The VAT Opportunity
DEVOLVING VAT WOULD HELP BALANCE SCOTLAND’S TAX POWERS
Think tank calls for parties to confirm support for post-Brexit VAT devolution
Reform Scotland, the independent, non-party think tank, has highlighted that VAT was not devolved under previous Scotland Acts because it was illegal under EU law. However, the exit of the UK from the EU will remove this impediment.
Devolving VAT to the Scottish Parliament would mean that the Scottish Parliament would be responsible for raising 60% of what it spends, passing the 50% threshold for the first time. This would also significantly reduce Holyrood’s reliance on income tax revenue.
The think tank’s latest briefing – The VAT Opportunity- focuses on the issue of VAT devolution and has been published today.
The link between VAT and the performance of the economy has been a talking point for successive Commissions into Scottish devolution. The Calman Commission said that the devolution of VAT had the “potential to deliver accountability given its significant yield and the transparency to the population.” but “devolution of VAT to Scotland is precluded by EU law.”
The post-independence referendum Smith Commission recommended (and the Scotland Act 2016 delivered) the assignation of 50% of VAT revenues to the Scottish Parliament, again acknowledging the link with growth but the illegality of devolving the tax.
The Scottish Conservatives’ submission to the Smith Commission went as far as saying that “were it not illegal under EU law, we would have been inclined to recommend that VAT be devolved to the Scottish Parliament”.
Furthermore, for the UK Government, then Chief Secretary to the Treasury David Gauke told the House of Commons that “control over setting VAT rates is not being devolved to Scotland, because EU VAT law does not allow for differential VAT rates within a member state”.
Commenting, Reform Scotland’s Chairman Alan McFarlane said:
“Whilst we supported the principle of devolving income tax to the Scottish Parliament, we have consistently expressed concern that the Scottish Government’s powers are so heavily dependent on one tax.
“The devolution of VAT, adding a consumption tax to an income tax, would help address this problem. Politicians have previously acknowledged the benefits of devolving the tax, but it was never previously possible due to EU law. Brexit removes this impediment.
“We hope that the Scottish Conservatives still recognise the benefits of devolving VAT and will argue its case, along with politicians from other parties in Scotland.
“Although the politics of this issue are critical, so are the economics. Devolving VAT would rapidly focus minds at Holyrood on promoting economic growth because of its direct link to tax revenue, and it would also give the Finance Secretary an important extra tool to change outcomes through tax policy.”