In a report issued today, the Institute of Chartered Accountants of Scotland (ICAS) has said the Scottish Government needs to get to grips quickly with its tax system for its devolved tax powers.
ICAS further warns that if Scotland
becomes independent, designing a tax system for Scotland will potentially be
“massive, complex and expensive”.
In its paper ‘Scotland’s Tax Future:
The Practicalities of Tax Devolution’, ICAS advises that taxpayer profiling
will be a vital start to understanding how any changes in allowances, tax
structures, reliefs or rates will impact on total tax paid.
The Scottish Government under Revenue
Scotland needs to create a system that provides an easy taxpayer experience, to
encourage taxpayer compliance and the generation of revenues; particularly as
the tax avoidance issue gains momentum across the UK.
Elspeth Orcharton, director of
corporate and international tax at ICAS, said: “Any implementation of tax
devolution requires data on not just current tax revenues, but also on taxpayer
profile and behaviours, to know what tax revenues are actually generated in
Scotland and on what. This is the data foundation for tax system design,
which we would expect Revenue Scotland to adopt. This is required to
inform the compliance and enforcement regime and the design of a penalty
system, along with projections of future tax income generated for the Scottish
Irrespective of independence, under
the Scotland Act 2012, the Scottish Government has the power to set a new
Scottish rate of income tax, devolution of stamp duty land tax, devolution of
landfill tax and the power to create new taxes.
The latest personal tax statistics
suggest that the top 1 per cent of Scots taxpayers paid income tax of over
£2.1bn in 2009/10. When compared to the estimated total corporation tax
collection for Scotland for the same year of £2.7bn and council tax of £1.96bn,
ICAS recommends that resources should be focused on both collecting and
celebrating their contribution, which will also bring in to real focus the
definition of who is a Scottish taxpayer.
David Gauke recently announced the tax
raising successes of Connect, a data mining approach through which HMRC can
link a wealth of commercial and tax information to form a complete financial
picture of a taxpayer’s position, which it can use to ensure the completeness
of that taxpayers’ tax returns and payment of all taxes due.
ICAS questions whether HMRC will have
access to the same tax data from Revenue Scotland in relation to disposals of
land under the proposed land and buildings transaction tax regime, which will be the first tax that the Scottish Government
gains control of. Without this tax data there is the consideration
that Scotland, like the Channel Islands, could be a place for sale proceeds to
hide from HMRC. If future tax powers are devolved, Revenue
Scotland may also need tax data from HMRC, for its tax collection to be as
efficient as possible.
HMRC estimates there are just over
2.6m income taxpayers in Scotland, out of a Scottish population of around
6m. The balance are likely to be only temporarily not in current contact
with HMRC rather than permanently excluded from tax provisions altogether.
“This raises some serious points of
policy and principle to be determined by the Scottish Parliament over the next
year in relation to information sharing powers and the nature of international
tax cooperation”, said Orcharton.
A key practical challenge highlighted
by recent tax avoidance cases, is how any disagreement between taxpayers and Revenue
Scotland might be resolved. “Core taxes management legislation is due to be consulted
on in 2013”, said Orcharton. “This timescale brings to sharp focus the
fact that this is not a theoretical or abstract debate, but a real one.
“The volume of tax disputes between
taxpayers and the tax administration will depend on the quality and clarity of
the tax legislation enacted, the organisational culture established in Revenue
Scotland, and its clear accountability. Decisions on tax matters
are as important as other areas of the justice system, and processes and
provisions need to be written into the legislation.”
ICAS highlights that frustrations
around time wasting and delays in dispute processes can be used as a reason by
tax authorities and taxpayers to encourage a settlement, particularly in
complex avoidance cases.
The most complex issues would arise
around any future independence. Tax deferrals - legitimate reliefs
that delay the payment of tax while gains or proceeds from prior transactions
are invested into “good things”, including business start-ups and capital
equipment – are a sticking point. ICAS warns that Westminster might not
want to give their control up over their entitlement to this tax, so either
needs to find, with Holyrood, a mechanism for tracking delayed liabilities so
that they are paid back to the UK, or levy the tax as an exit tax.
However, an exit tax isn’t currently possible between European Union states, so
a resolution of Scotland’s position in the European Union would be a key factor
“Scottish taxpayers should expect to
pay the cost of changeover, although in the absence of any independence
settlement, estimate of tax revenue needed to be raised, tax system shape, or
taxpayer base, it is impossible at this stage to know what the tax position of
any Scot would be”, said Orcharton. “The extent of work needed to achieve
changeover will be massive, the taxpayer’s role will also be to pay for it.”
Scotland's Tax Future: The Practicalities of Tax Devolution