Recent years have seen the Scottish Government gain – and make use of – a range of new tax and benefit powers, to add to the powers it has had over council tax and business rates since the advent of devolution in 1999. Devolved taxes now account for around 30% of all tax revenue raised in Scotland, and devolved benefits almost 20% of all benefit and tax credit expenditure in Scotland.
Are there any common themes in how the current Scottish Government has used these powers? Who are the winners and losers from the reforms it has undertaken? What opportunities has it taken and what difficult decisions has it ducked? And what are some of the key issues for the coming years?
- There is a common theme to the tax and benefit reforms introduced by the Scottish Government. Both over time and relative to the rest of the UK, they have made the system more generous to the less well-off while raising more revenue from the better-off. Changes to income tax, social security benefits, council tax, and land and buildings transaction tax (LBTT) on housing have all contributed to that pattern. Business rates and LBTT on business property are also targeted more at high-value properties, though that does not necessarily imply the burden falls more on high-income households.
- The reforms have tended to complicate the tax system, introducing more rates and bands into income tax, business rates and LBTT as well as several new reliefs in business rates. The additional complexity in income tax is unnecessary: a very similar and indeed slightly more progressive pattern of tax payments could have been achieved by applying a 21% rate above a new 0% income tax band, rather than having three separate rates (19%, 20% and 21%).
- Council tax increased between 2016–17 and 2020–21 after nine years of freezes and has been made less regressive by increasing the tax rates that apply to properties in Bands E to H. But, like the UK government in England, the Scottish Government has failed to grasp the nettle and introduce much-needed fundamental reforms, most notably to update property valuations that are now 30 years out of date.
- A range of targeted business rates reductions provide immediate support to hard-pressed businesses and will promote development of commercial property. But in the long term the main effect is likely to be higher commercial rents than we would otherwise see, benefiting landlords more than reducing the overall cost of premises.
- The election campaign and coming parliamentary term are likely to see significant debate about further tax devolution – with the current Scottish Government having called for the devolution of National Insurance, capital gains tax and the remainder of income tax. Doing this would mean Scottish income tax changes applied to all income – reducing the scope for tax avoidance – and allow the Scottish Government to address inefficient and unfair differences in tax treatments between different forms of income. However, such radical reforms would create many losers as well as winners and the current Scottish Government has shied away from radical reform in the property tax sphere, where the requisite powers are already devolved.
- The current Scottish Government has also suggested that VAT could be devolved now that the UK has left the EU (whose rules prevented this while we were a member). However, the way VAT is calculated and collected means devolution would entail significant additional administration costs and compliance costs, especially for businesses with operations on either side of the Scottish border. Only if Scottish preferences on VAT policy differ significantly from those in the rest of the UK would it seem worthwhile incurring these costs.
- The main giveaways to low-income households have come not from the small cuts to income tax but from the introduction of a number of new benefits and top-ups to existing UK-wide benefits. These include a top-up to carer’s allowance, more generous housing benefit for those in social housing who have what the UK government deems to be ‘spare’ bedrooms, and extra payments for families with young children on means-tested benefits. These will boost the incomes of the poorest fifth of Scottish households by an average of almost 1.5% this year.
- The Scottish Government’s changes to universal credit – giving recipients more flexibility in how they are paid – and planned changes to the process of assessing entitlement to disability benefits should both make life easier for claimants. The test will be whether the admirable intentions and welcome direction of travel are reflected in improved performance in practice.
- Taken together, the changes in devolved tax and benefit arrangements during the current parliament are progressive. Using Scottish rather than rUK rates of income tax and benefits, combined with real-terms changes to council tax, cost Scottish households £270 a year on average (0.8% of their average income), but that rises to £1,940 a year (2.4% of income) for the highest-income tenth while on average the lower-income half have gained.
- As well as these permanent changes to taxes and benefits, the Scottish Government has provided some temporary support to help with the COVID-19 crisis in areas where policy is devolved. Like the UK government, it introduced significant and well-targeted business rate reliefs for hard-pressed firms, and LBTT relief to stimulate the housing market – but more of the former and less of the latter than the UK government. It also announced additional payments for carers, those getting free school meals and those getting means-tested council tax discounts, the biggest of which are still to come.