SRIT. Strictly, this isn't a devolved tax although the revenue implications are similar; the SRIT does not allow the Scottish government to choose the thresholds, or to impose different tax rates at different levels. If the SRIT is set at, say 9 pence, the rates of tax in Scotland would become 19%/39%/44%.

The SRIT applies only to income from employment, self-employment and pensions - investment income remains subject to the general UK rates. Further, Westminster will continue to set the personal allowance and define the amount on which tax is charged. The tax will continue to be collected by HMRC, which will need to notify employers and annuity payers who are liable to the SRIT.

A Scottish taxpayer is defined as an individual who is resident in the UK and has his or her main residence in Scotland. For the majority, this will be easy to determine. However, those who move between Scotland and other parts of the UK may need to wait until the end of the tax year before their status can be determined.

What else are the main political parties proposing?

The Scottish Labour party, Conservatives and LibDems all formed commissions to consider taxation in the run up to the referendum. They all recommended that Scotland should be given greater control over the taxes that finance Scottish spending, with the minimum being control over taxes that raise about 40% of devolved spending. The three main taxes in the UK are income tax, national insurance and VAT. Of these, there is agreement to devolve additional powers over income tax.

The Conservatives and LibDems would devolve control over both rates and thresholds of income tax in Scotland. Labour proposes that Westminster should retain control over thresholds, but that Scotland's power to vary the UK income tax rate be increased from 10 pence to 15 pence and that Scotland be granted the ability to increase (but not decrease) the higher rate and additional rate.

All three parties would leave control over the amount on which tax is charged and the personal allowance with Westminster, and would also leave Westminster to set the tax rates for investment income – as with the current SRIT. The reason for leaving tax on investment income with Westminster is presumably the wish to retain a single market for financial products in the UK and to avoid the huge complexity that would be introduced for banks and other deposit takers and for HMRC were the basic rate to differ.

Which taxes are unlikely to be devolved?

It is not possible to pass control of VAT to Scotland, as it is not possible to have a different rate of VAT within a country under EU law.  Nonetheless, some of the parties favour assigning VAT receipts from Scotland to the Scottish Parliament. How this would be done has not been spelt out.  

National insurance is perceived as too linked to the welfare system to be capable of being passed to Scotland (or indeed the other countries within the UK). There seems to be widespread acceptance that the UK needs to keep a single welfare system, which requires the support of national insurance. Perhaps if one day national insurance contribution and tax are merged that might change.

None of the political parties favour passing control over corporation tax to Scotland, as allowing different rates could encourage tax-motivated transactions, creating huge complexity and no doubt reducing the size of the overall UK cake.

It will be worth keeping an eye on the proposals to devolve corporation tax to the Northern Ireland Assembly (NIA).  An announcement on this was deferred until after the referendum.  A decision to devolve corporation tax powers to the NIA would likely pave the way for the Scottish Parliament to request similar powers.

Next steps

Translating the proposals from each of the parties into an agreed set of proposals will require more detail to be produced.  The timetable of draft clauses by January 2015 is very ambitious and much quicker than the UK has experienced to date with devolved powers.  Business will want to keep a close eye on the proposals as they are developed.  We will be keeping our clients and contacts up to date with the latest developments as they become clearer. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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