"Costs and complexities" of establishing and operating post-independence Scottish tax system should be investigated, says expert

Out-Law News | 22 May 2014 | 10:22 am | 2 min. read

More details are needed about how a new tax system would be funded and what taxes would be raised in the event of Scottish independence, according to a new report by the Institute of Chartered Accountants Scotland (ICAS).

The accountancy professional body highlighted the "information gap" in relation to how a new system would be paid for given the "lack of simple numbers" in the Scottish government's recent white paper on independence. The white paper said that the transitional costs of setting up a new system and ongoing operating costs would be a "small proportion" of Scotland's total budget.

"'Small' might be 1%, which would be around £650m, but 5% would be £3.25bn ... What it is really going to be, and how it is to be paid for is a question that still needs to be answered," the report said.

"The potential must exist for a shiny new tax system to be more cost effective operationally, but that depends significantly on the system adopted, and tough decisions being made, as well as the level of investment made up front; the greater the investment, the greater the hoped for potential saving, but it's still money being spent in the short term from the public finances," the report said.

Scottish finance secretary John Swinney said that the report failed to take into account the "long-term opportunities to create a modern, efficient and cost-effective tax system" after independence. The UK as a whole had "one of the most complex tax systems in the world and one of the most expensive systems in Europe," he said.

The Scottish government's white paper, which was published in November 2013, proposed an approach to tax which would focus on "fairness and economic growth" on independence ahead of a more significant review of the tax system once the first new Scottish parliament is established. The paper set out the position of the current Scottish government and proposed inflation-linked increases to the personal allowance and tax credits; a 50% reduction in Air Passenger Duty (APD) with a view to its eventual abolition; and a "competitive" corporation tax set at a level up to 3% lower than the prevailing UK rate.

The white paper proposed a transitional period following a "yes" vote in the referendum, during which an independent Scotland would replicate the UK tax system for a transitional period before the first elected government decides on further changes. However, ICAS said that the paper was "virtually silent" on further detail and that the proposed "competitive strategy" on corporate tax rates was "aspirational".

"From the questions still being put to the ICAS technical team, it seems that the volume of detail sometimes overwhelms and the presentation of the few numbers in the white paper leaves a gap, particularly about the impact of oil and gas tax revenues on Scotland's spending capacity," the paper said. "The need for independent and unbiased analysis remains; and the desire for numbers is growing."

"It's concerning, but perhaps not surprising given the complexity, that the independence debate on both sides of the fence has not drilled into the costs and complexities of establishing and operating a new tax system in an independent Scotland, so it is good to see ICAS seeking to inform the debate here," said tax expert Karen Davidson of Pinsent Masons, the law firm behind Out-Law.com.

"John Swinney has argued that the cost savings of operating a more simple tax regime have not been taken into account. A simpler regime is a laudable aspiration; but with public frustration in relation to tax avoidance, which has driven much of the complexity of the UK tax regime, it will be a difficult task to balance a fair and simple tax regime with taxpayers' need for certainty in an area which is not black and white," she said.