Reform Scotland

Fit for Consumption? Examining the case for devolution of VAT & sales taxes

Fit for Consumption? Examining the case for devolution of VAT & sales taxes

REFORM SCOTLAND CALLS ON NEW FIRST MINISTER TO SET OUT PROPOSALS ON TAX DEVOLUTION

  • Former senior civil servant authors new paper on Holyrood taking control of VAT
  • Argues other taxes should also be considered to encourage responsibility and resilience and reap financial benefits

Reform Scotland, the non-partisan think tank, is calling for a better mix of devolved tax powers so the Scottish Government can directly raise more of the money it spends.

Heather McCauley, who has advised two New Zealand prime ministers and is a former senior civil servant in the Scottish Government, has authored a new paper, “Fit For Consumption? Examining the case for devolution of VAT and sales taxes”, in which she explores the costs and benefits of devolving VAT, a step the Scottish Government is calling for as part of the Fiscal Framework Review currently underway. This follows her previous report for Reform Scotland, Taxing Times, which assessed the potential of a number of other taxes for the Scottish Government.

The Scotland Act 2016 made provision for assignation of 50% of VAT revenues to Scotland, but seven years on this has yet to be implemented and the debate around VAT has stalled. McCauley’s paper seeks to reignite that debate by drawing insights from similar schemes around the world.

The paper suggests that there are three main reasons to devolve taxes – to increase the extent to which the Scottish Government funds its own spending, to enable the Scottish Government to benefit directly from any improvement in Scotland’s economic performance, and to improve the Scottish Government’s financial resilience. It concludes that Scotland should think much more deeply about whether VAT is the right type of taxation to ensure that those boxes are ticked.

The paper identifies risks such as tax flight, administrative costs and the impact on Scotland’s tax mix, and concludes that devolving or creating taxes on wealth are likely to be a more sensible method of ensuring a broad basket of taxes under the control of the Scottish Government.

“There has long been talk about the assignation or devolution of VAT, and provision was made for assignation in the 2016 Scotland Act, but nothing has yet actually happened. The Scottish Government has called for full devolution of VAT to be considered as part of the Fiscal Framework Review currently underway. An examination of other countries suggests that devolution of VAT is feasible but could be complex and impose significant additional costs on business, without fundamentally broadening the Scottish Government's tax base.

“Rather than pursuing VAT devolution, it may be more useful to assess the relative merits of extending the Scottish Government's tax powers to include other forms of income taxation - particularly on savings and dividends - and either devolving or creating taxes on wealth, as potentially better ways to increase financial resilience and accountability.”

“There was some discussion during the SNP leadership debate about the party’s poor relationship with the business community, and on how to grow the economy. I would now like to see the new First Minister, Humza Yousaf, engage in a debate about which further taxes he would like to see devolved. The Scottish Government should be responsible to a greater degree than it is for raising the money that it spends, with the right mix of tax powers to maximise its responsibility and resilience. With the right policies it could then be able to enjoy the benefits of economic growth.

“Humza Yousaf should tell us whether he supports the devolution of VAT, as has been part of the negotiations with the UK Treasury during the ongoing Fiscal Framework Review, and which other taxes he thinks would enhance the Scottish tax base were they to be devolved.

“A little more risk and responsibility and a little less comfort and complacency would benefit Scotland’s devolved democracy more than two decades into its existence.”