A Vision for Good Tax Policy Making
Taxes form part of the fabric of society and we should all be proud of the contribution they make. They are a key component of the social contract. How we develop and deliver tax policy is therefore of high, and growing, importance to the Scottish Government. We have already taken significant steps to modernise the taxes that have been devolved to the Scottish Parliament, in line with our Scottish Approach to Taxation, and the Framework for Tax further enhances our approach. It embodies our ongoing commitment to, and vision for, tax in Scotland, underpinned by policy and delivery excellence, best practice, open government and transparency. This way, we can position tax policy to meet the challenges of today and tomorrow.
This is of fundamental importance to the people of Scotland, noting the vision for tax put forward by the Citizens' Assembly for Scotland:
Scotland should be a country where all taxes are simplified and made more proportionate so that everyone is taxed accordingly; taxation is transparent and understandable; measures are introduced to minimise tax avoidance: and companies are incentivised to adopt green values.
What the Framework does
The Framework broadly sets out the what, how, when and why in relation to our overall approach to tax policy making. One of the core aims is transparency. It is therefore designed to be accessible for the public and stakeholders alike. As far as possible, technical jargon is minimised or explained.
- Chapter 1 provides background, setting out the tax powers devolved to the Scottish Parliament and the fiscal landscape within which they sit.
- Chapter 2 sets out the principles that underpin the Scottish Approach to Taxation.
- Chapter 3 sets out our overarching strategic objectives and our approach to appraisal and decision-making.
- Chapter 4 looks at the policy and Budget cycles and how we plan and deliver tax policy around these.
- Chapter 5 sets out our programme of work for this Parliament 2021-2026, which will be updated around the mid-point in 2023.
In creating a Framework for Tax, the Scottish Government is aiming to:
- Be open and transparent about how we approach tax policy. Responding to the recommendations of the Citizens' Assembly, the Framework provides more information, in accessible language, on the purposes for collecting taxes; the principles that underpin our approach; our strategic objectives; and our programme of work for this Parliament.
- Exemplify best practice and embed continuous improvement by ensuring tax decisions are coherent, rooted in a defined set of principles and objectives and rigorously appraised; and by embedding a policy cycle, including evaluation, and putting proactive engagement at the heart of tax policy making.
- Improve sequencing so that policy and Budget cycles align as far as possible, to ensure we take an organised and structured approach to tax policy.
- Take a forward-thinking approach especially in the wake of COVID-19, identifying medium to longer-term opportunities and threats to inform future work, new ideas and to be prepared should further tax powers be devolved to the Scottish Parliament.
Funding the Scottish Budget
The Scottish Budget is principally comprised of the Block Grant, pooled local tax revenues, net devolved tax revenues and additional funding for devolved social security powers. The overall funding position depends in large part on the operation of the Fiscal Framework.
Graphic text below:
Barnett Formula Determined Block Grant
Deduction to reflect Ukg revenues forgone (BGA)
Addition to reflect Ukg social security expenditure no longer incurred (BGA)
Revenues raised from devolved tax in Scotland
Funding For Scottish Budget
- Component One – Barnett formula determined Block Grant – Barnett continues to determine the initial size of the Block Grant and block grant funding remains the largest component of the Scottish Budget.
- Component Two – Block Grant Adjustments (BGAs) – the Block Grant is adjusted to reflect the devolution of tax and social security powers. The size of the adjustment is based upon the performance of the corresponding UK tax revenues and social security expenditure.
- Component Three – Devolved tax revenues – the revenues from devolved local and national taxes, which contribute to Scotland's funding.
Scotland's Devolved Taxes
The Scottish Parliament has limited powers when it comes to taxation. Under the current devolution settlement, the vast majority of tax powers remain reserved to the UK Government and Parliament. This, together with the operation of the Fiscal Framework, constrains what the Scottish Government can do in relation to tax policy.
The Scottish Parliament currently has devolved responsibilities in relation to five taxes:
- Scottish Income Tax is partially devolved – the Scottish Parliament is able to set the rates and bands for Scottish taxpayers on non-savings and non-dividend income, e.g. earnings from employment, self-employment, pensions or property. The personal allowance, reliefs and the rates and bands for savings and dividend income all remain reserved to the UK Parliament. Scottish Income Tax is administered and collected by HMRC on behalf of the Scottish Government.
- Land and Buildings Transaction Tax, a tax paid in relation to land and property transactions in Scotland, and Scottish Landfill Tax, a tax on the disposal of waste to landfill, are fully devolved national taxes and are managed and collected by Revenue Scotland.
- The Scottish Parliament also has powers over local taxes for local expenditure. Currently, the two main local taxes are Council Tax and Non-Domestic Rates (also known as business rates), which are collected by local authorities. Council Tax is set and collected by local authorities and does not form part of the funding of the Scottish Budget. The Scottish Government guarantees the revenue funding available to local authorities through the combined total of Non-Domestic Rates income and the General Revenue Grant, as an integral part of the Scottish Budget process.
- Powers in relation to two further taxes have been devolved to the Scottish Parliament, but these have not yet been implemented and the relevant reserved taxes therefore continue to apply. These taxes are Air Departure Tax, a tax on all eligible passengers flying from Scottish airports, which will replace Air Passenger Duty when introduced, and a devolved tax on the commercial exploitation of crushed rock, gravel, or sand, which will replace the Aggregates Levy when introduced.
- A portion of VAT revenues generated in Scotland is due to be assigned to the Scottish Budget, referred to as VAT Assignment. This is not a devolved tax power, as VAT policy remains reserved to the UK Government, and its implementation is dependent upon agreement between UK and Scottish Ministers regarding the methodology for assigning VAT receipts. The Scottish and UK governments have agreed to postpone VAT Assignment and revisit the issue during the review of the Fiscal Framework.
- The Scottish Parliament has the power to create new local taxes (i.e. local taxes to fund local authority expenditure). There is also a mechanism allowing the UK Parliament, with the consent of the Scottish Parliament, to devolve powers for new national devolved taxes to be created in Scotland. This is unlikely to be a swift process and would likely depend on the complexity of the new national tax and negotiation over devolution of the requisite powers.
The Fiscal Framework
The funding arrangements agreed mean that Scotland's budget position improves if tax receipts per head grow more quickly in Scotland than in rUK (and vice versa).
However, there are a number of factors which can affect Scotland's relative tax performance, including:
- Growth in earnings, pensions, property income and house prices;
- Growth in the number of taxpayers or taxable transactions;
- Differences in the composition of the tax base;
- Policy changes and resulting changes to taxpayers' behaviours.
The operational constraints of the Fiscal Framework also present additional challenges in the context of tax:
- The Block Grant Adjustment is based on forecasts, and the differences between forecasts and actual receipts do not come to light immediately. Differences in forecast and actual income tax revenues require adjustments three years later. For the fully devolved taxes, an in-year adjustment is made and a final adjustment is made two years later. The formal record of tax receipts is often referred to as outturn data and the adjustments as reconciliations.
- Borrowing powers are included in the Fiscal Framework to help manage the uncertainty of forecast errors and to fund the required reconciliations in future budgets; however, current powers remain limited in comparison to the scale of revenues and reasonable forecast error.
Bodies involved in the development and delivery of tax policy in Scotland
All devolved and local tax powers operate based on the consent of the Scottish Parliament. Any changes to existing taxes, or the introduction of new taxes, will require the agreement of the Scottish Parliament to have effect. This is achieved through legislation (either primary or secondary).
Through the Scottish Parliament's Finance and Public Administration Committee in particular, MSPs provide scrutiny of the budget process and Scotland's public finances, and can undertake inquiries at their discretion, including questions regarding devolved and local taxation.
The Scottish Government is responsible for the setting and developing devolved tax policy in Scotland. This includes changes to rates and bands of existing taxes; structural changes to the way a tax is designed; the introduction of new taxes such as a new local tax; and significantly reforming existing devolved tax powers. Changes can be announced at the Scottish Budget annually, or at other times throughout the year (more information on sequencing can be found in Section 4).
Revenue Scotland and HMRC
Revenue Scotland is responsible for the administration and collection of the fully devolved taxes in Scotland and HMRC for the devolved aspect of Scottish income tax. Tax authorities play a critical role in delivery, principally in relation to collection and administration, as well as providing a rich source of knowledge and expertise to inform policy development.
They also play a crucial role as data holders of all taxpayer-related information. As experts in the feasibility and efficiency of tax collection and the potential impacts on taxpayers, they are a vital component of a people-centred approach to tax policy making. Working closely at the earliest possible stage (Stage 1: Engagement & Analysis, see Section 4 below) is essential for good tax policy making, as set out in the joint Scottish Government and Revenue Scotland statement on working together on tax.
Local Authorities in Scotland are responsible for the collection and administration of local taxation, most notably Council Tax and Non-Domestic Rates. They also set Council Tax rates annually and administer the Council Tax Reduction scheme, which supports lower-income households. Much like Revenue Scotland and HMRC, they play a crucial role as tax authorities and data holders of taxpayer information, including on the performance of local taxes. Where changes or new proposals in relation to local taxation are being considered, early engagement is vital to ensure the potential effectiveness and administration of any measure is understood.
Scottish Fiscal Commission
The Scottish Fiscal Commission (SFC) is an independent statutory body, directly accountable to the Scottish Parliament, that produces official fiscal and economic forecasts twice every financial year. The Scottish Government uses those forecasts to inform the Scottish budget and its financial planning. When the Scottish Government publishes its Budget, the SFC publish the forecasts alongside it. This includes expected tax revenues and how much specific taxes and policies are likely to raise and cost. This allows the Scottish Parliament to properly scrutinise the Budget's policy and financial implications ahead of the new financial year. The SFC may also produce forecasts when primary or secondary legislation is proposed that will materially impact the funding available for the Scottish Government. The Protocol for engagement between the Scottish Fiscal Commission and the Scottish Government underpins working practices between the two organisations.
The First-tier Tribunal for Scotland decides on disputes relating to Land and Buildings Transaction Tax and Scottish Landfill Tax. The Upper Tribunal can and does hear appeals on decisions of the First-tier Tribunal. In turn, decisions of the Upper Tribunal may be appealed to the Court of Session and, ultimately, the Supreme Court.
Better intergovernmental relations
With the vast majority of tax and macro-economic policy powers remaining reserved to the UK Government, UK policy decisions have a significant impact on devolved tax powers and performance. The pivotal interaction between UK and Scottish Government policy is not yet adequately reflected in our governance arrangements. This is symptomatic of wider challenges in relation to intergovernmental relations between the UK Government and the devolved nations. It is therefore crucial that we increase our efforts to agree appropriate governance arrangements and improve trust, information sharing and collaboration at all levels.
The introduction of a formalised Devolved Administrations impact assessment for tax decision-making at a UK level would be a straightforward and sensible starting point, together with appropriate governance structures that provide systems for policy development, consultation and advance notice and collaboration, allowing new or significant tax changes to be managed appropriately. The Finance Ministers' Quadrilateral (a meeting of Finance Ministers from the UK Government and Devolved Administrations in Scotland, Wales and Northern Ireland) should be strengthened and regularised, meeting more frequently and ensuring that devolved and UK Governments can participate as equal partners in relation to tax policy decisions. This is and will remain a key strategic priority for the Scottish Government.
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