Fourth Annual Report on the Implementation of the Scotland Act 2016 Eighth Annual Report on the Implementation and Operation of Part 3 (Financial Provisions) of the Scotland Act 2012 April 2020 Fourth Annual Report on the Implementation of the Scotland Act 2016 Eighth Annual Report on the Implementation and Operation of Part 3 (Financial Provisions) of the Scotland Act 2012 Presented to Parliament pursuant to Section 33(2)(b) of the Scotland Act 2012 Laid before the Scottish Parliament SG/2020/31 April 2020 Contents 1. Introduction ......................................................................................................................... 1 2. Fully Devolved Taxes ......................................................................................................... 3 3. Scottish Income Tax and VAT Assignment........................................................................ 7 4. Block Grant Adjustments, Reconciliation & Indexation.................................................... 11 5. Borrowing and Scotland Reserve..................................................................................... 13 6. Social Security .................................................................................................................. 18 7. Employability ..................................................................................................................... 21 8. Fiscal Framework Implementation ................................................................................... 23 1. Introduction 1.1.1 This is the eighth annual report on the implementation and operation of Part 3 (Financial Provisions) of the Scotland Act 2012 and the fourth report on the implementation of the Scotland Act 2016. 1.1.2 It is intended to inform Parliament of the implementation work that has been carried out on fiscal powers in the Scotland Acts 2012 and 2016 as required by Section 33 of the Scotland Act 2012 and paragraph 107 of the Fiscal Framework. The UK Government produces a separate report on the implementation work they have carried out. 1.1.3 The Scotland Act 2012 was granted Royal Assent in May 2012 and represented the first transfer of fiscal powers from Westminster to the Scottish Parliament following devolution. These included: The creation of a new Scottish rate of income tax; The disapplication of UK Stamp Duty Land Tax in Scotland and provision for the introduction of a new Scottish tax on land transactions; The disapplication of UK Landfill Tax in Scotland and provision for the introduction of a new Scottish tax on disposals to landfill; Provision for capital borrowing by Scottish Ministers; and The power to create new devolved taxes. 1.1.4 The Scotland Act 2016 received Royal Assent in March 2016 and devolved a range of further powers to the Scottish Parliament. These included: Further income tax powers including the power to set rates and bands income; Assignment of VAT; Certain social security benefits; Air passenger duty; Aggregates levy; and Fines, forfeitures and fixed penalties. 1.1.5 This report provides an update on these sections, as well as non-legislative elements in the Fiscal Framework including: 1 Block grant adjustments; Administration and implementation costs; Spillover effects; Borrowing; and Scotland Reserve. 1 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_ data/file/503481/fiscal_framework_agreement_25_feb_16_2.pdf 1 1.1.6 The report provides an update on all legislative, policy and implementation work that has been carried out since the previous report on 24 April 2019 and outlines any forecast administration and implementation costs incurred in 2019-20. 1.1.7 Administration costs are the ongoing costs incurred in supporting the delivery of the Scottish Government’s responsibilities under the Scotland Acts 2012 and 2016. Implementation costs are one-off costs associated with the initial investment to set up all the necessary systems and other elements required for the delivery of the powers under the Scotland Acts 2012 and 2016, whether through setting up a body or a service, implementing IT systems. 1.1.8 The next report will be published in 2021. 2 2. Fully Devolved Taxes 2.1 Costs £m 2017-2018 2018-2019 2019-2020 (forecast) Administration 5.5 7.8 6.9 Implementation 0.2 0.0 1.8 2.1.1 The above table reflects Revenue Scotland’s costs to administer and implement Land and Buildings Transaction Tax (LBTT), Scottish Landfill Tax (SLfT), Air Departure Tax (ADT) and Aggregates Levy (AL). 2.2 Land and Buildings Transaction Tax The Scotland Act 2012 provided for devolution of powers to introduce a tax on transactions involving interests in land. Land and Buildings Transaction Tax subsequently replaced UK Stamp Duty Land Tax in Scotland from 1 April 2015. LBTT is a tax applied to residential and commercial land and buildings transactions (including commercial leases) where a chargeable interest is acquired. Key Developments Introduction from 7 February 2020 of a new 2% tax band for LBTT non-residential leases. Amendment of Section 161 of the Revenue Scotland and Tax Powers Act 2014 to provide that a daily penalty related to LBTT returns can be charged by Revenue Scotland through a single Penalty Assessment Notice. Outturn 2.2.1 Revenue Scotland reported that 2018-19 LBTT receipts were £554 million in its Annual Devolved Taxes Accounts on 2 October 2019. Rates and bands 2.2.2 In the 2019-20 Scottish Budget, residential and non-residential LBTT rates and bands were amended, these are outlined in table 2.1. 3 Table 2.1 2 Residential Non-residential Non-residential leases transactions transactions Purchase LBTT rate Purchase LBTT Net present LBTT price price rate value of rent rate payable Up to 0% Up to 0% Up to 0% £145,000 £150,000 £150,000 £145,001 to 2% £150,001 to 1% Over 1% £250,000 £250,000 £150,000 £250,001 to 5% Over 5% £325,000 £250,000 £325,001 to 10% £750,000 Over £750,000 12% 2.2.3 The Scottish Budget 2020-21 announced that all rates and bands relating to residential and non-residential conveyances for 2019-20 would remain in place in 2020-21, providing certainty for the vast majority of taxpayers. 2.2.4 Provisional affirmative legislation to introduce (from 7 February 2020) a third tax band on non-residential leases where the Net Present Value (NPV) of rental income is above £2 million was approved by the Finance and Constitution Committee of the Scottish Parliament on 26 February 2020 and confirmed by a vote in the Scottish Parliament on 4 March 2020. 2.2.5 The Additional Dwelling Supplement (ADS) remains at 4 per cent of the total price of the property for all relevant transactions above £40,000, and will be charged in addition to the residential conveyance rates and bands. Legislation 2.2.6 In January 2020, the Scottish Government laid legislation in the Scottish Parliament, amending Section 161 of the Revenue Scotland and Tax Powers Act 2014 (RSTPA) to provide that a daily penalty related to LBTT returns can be charged by Revenue Scotland through a single Penalty Assessment Notice. The legislation took account of a decision by the Upper Tribunal for Scotland published on 4 July 2019 regarding the application of daily penalties for late LBTT returns in 2 https://www.gov.scot/publications/scottish-budget-2019-20/pages/4/ 4 circumstances where Revenue Scotland is not aware that a return is due until it is submitted. 2.2.7 The Regulations brings Section 161 into line with other penalty provisions in Sections 162 and 163 of the RSTPA, which deal with LBTT returns filed 6 and 12 months late respectively. 2.3 Scottish Landfill Tax The Scotland Act 2012 provided for devolution of the power to introduce a tax on disposals to landfill. Scottish Landfill Tax was subsequently introduced on 1 April 2015, replacing UK Landfill Tax. It is a tax on the disposal of waste to landfill, charged by weight on the basis of two rates: a standard rate, and a lower rate for less polluting materials. Key Development Increase in the standard and lower rate of SLfT, with effect from 1 April 2019, and the introduction of legislation to provide for further increase from 1 April 2020. Outturn 2.3.1 Revenue Scotland reported that 2018-19 SLfT receipts were £149 million in its Annual Accounts on 2 October 2019. Rates 2.3.2 SLfT rates have risen in line with inflation and continue to match the corresponding landfill tax rates in the rest of the UK. The rates for 2019-20 were £91.35 per tonne for standard rated waste and £2.90 per tonne for lower rated waste with the credit rate for the Scottish Landfill Communities Fund (SLCF) marginally higher than the rest of the UK equivalent at 5.6% as set out in Chapter 2 of the Scottish Budget 2019-20.3 2.3.3 The Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2020 was laid before the Scottish Parliament on 4 March 2020 to provide for SLfT rates for 2020-21. The planned increase will again provide for consistency across the UK. 2.3.4 The Cabinet Secretary for Environment, Climate Change and Land Reform announced in September 2019 that full enforcement of the ban on the landfilling of biodegradable municipal waste (BMW) should be delayed until 2025 for both local authorities and commercial operators managing waste covered by the ban. Work is currently underway to explore the role that SLfT could play during this transitional period and a further announcement will be made in 2020-2021. Whilst a transitional period has been agreed, the Scottish Government remains committed to ending the practice of sending BMW to landfill, in order to contribute to climate change targets and ensure Scotland's waste is managed in a sustainable way. 3 https://www.gov.scot/publications/scottish-budget -2019-20/pages/4/ 5 2.4 Air Departure Tax Air Departure Tax is Scotland's planned replacement for Air Passenger Duty, which was devolved by the Scotland Act 2016. The UK and Scottish governments have agreed that introduction of Air Departure Tax will be deferred beyond April 2020 to ensure it is not devolved in a defective state. Key Development On 23 April 2019, the Minister for Public Finance and Digital Economy informed Parliament that introduction of ADT would be deferred beyond April 2020.