Publication - Corporate report

Scottish Budget - Draft Budget 2017-2018 devolved taxes methodology report

Published: 15 Dec 2016
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Economy, Public sector

Report detailing the methodologies used for the devolved tax forecasts.

Scottish Budget - Draft Budget 2017-2018 devolved taxes methodology report
Chapter 2 - 2015-16 and 2016-17 Outturn

Chapter 2 - 2015-16 and 2016-17 Outturn

Land and Buildings Transaction Tax ( LBTT)

The Scottish Government published its original devolved tax revenue forecasts for 2015-16 in the Scottish Draft Budget of October 2014. The residential LBTT forecast was updated in January 2015 following a revision to rates proposed in light of changes made to SDLT by the UK Government in December 2014. These forecasts were then endorsed as reasonable by the Commission. Provisional LBTT whole-year outturn data for 2015-16 became available in April 2016 (on a cash basis) with the publication of March 2016 revenues. The publication of Revenue Scotland's Devolved Taxes Report (September 2016) contained the outturn data on an accruals basis. [4]

2015-16: T otal Revenues

Total LBTT revenues in 2015-16 exceeded our original forecast by around £44 million, driven in the main by higher than expected non-residential revenues as shown in Table 2.

Table 5: LBTT revenue outturns versus Scottish Government forecasts,

2015-16, £ million

Forecast Outturn Variance against forecast
Residential 235 208 (27)
Non-residential 146 217 71
Total 381 425 44

Source: Forecasts - Scottish Government, Outturns (accruals basis) - Revenue Scotland (pre-audit - accruals basis)

2015-16: Residential Revenues

The revised 2015-16 forecast of £235 million, published in January 2015, [5] excluded an estimate of forestalling losses, i.e. the expected impact on revenues due to the timing of transactions being altered in response to the different tax rates under LBTT and SDLT, which were at the time the subject of a funding negotiation with the UK Government.

The Scottish Government estimated that this forestalling impact would result in a loss of revenue in the range of £12 million to £37 million. This was in anticipation of a significant volume of high value purchases being brought forward into the 2014-15 financial year, since they would be liable for less tax under the UK Government's Stamp Duty Land Tax ( SDLT) regime than the LBTT regime. The introduction of the Additional Dwelling Supplement ( ADS) in April 2016 was also expected to generate forestalling behaviour that would increase revenues in 2015-16 in the range of £5 - £7 million, as purchases were brought forward into the 2015-16 financial year so that no ADS would be payable. Table 6 summarises these various factors and shows that the adjusted Scottish Government forecast for residential revenues in 2015-16 was that they would lie in a range from £203 - £230 million.

Table 6: Residential LBTT revenue outturn versus forecasts, 2015-16

£ million
Original residential LBTT revenue forecast for 2015-16 235
Forecast loss in revenue from forestalling due to transition from SDLT to LBTT on 1 April 2015 (12 - 37)
Forecast increase in revenue from forestalling due to introduction of Additional Dwelling Supplement on 1 April 2016 5 - 7
Revised range for residential LBTT forecast 203 - 230
Actual revenue outturn 208

Sources: Forecasts - Scottish Government, Outturn - Revenue Scotland (pre-audit basis)

The residential revenue outturn for 2015-16 of £208 million fell within the forecast range, when taking into account the estimated ranges of forestalling impacts. The strong growth in the number of transactions was in line with forecasts. However, the main reason why the outturn was towards the lower end of the forecast range was that average residential property prices in Scotland were relatively flat over 2015-16, in contrast to an original forecast assumption (October 2014) of around 5% growth. This lower-than-forecast price growth applied to the market as a whole rather than specific segments.

2015-16: Non-residential Revenues

As Table 6 above shows, the non-residential LBTT revenue outturn of £217 million was £71 million above forecast.

Historically, non-residential property taxes tend to have a volatile tax base, with large swings in both the number and average value of transactions being common. Tax receipts can be significantly affected by a relatively small number of high-value transactions. In 2015-16, conveyances with a taxable consideration in excess of £1 million accounted for 80% of the revenue, but less than 10% of all non-residential transactions (including leases). Thus, a few high-value commercial transactions can create a significant spike in tax revenues in a particular month which may or may not be repeated in later months in the year.

2016-17: Total Revenues

For the seven-month period April-October 2016, provisional total LBTT revenues (adjusted downwards by £9 million of revenue recorded in 2016‑17 but which relate to transactions which completed in 2015‑16) amounted to approximately £269 million. This compares with a forecast in Draft Budget 2016-17 that total LBTT revenues in 2016-17 would total £538 million. The revenue outturns include net ADS revenue of £51 million, comprising gross ADS revenue of £57 million less £6 million repayments of ADS (and the level of repayments can be expected to rise further).

While outturn residential LBTT revenues in the early months of 2016-17 will have been affected by forestalling behaviour to bring forward a proportion of transactions from 2016‑17 into 2015‑16 in order to avoid liability for ADS, [6] lower-than-expected revenue outturns to date can be attributed to lower growth in both transactions and in prices across all price segments of the residential market than had been forecast. One significant contributor to this trend has been the slowdown in north-east Scotland, where the impact of a drop in oil prices on the local economy has contributed to residential prices declining by nearly 10% in Aberdeen City, and volumes in both Aberdeen City and Aberdeenshire dropping by nearly a quarter. Excluding these two local authority areas, residential property prices and transactions in Scotland were still rising in the year to September 2016, albeit more modestly than previously forecast.

In terms of non-residential revenues, £93 million of revenue has been collected in seven months to October, compared with a forecast of £220 million. [7] General economic uncertainty, including the aftermath of the EU Referendum result in June 2016, could be a contributing factor to this trend. However, given the dependence of non-residential revenues on a small number of high-value transactions (in 2015-16, about 80% of revenues came from the approximately 10% of transactions where the purchase price was above £1 million), monthly outturns tend to be volatile, and thus it is too soon to draw strong conclusions.

Actual tax revenues raised in the remainder of 2016-17 will depend on the performance of both the residential and non-residential property markets and, in particular, the number of transactions and trajectory of property prices in the residential and non-residential sectors in the remainder of 2016-17. As full year outturn figures for 2016-17 become available, we will report on these in future years' Draft Budget documents including any variances between forecast and outturn receipts. This outturn information will be available for 2016-17 as a whole in time for the preparation of the Draft Budget for 2018-19 in Autumn/Winter 2017.

Scottish Landfill Tax ( SLfT)

2015-16: Total Revenues

The Scottish Government published its original SLfT revenue forecasts for 2015-16 in the Scottish Draft Budget of October 2014. The forecast of £117 million was endorsed as reasonable by the Commission. Provisional SLfT outturn data for the whole of 2015-16 first became available in June 2016 with the publication of January-March 2016 revenues by Revenue Scotland. As for LBTT above, the publication of Revenue Scotland's Devolved Taxes Report (September 2016) contained the official outturn data for 2015-16.

Total SLfT revenues in 2015-16 (£147 million) exceeded our original forecast by around £30 million. There were three factors which, in effect, suppressed the forecast of £117 million. Two of those factors were statistical and couldn't have been anticipated; and the third is due to a modelling assumption.

a) at the time of the October 2014 forecast, we assumed that a previously observed discrepancy between HMRC and Environment Agency waste data for England (the HMRC data implied lower waste volumes) and that would also apply in Scotland when Revenue Scotland data became available for the first time in mid-2015. We therefore reduced the forecast proportionally in anticipation of this. As Revenue Scotland data became available from mid-2015 onwards, it became clear that the expected discrepancy between their data and Scottish Environmental Protection Agency ( SEPA) data did not seem to apply for Scotland. The effect of this was to push outturn up by £20 million.

b) when actual 2013 waste volume data from SEPA was published it pushed up our estimated landfill waste volumes for 2015-16 beyond our initial forecast (which was based on 2011 SEPA waste volume data). The effect of this was to push outturn up by £5 million.

c) we had assumed steady progress in reducing landfill tonnage through the second half of 2015-16. The actual decline in waste volumes in the second half of 2015-16 was lower than anticipated. The effect of this was to also push outturn up by £5 million.

These factors were only observable with hindsight. The final reconciliation between the original forecast for 2015-16 and the eventual outturn is as set out in Table 7:

Table 7: Scottish Landfill Tax Forecast Outturn Reconciliation, 2015-16

Draft Budget 2015-16 forecast (October 2014) 117
Factor a) Add HMRC/Environment Agency forecast correction +20
Factor b) Add SEPA 2013 data forecast correction +5
Factor c) Add lower than anticipated landfill reduction in 2015-16H2 +5
Equals 2015-16 Revenue Scotland Outturn (June 2016) 147

2016-17: Total Revenues

Over the first quarter of 2016-17, Revenue Scotland collected £39 million in SLfT revenues. With only one quarter of outturn figures available, it is too early in the financial year to say if annual revenues as a whole will exceed or fall short of the original forecast of £133 million (Draft Budget 2016-17, December 2015). However, with 29 per cent of forecast revenue collected after one quarter and little seasonal variation in landfill volumes expected, SLfT revenues are currently on track to meet the annual forecast. Actual tax revenues for the full year will depend on trends in landfill volumes between now and 31 March 2017. As full year outturn figures for SLfT become available for 2016-17 (around June 2017) we will report on these in future Draft Budget documents.

Economic Determinants of NDRi

2015-16 outturn

In terms of the economic determinants of non-domestic rates income ( NDRi), the Draft Budget 2015-16 used March 2014 OBR forecasts of September 2014 RPI of 2.5%. The actual outturn was slightly lower at 2.3%. After the publication of the Draft Budget 2015-16, the uplift in poundage was capped at 2.0% rather than increasing in line with September RPI. An error of 0.2 percentage points would typically result in an error in the poundage assumption of 0.1 pence - which is equivalent to around £5 - 6 million in NDRi terms. Outturn buoyancy in 2015-16 was 1.3%, marginally above the forecast for that year of 1.25%. The impact on 2015-16 NDRi of this forecast error was around £1 million.

2016-17 outturn

The Draft Budget 2016-17, presented in December 2015, used the September 2015 RPI of 0.8% which was known at the time the forecast. Scottish Assessors have the full year to make adjustments to the Valuation Roll (with resulting bills backdated to the effective date of the valuation). We therefore cannot provide a comprehensive update on buoyancy part way through the current year.