From financial year 2020 to 2021, a further 15% of Scotland's budget will be based on VAT revenues raised in Scotland – although the power to set VAT rates will remain reserved to the UK Government.
The Scotland Act 2016 legislated to assign half of the VAT receipts raised in Scotland (10p of the standard rate and 2.5p of the reduced rate) to the Scottish Government's budget.
Value Added Tax (VAT) is a consumption tax charged on goods and services; goods include items such as cars and clothing, whereas services include things like car repairs and hairdressing.
It is an indirect tax, meaning it is collected by third parties on behalf of the government. Ultimately the final consumer pays the VAT, but the system is designed so that businesses collect and account for the tax.
Developing the VAT assignment
VAT is collected by HMRC and it is not possible to extract Scottish VAT receipts from the current VAT collection process.
All VAT returns are on a UK basis, and we agreed with the Government that requiring businesses to report their VAT separately for Scotland and the rest of the UK would impose an additional administrative cost. Instead, we agreed that VAT raised in Scotland will be estimated.
In the Fiscal Framework we agreed with the UK Government to jointly develop and agree the full details of the VAT assignment methodology. Details on the model are available in the paper VAT Assignment: calculating the VAT raised in Scotland.