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3rd Report, 2011 (Session 3)
The Scottish Variable Rate of Income Tax
Annexe B: Government papers and oral evidence taken by the Committee
The Scottish Government published all relevant papers on the SVR on 10 January 2011 and provided the Committee with a timeline of events.
Please note that all oral evidence and correspondence received by the Committee is published electronically only, and can be accessed via the Finance Committee’s webpages, at:
1st Meeting, 2011 (Session 3), Tuesday 11 January 2011
3rd Meeting, 2011 (Session 3), Thursday 20 January 2011
4th Meeting, 2011 (Session 3), Tuesday 25 January 2011
1. The remit of the Finance Committee is to consider and report on-
2. The Committee may also consider and, where it sees fit, report to the Parliament on the timetable for the Stages of Budget Bills and on the handling of financial business.
(Standing Orders of the Scottish Parliament, Rule 6.6)
Committee Clerking Team:
Clerk to the Committee
Senior Assistant Clerk
The Committee reports to the Parliament as follows—
1. On 18 November 2010 the Secretary of State for Scotland, the Rt Hon Michael Moore MP, wrote to the First Minister, the Rt Hon Alex Salmond MSP, about the operation of the Scottish Variable Rate of Income Tax (“SVR”). In particular, he stated that “a new Scottish Parliament, elected at the May 2011 election, would not be able to invoke the SVR until at least the 2013-14 tax year”.
2. The First Minister responded on 19 November, while the Cabinet Secretary for Finance and Sustainable Growth, John Swinney MSP, also wrote to the Secretary of State on 22 November.
3. On 23 November 2010 the Finance Committee took oral evidence from the Cabinet Secretary on the 2010 Autumn Budget Revision, which included a brief discussion of issues relating to the SVR. The Cabinet Secretary said that he would make a full statement on this matter to the Parliament the following day. A chamber debate on the SVR was held on 24 November 2010. Following this debate, the Finance Committee decided at its meeting on 14 December to undertake an inquiry into the SVR, and agreed the following remit—
4. The main aims of the inquiry are—
5. The Committee took oral evidence at three meetings, from the following witnesses—
6. To assist with the Committee’s inquiry, the Scottish Government published on its website “all relevant papers on the Scottish Variable Rate”1. This documentation covers the period from December 1999 to December 2010 and amounts to over 700 pages.
7. In the devolution referendum on 11 September 1997, 63% of those voting supported a Scottish Parliament with the ability to increase or decrease the basic rate of income tax by up to three pence.
The Scotland Act 1998
8. This power was subsequently enshrined in the Scotland Act 1998. Other relevant provisions in the Act can be summarised as follows—
9. Standing Orders amplifies some of these powers. In summary, Rule 8.10 states that a motion for a tax-varying resolution—
10. Standing Orders Rule 9.16.7 states—
Using the SVR power
11. No member of the Scottish Executive has ever proposed that a tax-varying resolution be moved and the Scottish Parliament has, therefore, never used its power to alter the SVR.
12. The former Scottish Executive and the current Scottish Government have always made clear, whether at the start of a parliamentary session and/or in the relevant Draft Budget document, that they did not intend to use the power.
13. While the power has never been used, attempts have been made to put practical arrangements in place that would ensure that the SVR power could be used in future, should the Scottish Parliament so decide. The key issue discussed in this inquiry is the extent to which the Parliament’s ability to vary the SVR has been affected by these practical arrangements and associated political decisions.
14. While the Secretary of State’s letter commented on the current Scottish Government’s actions, this section provides a chronological summary of the key decisions made by all Administrations since 1999.
15. The Scottish Government provided the following timeline of key dates—
16. Mr McConnell was the first Finance Minister under devolution. In oral evidence, he explained that the United Kingdom Government had put in place an infrastructure in advance of the 1999 Scottish Parliament election “in anticipation that at least one party might propose using the tax power”. Following the election, the Scottish Executive made it clear that it did not intend to use the tax-varying power during the lifetime of the Parliament. Mr McConnell decided, however, to maintain an infrastructure for the power in recognition that a future Scottish Executive may have decided to use it. He explained that the option he chose, which was discussed with the Parliament, would have allowed the tax to be introduced in the financial year immediately following a Scottish election i.e. for an election held in May 2003 the tax could have been introduced the following April. Mr McConnell added that the option chosen “was based on advice that changes could not be introduced mid-financial year, so we had devised a system that would allow the changes to be made as quickly as possible.”2
17. In its oral evidence, HMRC explained that, following the Scottish Executive’s decision, an agreement was reached whereby the then Inland Revenue (subsequently merged into HMRC) would be able to put the SVR into “live running” within 10 months of a Scottish election on the normal cycle. Witnesses throughout this inquiry referred to this process as the “10 month state of readiness”. HMRC also referred to a memorandum of understanding between the Scottish Executive, the Inland Revenue and the Department of Work and Pensions. A key element of the memorandum was that the parties to it would review their state of readiness for the SVR, in recognition that “knowledge would dissipate over time if the SVR was not being used”. HMRC also stated that—
18. A review of the state of readiness was undertaken before the 2003 election. HMRC confirmed that “the operational planning for the implementation of the SVR was in place” and that no additional IT was therefore necessary.
19. As in 1999, the Administration formed after the 2003 Scottish Parliament election did not intend to use the SVR powers. Mr Kerr, the then Finance Minister, decided to maintain the state of readiness. This entailed the Scottish Executive paying an annual sum of £50,000 to the Inland Revenue.
20. From 1999-2007 the memorandum of understanding was underpinned by two separate service level agreements (SLAs) between the Scottish Executive and the Inland Revenue/HMRC. While an SLA was operational between 2003 and 2007, it was only signed by Scottish Government officials in March 2007.
21. At the same time as the review of the state of readiness before the 2007 Scottish Parliament election, HMRC was undertaking a major computer upgrade that involved changing the IT that operated pay-as-you-earn (PAYE) across the United Kingdom. The overall cost of this was £389 million. HMRC informed the Scottish Executive in March 2007 that it would need additional expenditure in order to be able to implement the SVR within 10 months following the election—
22. HMRC went on to explain the difference between the £50,000 a year mentioned by Mr Kerr and the additional costs outlined above—
23. HMRC continued—
24. In response to further questioning, HMRC confirmed that it would have been possible to implement the system for tax year 2008-09 “but not with full functionality”.7
25. Mr McCabe, giving oral evidence in his capacity as a former finance minister, stated—
26. He later added—
27. In his oral evidence, the Cabinet Secretary reasserted the opinion he previously gave to the Parliament, that he did not inherit a functional IT system that was capable of delivering the tax power at 10 months' notice. He said that one of the first briefings he received as a new minister, in May 2007, presented three options in relation to the SVR—
28. HMRC clarified that the £1.2 million cost of the Cabinet Secretary’s preferred option was—
29. The Committee asked the Cabinet Secretary whether, following the initial briefing he received on the SVR in May 2007, HMRC was formally informed of the Scottish Government’s preferred option. Mr Swinney stated that discussions on progressing his preferred option were taken forward on behalf of ministers by officials. The Committee asked where the Cabinet Secretary’s decision to delegate this matter to officials was minuted. Mr Swinney responded—
30. The Cabinet Secretary set out why there had been a delay in the Scottish Government communicating its preferred option to HMRC—
State of readiness negotiations from 2008 onwards
31. The Cabinet Secretary also summarised some of the reasons for the delay in progressing his preferred option in the period after 2008—
32. HMRC confirmed that it was in the process of a major computer upgrade between early 2008 and 2010 meaning that it “became difficult for us to isolate the cost of the SVR aspects from the overall HMRC PAYE project”. For example, in February 2008 the Scottish Government asked HMRC for more detail about the expenditure involved in its preferred option. HMRC admitted that—
33. A briefing released by the Scottish Government in relation to this inquiry shows that, in November 2008, the Scottish Government’s Director of Finance suggested to the Cabinet Secretary that HMRC be formally minuted to ask for clarification about the current state of readiness and possible costs to the Scottish Government. The briefing continues: “The Cabinet Secretary advised that since there were no plans to implement the SVR in the lifetime of the Parliament no formal correspondence with HMRC was necessary. However he asked that Finance officials continue to maintain informal contact with HMRC”.
34. The Committee asked HMRC when it first told the Scottish Government that there would be a deadline in 2010, which would be the last point at which SVR readiness would be available to an incoming Government after the 2011 election. HMRC said that it sent Scottish Government officials an email on 6 April 2010 saying that—
35. In his oral evidence, the Cabinet Secretary told the Committee that—
36. In relation to the Cabinet Secretary’s reference above to a communication of 20 August from Scottish Government officials, the email in question states—
37. HMRC confirmed that—
38. The letter from the Secretary of State also said—
39. The Committee asked the Cabinet Secretary when he first became aware of the deadline set by HMRC, for allowing the SVR power to be available after the 2011 election.
40. Mr Swinney said that a Scottish Government official discussed the matter with him on 4 or 5 August 2010, and that he instructed officials to “find out some more information, because I was not committing to £7 million without more detail about how it had suddenly become £7 million”19.
41. HMRC explained why the estimated costs for maintaining the state of readiness increased to £7 million between 2007 and 2010—
42. HMRC also confirmed, in accordance with the letter from the Secretary of State for Scotland, that it could not deliver the SVR for tax year 2012-13 i.e. the first financial year after the forthcoming Scottish Parliament election. The Cabinet Secretary stated that he had made a mistake in not communicating to the Parliament that the SVR is not operable for 2012-13 and that discussions with HMRC were ongoing.
43. The Committee emphasises that the power to alter the SVR belongs to the Scottish Parliament and not to the Scottish Government. The Parliament should therefore have been kept informed throughout this session about the Scottish Government’s position on the SVR, the ongoing dispute with HMRC and the threat to the state of readiness for 2012-13.
44. In particular, the Committee highlights that the Scottish Government decided in August 2010 not to commit to further IT work being undertaken on the SVR. This decision was made in the knowledge that it may result in the SVR power for 2012-13 being lost. The Committee considers that this matter should, at the very least, have been communicated immediately to the Parliament.
Wording of budget documents
45. There is a further, specific matter that the Committee wishes to highlight in this section, which concerns the wording used about the SVR in previous Scottish Government and UK Government budget documents.
46. The Committee questioned the Cabinet Secretary about the wording used in various Draft Budgets this session regarding whether the SVR would be used. The Committee pointed out that the Cabinet Secretary had said that the wording in the 2011-12 draft budget was the same as the wording used since the 2005-06 budget.
47. Both the 2005-06 and the 2006-07 Draft Budgets (i.e. the last two Draft Budgets of the previous Administration) stated—
48. The current Scottish Government’s first Draft Budget, for 2008-09, stated—
49. In response to the question of whether he had knowingly changed the language used in the budget documents, the Cabinet Secretary stated—
50. On a separate note, the Committee raised with the Secretary of State the point that UK budget documents for 2007-2010, but not the June 2010 budget document, included a paragraph on the effects of the Scottish Parliament’s SVR powers. The paragraphs stated that a one penny change in the SVR in 2007-8 would be worth approximately £300 million. The Committee also asked why the Treasury’s Statement of Funding Policy, published in October 2010, referred to the SVR. The Secretary of State advised that the Committee should raise both these matters with the Treasury. Having done so, the Chief Secretary to the Treasury’s response clarified that Section 76 of the Scotland Act 1998 requires the Treasury to make a statement where it appears to the Treasury that the proposed modification to any provision of the Income Tax Acts “would have a significant effect on the practical extent for any year of assessment of the Scottish Parliament’s tax-varying powers”.
51. The Committee highlights that its current written agreement on the budget process with the Scottish Government does not actually discuss the SVR at all; the convention to which the Cabinet Secretary refers above stems from a previous written agreement, which was revised in 2005. The Committee recommends that the new Finance Committee considers what information relating to the SVR should be included in a further revised written agreement, following the 2011 election.
52. Currently, there is no Service Level Agreement (SLA) in operation between the Scottish Government and HMRC, while the dispute between the Scottish Government and the UK Government about paying for costs associated with the SVR has not been resolved. The Committee explored these issues in evidence with the Cabinet Secretary.
Service Level Agreement
53. In relation to why there has been no SLA this session, the Cabinet Secretary explained that—
Costs associated with the SVR
54. In terms of the dispute over paying for costs associated with the SVR, the Secretary of State for Scotland’s letter stated—
55. The First Minister’s response challenged this interpretation, by quoting paragraph 3.2.8 of HM Treasury’s Statement of Funding Policy—
56. In oral evidence, HMRC said—
57. The Committee asked HMRC officials whether the Scottish Government had, since 2007, ever stated to HMRC that the funding policy was wrong. The Committee also asked whether the Scottish Government’s view – that the statement of funding policy says that the Scottish Government would not have to cover the increased costs because of actions that were taken by HMRC – had ever been communicated to HMRC.
58. HMRC said that neither point had been communicated at official to official level.
59. HMRC added that—
60. Given the long running and ongoing discussions between the Scottish Government and HMRC over costs, the Committee asked whether the matter could have been escalated to a dispute between the Scottish Government and HMRC. The Cabinet Secretary replied that—
Role of HMRC
61. The SVR powers set out in the Scotland Act do not, understandably, take full account of practical arrangements that a Scottish Administration may make in relation to the actual operation of the tax-varying power. Therefore, the Committee also discussed with the Cabinet Secretary the point that while the Parliament may agree to alter the SVR it would be dependent on HMRC IT systems for the actual implementation of this decision.
62. The Cabinet Secretary said that—
63. He further explained that—
64. The Committee asked whether this meant that it is HMRC and not the Scottish Parliament that decides whether the SVR is implemented. Mr Swinney responded: “What I am saying is that we are dependent, as we always have been, on HMRC to operate the system.”30
65. Finally, given the ongoing discussions about costs between HMRC and the Scottish Government, it is also worth highlighting oral evidence from HMRC that there would be costs associated with introducing the SVR separate from any IT upgrade bill. HMRC confirmed that these costs are estimated to be £10 million in the first year, with an on-going cost of £4 million a year, to be met by the Scottish Government.31
The SVR in 2013-14
66. In his oral evidence, the Cabinet Secretary referred to a letter from the Exchequer Secretary to the Treasury, David Gauke MP, dated 21 December 2010. The letter, which had not previously been seen by the Committee, discusses the preparations that would have to be made in this parliamentary session to allow an incoming administration to activate the SVR for 2013-14 i.e. the second financial year after the forthcoming Scottish Parliament election. It states—
67. The letter does not attach a cost to the Viability Study.
68. The Cabinet Secretary confirmed that he hopes to report to the Parliament shortly on the steps and costs associated with reintroducing a state of readiness to deploy the SVR.
69. Considering the Committee’s inquiry remit and the Cabinet Secretary’s apology to the Parliament for a lack of communication on the SVR, the Committee finds it unacceptable that the Exchequer Secretary’s letter was only mentioned at the very end of the Committee’s last formal evidence-taking session. The letter should have been made available to the Committee as soon as possible after receipt.32
70. The immediate issue is how the Scottish Government intends to respond to the Exchequer Secretary on the preparations to activate the SVR for 2013-14. The Committee notes that the Cabinet Secretary is seeking further information on reinstating the state of readiness and urges him to make a ministerial statement as soon as possible so that the situation can be clarified prior to dissolution. Any decision that could affect the next Parliament’s ability to exercise its SVR powers should be agreed by the current Parliament.
71. The Committee recognises that the next Parliament’s full SVR powers will not be clear until the Cabinet Secretary has reported to the current Parliament. The Committee also recognises that the Scottish Government is dependent on HMRC to operate the SVR system, and that previous agreements with HMRC have been based on it being able to introduce the SVR following each Scottish election, rather than maintaining that capacity continuously every year between elections. Depending on the Cabinet Secretary’s statement, the Committee recommends that the new Administration inform the new Parliament about any arrangements it intends to enter into with HMRC in terms of maintaining the state of readiness, and clarifies how any decision by the Parliament to alter the SVR would actually be implemented by HMRC.
72. The Committee also recommends that the final decision on whether to bring the SVR back to a state of readiness be taken by the Parliament.
73. The Committee is aware that the income tax powers contained in the UK Government’s Scotland Bill would, if the Bill is enacted, be implemented by 2016-17 and would supersede the current arrangements. Therefore, the next session of the Scottish Parliament, from May 2011-April 2015, will be the last under which the current SVR powers could be used.
74. The Committee recommends that the Finance Committee be fully consulted by the incoming administration on the implementation of any new financial powers resulting from the Scotland Bill. The current written agreement between the Scottish Executive and the Finance Committee should also be fully revised to ensure that the Parliament is fully consulted on the operation of these powers.
1st Meeting, 2011 (Session 3) Tuesday 11 January 2011
Scottish Variable Rate inquiry The Committee took evidence by video conference from—
3rd Meeting, 2011 (Session 3) Thursday 20 January 2011
Scottish Variable Rate inquiry: The Committee took evidence from—
4th Meeting, 2011 (Session 3) Tuesday 25 January 2011
Scottish Variable Rate inquiry: The Committee took evidence from—
6th Meeting, 2011 (Session 3), Tuesday 8 February 2011
Scottish Variable Rate inquiry (in private): The Committee considered a draft report and agreed to consider a revised draft, in private, at its next meeting.
7th Meeting, 2011 (Session 3), Tuesday 22 February 2011
Scottish Variable Rate inquiry (in private): The Committee considered and agreed a draft report.
2 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2965.
3 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2929.
4 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2914.
5 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2916.
6 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2917.
7 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2918.
8 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2967.
9 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2971.
10 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2989.
11 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2921.
12 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2996.
13 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2996.
14 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2990.
15 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2922.
16 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2922.
17 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2990.
18 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2915.
19 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 3004.
20 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2926.
21 Scottish Executive. (2004) The Scottish Executive: Draft Budget 2005-06. Available at: http://www.scotland.gov.uk/Publications/2004/10/20079/45117. [Accessed 24 February 2011
Scottish Executive. (2005) The Scottish Executive: Draft Budget 2006-07. Available at: http://www.scotland.gov.uk/Publications/2005/09/06112356/23573. [Accessed 24 February 2011
22 Scottish Government. (2007) Scottish Budget Spending Review 2007. Available at: http://www.scotland.gov.uk/Publications/2007/11/13092240/0. [Accessed 24 February 2011
23 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2999.
24 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2997.
25 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2923.
26 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2924.
27 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2993.
28 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2993.
29 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2993.
30 Scottish Parliament Finance Committee. Official Report, 25 January 2011 Col 2993.
31 Scottish Parliament Finance Committee. Official Report, 11 January 2011 Col 2927.
32 Paragraph 69 was agreed to by division. For 5 (Derek Brownlee, Tom McCabe, David Whitton, Jeremy Purvis, Malcolm Chisholm), Against 3 (Andrew Welsh, Linda Fabiani, Joe FitzPatrick).