Written evidence submitted by the Scottish Technical Committee and the Welsh Technical Committee

of the Chartered Institute of Taxation

1          

Introduction

1.1    

The Scottish Technical Committee and the Welsh Technical Committee of the Chartered Institute of Taxation (CIOT) welcome the opportunity to respond to the Treasury Committee’s inquiry ‘Tax after coronavirus’.

1.2    

We endorse the main submission made by the CIOT. We have decided to make a separate submission to highlight the importance of the UK, Scottish, Welsh and Northern Irish Governments working together to ensure that any reforms to the UK tax system take account of the interactions between devolved and reserved taxes.

1.3    

As an educational charity, our primary purpose is to promote education in taxation. One of the key aims of the CIOT is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. Our comments and recommendations on tax issues are made solely in order to achieve this aim; we are a non-party-political organisation.

1.4    

Our stated objectives  for the tax system include:

  • A legislative process which translates policy intentions into statute accurately and effectively, without unintended consequences.
  • Greater simplicity and clarity, so people can understand how much tax they should be paying and why.
  • Greater certainty, so businesses and individuals can plan ahead with confidence.
  • A fair balance between the powers of tax collectors and the rights of taxpayers (both represented and unrepresented).
  • Responsive and competent tax administration, with a minimum of bureaucracy.

1.5    

Much of the CIOT’s technical work is carried out by the Technical Policy and Oversight Committee and its technical committees.[1] The Scottish Technical Committee carries out technical work covering all aspects of Scottish taxation and tax powers devolved to Scotland. The Welsh Technical Committee carries out technical work covering all aspects of Welsh taxation and tax powers devolved to Wales. The two committees work to further the CIOT’s objectives for a tax system in the devolved context and in terms of the interactions between devolved and reserved powers.

 

2          

Executive summary

2.1    

The majority of the issues that we describe in this response are not exclusive to the challenges of the coronavirus pandemic. However they highlight that any future reform of the UK tax system post COVID-19 must take into account the practical consequences of tax devolution and ensure that the devolved administrations are consulted on in any subsequent proposals for change. Failure to do so could result in an increasingly fragmented and disjointed tax regime, which may threaten the integrity and sustainability of the system as a whole with negative consequences for all the tax authorities.

2.2    

The past decade has seen an increase in devolution of powers to the devolved nations; this trend seems likely to continue, based on current developments. Our experience of tax devolution has shown that one of its accepted consequences, particularly in the case of partially devolved income tax, is the creation of a more complicated tax regime for those taxpayers that are directly impacted by these changes and indeed for the tax authorities tasked with administering those tax powers. It is important therefore that there is certainty and clarity for affected taxpayers in both the devolved and reserved tax systems and the way in which they interact.

2.3    

The coronavirus pandemic has perhaps highlighted the fact that in order to ensure the tax system and devolution settlement are as effective as they can be, there needs to be proactive co-operation between the Scottish, Welsh, Northern Irish and UK Governments, not only at civil servant level but at ministerial level. In particular, it would be sensible, and improve the policy-making process, for the devolved governments to receive forewarning of changes (through confidential channels) to predecessor taxes. Since implementing tax changes is a difficult process, such proactive co-operation is necessary in order to enable the devolved governments to run their tax systems effectively, in the spirit of devolution and in the interests of the wider UK economy.

2.4    

It is also important that whatever reforms are made have buy-in from stakeholders, including tax authorities, agents, businesses and the wider taxpaying general public. Improving the general public’s awareness and understanding of tax powers, and their devolution, should in turn help to improve the accountability and credibility of the tax system, and therefore taxpayer buy-in.

 

3          

Consideration of devolution

3.1    

It is important that any examination of the tax system in the UK takes into account the fact that parts of the UK tax system are devolved to the UK’s constituent nations and local authorities. This matters because the manner in which devolved and reserved taxes interact with one another has a bearing on the overall efficiency and performance of the UK tax regime. The challenges of managing and responding to anomalies arising from the interactions between devolved and reserved taxes – and the relationships between ministers and officials in the UK and devolved governments – are ones that will need to be managed when considering future reforms to the UK tax system. It is also necessary to consider how reforms affect the underlying tax base.

3.2    

In the spirit of devolution, it should not be the case that once a power has been devolved, the UK Government and Parliament simply forget about it or its interactions with the aspects that remain under their control.

3.3    

The general direction of travel over the last decade has been in favour of increased devolution to the UK’s constituent nations. This has been evidenced in the devolution of property and landfill taxes and in the responsibility for setting certain bands and/or rates of income tax being devolved to the Scottish and Welsh Parliaments. There has not been any significant tax devolution to Northern Ireland to date, although the possibility has been explored.

3.4    

At the time of writing there are also taxes that had been due to be devolved to the Scottish Parliament over the course of the 2016-21 parliamentary term as a result of the Smith Commission agreement of 2014,[2] but which have been delayed because of problems associated with their implementation and a lack of agreement between the UK and Scottish Governments.

3.5    

The devolved Scottish replacement for Air Passenger Duty, Air Departure Tax, is currently on hold due to issues arising from EU State Aid regulations. In addition, the assignment of a proportion of VAT revenues to the Scottish Budget, which was scheduled to take effect from April 2020, has also been paused due to disagreements between the UK and Scottish Governments on the methodology used to calculate and assign these.

3.6    

Consideration is also being given to the potential for new taxes to be created and this represents a further example of the trend towards increased devolution. In Scotland, this debate to date has centred on the creation of new local taxes or levies such as the Workplace Parking Levy and a proposed Tourist Tax/Transient Visitor Levy. In order to implement these taxes, no further powers are required from the UK Parliament. The Welsh Government is investigating four new tax ideas: a Vacant Land Tax, a Disposable Plastics Tax, a Tourism Tax, and taxation as a way of funding social care. The Wales Act 2014 enables the creation of new devolved taxes by way of Her Majesty making an Order in Council. A recommendation to Her Majesty to make an Order in Council cannot be made until a draft of the statutory instrument containing the Order has been laid before and approved by each of the Houses of Parliament and the Welsh Parliament. Vacant Land Tax is being used to test the intergovernmental mechanism for introducing new taxes, while work continues on the other three ideas.

3.7    

We do not offer commentary on these developments, except to say that they highlight a continuing trend towards increased devolution and differences in the tax regimes of the UK nations.

3.8    

It is also worth considering the fact that the upcoming elections (May 2021) to the Scottish Parliament and Welsh Parliament, the manifesto commitments of the party or parties that form the subsequent administrations and the policy response of the UK Government to this will have a bearing on if and how this trend continues to develop.

3.9    

Our experience of tax devolution has shown that one of its accepted consequences is the creation of a more complicated tax regime for those taxpayers that are directly impacted by these changes. This is particularly so in the case of income tax, which is partially devolved to Scotland and Wales. The coronavirus pandemic and the support schemes put in place by the UK Government in response have served to highlight some of the areas where there are complex interactions between devolved and reserved aspects of the UK tax regime.

3.10            

We set out a few examples of these in the sections below. The examples relate to Scotland where rates and bands differ from England and Northern Ireland whereas the devolved Welsh rates of income tax have been set such that the tax paid by Welsh taxpayers is the same as that paid by taxpayers in England and Northern Ireland. The Welsh Government has committed to not increasing income tax rates during this Welsh Parliament term. Accordingly, Welsh taxpayers are currently taxed at the same rates and bands as in England and Northern Ireland although this may change in the future.

 

4          

National Insurance and income tax on earnings

4.1    

The first example that we would like to draw to the committee’s attention is one that is mainly driven by employer’s National Insurance contributions in the UK context, but that is also linked with the devolved tax regime in Scotland.

4.2    

Currently, in Scotland, three people carrying out essentially the same type of work, can be subject to tax in three different ways, if one is an employee, another is self-employed (owner of an unincorporated business) and the other is the sole employee-director of a one-man limited company.[3] The employee and self-employed person are both taxed according to Scottish rates and bands of income tax, but pay different types of UK National Insurance contributions; the person operating through a limited company is taxed according to UK rates and bands on any dividends or interest they take from the company but according to Scottish rates and bands on any salary, pension or rent. The company also pays employer UK National Insurance contributions and UK corporation tax.

4.3    

A further issue is that while for UK income taxpayers the income tax higher rate threshold and the upper earnings limit for National Insurance are aligned,[4] this is not the case for Scottish income taxpayers, who face combined effective marginal rates of 53% or 50% depending on whether they are employed or self-employed on income that falls between the Scottish higher rate threshold[5] and the upper earnings limit for National Insurance.

4.4    

At a UK level, one suggestion for simplification that is often put forward is that income tax and National Insurance should be merged. But this fails to take into account the fact that Wales and Scotland have powers in relation to income tax on non-savings and non-dividend income (that is the type of income that is often subject to National Insurance contributions), whereas National Insurance is wholly reserved.

 

5          

Pension contributions

5.1    

In respect of tax reliefs, a complex area is tax relief on pension contributions. There are some UK-wide issues, including the difference in relief obtained or not obtained by those on low incomes depending on whether the pension scheme is a relief at source scheme or a net pay arrangement.[6] In terms of devolved income tax powers, while those in net pay arrangements (other than very low earners) receive the correct tax relief automatically through the payroll, those in relief at source schemes receive tax relief at 20% automatically, regardless of whether their marginal rate is 19%, 20% or 21%. While 19% (and 0%) taxpayers benefit from extra tax relief (as is the case in the rest of the UK for 0% taxpayers), which is not clawed back, 21%, 41% and 46% taxpayers in Scotland have to claim the additional tax relief due. While this is to be expected in respect of 41% and 46% taxpayers, this is essentially a new obligation for 21% taxpayers and one which is not well-publicised.

5.2    

Due to a lack of publicity and taxpayer awareness, and the fact that many 21% taxpayers will not be under an obligation to complete an annual Self-Assessment tax return, we are concerned that intermediate rate taxpayers in Scotland are missing out on tax relief to which they are entitled.

5.3    

Indeed, it is our understanding that when the Scottish rate of income tax was introduced with effect from 6 April 2016,[7] the intention was that there would be a two-year transition period, after the completion of which pension providers would be expected to automatically provide relief at source at the correct Scottish rate. However, when the Scottish Parliament voted to introduce new rates and bands of income tax from April 2018 (a five band structure), it was decided that the practice of pension providers claiming 20% relief at source for all Scottish taxpayers should continue for the time being, regardless of whether their marginal rate was 19%, 20% or 21%.

5.4    

Moreover, when a 21% taxpayer obtains the extra relief, this is in the form of a refund rather than an addition to their pension fund, which is arguably where the 1% should go for intermediate rate taxpayers. At present, this situation is unique to Scottish taxpayers, but were the Welsh Parliament to diverge its income tax regime from England, these issues may also be experienced by Welsh taxpayers.

 

6          

Governmental relations

6.1    

In terms of tax reform and consultation, it is important that the UK Government actively seeks input from the devolved governments and the devolved tax authorities when considering major changes that may have knock on effects for the devolved tax regimes. The coronavirus pandemic has perhaps highlighted the fact that in order to ensure the tax system and devolution settlement are as effective as they can be, there needs to be proactive co-operation between the Scottish, Welsh, Northern Irish and UK Governments, not only at civil servant level but at ministerial level.

6.2    

In particular, it would be sensible, and improve the policy-making process, for the devolved governments to receive forewarning of changes (through confidential channels) to predecessor taxes. This will ensure they can understand the effects of UK changes on block grant adjustments and have time to consider the implications for their tax policies, revenues and broader policies. Currently the devolved governments only have knowledge of the content of the UK Budget, other fiscal announcements and Finance Bill during the Chancellor’s speech – at the same time as the general public and a limited window in which to respond via their own budget process. Implementing a tax change is a difficult process. It is necessary to consider and model alternatives and their likely consequences. Guidance for taxpayers must be drafted. The tax authorities have to make changes to their operating systems. Proactive co-operation is necessary therefore in order to enable the devolved governments to run their tax systems effectively, in the spirit of devolution and in the interests of the wider UK economy.

6.3    

As an example, due to the coronavirus pandemic, the UK Government announced on 8 July 2020 that reduced rates of Stamp Duty Land Tax would apply to purchases of residential properties taking place from 8 July 2020 to 31 March 2021. The measure therefore took immediate effect. It is our understanding that although tax on land and property transactions has been devolved to Scotland and Wales (Land and Buildings Transaction Tax and Land Transaction Tax respectively) and there would be a consequent effect on the block grant adjustments, neither of the devolved governments in question received prior warning of this announcement. The Scottish Government has since announced a similar measure for Land and Buildings Transaction Tax that took effect from 15 July 2020. Likewise the Welsh Government made an announcement to bring in a measure for Land Transaction Tax, with effect from 27 July 2020. Because the Scottish Parliament and Welsh Parliament lack the ability to backdate changes to tax legislation with ease it was not a simple matter for either administration to bring in a measure that would also take effect from 8 July 2020.

6.4    

To expand, in Scotland, on 9 July, the Scottish Government’s policy response to this announcement was to increase the nil rate band threshold of Land and Buildings Transaction Tax for residential purchases from £145,000 to £250,000. However in doing so, ministers were unable to give the change immediate effect. This is because the Scottish Government lacks the ability to provisionally collect taxes pending parliamentary approval. While a solution was subsequently found by making a regulation under the provisional affirmative procedure the following week (15 July), this period of uncertainty prompted concerns from the CIOT and others that delays to tax changes could have a behavioural impact (in this case, buyers delaying transactions).[8]

6.5    

Civil servants across the UK are bound by the same rules, so it would appear that, especially when there is an implication for the block grant adjustments, it would be appropriate for there to be advance warning of such announcements in order that there are no detrimental effects on the populations in the devolved nations and the devolved governments can respond in line with their tax principles.

6.6    

Furthermore, the lack of co-ordination of timing in relation to significant fiscal events such as the Budget can create difficulties for the devolved nations. The delay of the UK Budget to 11 March 2020 (from autumn 2019) caused problems for the Scottish Government and Parliament. Ideally, the Scottish Government would publish its own draft budget at least three weeks after the UK Budget. This allows it to incorporate the block grant implications of UK tax and spending decisions into its own draft budget. However, unlike the UK Parliament, the Scottish Parliament must pass its Budget Bill and Scottish Rate Resolution prior to the start of the new tax year.[9] For 2020-21, the Scottish Government was placed in a difficult position of having to choose between allowing adequate time for parliamentary scrutiny and voting in respect of the necessary legislation and having sight of the UK Budget. In the end, to ensure the legislation was passed in time and also to ensure local council funding was determined in time for setting their budgets, the Scottish Government published its draft budget for 2020-21 on 6 February 2020, over a month before the UK Budget.

6.7    

The UK March 2020 Budget was also after the publication of the Welsh Government’s final budget on 25 February making it difficult plan and respond quickly to any UK Government changes.

 

7          

Stakeholders and public awareness

7.1    

It is also important that whatever reforms are made have buy-in from stakeholders, including tax authorities, agents, businesses and the wider taxpaying general public.

7.2    

For the last two years (2018 and 2019), we have undertaken a poll of the Scottish public and found a decline in awareness and understanding of the devolved tax regime.[10] In our 2019 survey, for example, 86 per cent of respondents said they need better information about how taxes are decided in Scotland. The poll also identified that the number of people who could correctly identify that income tax was a tax shared between Holyrood and Westminster fell from 34 per cent in 2018 to 26 per cent in 2019. This problem is not unique to Scotland. Last year, a Deloitte survey found that a majority of the UK do not understand their personal tax affairs.[11] We understand that the Scottish Government has been carrying out work to improve communications about tax with the general public; we have already emphasised to the Scottish Government and Parliament that this needs to be built on and should consider interactions between the Scottish and the UK powers and responsibilities.[12] We think this is something that should also be carried out at a UK level.

7.3    

Improving the general public’s awareness and understanding of tax powers, and their devolution, should in turn help to improve the accountability and credibility of the tax system, and therefore taxpayer buy-in.[13] In Wales, key to acceptance of Welsh taxpayer status and any future divergence of rates will, we think, be based on how well the changes are publicised and the accessibility of clear guidance.

 

8          

Acknowledgement of submission

8.1    

We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the Chartered Institute of Taxation is included in the List of Respondents when any outcome of the consultation is published.

 

9          

The Chartered Institute of Taxation

9.1    

The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries.  The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 19,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification. 

 

September 2020             

 

              7

 


[1] https://www.tax.org.uk/policy-technical/technical-committee-who-we-are-and-what-we-do

[2] https://www.parliament.uk/smith-commission-inquiry

[3] There is a similar, but slightly less complex, issue if one considers purely UK taxpayers, whereby the taxpayers pay different levels of National Insurance contributions. But they are all taxed entirely according to UK rates and bands.

[4] The UK higher rate threshold for income tax is £50,000 as is the upper earnings limit for National Insurance.

[5] The Scottish higher rate threshold for income tax is £43,430.

[6] The CIOT’s Low Incomes Tax Reform Group has drawn attention to this issue: https://www.litrg.org.uk/latest-news/submissions/200204-budget-representation-2020-net-pay-action-group

[7] The Scottish rate of income tax (power to set one rate) was in place for only one tax year – 2016/17; with effect from April 2017 the Scottish income tax (power to set rates and bands) came into force.

[8] https://www.tax.org.uk/media-centre/press-releases/chartered-institute-taxation-comment-land-and-buildings-transaction-tax

[9] We acknowledge that this is in part a Scottish parliamentary process matter; we note that a review to allow for exceptional circumstances would be helpful.

[10] https://www.tax.org.uk/media-centre/press-releases/press-release-new-poll-discovers-more-four-fifths-scots-lack and https://www.tax.org.uk/media-centre/press-releases/press-release-poll-scots-still-failing-understand-devolved-taxes-support

[11] https://www2.deloitte.com/uk/en/pages/press-releases/articles/the-tax-education-gap-majority-of-the-uk-dont-understand-personal-tax.html

[12] https://www.tax.org.uk/policy-technical/submissions/pre-budget-scrutiny-2021-22

[13] https://www2.deloitte.com/uk/en/pages/press-releases/articles/the-tax-education-gap-majority-of-the-uk-dont-understand-personal-tax.html