1. Policy context
1.1 Fully devolved taxes
The Scotland Act 2012 (“2012 Act”) fully devolved the power to the Scottish Parliament to introduce taxes on land transactions and on waste disposal to landfill in Scotland. On 1 April 2015, Stamp Duty Land Tax (“SDLT”) and Landfill Tax ceased to apply in Scotland and were replaced by the Scottish Government with the two present fully devolved taxes, which are:
- Land and Buildings Transaction Tax (“LBTT”); and
- Scottish Landfill Tax (“SLfT”).
The Scottish Government established in statute an independent Scottish tax administration body, Revenue Scotland, as the tax authority responsible for the collection and management of the fully devolved taxes. Recognising an important and internationally recognised principle, the Revenue Scotland and Tax Powers Act 2014 constituted Revenue Scotland as a non-ministerial department that would operate independently of Ministers. In order to further safeguard Revenue Scotland’s independence, the Scottish Government retained responsibility for all aspects of devolved tax policy development and future legislation.
The 2012 Act also provided powers for new taxes to be created in Scotland and for additional taxes to be devolved, paving the way for the devolution of the power to introduce taxes on the carriage of passengers by air and on the commercial exploitation of aggregate through the Scotland Act 2016. These taxes are yet to be introduced due to State Aid related issues, therefore Air Passenger Duty and Aggregates Levy, while still payable in Scotland, remain reserved taxes.
The fully devolved taxes have been operational in Scotland for almost four years now. These taxes operate in a dynamic landscape; regular consideration must be given to potential changes, as well as to general care and maintenance, and there are interlinkages with corresponding UK taxes and the potential for new taxes. In this respect, changes to the fully devolved taxes can be driven by a number of factors:
- new policy development to support a particular industry, to encourage economic growth or to change behaviours;
- care and maintenance, including technical changes;
- decisions made by Revenue Scotland or a Tribunal;
- representations from stakeholders; and
- in response to measures announced by the UK Government, sometimes at short notice.
Since 2015, a number of changes have been made to both LBTT and SLfT. For example:
- The Additional Dwelling Supplement - an additional amount of LBTT payable by those acquiring additional residential properties (such as buy-to-let properties and second homes) - was introduced in 2016 to support first-time buyers and ensure that the opportunities for them to enter the housing market in Scotland would remain as strong as possible.
- To further support first-time buyers, a first-time buyer relief was introduced on 30 June 2018 meaning that 90% of first-time buyers pay no tax on the acquisition of their first home.
- In 2016, the Scottish Government consulted on and legislated for a statutory testing regime for SLfT to ensure that fine residual waste material was taxed at the correct rate, and to minimise the scope for tax evasion.
Other than the Scottish Budget, there is no formal process or structure in place to guide the consideration, analysis and implementation of legislative change for the devolved taxes. The Scottish Government has received representations from stakeholders on the current process and considers this to be an appropriate time to establish a framework to bring greater certainty, transparency and efficiency to the tax policy making process.
The primary focus of this consultation is, therefore, to establish a greater structure to the process by which changes to the fully devolved taxes are made. Whilst this consultation sets out proposals and options for a new process, the Scottish Government remains open to alternative views and is keen to learn from the experience and expertise of individuals and organisations. In this respect, any proposals will be developed and guided by responses to this consultation.
1.2 Budget Process Review Group
The Budget Process Review Group was established by the Finance and Constitution Committee of the Scottish Parliament and the Scottish Government in 2016 to carry out a fundamental review of the Scottish Parliament’s budget process. Its report, published on 30 June 2017, made a number of recommendations, two of which are directly relevant to the fully devolved taxes:
- Recommendation 50: The Group recommends that further work is undertaken by the Finance and Constitution Committee in consultation with the Scottish Government, Revenue Scotland and others to explore options for alternative legislative processes for devolved taxes legislation, particularly where tax measures need to be introduced quickly or where minor amendments are needed to existing primary legislation.
- Recommendation 51: The Group recommends that the Scottish Government in consultation with the Finance and Constitution Committee examines the need for a Finance Bill and brings forward any recommendations by the end of the current Parliament.
Alongside this consultation, a Working Group made up of officials from the Scottish Government, Scottish Parliament, Revenue Scotland, and others will be established to build on the recommendations and consider the legislative process for the fully devolved taxes. A further update on this work will be provided later this year.
1.3 Other Scottish taxes
While the scope of this consultation is limited to the fully devolved taxes, it is important to understand the wider context in which these taxes operate. Therefore set out below is a brief overview of the others taxation powers available to the Scottish Government.
Scottish Income Tax
The Scotland Act 2016 provided the Scottish Parliament with the power to set the rates and band thresholds that apply to all non-savings non-dividend income tax paid by Scottish taxpayers. While the Scottish Parliament has the power to set the Scottish Income Tax rates and bands, HM Revenue and Customs (“HMRC”) continue to be responsible for its collection and management. As such, Scottish Income Tax remains part of the existing UK income tax system and is not a fully devolved tax.
Assigned VAT Revenues
The Scotland Act 2016 also allows for receipts from the first 10p of the standard rate of VAT and the first 2.5p of the reduced rate of VAT in Scotland to be assigned to the Scottish Government. The power to set the VAT rates and determine the tax base will remain reserved to the UK Government so VAT is not a fully devolved tax.
Local Government Taxes
Council Tax and non-domestic rates, also known as business rates are two other forms of taxation in Scotland. The Scottish Government is responsible for the policy and legislative framework for these taxes, however individual local authorities administer and collect them.
The 2019-20 Scottish Budget delivered additional powers to local authorities to introduce taxes on workplace car parking spaces and tourism. These proposals will be developed through close consultation with the public, industry and local authority partners. It will then be for each local authority to decide whether to introduce these powers.