Budget 2021/22: Supporting the COVID-19 Recovery - Analysis of Consultation Responses

The ‘Budget 2021-22: Supporting the COVID-19 Recovery – Scotland’s taxes and Fiscal Framework’ consultation, sought views on the role of our devolved taxes and the Fiscal Framework in the COVID-19 economic recovery and to inform decisions taken at the Scottish Budget 2021-22.

3. Tax Policy

3.1 How should the Scottish Government use its devolved and local tax powers to support the COVID-19 recovery as part of Budget 2021-22?

3.1.1 Devolved and Local Taxes

Respondents provided a wide range of perspectives on how the Scottish Government should use its devolved and local tax powers to support the COVID-19 recovery as part of Budget 2021-22.

A majority of respondents highlighted the disproportionate impact of COVID-19 on specific business sectors and/or low earners. Linked to this, a number of respondents commented that more focus was needed on the role of tax policy in tackling inequality. For example, the Scottish Human Rights Commission commented that:

“truly building back better means that tackling Scotland’s pre-existing inequalities must be at the heart of how we move forward as a society.”

Responses from individuals conveyed a diverse range of viewpoints on tax powers, including calls for more progressive taxation, the further devolution of tax powers to local government, the introduction of a universal basic income and lowering taxes to stimulate the economic recovery.

Furthermore, although the consultation did not set out to consider tax avoidance, a number of individuals (7) highlighted the need to minimise tax avoidance as a priority, and felt that additional revenues via this route could support the COVID-19 recovery. This feedback aligns with wider research on public attitudes to tax, where there is evidence that corporate tax avoidance is perceived to be widespread, and that the public are averse to taxes on individuals being raised when they perceive that additional revenue could be raised by tackling tax avoidance[5].

Organisational responses were more focused on the need for tax policy to deliver stability, and recommended measures that would protect and stimulate the economy. Furthermore, one respondent (the Institute of Chartered Accountants of Scotland) underlined that the recovery from COVID-19 is subject to considerable uncertainties, and that tax policy is difficult to manage in such circumstances, as the tax base is subject to volatility and uncertainties commensurate with the wider economy.

Devolved Taxes

Income Tax

A mix of views were expressed on the role of Income Tax policy, with business organisations tending to focus on the need for policy stability, and individuals and third sector respondents communicating a broader range of perspectives on the need to both lower and raise Income Tax rates.

Respondents, individuals and organisations, highlighted the interactions between the Scottish and wider UK tax systems, and some cautioned against any further divergence from the UK’s Income Tax rates. Indeed, a handful of respondents commented on alternative approaches to raise additional revenue. For example, Deloitte noted that:

“The Scottish Government may have greater success increasing tax revenues to support the COVID-19 recovery by widening the tax base rather than simply increasing the rates applied to the existing tax base.”

Furthermore, some respondents acknowledged that COVID-19 would understandably lead to calls for a more progressive Income Tax system with increased rates on higher earners, however, the Institute of Chartered Accountants of Scotland cautioned that:

“…there are tensions and challenges arising from the size, shape and potential mobility of the Scottish Income Tax base, which need to be factored in when developing the Scottish Budget Income Tax rates for 2021/22.”

One particular factor mentioned by two organisational respondents was the rise of remote working as a result of COVID-19. It was highlighted that this trend may provide an effective way of broadening Scotland’s tax base if newly remote workers were to relocate to Scotland. A similar share of respondents gave the counter argument that this represented an increased risk to the Scottish Income Tax base, observing that newly remote workers would, in theory, have an increased ability to move between tax jurisdictions.

More broadly, two organisations commented that Income Tax is the Scottish Government’s key tax lever, and that it is already a more progressive regime than the UK system. Therefore, if changes were made to Scottish Income Tax, respondents, in particular tax professional bodies, noted that it would be important that the interactions with the reserved aspects of Income Tax were carefully examined.

Fully Devolved Taxes

Consultation respondents expressed a range of views on Land and Buildings Transaction Tax (LBTT), and more widely on the role of land and property taxation.

Commentary on LBTT was wide ranging, and included submissions calling for greater alignment with wider UK policy, increased taxes on the most expensive properties and discussion on its future role in supporting a green transition to more energy efficient homes. On the whole, respondents from the property industry welcomed the temporary change to the residential nil rate band, highlighting the negative impact of COVID-19 restrictions on the residential property market.

However, not all respondents were supportive of the temporary nil rate band change, with Citizens Advice Scotland opposing any further extension, and urging any further changes to LBTT, and the Additional Dwellings Supplement, to be more focused on raising further revenue to support the Scottish Government’s strategic priorities.

Respondents also commented on broader land and property taxation issues. A number of organisations (e.g. ESPC, Scottish Wildlife Trust, National Trust for Scotland, Scottish Land Commission) felt that tax and fiscal policy development in this space should be mindful of the broader landscape in relation to both land ownership and housing policy.

Two business organisations also commented on Air Departure Tax (ADT), in particular, noting that once the devolved tax is introduced[6], they would support the use of ADT to boost international travel and support the economic recovery.

Local Taxes

Non-Domestic Rates

A majority of organisational respondents called for the continuation of support for those businesses most adversely impacted by COVID-19. There was also a range of perspectives on the need for further action in relation to Non-Domestic Rates (NDR), for example:

  • UK Hospitality called for a fundamental review of NDR which should include the conclusion of the review of the Small Business Bonus Scheme.
  • The Scottish Property Federation highlighted the empty property rates faced by commercial landlords; and called for Government to review NDR.
  • Homes for Scotland has called for the domestic and commercial rates currently charged on show homes on developments of 25 or less homes to be waived.
  • Reform Scotland called for the devolution of NDR to local authorities in full.
  • Union of Shop, Distributive and Allied Workers (USDAW) encouraged a permanent reduction in non-domestic rates for all retailers; and protection against the ‘reverse cliff edge’ when 100% Retail, Hospitality and Leisure relief ends at the end of 2020-21.
  • Alcohol Focus Scotland called for a public health supplement to non-domestic (business) rates, applied to retailers licensed to sell alcohol and linked to volume of sales, and the creation of a new local public health tax that applies a levy to the sale of alcohol in the off-trade.

Council Tax

The consultation received a large number of responses (14), from both individuals and organisations, which commented on Council Tax and local taxation. These responses focused on the further devolution of tax powers to Local Authorities, and called for a fairer and more progressive way to collect local revenues.

A significant number of these responses referenced Council Tax, calling for a reformed system which was more progressive and tailored to local circumstances. In general, although there was broader agreement for those who commented on Council Tax that reform was required, there was limited commentary on what a reformed or renewed form of Council Tax would actually look like.

3.1.2 Overarching Priorities

In addition to feedback on specific tax powers, some respondents also commented on overarching priorities.

Business Support

A number of organisations (9) commented that tax policy should be aiming to provide certainty and stability as businesses deal with the consequences of COVID-19. For some of these respondents, business growth and consumer confidence were seen as key considerations, and there were several calls for Scottish Government action which would increase consumer demand, and protect and generate jobs. Several respondents also called for the use of fiscal powers to support those sectors hit hardest by COVID-19 (e.g. tourism, hospitality, culture sector).

In addition, three respondents observed that if existing tax powers were used to support the recovery, any policy choices should not work against other aims of the Scottish Government, for example, in relation to skills and retraining programmes, and the climate crisis.

Green Recovery

There was agreement across a handful of organisational and individual responses that the COVID-19 recovery should support and incentivise businesses to build back greener. For example, the Scottish Wildlife Trust commented:

“Budget 2021-22 must pave the way for the Scottish Government to deliver on its economic priorities for a green and transformative recovery.”

Views were expressed on the need to prioritise and fund green infrastructure, with, for example, the National Trust for Scotland noting that the Scottish Budget represents an opportunity to support investment in natural capital to the same extent as other forms of capital. When discussing a green recovery, several respondents also called for improvements to digital connectivity, especially in rural areas.

3.1.3 Approach to Tax Policy

Scottish Government Policy Making

Tax professional bodies (3) commented on the need to continue the work to develop the Scottish Government’s tax policy and legislative processes, highlighting that such changes would have broader benefits. For example, the Chartered Institute of Taxation noted that:

“If anything, we think the pandemic has highlighted the importance of expediting the changes that have already been explored in the Scottish Government policy framework consultation[7] or are in the process of being considered by the Devolved Taxes Legislative Working Group[8]. The implementation of the changes to the tax policy and legislative processes should also assist in improving engagement, scrutiny and flexibility in relation to tax policy-making and legislative activity.”

Four respondents also highlighted the importance of proactive and open consultation on any changes to devolved and local tax powers. The Scottish Human Rights Commission suggested that the Scottish Government should take a human rights-based approach to taxation which puts people’s rights at the very centre of policies and practices. They emphasised that “meaningful participation, and not only information, must be implemented throughout the policy cycle”.

Scottish & UK Tax System Interactions

The interactions between Scottish and UK tax powers was highlighted by a number of respondents (11), with some stressing the importance of an aligned and coordinated UK-wide fiscal response to COVID-19. As an illustration of the somewhat complex landscape of devolved and reserved tax powers, a significant minority of individual respondents called for Scottish Government action on reserved tax matters.

The Low Income Tax Reform Group commented that close attention should be paid to the interactions between devolved and reserved parts of the tax system, and that failure to do this could result in well-intentioned policy not achieving its desired result. A number of other respondents, including the Institute of Chartered Accountants of Scotland and Deloitte, also proposed that any changes to devolved and local tax powers should form part of a long-term tax policy strategy, one which provides clarity and certainty on the Scottish Government’s objectives.

3.2 Are there any further tax powers that should be devolved to the Scottish Parliament to facilitate our ability to support the economic recovery?

A wide range of viewpoints were highlighted in response to this question, with respondents focusing on support for further devolution, tax policy approach and specific further powers (e.g. VAT, Corporation Tax, National Insurance and wealth taxes).

3.2.1 Support for further devolution

Support for further devolution of tax powers was mixed, though a higher proportion of respondents felt that more powers should be devolved. Ten respondents called for full fiscal devolution, or full independence from the United Kingdom, while five noted that powers should be handed back to the UK Government. A number of respondents (13) also noted that they believed that the current powers at the disposal of the Scottish Parliament were sufficient, however, some in this category felt that these powers needed refinement to operate more effectively.

Among those respondents who raised concerns over further powers, partial devolution was cited as a source of additional complexity in the tax system, using the interaction between National Insurance and Income Tax as an example, and calling for the full set of policy levers to be devolved in future. In addition, a view was expressed that the partial devolution of tax powers has led to the Scottish Government being overly reliant on Income Tax. For example, Reform Scotland commented:

“According to GERS 19/20, NSND Income Tax accounted for 66% of Scotland’s devolved tax revenue. To put that in context, for the UK as a whole, all of Income Tax accounts for only 24% of tax revenue income. This leaves Holyrood far too vulnerable to fluctuations in this one tax, and without other fiscal levers to offset any variations.”

In contrast, a minority of respondents thought that the challenges in the devolution of some taxes, for example, the deferred introduction of Air Departure Tax due to State Aid issues, suggested that timescales should be considered alongside the potential benefit of increased policy control. A similar point about potential complexity was made about the deferral of assignment of VAT revenues.

3.2.2 Tax policy approach

A number of organisational respondents did not offer views on whether specific powers should be devolved, however noted that a “principles based approach” should underpin any further devolution. For example, when considering which further powers to seek, the Scottish Government should prioritise purpose, transparency and administration.

In addition, while respondents supported the principles of fiscal devolution, such as those identified by the Smith Commission[9], some felt that recent events such as COVID-19 and Brexit should warrant others such as:

  • Tax powers should be used to support economic recovery.
  • Avoid a “race to the bottom” or increased competition between Scotland and rUK which could be particularly detrimental to recovery.

Specific recommendations included:

“Any further tax powers devolved should be capable of being targeted to Scotland-specific factors or industries.” Deloitte

“If new tax powers are devolved, it is essential that there is a full and thorough consultation process, as has indeed generally been the case with Scottish taxes to date, such as Land and Buildings Transaction Tax and use of the powers over Scottish income tax.” Chartered Institute of Taxation

3.2.3 VAT

VAT was the most-cited of the existing taxes in support of “full devolution”, and a number of proposals were put forward to reform the tax once the levers were available to do so, such as allowing local governments to administer VAT to offset changes to Council Tax.

Of the 15 respondents who wanted VAT to be devolved to the Scottish Parliament, three were particularly concerned about the burden of VAT falling disproportionately on lower earners, calling it “regressive” and “unfair”. While individuals focussed on addressing inequality, organisational comments tended to focus on the opportunities to use VAT as a driver for behaviour change, particularly as lever for incentivising low carbon alternatives. Some respondents raised specific opinions that VAT assignment was “not a power as it is reserved to Westminster” and not the right approach – citing the lack of a “satisfactory methodology” for VAT assignment.

3.2.4 Corporation Tax

A number of respondents did not specifically mention Corporation Tax, but suggested taxing profits, industries, or businesses in Scotland. Within the subset of respondents generally in favour of devolution, there appears to be support for full devolution of Corporation Tax or “all business taxes” and “taxes on profits” as well as taxes on specific industries in Scotland. With respect to devolving a range of business taxes, some argued that this would establish greater resilience in the Scottish Budget which was described as currently relying heavily on Income Tax (disproportionately to the UK Government).

The arguments in favour of devolution of Corporation Tax followed several lines of reasoning:

  • The perception that firms based in Scotland, especially those employing large numbers of people, are benefiting ‘by proxy’ from Scotland’s public services as the health and wellbeing of their employees contributes to their profits – the same argument applies to those benefitting from “public infrastructure”.
  • With particular emphasis on resource-intensive industries, companies which benefit from being physically based in Scotland should be contributing “their fair share” to directly benefit local communities.
  • With respect to economic recovery or stimulus packages, Scotland should be able to offer incentives or relief to companies in the form of regional corporation taxation.
  • In direct opposition, others felt Corporation Tax as set by the UK Government is “too lenient” and does not reflect Scotland’s values which, they argued, are more in line with European approaches to Corporate Taxes.

Two respondents pointed to the example of Northern Ireland’s devolved Corporation Tax as a positive demonstration of divergence.

There were a number of specific references to gaining more direct control over tax revenues in relation to the oil and gas industry in Scotland. Most of the specific references to this industry advocated additional taxes in order to directly benefit the Scottish communities most reliant on this industry.

3.2.5 Income Tax and National Insurance

Generally, there appeared to be a correlation between support for fully devolved Income Tax and support for the transfer of National Insurance (NI) powers to Scotland. The arguments in favour tended to suggest that devolving “similar powers” and allowances could allow Scotland to further pursue a more progressive approach to Income Tax.

There appears relatively widespread support for NI devolution, among those who favour further devolution, with most pointing to the interaction between NICs and Income Tax. One respondent commented on the unfairness of the perceived “53% taxation band”, and that devolving similar powers in relation to unearned/ investment income and tax allowances could provide more flexibility to further develop a more progressive Income Tax regime in Scotland.

3.2.6 Capital Gains Tax, Inheritance Tax and other taxes on capital

Seven respondents raised Capital Gains Tax, with four of these in the context of “wealth taxes”, often twinned alongside Inheritance Tax, as powers to devolve to the Scottish Parliament.

There were also strong links drawn between these so-called wealth taxes and issues around land and property ownership as well as wealth disparity between Scotland and the rest of the UK. Generally, these taxes seem to be viewed as levers either to redistribute wealth or to account for income differences between Scotland and the rest of the UK.

Similar to Corporation Tax, among those who support devolution of Capital Gains Tax, there is disagreement about whether the Scottish Government should then exercise powers to increase or decrease rates.

3.2.7 Other points to note

Using taxation to support green and resilient recovery from COVID-19, while continuing to support Scotland’s climate, equality or other ambitions (as set out in the National Performance Framework[10]) was a common theme. For example:

“In some ways, the crisis presents an opportunity to address the problems and inequalities within the current system. As far as possible, the economic recovery should focus on achieving sustainable regeneration of the economy while also addressing strategic priorities which aim to reduce inequalities and create a more resilient economy.” Royal Society of Edinburgh

“…this budget represents an opportunity to secure a green recovery for Scotland… [and] better define what we consider ‘public goods’ and how these are funded. It also provides opportunity to use tax proposals to protect the creative industries and tourism sector, as well as encourage market activity and consumer behaviour that contribute towards carbon net-zero and biodiversity targets.” National Trust for Scotland

3.3 Are there any new tax proposals you would like to see implemented by the Scottish Government?

The consultation sought views on new taxes which respondents would like to see implemented by the Scottish Government, with responses covering a range of topics (e.g. wealth taxation, land ownership, transport and environmental issues). A minority of respondents also felt that all tax policy should be a matter for UK Government and that further devolution of tax powers is unwarranted.

3.3.1 Wealth taxation

Both organisations and individuals commented on their desire for differing forms of wealth taxation. However, views on this were predominantly from individuals with four making suggestions in the area, compared with only half this number of contributions coming from organisations. Respondents suggested a variety of wealth taxes, including the introduction of ‘local’ wealth taxes such as those used in Nordic countries, however, in general, there was limited detail on the specific form and operation of such taxes. For example, the Institute of Chartered Accountants of Scotland noted that:

“In the longer term, some commentators have been suggesting that additional tax revenues need to be raised and that these could come from a tax on wealth. It is not clear what the definition of wealth might be and, depending on this, whether such a tax would be a reserved matter or have devolved implications.”

More specifically, one respondent to the consultation called for the creation of a ‘mansion tax’, which coincided with references to the perceived regressive nature of Council Tax. Related to these calls were suggestions that there should be a greater focus on, and a more robust approach to, tax avoidance within Scotland.

3.3.2 Land and Home Ownership

Respondents who commented on this topic tended to focus on the need for a tax on land value. Land taxation was noted by six respondents, with various ways in which to approach the topic suggested. The Scottish Land Commission’s focus was on a specific ‘vacant and derelict land’ tax. Related to suggestions of land taxation were calls for a supplementary charge, outwith the LBTT and Council Tax regimes, on the ownership of second properties that were not the owners’ primary residence.

3.3.3 Transport and Travel

Responses relating to new transport and travel taxes were closely connected to support for a green recovery and pro-environmental change, and included suggestions such as a ‘road passenger duty’ to encourage people to stay local or use public transport. Linked to this were suggestions that existing powers, such as Vehicle Excise Duty, should further incentivise the purchase of smaller, more fuel efficient vehicles. It was also suggested by a number of respondents that Air Passenger Duty, at present a tax reserved to the UK Government, should be increased.

Though not an example of a new tax proposal, three respondents suggested a ‘tourist tax’ in relation to travel. Respondents who commented on this topic related travel to the notion of tourism or recreation as opposed to travelling to work or modes of transport. Respondents provided a range of views on a Transient Visitor Levy or Tourist Tax[11], with some organisational respondents, such as Scottish Land & Estates, commenting that a tax would negatively affect Scotland as an attractive holiday destination.

3.3.4 Environmental taxes

Suggestions for new environmental taxes focused on behaviour change interventions, with several respondents noting these taxes should not be aimed at revenue raising but to encourage pro-environmental behavioural change.

Outwith the above main themes there were some more specific suggestions such as an online sales tax; a future Public Health Supplement to raise additional revenue to support the economic recovery; business rates based on number of employees, instead of size and location of premises, due to home working; and tax reliefs for specific industries (e.g. creative sector).


Email: covidrecoveryconsultation@gov.scot

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