Is it on the menu? – David Glen, head of tax at Pricewaterhousecoopers in Scotland examines what further tax powers could be devolved to Holyrood.
The referendum dust has now settled and the Smith Commission is now underway, leading a process through which heads of agreement are to be reached on the devolution of further powers to the Scottish Parliament.
When the commission report is submitted on November 30, it’s likely to propose a range of powers relating to fiscal responsibility and social security.
But what kind of tax raising powers could be devolved to Holyrood and could they act as a lever to promote the business growth agenda so eagerly sought?
We can perhaps start by eliminating those fiscal powers that while suitable for devolution, are limited by EU law, either by practical considerations or by concerns over potential avoidance/evasion.
For example, under EU law, the rate of vat cannot vary across a territory so there is no scope to introduce a different rate in Scotland.
Alcohol and tobacco duties are areas where concerns over avoidance/evasion arise if different rates were to exist north of Carlisle.
When you run through the various issues and concerns you are left with the likes of income tax, corporation tax, capital gains tax and air passenger duty – not forgetting that landfill tax, stamp duty and elements of income tax are already on course to be devolved under the Scotland Act 2012.
PwC research in relation to other regions have shown that reductions in air passenger duty can have a positive impact on the economy, but the real drivers for growth, given the magnitude of the taxes involved, will come from income tax and, particularly, corporation tax.
With regards to income tax, the Scotland Act 2012 currently envisages the top 10% of each rate of tax being devolved.
The Conservatives and Liberal Democrats both seem to be promoting the devolution of the entire tax rates and the bandings of those rates, and this could allow the low paid to be targeted, to alleviate the growing issue of ‘in work’ poverty, and stimulate growth through increased productivity.
However, our fiscal research has also shown that the biggest influence on stimulating growth can come from corporation tax.
The SNP has promoted a reduction in CT by up to 3%; whilst this can work, the danger is you end up with a ‘race to the bottom’ with other nations (or other parts of the UK) and this is not desirable.
Alternatively, measures such as targeted incentives for new investors into the region could have a big impact on growth.
Additionally, tax credits for the likes of innovation, training or exports can be effective, whilst being fiscally neutral in the long run for the Scottish Government.
Whatever fiscal devolution package is delivered in Scotland, it will be vital to ensure that it is transparent, simple, and not place a burden on business.