‘Wide concerns’ over SNP tax plan
4 Aug 08
Large areas of uncertainty remain over the Scottish Government’s proposals to replace council tax with a local income tax (LIT), according to ICAS
In its response to the consultation on LIT, the Institute has warned that concerns over its legal basis, the administrative burden it could place on HM Revenue & Customs (HMRC), employers and individuals, and the loopholes which appear to be available, would all need to be addressed for LIT to be successful.
The Scottish Government’s consultation on LIT closed on 18 July. The proposals outlined include scrapping the property-based council tax in Scotland and replacing it with an additional income tax of 3p in the pound, levied on income but excluding investment income. The rate would be set centrally and collected by HMRC on behalf of the Scottish Government. It would apply to Scottish taxpayers as defined in the Scotland Act 1998 and there would be an additional charge, still to be specified, on “second homes”.
Among the key points raised by ICAS, in its response, are:
• Doubt over the legal competence of LIT under the Scotland Act 1998 “could have an adverse effect on collection rates”, and if LIT was subject to a legal challenge “it could have serious implications for public finances in Scotland.” ICAS urges the Scottish Government not press on with legislation until it is clear that the proposals are legally competent under UK and European law.
• HMRC is the appropriate body to collect a local income tax, but it is unclear whether HMRC would be willing or able to do so. ICAS says the co-operation of HMRC, including a realistic timetable for introducing LIT, would be essential to its successful implementation.
• UK legislation is likely to be needed in order to enable HMRC to collect LIT from employers based elsewhere in the UK who employ Scottish taxpayers. If so, ICAS says, the co-operation of the UK Government would be essential.
• ICAS says the administrative burdens and costs on employers have not been considered in detail, and highlights areas, such as the need to adapt payroll systems for LIT, that could add significant costs to employers.
• Retaining the £400m that Scottish local authorities receive in council tax benefit would require the agreement of the Treasury. Loss of the £400m would represent a significant shortfall in the resources available to fund Scottish public services.
• The interaction of LIT with the UK tax credits system would create additional complexity, ICAS says.
• As investment income would not be liable to LIT, ICAS says, this could lead to an increase in incorporations and Scottish taxpayers extracting cash from businesses as dividends rather than salary to avoid LIT.
• Excluding investment income from LIT will hit working individuals and families, while high net worth individuals who can live off investments will not have to pay anything. There may be few individuals in this position but their exclusion from LIT could bring it into disrepute.
Christine Scott, ICAS assistant director, accounting and auditing, said: “It is not for ICAS to comment on the form that local taxation should take, but it is appropriate for the Institute to comment on the practicalities of implementing a new system for raising and collecting local tax.”
See also Reporter, page 8.8