Tax and Devolution

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Tax and devolution

Who collects taxes in the UK?

The majority of taxes in the UK are set by central government in Westminster, with revenue collected by HMRC and the Treasury determining how this should be distributed across government.

But there are some exceptions. The UK parliament has legislated over recent years to devolve some tax powers away from Westminster. This means Scotland, Wales and Northern Ireland – and local authorities in England – have varying levels of power over some taxes.

Why have some taxes been devolved?

When devolved administrations were established in 1999, there was a significant imbalance between their spending and tax raising powers. This meant that they were not responsible for raising any of the money they spent, relying instead on funding from the UK government.

Tax devolution in Scotland and Wales is seen as a way of improving the financial accountability of devolved administrations, and encouraging them to choose policies that stimulate growth in their tax base.

During the 2014 Scottish independence referendum, UK party leaders also committed to create a more empowered Scottish parliament by devolving substantial revenue-raising powers, as part of ‘The Vow’[1] agreed in the final days of the campaign.

In Northern Ireland, the tax devolution debate has been driven by different considerations, including to enable the Northern Ireland executive to mitigate the effect of lower business tax rates in the Republic of Ireland.

In England, the government has a longstanding commitment to the decentralisation of business rates revenue, which is intended to strengthen the incentives for local government to support the growth of business in their areas.

Which taxes are devolved?

Scotland

Stamp duty land tax, landfill tax, and the power to set all rates and bands of income tax (except for the personal allowance) are already devolved. Air passenger duty and the aggregates levy (a tax relating to rock, sand and gravel) are due to be devolved at a future date. In both cases devolution has been held up by legal issues relating to state aid Half of VAT receipts collected in Scotland are also due to be ‘assigned’ to the Scottish government, but the implementation of this change has been delayed until the UK and Scottish governments can agree upon a method to estimate Scottish VAT receipts. The same VAT rates will continue to apply across the UK, but for the first time changes in Scottish VAT revenue will have a direct effect on the size of the Scottish government’s budget.

Wales

Stamp duty land tax and landfill tax are already devolved, following the implementation of the Wales Act 2014. Partial income tax powers are also devolved. UK income tax rates have been reduced by 10p in each band, on top of which the Welsh Government sets its own Welsh rate of income tax for each band.

Northern Ireland

Long-haul air passenger duty was devolved and subsequently abolished in 2012. Legislation was passed in 2015 to devolve corporation tax to Northern Ireland, so that tax rates could be reduced to the lower rates applying south of the Border. However, the plans to bring this reform into effect were postponed following the collapse of power-sharing in Belfast in 2017. Devolution was restored in early 2020, but it remains uncertain whether this tax will eventually be devolved.[2]

English local authorities

In 2015, the UK Government committed that all revenue from business rates would be retained by local government. This is currently happening in some parts of the country where devolution deals have been agreed, such as Greater Manchester and the West Midlands, and 75% business rate retention is being trialled in other parts

1 of England including London. There is no confirmed timeline for full implementation.

Tax devolution measures announced from 2012 to 2017, with planned implementation dates (Updated: 26 Nov 2020) [2] [3]

[4]

How much tax revenue is devolved? [5]

In the 2020/21 financial year, devolved taxes and local property taxes make up an estimated:

31% of tax revenue in Scotland (including assigned VAT revenue) 20% in Wales 9% in Northern Ireland 9% in England, although for both council tax and business rates, local government will continue to operate within a nationally-controlled system.

If all legislated tax devolution measures are implemented, this will increase to 41% in Scotland (including assigned VAT revenue) and 15% in Northern Ireland.

Tax revenue by UK nation, showing the impact of tax devolution measures announced between 2012 and 2017 (indicative) (Updated: 26 Nov 2020) [7] [8]

[9]

Why are some taxes devolved while others are not? [10]

2 Some taxes are easier to devolve than others. The easiest to devolve are those relating to land or property, where it is easy to attribute revenue to a certain part of the UK, and difficult for taxpayers to move their assets to avoid paying taxes. This is one reason tax devolution in Scotland and Wales started with stamp duty land tax and landfill tax.

Of the larger taxes, devolution of income tax was judged the best candidate for devolution. This was partly because of its high visibility, which makes it a good tax for enhancing devolved accountability. The devolution of other major taxes was ruled out for practical, legal or economic reasons, including:

It would be complicated to break up the UK-wide system for national insurance. Devolving corporation tax to Scotland or Wales could create unwelcome tax competition between different parts of the UK (although, as noted, it was proposed in Northern Ireland specifically to allow the north to compete with the Republic of Ireland). EU laws mean that the same VAT rates had to apply across the UK. In principle, VAT could be a candidate for post- Brexit devolution, but this would run counter to the UK government’s commitment to preserving the UK internal market [11] and avoiding new barriers for business.

How do tax revenues vary across the UK? [12]

Since 1999, tax revenue in Wales and Northern Ireland has been significantly lower than in England, while that of Scotland has been more volatile, principally due to fluctuating offshore oil and gas revenue.

Tax revenue per capita in England, Scotland, Wales and Northern Ireland, 1999/00 to 2015/16 (Updated: 26 Nov 2020) [14]

[15]

[16]

There is also significant variation across the UK for individual taxes. Revenue varies more for income tax, which has been partially devolved, than for VAT and national insurance, which have not. The greater proportion of higher rate taxpayers in England is one reason why this gap has widened in recent years. Corporation tax receipts have also shown huge volatility in Scotland due to rising and falling revenue from offshore oil and gas.

Of the smaller taxes being devolved, stamp duty is again among the most volatile in terms of revenue. Here again England greatly outperforms the rest of the UK, but English tax receipts per person are lower than the other nations for taxes on fuel, alcohol and tobacco. Within England, there is also a huge variation in council tax and business rate [3] revenue by local authority. The IFS has estimated, [17] for example, that local tax raising capacity was 14 times higher in Westminster than in Lewisham in 2015/16.

Tax revenue in each nation is likely to be severely impacted by the coronavirus crisis, including for both devolved and reserved taxes. In July 2020, the Office for Budget Responsibility estimated that revenue would fall by around 12% for income tax and national insurance, 23% for VAT, and 36% for corporation tax in the 2020/21 financial year.

3 Comparison of tax revenues across the UK (for the eight largest taxes), 1999/00 to 2015/16 (Updated: 26 Nov 2020) [19] [20]

[21]

How have devolved administrations used their tax powers? [22]

Both the Scottish and Welsh governments have used their new tax powers to diverge from tax policies set in Westminster.

In both these devolved nations, the threshold for paying property transaction tax (stamp duty) is now higher than in England – at £145,000 in Scotland and £180,000 in Wales compared to £125,000 in England. This means that less tax is paid on lower value property purchases. But Scotland and Wales also charge higher property transaction taxes on expensive properties, and have not replicated the significant discount for first-time buyers that is available in England.

In July 2020, the UK government announced a temporary stamp duty discount in response to the coronavirus crisis. In the following weeks, both the Scottish and Welsh governments announced similar (albeit less generous) measures.

In Scotland, income tax rates have also diverged from the rest of the UK. The Scottish government has introduced two new tax bands for lower earners, and increased tax rates for higher earners by 1p per pound. The overall effect is that those earning less than around £27,000 pay less tax in Scotland, with those earning above that amount paying more tax in Scotland. In the two years since partial income tax powers were devolved to Wales, the Welsh government has chosen not to diverge from the policy set in Westminster.

4 5

What are the challenges and risks of tax devolution? [23]

Tax devolution often ignites a debate about the wider allocation of resources within the UK. Ability to raise taxes varies in each part of the UK, depending on the strength on the local economy, so devolving taxes risks increasing regional inequality. In Scotland and Wales, there are frameworks in place to mitigate this risk, but in both cases reaching agreement was challenging [24]. In England, the difficulty agreeing a new system for redistributing revenue from richer to poorer areas is one reason for delay in implementing business rate reforms.

Devolution also exposes devolved administrations to more risk. Some of the taxes being devolved – including income tax and stamp duty – can be relatively volatile, making it difficult to plan future spending. This risk becomes particularly challenging if devolved administrations rely on a small number of revenue streams.

There is also a risk that accountability could be weakened rather than strengthened if voters do not clearly understand which layer of government is responsible for decisions on each tax.

How do other countries collect tax? [25]

The UK is an outlier by international standards. In 2014, every other G7 nation collected more taxes at either a local or regional level according to estimates by the Organisation for Economic Co-operation and Development.

Taxes collected at the federal and local level as a percentage of total tax revenue, G7, 2014 (Updated: 26 Nov 2020) [27] [28]

[29]

1. Cook J, What now for 'the vow'?, BBC News, 1 October 2014, www.bbc.co.uk/news/uk-scotland-29443603 [30] 2. McDonnell F, Northern Ireland drops campaign for lower corporation tax rate, The Irish Times, 21 January 2020, www.irishtimes.com/business/economy/northern-ireland-drops-campaign-for-lower-corporation-tax-rate- 1.4147171 [31] 3. Amin-Smith N, Phillips D, Simpson P, Spending needs, tax revenue capacity and the business rates retention scheme, Institute for Fiscal Studies, February 2018, www.ifs.org.uk/uploads/R141.pdf [32]

Update date: Wednesday, November 25, 2020

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