Editor's Desk: LITtle local difficulties
4 Aug 08
Robert Outram finds that the SNP's plan to replace council tax with a local income tax leaves a lot of questions unanswered
by Robert Outram
When devolution for Scotland was introduced at the end of the 1990s, the new Parliament at Holyrood was given powers to raise up to an additional 3p in the pound from income tax. This was the Scottish Variable Rate or SVR.
The current Scottish National party administration is looking to use these powers for something more radical – replacing council tax, which the
SNP sees as unfair, with a centrally levied local income tax (LIT).
The responses to the Scottish Government’s consultation on LIT, which closed last month, have revealed deep concerns over the workability and fairness of the proposed regime.
Quite rightly, ICAS, like the other professional bodies that have commented, has not come down on one side or the other about whether LIT or a property tax is the right way to fund local spending. That is a matter for political debate. But the professionals who will have to make the tax work have much to say about the practicalities.
Among the difficult questions for LIT are:
Is it legal? There is a question mark over whether the Scotland Act 1998 provides a basis for introducing LIT, and whether additional legislation would be needed to give HMRC the necessary powers and to compel employers outside Scotland to make the necessary changes to their payroll systems.
Will it be accepted as fair? Unlike council tax, LIT is based on income, not property values. However, the proposals exclude investment income, so the independently wealthy would be the biggest gainers.
Will it be enforceable? The details are unclear, but exempting investment income from LIT may create loopholes. For example, business owners could channel most of their earnings through dividends rather than draw a salary. Manipulation of residence status would also be a major headache for the tax authorities.
Also, as the poll tax debacle of the 1980s demonstrated, taxing something immobile like a house is easier than taxing highly mobile human beings.
What will collection cost? It makes sense for HMRC to collect the tax. However, this would not be as simple as adjusting the basic rate, as would be the case under the SVR. LIT would be levied on a different basis from personal income tax. Residence status, personal allowances, tax codes and tax credits would all create complexity, so HMRC would need additional resources and training.
There will also inevitably be costs to employers, whether in Scotland or south of the border, for example in updating PAYE systems. These have not been estimated, so far.
What about accountability? The rate for LIT would be set centrally by Holyrood and collected centrally. There would be no incentive for a council to do anything other than spend all the funds it is allocated. Bringing down costs, so as to charge less local tax, would not be an option.
Will LIT be accepted by Westminster? This could be the toughest question of all. Additional legislation will almost certainly be needed, not just by Holyrood but also by the UK Parliament.
There is also a question about funding. Currently, around £400m is transferred from HM Treasury to Scottish local authorities in the form of council tax benefit. Unless the UK Government is prepared to support LIT to the same extent, a serious hole would be left in Scotland’s public finances.
The SNP is adamant that LIT remains a flagship policy and that it will win the support of the Scottish voters. If the aim is a fairer local tax, however, then arguably a root-and-branch reform of council tax, rather than scrapping the property-based tax altogether, might be a more feasible way forward.