With this it will be convenient to discuss the following:
Amendment 69, page 20, line 5, after ‘may’, insert
‘after consultation with (a) Scottish Ministers, (b) the Scottish Parliament and (c) such persons as it considers appropriate’.
Amendment 70, page 20, line 21, leave out subsection (4).
Government amendments 61 and 62
Amendment 43, page 20, line 35, after ‘Treasury’, insert
‘, with the consent of the Scottish Parliament,’.
Amendment 44, line 38, at end insert—
‘(6A) For the purposes of subsections (4) and (5)—
(a) reference to the consent of the Scottish Parliament means consent by resolution, and
(b) standing orders must provide that only a member of the Scottish Government may move a motion for such a resolution.’.
Government amendment 63
Amendment 47, clause 29, page 23, line 12, after ‘Treasury’, insert
‘, with the consent of the Scottish Parliament,’.
Amendment 48, line 28, at end add—
‘(7) For the purposes of subsection (4)—
(a) reference to the consent of the Scottish Parliament means consent by resolution, and
(b) standing orders must provide that only a member of the Scottish Government may move a motion for such a resolution.’.
Government amendment 64
Amendment 49, clause 31, page 24, line 8, after ‘Treasury’, insert
‘, with the consent of the Scottish Parliament,’.
Amendment 50, line 8, at end add—
‘(5) For the purposes of subsection (4)—
(a) reference to the consent of the Scottish Parliament means consent by resolution, and
(b) standing orders must provide that only a member of the Scottish Government may move a motion for such a resolution.’.
Government amendments 65 and 66
Government new clause 18—Orders
I am speaking to amendments 68, 69 and 70 and I wish to put it on record that the wording of those amendments was suggested by the Law Society of Scotland. I shall speak to the amendments first and then to the clause stand part—with your agreement, Mr Walker. I have a substantial number of questions to put to the Government about the implementation of this important clause.
On amendment 68, new section 80C empowers the Scottish Parliament to set by resolution the Scottish rate of income tax. This is an important power that is required to be exercised in accordance with the principles set out by the consultative steering group report published by the Scottish Office in 1999. These principles include accountability, openness and accessibility with a view to making possible “a participative approach” to “policy and legislation”. Accordingly, Scottish Ministers should, we believe, be required to consult those considered to be appropriate when proposing the resolution for the Scottish rate—much in line with existing practice of the Treasury here.
On amendment 69, new section 80G enables the Treasury to disapply or modify section 6 of the Income Tax Act 2007. This could involve issues such as gift aid relief or pensions relief. The order would be introduced in the UK Parliament and debated and passed or rejected in the UK Parliament. However, it could substantially affect the Scottish rate and Scottish taxpayers, as well as Scottish charities and pension funds, so we believe that
Scottish Ministers and the Scottish Parliament should be specifically consulted prior to any amendment of these reliefs.
Finally, amendment 70 takes out subsection (4). We have concerns about the provision. Section 80G(4) provides that an order made under that section
“may, to the extent that HM Treasury consider it to be appropriate, take effect retrospectively”.
We believe that HM Treasury should, at a minimum, consult Scottish Ministers and the Scottish Parliament if retrospectivity is required. The Minister will not be surprised to hear me say that I think all Governments should avoid retrospective legislation whenever possible—unless there is a proven and specified need. We think that the case for retrospective application in this instance has not yet been made out.
The amendment is designed to probe this issue. The Scotland Office has indicated that the power would be used to make tax reliefs applicable retrospectively, but I suggest that this could be done either by regulation or statutory instrument. The clause enables a charging order to be made by the Treasury, which is a matter of concern to us. Any retrospective action by the Treasury could—I stress could—have a detrimental impact on individual taxpayers and on the Scottish parliamentary budget. I hope that when the Minister responds he will provide some assurance about the circumstances in which and when the Government intend to use this power. I hope he will confirm how limited the power will be when it comes to its practical exercise.
Paragraph 673 of the report by the Holyrood Committee asked a number of questions about residence. The question of residence is one about which most of the tax experts we consulted expressed some concern. I understand that there is no statutory definition of a UK resident taxpayer. This legislation, however, attempts to define by statute a Scottish resident taxpayer. Given that that is, in a purely technical sense, a subset of a UK resident taxpayer, I think the Minister would accept that it is unusual to have a fixed statutory definition within a floating definition. I would like to question him a bit further about how this will work in practice and what the levels of risk are in respect of the current application of the law.
Paragraph 673 of the Holyrood Committee report asks what “place of residence” means, as defined in clause 26, as it appears to be different from how residence is understood in other areas of tax law such as capital gains tax. Does place of residence imply ownership when juxtaposed against “main place of residence” in new section 80E(a), (b) and (c)? Place of residence and main place of residence are not defined in that new section, which I fear could present problems of interpretation. I would be grateful if the Minister clarified his understanding of the interpretation in this case.
How the tax is to be applied in practice is an important issue. The vast majority of Scottish taxpayers live the whole period of their lives in Scotland or live there for very substantial periods, and it is relatively easy to define who those people are. What about people working on board ships or on oil rigs, for example? What about members of our armed forces and what about those who are neither UK resident nor employed by non-UK employers? As I said, the Scottish taxpayer is defined by reference to an individual who is resident in the UK for income tax purposes. The current definition of UK residency lies in 86 pages of guidance that are the subject of frequent revision by HMRC. How, then, can the Government be confident that this definition is going to work? Do the Government agree with the Chartered Institute of Taxation that the introduction of a possible statutory residence test for the UK is now essential? Experts in, for instance, the Institute of Chartered Accountants of Scotland, the Chartered Institute of Taxation, the Federation of Small Businesses and CBI Scotland have expressed concern about the lack of a concrete definition. What are the Government doing to address those concerns expressed by professional experts? I understand that they are considering the issue. Will the Minister tell us whether they are likely to attempt to provide a better definition of a UK resident taxpayer in the Finance Bill that will follow next week’s Budget statement?
Will the Government clarify the position of personal representatives of a deceased person? Will they count as individuals for the purpose of this definition? If so, will any income arising during the administration of an estate be treated as income subject to the Scottish rate?
What are the Government doing to address concerns about the “close connections” test? For example, an English oil worker who lives in England but commutes to a Scottish oil rig—which, of course, is a regular occurrence—will not have a close connection, but a Scottish resident who works in England and returns to Scotland for weekends and holidays could be caught. How will the Government deal with mobile workers who may find it impossible to know where they are until a day count is carried out at the end of the tax year?
It has been suggested that there is a high risk of perception of unfairness because the definition of “Scottish residence” is so loose that wealthy individuals can arrange their affairs in such a way as to avoid a higher rate of tax. How do the Government plan to avoid such a scenario? What mechanisms do they propose to deal with disputes about the application of the rules? Will there be a special tribunal system and a right of appeal?
Do the Government not agree that if a non-UK resident is working in Scotland and liable to pay tax, it should be paid at the Scottish rate? The Bill currently provides for company directors, sports people and entertainers undertaking duties wholly in Scotland to pay UK income tax on income earned entirely in Scotland, but not to pay Scottish income tax. Employees will inevitably approach their employers rather than the tax office for information on their tax status. What will the Government do to support employers? I appreciate that the implementation of the Bill is a number of years away, but I think it important at this stage to give businesses and employers as much reassurance as possible about how the Government will seek to minimise the burden and bureaucracy that they may have to face as a result of the Bill.
When the Federation of Small Businesses surveyed its members, it found that 18% of them did not use PAYE software to administer their payrolls by means of computer systems, but undertook the task manually. Is it not unhelpful of the Government to suggest that many small businesses should be forced to take on the burden of identifying and administering the new tax rates? What specific measures will the Government introduce to help small businesses with 10 or fewer employees to cope with the changes?
Although there has been some publicity in Scotland about the Bill, south of the border there will be little knowledge among businesses that may employ a few staff north of it. What kind of public awareness campaign will the Government conduct to make companies aware of the proposed changes and their impact on payrolls?
I should be grateful if the Minister told us about any of the discussions he has held with the high-level expert group about the definition of Scottish residence and the issues that have arisen as a result of those discussions, which I understand have been proceeding for some months.
The Chartered Institute of Taxation has suggested that HMRC will need to
“staff up properly in anticipation of a considerable extra flow of questions when the Scottish income tax goes live.”
What are the Government doing to achieve that, given that in recent months HMRC has been closing offices across Scotland and the rest of the UK and reducing its capabilities?
Under the Bill in its present form, no account is taken of a split year, which means that once someone is classified as a Scottish taxpayer he or she will remain one for the entire year. The opposite will apply to those living in another part of the United Kingdom. For example, if a company’s one Scottish employee moves south, the company will have to continue to have a Scottish taxpayer on the payroll even when that person is no longer a Scottish employee. What is the Government doing to address an anomaly that some may consider unfair?
Do the Government not agree that new section 80G (1) is drafted too widely? The Chartered Institute of Taxation has described it as a Henry VIII provision. Do the Government not think it inappropriate to use secondary legislation to make major structural changes in primary legislation without proper oversight from the UK Parliament, and indeed the Scottish Parliament, on whose budget such measures could have a substantial impact?
If changes such as pension deduction rules are required, should they not be effected through primary legislation, or should not the Scottish Parliament and Government at least be given the right to be formally consulted? As I said earlier, we are concerned about the potential retrospective application of orders. Do the Government not agree that individual taxpayers deserve a degree of certainty in regard to their tax affairs as the end of a tax year approaches?
The hon. Lady has raised many issues connected with income tax. I may be demonstrating my ignorance of the Scotland Act 1998, but under that legislation the Scottish Parliament could have increased or decreased the basic rate by 3p. Why were these issues not addressed then?
I was not a Member of Parliament at that time, unlike some of my colleagues who were in the House when the legislation was discussed in detail. I think it fair to say, however, that a great deal was left to the potential for secondary legislation. As the hon.
Gentleman knows, those provisions have never yet been used. That is one of the reasons that the Calman commission specifically addressed the issue of fiscal accountability.
The hon. Gentleman may also be aware of recent debates in the Scottish Parliament following the decision of the Finance Secretary—without informing the Parliament—to advise HMRC that it would not be required to implement the rules for a few years. I do not wish to discuss that controversy, but I will say that the establishment of the Calman commission was partly due to the fact that the rules had never been implemented. Much of the detailed work that we are now considering had been put on the shelf without being properly examined. I take the hon. Gentleman’s point, but I think it necessary for me to ask the Minister a number of detailed questions in order to ensure that the Government’s intentions are on record.
Given that income tax issues such as this are addressed throughout the world where jurisdictions—for example, American states—abut each other, does the hon. Lady consider them to be reasons for fundamentally objecting to the Bill, or simply matters of minor detail that could be resolved by means of secondary legislation?
As I have made clear, on Second Reading and throughout this debate, Labour fully supports the principles behind the Bill and the additional fiscal powers given to the Scottish Parliament. Before the election, the Labour Government supported the Calman commission, as we made clear in a White Paper published in the summer of 2009. I think that all these issues can be dealt with, but, as I am sure accountants and lawyers will confirm, the devil is in the detail at times. It is important for the House of Commons and, no doubt, the House of Lords to give the Bill proper scrutiny, because ultimately individual taxpayers, businesses and employers will have to live with the consequences of its implementation.
Indeed, and the fact that we now have converts to the cause shows what a difference the passage of time makes. As I said earlier, I am pleased that even the SNP has agreed to the LCM motion.
Our present approach is consistent with the approach that the Labour party has always taken to constitutional reform, which is to seek political consensus before introducing legislation in the House of Commons. The reason we have such a degree of consensus this evening is that we have spent a good deal of time examining details of the legislation. I congratulate the Holyrood Committee, which has done an excellent and thorough job in examining many of the issues in great detail. We all benefit from its work and from last week’s debate in the Scottish Parliament, which showed that the Scottish Parliament and its Committees are more than capable of doing a thorough job in scrutinising legislation.
I should be interested to know whether the Government agree that the retrospective application of an order could adversely affect the budget of the Scottish Parliament. For example, if the Budget is set in March and the Treasury lays an order in October to apply a relief clause retrospectively, that could have grave implications for the Scottish Government’s budget. That is another reason why I seek some reassurance about the Government’s intentions for the use of this clause.
How do the Government propose to deal with avoidance of the Scottish tax rate? Unlike other jurisdictions that have devolved taxes, and where there are different forms of collection and reporting, many people self-assess or are in pay-as-you-earn schemes, and they are not currently specifically called on to declare their residence to the tax authorities in the way required by the Bill. The Bill’s provisions only apply to income; they do not apply to dividends or to interest on savings, and we would want appropriate measures to be taken to ensure that people do not end up transferring income into another route, to try to avoid the income tax provisions made by the Scottish Parliament.
What provisions have the Government put in place for the self-employed? Will, as anticipated, the self-assessment tax return have to be altered, with additional questions on residency for example, particularly for those who work in a different part of the UK? I realise there are specific measures dealing with Members of Parliament and we are automatically included, but it has been pointed out that Scottish judges serving at the Supreme Court are not covered by the Bill’s provisions. Similarly, other senior Government officials travel from different parts of the country for their work. It is important that they are aware of what may be expected of them in terms of self-assessment claims.
Many of the hon. Lady’s comments imply that she is unhappy with residency being the method for working out where people pay tax, but it seems to me that there is no alternative. Is her position that she would like everybody to fill out a tax return?
No, I can assure the hon. Gentleman that I do not want to burden the taxpayer unnecessarily with additional questions and pieces of paper and that I think the residency basis is the simplest way to deal with this issue. The problem is that we have a floating definition of a UK resident taxpayer, and from that we are trying to define in very exact terms a Scottish resident taxpayer. That is the point at which there could be challenges, and sometimes mischief in that people might try to change their declaration of where they believe they are resident.
This situation is unlikely to arise for the vast majority of taxpayers in Scotland; most of them will be faced with a very simple exercise. Nevertheless, as I have pointed out, in other jurisdictions with devolved income tax there are ways in which people have to declare where their residence is that we currently do not have in the UK. I want the Minister to say whether the Government are aware of any potential problems, and what measures they intend to put in place to avoid them, so that the maximum level of tax that is due is collected and returned to the Scottish Government, and so that administration is kept to a minimum. All hon. Members will be concerned about the cost to the Exchequer, and also about the costs to individual businesses. That is why I am asking these questions, but I agree that residency is the easiest way to define who should be liable to tax.
I also appreciate that a decision has been taken not to include interest on dividends and on savings. People will comment that that perhaps creates a degree of unfairness because some individuals get the majority of their income from those sources, but I acknowledge that there are complex and expensive practical difficulties in applying a residency test for those types of revenue, and that ultimately the benefit may not be great. We therefore understand why the Government have phrased the clauses in this way, but the devil is in the detail of defining exactly what they will mean in practice.
The hon. Lady will understand that there is a very close relationship, particularly at the lower levels of income, between dividends and savings income, income tax and, as importantly, income tax allowances and thresholds. We have not tabled amendments on this topic, and it is extremely complicated, but if it were proved that there is an inherent logic in bringing together income tax, the tax on savings and dividend income, and how that relates to thresholds, allowances and the Scottish rate, might the hon. Lady and her colleagues be prepared to listen to that argument in future?
The Holyrood Committee did not consider that in detail, and the Calman commission did not make any specific recommendations that would lead us to legislate tonight. We have to reach a compromise in respect of striking a balance between fairness to Scottish taxpayers and having a system that is as simple and easy to understand as possible, and that reduces the administration costs to the Scottish Government as far as possible.
On thresholds, given that the Welfare Reform Bill has just been introduced with proposals on universal credit at the same time as this Bill is passing through the House, I ask the Government to say what consideration has been given to the impact on welfare benefits. Those on low incomes often have the most complicated tax affairs. Most benefits are calculated on after-tax income. If the Scottish rate income tax is higher than the basic rate, Scottish taxpayers on benefits will be entitled to claim more benefit. Will the Government ensure that the extra benefit is paid automatically, or will they issue public information on how full entitlement can be claimed? How will the new proposals on universal credit be implemented in respect of these tax changes? The Government have stated that their general rule on the tax base is one of no detriment, but I ask the Minister to reflect and give any assurance he can about whether there might be a possible conflict.
Conversely, if the Scottish tax rate is lower than that of the rest of the UK, Scottish taxpayers on benefits will be entitled to fewer benefits in some cases. What mechanism will the Government put in place to ensure that adjustments are made to their payments? We would be concerned if those on the very lowest incomes were adversely affected in their entitlement to the welfare benefits system. That is largely based on the national insurance system of course, which is separate from the tax system, but, as the Minister will be aware, the interaction between benefits and taxes is complex, and I am sure none of us would want to do this in a way that adversely impacts on pensioners, people on lower incomes, single parents, the disabled and others who may already have many concerns about what is being proposed in the Welfare Reform Bill. I hope the Minister can reassure us that he will not be adding to that burden.
Are the costs of implementation still as estimated in the Command Paper? How do the Government intend to control those costs? There is a long period of implementation, and hon. Members may be concerned about that, as some implementation schemes have taken longer, and been much more expensive, than originally estimated. Will the Minister tonight undertake to produce an annual report to the House of Commons until the full-scale implementation of the scheme, so that we may better scrutinise it, and ensure that value for money to the taxpayer is maintained and that the burden—which, of course, is ultimately to be met by the Scottish Government—is kept to a minimum?
I support the clause, but I wish to raise a couple of specific examples just to test that the definition of a Scottish taxpayer as set out in the Bill is robust and covers all eventualities. I appreciate that the examples I am about to give are technical, and if the Minister is unable to give me a definitive response tonight, I hope he will be able to do so on Report.
My first example is based on the situation my father was in for a number of years. It relates to proposed new section 80E(3)(c) on the definition of Scottish residence, as opposed to residence of another part of the UK. My father’s home was, and is, in Hamilton, just outside Glasgow. By any reasonable test, that is his main residence: it has been the family home for generations; my mother lives there; and it is what my father would call home. However, for a number of years he worked for the Civil Aviation Authority and although he was mainly based at Prestwick, the nature of his job required him to spend a considerable amount of time at its headquarters in London. He rented a flat in central London, where he was registered on the electoral roll for council tax, for utility payments and for all the other aspects of living in a dwelling. For a number of tax years he spent a majority of nights in London, as opposed to spending them at the family home in Scotland. Therefore, if I have read proposed new section 80E(3)(c) correctly, he would not be deemed to be a Scottish taxpayer. I would be grateful if the Minister would confirm whether that is the case. If so, is this not an anomalous situation and will the Government re-examine what the definition of “a Scottish taxpayer” should be?
Secondly, I wish to discuss the “Caledonian sleeper” question, which relates to proposed new section 80F(1)(a) and the number of days spent in Scotland
“at the end of the day.”
I do not have a detailed knowledge of the railway timetable, but let us suppose that the sleeper train left Glasgow at 10.30 pm or 10.45 pm and so was clearly in Scotland at the end of the day. If it traversed the border before midnight and so was actually in England on the stroke of midnight, would that day be counted as Scottish or English for the purposes of this calculation? I hope hon. Members will forgive me for raising this very detailed point, which will affect only a small number of people, as it is the job of this Committee to tease out these practical matters. I do not expect the Minister to give me a definitive reply right now, but I would be grateful if he undertakes to examine the matter and give an answer at a later stage in our proceedings.
It is important that we move forward on these tax powers for the Scottish Parliament. The big difference between these proposals and the ones in the Scotland Act 1998 are that these apply to all the different rates of tax. The structure being used and the fact that there will be a corresponding reduction in the block grant will deliver to the Scottish Parliament a real ability to make decisions, be accountable and test how well these things work. We wanted that in Scotland and we need it, but that is not to say that the arrangements will not have any complications and that there is no need to be clear about the answers to some of these questions. Some could be covered by regulations that are to follow, but there is always an anxiety involved in depending too much on detailed regulations, as opposed to primary legislation.
I wish to discuss two particular areas, one of which is tax avoidance and the provisions that the Government suggest we put in place to deal with it. The last thing that we would want is for those who have the ability to arrange their tax affairs in different ways to be able to avoid paying this tax, as that would harm the Scottish economy and undermine the whole principle behind what we are trying to achieve. We need to know what provisions will be put in place to deal with tax avoidance in the future. My hon. Friend Ann McKechin mentioned the self-employed, and they are also important. It is easier for them to arrange their tax affairs in a beneficial way, whereas those of us on PAYE may not be able to do that. It is important for self-employed people to know exactly how this system will work for them, particularly if they generate earnings in different parts of the United Kingdom, as it is quite possible for such people to generate.
I also have concerns about the future interrelationship between the benefits system and the tax system. This is important because the way in which benefits are calculated for some people depends on their income after tax, which means that a variation in tax will affect benefits. The Government may be clear that systems will be in place to deal with that very quickly, but the last thing that people on benefits need is any uncertainty about their income. They need to know how any increases in their income, and therefore in their tax liability, or any decreases in their income will affect them, because at that level of income people suffer particularly badly when changes are made. If the Welfare Reform Bill proceeds in full, we will be moving towards a new benefits system at just about the same time as some of these new powers come into force, so it is important to get this right. I urge the Government to provide answers to these questions, if not now, in time for Report, so that we can be clear about how this interrelationship will work.
May I begin by telling hon. Members how pleased I am that, after a thorough independent evaluation of the devolution settlement in Scotland, this Government have been quick to legislate on this issue, fulfilling a manifesto commitment of more than one party in this House? After more than a decade, the time is right to assess the implications and consequences of the devolution settlement.
I shall now speak generally in support of the provisions of clause 26. The Calman commission review predates the economic crisis, but the need to recover the UK’s economic strength makes this issue ever more important. It is clear that economic growth will be driven by enterprise in local communities. Creating a Scottish rate of income tax will give the Scottish Government more responsibility over not only how they spend revenue, but how they raise it. That is a crucial discipline, which we hope will increase the likelihood that fiscal decisions will reflect the needs and priorities of Scotland, the Scottish economy and, most importantly, the people of Scotland. This is an opportunity for genuine fiscal accountability.
The proposals outlined in the Bill are not entirely new, but they do mark the next stage of the devolution settlement for Scotland. The existing Scottish variable rate gives the Scottish Government the power to raise or reduce the basic level of income tax. As Donald Dewar, the original First Minister, said, the Scottish variable rate
“asks the Scottish Parliament to face real financial choices and makes it, in a sense, more directly accountable to the people it represents.”—[Hansard, 31 July 1997; Vol. 299, c. 465.]
However, as we have discussed tonight, the Scottish variable rate has previously been only somewhat theoretical, in that it has never been employed as a tool to influence the economic fortunes of Scotland. That raises the question of whether the new rate will be any different, but I believe that it will be. I believe that the Scottish Government can and will enjoy more financial responsibility through the radical proposals in the Bill. More importantly, the proposals have the propensity to have long-lasting positive effects in Scotland.
To understand that, we have only to ask ourselves how our constituents—no matter which part of the UK we represent—would respond if more funding were raised and distributed locally, rather than by central Government. If that were the case, I am sure that my constituents would take an even greater interest in what their money was spent on and would be able to assess more easily whether politicians were responding to local priorities. Although the provisions relating to Scotland are based at the national level, not the local one, the same phenomenon should apply. This move should strengthen democratic accountability and bolster political engagement in Scottish communities.
I am sure that I am not the only hon. Member recently to have received letters from constituents unhappy about the level of block grant funding given to the devolved nations and, in particular, concerned that there is a difference in funding for certain policy areas, such as university fees and prescription charges. What needs to be communicated more effectively is how the Scottish Government can prioritise their funding. In England, all funding is distributed by the UK Government but in Scotland, the UK Government pay for national—that is, UK-wide—public services, such as defence and industry, and the block grant funding is distributed by the Scottish Government and pays for devolved powers: education, various aspects of health policy and so on. As a result, although decisions on funding in England must involve national, regional and local priorities, the Scottish Government can spend their block grant funding on regional and local issues only.
The income tax provisions in the Bill will mean that the procedure of setting the Scottish Government’s budget is more responsive to the wishes of the Scottish electorate. That will increase the financial accountability of the Scottish Parliament and relieve the Scottish Government’s reliance on the block grant—a healthy development and one that many of my constituents will welcome.
Will the hon. Lady concede, nevertheless, that choices are made about how to spend that block grant and that if a Scottish Government make a choice about how to deal with university funding, they do so to the potential detriment of other funding? The decisions that have been taken in this place about tuition fees and the reduction of the teaching grant for universities have had a considerable impact on Scotland, so we are not somehow free from those decisions.
The hon. Lady makes a valid point and that is why I prefaced my remarks with the phrase, “What needs to be communicated more effectively is how the Scottish Government can prioritise their funding.” By that, I meant that checks and balances are involved and that that needs to be communicated nationwide. A greater understanding of that needs to be gained.
My hon. Friend’s answer to that intervention was very generous. It is right that the Scottish Parliament should make decisions about priorities in Scotland—about free tuition, prescriptions and whatever else—but the question that remains and needs to be answered is whether the baseline of the block grant, as it is set up, is fair on Scotland, England and Wales.
My hon. Friend makes a valid point.
Let me turn now to the proposals in the Bill. It is only right that I should explain why complete financial independence would not, in my view, be beneficial for the Scottish or wider UK economy. Members of the Scottish National party might say that the Bill’s financial provisions do not go far enough but devolving full economic responsibility while retaining various regulatory and other competences would create a two-tier system that would serve to weaken our economy. Devotees of the two-tier system argue, I believe, on the basis of a fiction, if not a fantasy, that such a fragmented system could exist without disastrous consequences. The Calman commission and the Scottish Parliament’s report on the Bill both rule out financial independence on the grounds that it would create havoc for taxpayers and break up the Union.
In its final report, the Calman commission gave its reasons why income tax should not be fully devolved, including that it would not, in the commission’s view,
“be consistent with the social Union”.
We can add a further reason. There are certain areas of government that a responsible country will retain at a national level, such as defence and national security. They should remain UK-wide in the interests of the shared public good, and fragmenting them would be both inefficient and dangerous for national security. The same basic principles apply to immigration and trade. Unco-ordinated approaches in those areas could lead to potentially disastrous consequences so it is important that we act responsibly and in the whole country’s interest.
Such protections can be afforded only under a single economic framework and any moves to meddle in that area unnecessarily will create more damage than good. It is therefore refreshing that the Scottish Parliament recognises the merits of the Bill’s provisions and, rather than running before attempting to crawl, its report on the Bill does not go so far as to recommend full financial responsibility.
The Bill is about improving the devolution settlement and promoting economic growth. The income tax proposals in the Bill retain the reservation of overall fiscal management within the UK Government, which will ensure that the needs of Scotland are supported alongside a UK-wide strategy of promoting growth and economic stability. I welcome the Scottish Parliament’s Committee’s report on the Bill, which states in paragraphs 36 and 39, with reference to fiscal decentralisation:
“The evidential base was, in our view, remarkably weak, and the claims made did not stand up to challenge or scrutiny…the overwhelming balance of expert economic opinion in Scotland and internationally was that the existing evidence base supports neither any clear link between fiscal decentralisation and an economy’s long-run rate of growth, nor…a precise numerical link between fiscal decentralisation and an increase in GDP.”
It goes on:
“The Scotland Bill is about good government. It is intended to improve how Scotland is governed and align decisions on spending and taxation more closely so that the Scottish Parliament will be more accountable and, in the long run, take better decisions. Better decisions will, in the longer term, mean improvements to many aspects of Scottish public life.”
In true political fashion, I have a favourite section of the Scottish Parliament’s Committee’s report, which was mentioned earlier. In paragraphs 43 and 44, the report states:
“Full Financial Responsibility was the Scottish Government’s alternative to the plans in the Scotland Bill. The Committee did not examine this in detail, as there was no detail to examine. We received no costings for these plans, no material explaining the practical implications for taxpayers, employers, Scotland’s financial sector or collection plans. However, we were able to come to several obvious conclusions. Firstly, as was made clear in evidence to us, fiscal systems serve constitutional ends. Full Financial Responsibility is no exception. The constitutional aim it serves, however, is not the preservation of the UK. Secondly, it is plain that under fiscal responsibility, Scotland would run a substantial deficit…Finally, it is clear that no thought has been given to the effect of these plans on the economy of the UK, to which Scotland will inevitably remain linked…The Committee is clear that the evidence shows that full financial responsibility or autonomy is not a serious alternative to the fully worked out plans in the Scotland Bill.”
It is my contention that full financial responsibility would not benefit either Scotland or the UK more widely.
In conclusion, it has been made clear by the Scottish Parliament and acknowledged by the Calman commission report that reform of the devolution settlement in Scotland is essential. It is fair to assume that the Bill would exist regardless of which party was in government, and I hope it receives the support it deserves. Any futile disagreements with its premises discredit the fine work undertaken by the Calman commission and serve only to play partisan politics. It is difficult to argue against the income tax proposals laid out in the Bill as they further cement the coalition Government’s commitment to the localism agenda. That agenda is about devolving power to meet more local needs, but that does not mean that all powers can or should be devolved. Powers should be devolved to the most local level possible if feasible and responsible. I hope that if the Bill is successfully passed and implemented, Scotland will be able more effectively to deliver Scottish solutions for Scottish needs and the Scottish people. I support clause 26.
I rise to support amendment 42, tabled in my name and those of my hon. Friends, and amendments 43, 44, 47, 48, 49 and 50. All those amendments are concerned with the commencement only of a number of clauses. I congratulate Ann McKechin, who is not in her place, on her technical questions. I have a very similar list so I shall not reread the questions but I would like to reinforce two of the points that were made.
The first concerns Labour’s probing amendment 70, on retrospectivity in the tax code. I am seeking a guarantee, as far as the Minister can give one, that such use of any retrospective tax powers would only be in relation to stopping tax avoidance or tax evasion. That is extremely important. The second is about people on board ships and other installations. Is the Minister convinced that the description in new section 80E(4), introduced by clause 26, that a place
“includes a place on board a vessel or other means of transport” is sufficient?
Before I address my amendments, let me make an observation about the lovely speech of Fiona Bruce. She spoke about accountability under the proposals and not wanting things to be fragmented. I wonder how having control of 50% of the base rate, a quarter of the 40% rate and only a fifth of the top rate, and having no control over allowances and thresholds, is unfragmented. I understand that she wants things to work, but I fear that she might not understand that that might be deflationary. She said that there would be a link between tax and spending, which there might well be, but the provisions in total will assign the Scottish Parliament control of only 15% or so of the tax raised in and on behalf of Scotland. She also said that the Bill was a fully worked out plan. It is so fully worked out that there are amendments that we do not yet have, which we will debate on Report, and I suspect that amendments will be tabled in the other place. Of course, the Bill is also likely to be subject to a second legislative consent memorandum after the Scottish election, so it is not quite the fully worked out plan that she described.
Today, however, I am more concerned about commencement and I am glad that all the commencement amendments are being debated in a single group. They relate to tax provisions on the Scottish rate of income tax, stamp duty land tax and landfill tax, which come into force two months after the Bill receives Royal Assent. However, those provisions will not have any practical effect at that point because the Bill includes an additional step requiring the Treasury to appoint a tax year as the first year in which the income tax provisions are to operate. For SDLT and landfill tax, the Treasury will appoint a specific start date, but the principle is the same. Until the Treasury does that, those tax provisions will sit on the statute book without changing the current arrangements whereby the UK Parliament controls all aspects of income tax, SDLT and landfill tax. Similarly, although the measures to repeal the current Scottish variable rate provisions will commence two months after Royal Assent, they will have no practical effect until the Treasury appoints a tax year as the last tax year in which SVR will operate.
This two-stage approach to commencement is highly unusual but not unique. The practical effect is that the tax proposals will operate only when the Treasury decides they should. The powers conferred on the Treasury to appoint start dates are not subject to any parliamentary procedure and will not even be publicised by means of statutory instrument. The processes for bringing the tax provisions into effect do not require the consent of the Scottish Parliament, Scottish Ministers or even the Westminster Parliament. That would be a fundamental flaw in terms of scrutiny, particularly where the commencement of flawed provisions would result in something damaging the economy.
The SNP believes that there has to be a role for the Scottish Parliament. The Scottish Government have outlined the serious gaps remaining in the proposals, not least the fact that crucial details remain unknown. It is essential that the Bill should include a specific mechanism giving the Scottish Parliament the opportunity to consider the proposals after Royal Assent but before they are brought into effect. Our amendments seek to change the commencement provisions to ensure that the tax provisions cannot be brought into effect without the specific consent of the Scottish Parliament.
As the Bill alters the devolution settlement, the Scottish Government do not consider it appropriate for the key provisions on taxation to be brought into effect by means of an administrative decision by the Treasury. There are plenty of precedents for Scottish consent to be required before UK legislation comes into force. Section 127(4) of the Anti-terrorism, Crime and Security Act 2001 requires a joint order to be made by the Secretary of State and Scottish Ministers before certain measures can be brought into force. Section 148 of the Adoption and Children Act 2002 contains a range of commencement procedures involving Scottish Ministers and the Welsh Assembly. Certain provisions in the Policing and Crime Act 2009 relating to football banning orders require the consent of Scottish Ministers before being brought into force. Finally, the Public Bodies Bill, which is currently being considered in the other place, includes a requirement to obtain the consent of Scottish Ministers before an order abolishing or reforming a public body is made where that order includes provisions on a devolved matter.
If the commencement arrangements are left unchanged, many of the most important questions about the Bill will be left unanswered. They could then be answered only by HM Treasury when it decided to do so. In the view of the Scottish Government, the SNP and, I hope, Members on both sides of the House, the Scottish Parliament should not consent to what is effectively a blank cheque for the Treasury. Our amendments simply seek that the consent of the Scottish Parliament should be required before the commencement of the provisions. The amendments were not designed to be contentious, but they are vital and would give huge protection not just to the Scottish Government but to the Scottish Parliament by ensuring that the provisions that impact directly on fiscal tax and borrowing provision in Scotland must be agreed to by the whole Parliament and not just Scottish Ministers or UK Ministers before they are applied. I commend the amendments to the Committee.
I want to raise a technical point that was stimulated in my mind by the comments of Iain Stewart. It is a fairly minor point, but the aim of the Committee is to bring out such points. The hon. Gentleman referred to the Caledonian sleeper situation in which someone got on a train late at night in Glasgow, Edinburgh or somewhere else in Scotland and found that they were in England after midnight. There could also be a situation in which someone got on a train before midnight in Glasgow or Edinburgh, expecting to be in England after midnight, but found, on looking out of the window, that they were in fact in a siding in Carstairs due to the vagaries of the weather—a situation that has perhaps faced some of us in the past.
Leaving that fairly limited example aside, it occurs to me that the issue the hon. Gentleman raises could have wider implications. Take the situation of someone who lives in Dumfriesshire or the borders, perhaps in the constituency of the Under-Secretary of State for Scotland, David Mundell. That person may live in Scotland but be a night-shift worker in England—perhaps a delivery worker for a retailer or a regular night-shift worker in a factory. Such a person could be defined as being in England, rather than in Scotland, under one definition even though he clearly lived in Scotland—or vice versa. It probably would not be appropriate to amend the Bill specifically to cover this issue, but it should certainly be given some thought. Perhaps the Minister could consider it with a view to giving guidance to clarify how such a situation should be addressed. A large number of people would not be affected in that way, but more than a handful might, so it would be useful to get clarification on such points from the Minister now or later.
This evening’s debate has centred around the complexities of this hugely complex legislation. I had not intended to speak, but I, too, was prompted by the contribution of Iain Stewart, which led me to think about my experience of running a small business with 12 to 14 staff, doing payroll on a weekly basis and the huge complexities of keeping up with changes in legislation and making sure that my staff were aware of such legislation. Hon. Members would not believe the number of staff I have employed over many years who did not understand what a tax code was, how they were taxed on their income and how national insurance was involved.
Some of the previous speakers, such as my hon. Friend Mark Lazarowicz and Fiona Bruce, should remember that these proceedings are televised and that the public hope to understand what we are talking about. My hon. Friend Ian Murray has kept his contribution fairly simple so far, but I failed to understand some of the earlier contributions.
I am grateful for my hon. Friend’s intervention, which highlights the fact that the Government’s agenda for growth is about growth in the small and medium-sized enterprise sector, and making sure that small businesses in particular can contribute a significant amount to the private sector to take up the slack caused by the job cuts in the shrinking public sector. However, the complexity of the legislation we are examining is detrimental to the many small business owners who will be concerned about the complex process they will have to go through to make sure that they employ people in accordance with the right piece of income tax legislation. Many issues have been raised about travel—I do not call the train the Caledonian sleeper; I call it the Caledonian keep-you-awake, as I have yet to sleep on it—and I hope that the legislation does not include provisions on where someone falls asleep, otherwise my own tax affairs could be rather complex.
We must consider the issue of close connection. People may work in a different part of the UK, but it is not necessarily the place that they call home. Any Scottish MP who has regularly done the trip from Scotland to London will recognise many faces on their train or flight as people who work in London Monday to Thursday. They leave Scotland on Sunday night, and return on Thursday evening or Friday morning to their family. They would not regard themselves as English income taxpayers. They would very much regard themselves as being resident in Scotland. It is where they call home, but, as we have heard from the hon. Member for Milton Keynes South, it would not necessarily be classified as their place of residence for the payment of income tax.
I was about to say that I was delighted to receive an intervention from my hon. Friend, but perhaps I should say that I have noted his comments, and will move on.
I should like to mention Her Majesty’s Revenue and Customs. At my surgery—no doubt this is the case at the surgeries and advice sessions of many right hon. and hon. Members—I have been beset by the complicated problems that my constituents have experienced as a result of their not understanding the HMRC process. Indeed, taxation errors have been made by both HMRC and employers. HMRC is undoubtedly under pressure, with more job losses over the next few years. In fact, I think its work force will have halved by 2015. I hope that the Government will take into account the complexities of the legislation to make sure that HMRC has the resources to be able to deal with it properly. The Federation of Small Businesses has been mentioned by my hon. Friend Ann McKechin in connection with the number of small businesses that use the pay-as-you-earn system. There are problems with self-assessment, which can become complex for someone who satisfies some of the tests of the legislation, but conducts personal business in different parts of the UK.
My hon. Friend Sheila Gilmore raised the issue of tax avoidance. If there are different income tax rates in Scotland and England, I hope that HMRC will have the resources to deal with that so that people do not deliberately try to satisfy the tests of the legislation to benefit from a different income tax rate on the other side of the border. Many of the constituents of David Mundell will be affected by those cross-border issues, as we have heard.
HMRC definitely needs the resources required to be able to deal with that properly, and to put provisions in place to make sure that people understand the system. All too often, as the Member representing Edinburgh South, I have dealt with self-employed constituents who have filled in self-assessment forms and then experienced a hard-nosed approach from HMRC in some pretty dreadful letters. Some letters say that it will send agents round to seek to pin down possessions and sell them to cover the debt when, in fact, HMRC has made an error in its tax coding and the problem has to be sorted out at a different level.
All those issues come together. The measure is welcome, as it gives the Scottish Government and Parliament real accountability for the proportion of tax that they can raise locally in Scotland for the people of Scotland. However, we must be aware that there will be many small businesses, employers and employees who will be concerned about how the measure will operate. If the system is to be accountable and is to operate practically for the benefit of the people of Scotland and for the Scottish Parliament, we must make sure that it is not undermined by a complex set of rules that are easily circumvented as a result of tax avoidance or because genuinely self-employed or small businesses cannot understand it sufficiently. We must put support in place to ensure that they follow the rules properly and so that the measure operates in the most effective manner.
We have had a lengthy and thorough debate. First, I intend to address the amendments and then set out in a little more detail the various tests on what constitutes a Scottish taxpayer. Finally, I hope to pick up the points that have been made in the debate and try to answer as many technical questions as possible. Whether I will be able to find the solution to the question of whether Mr Stewart senior is a Scottish taxpayer remains to be seen, but I will do my best.
Amendment 68 would require the Scottish Parliament to consult such persons as Scottish Ministers consider appropriate before setting the Scottish rate. I believe that that is inappropriate, as it interferes with the accountability of the Scottish Parliament to the people of Scotland. It should not be for the UK Parliament to tell the Scottish Parliament or Scottish Ministers how they should go about setting the rate of tax. It is for them to decide and ultimately to be accountable for that decision to the Scottish people through the ballot box. There is nothing to stop the Scottish Parliament in its Standing Orders including a requirement to consult or take evidence on setting the rate if it wishes to do so. Rule 6.6 of the Standing Orders of the Scottish Parliament sets the remit of its Finance Committee, which is required to consider and report on, among other things,
“proposals for the making of a tax-varying resolution”.
It will be for the Scottish Parliament to decide whether a similar provision should be made in relation to any proposal to set the Scottish rate of income tax. That is a matter for the Scottish Parliament—it is not something that we should prescribe in Westminster.
Amendment 69 requires the Treasury formally to consult Scottish Ministers, the Scottish Parliament and other persons before it uses its powers to disapply or modify the application of the Scottish rate of income tax. It may help if I describe the purpose of this power. We plan to use it to set some of the detailed rules on the operation of the Scottish rate of income tax, because any changes have to operate within the UK income tax framework, which is a reserved matter. The Scottish Parliament has given its consent to the Bill through the legislative consent motion, which includes that power and the way in which it will operate. It was not raised as a concern by the Scottish Bill Committee in its extensive scrutiny of the measure.
Having said that, I can confirm that HMRC will work closely with all parties concerned, and it has set up three technical groups that include representatives of business and of individual taxpayers. The Scottish Government participates in all those groups, which cover in particular how reliefs for charitable contributions and pensions will be treated. The Government will publish draft legislation in advance, giving all parties an opportunity to comment. That is very much in line with our approach outlined in “Tax policy making: a new approach”, which was published at the time of the June Budget. Tax policy making has been criticised as piecemeal and reactive. I want a new approach, with consultation on policy design and scrutiny of draft legislative proposals as its cornerstone.
I accept the motivation behind the amendment, but I hope that Ann McKechin agrees that this is something we are very much doing already, so the amendment is unnecessary. Proposed new section 80G of the Scotland Act 1998 provides the Treasury with supplementary powers to allow modifications to be made at a later date. It allows, for example, certain types of income or relief to be included or excluded from the Scottish rate to provide the flexibility to be able to respond to stakeholder input and the changing environment.
Subsection (4) of new section 80G gives the Treasury a limited power to make any changes retrospective to the beginning of the tax year. The timing of the Budget cycle is such that many Finance Bills contain proposals that come into effect before Royal Assent. I hesitate to bring back painful memories for the official Opposition, but hon. Members might recall that the previous Government introduced a clause on Report of the Finance Bill 2008, increasing the personal allowance by £600 in 2008-09 in response to pressure over the abolition of the 10p rate of income tax. As is common, Royal Assent did not occur until the summer of that year—until
It is important therefore that, where necessary, any order made under the powers given by section 80G can take effect from the start of the tax year. The Scottish rate is to apply for a tax year, and preventing amendments under section 80G from applying for the whole of the tax year could create difficulties for individuals and businesses alike. It is also identical to the power already in section 79 of the 1998 Act introduced for the Scottish variable rate.
On the subject of retrospective taxation, the previous Government committed to tax breaks for the computer games industry. Will the coalition Government commit to introducing tax breaks for the computer games industry retrospectively to April 2010?
With the greatest respect to the hon. Gentleman, I am not sure that that is entirely in order. I am sure the Chair would not want me to be diverted into that matter.
I assure hon. Members that the Treasury is not seeking a general power to impose retrospective legislation. I am not in a position to predict what consequential changes might be needed to other legislation because of future finance or other Acts in relation to the Scottish rate of income tax. The period of potential retrospection is rightly restricted to the start of the tax year in which the order is made, so that if we need to make a consequential change it can take effect at the same time as the provision to which it is consequential. To do otherwise would create complexities.
The Minister will recall that on a small number of occasions an anti-avoidance measure went further back than the start of a financial year. In those circumstances, would he have to come back and seek a different power so that an avoidance measure in England went further back than the start of the financial year in Scotland? I would not like to see such an irregularity.
The hon. Gentleman is right. There are circumstances in which anti-avoidance measures have been retrospective and go back further. As I say, the power would take us only to the beginning of the relevant tax year in which the order is made. Other sorts of anti-avoidance measure would not fall under this power because of the constraint within it. The Bill is not designed to meet that purpose. I hope that provides the hon. Gentleman with some clarity. I hope also that my comments on amendments 68 to 70 are helpful and that he now feels able to withdraw the amendments.
Amendments 42 to 44 and 47 to 50 seek to make the process by which the Treasury appoints tax years to bring into effect the provisions relating to the new Scottish rate of income tax and the effective date that UK stamp duty land tax and landfill tax are disapplied subject to the consent of the Scottish Parliament. This is to be indicated by way of resolution. I consider this to be unnecessary. We have stated our intention to commence the Scottish rate of income tax from April 2016, and to devolve the landfill tax and stamp duty land tax by April 2015.
The Scotland Bill Committee in the Scottish Parliament welcomed these proposals, as it stated in its report. The Scottish Parliament has now given its approval to the measures included in the Bill through the legislative consent motion. The Bill provides for the new Scottish rate of income tax to be brought into effect in such tax year as is appointed by the Treasury as a precautionary measure. Appointed day orders will be issued in advance of disapplying the stamp duty land tax and landfill tax. We have also tabled Government amendments, which I will come to later, to ensure that this process is completed by order made by statutory instrument so that these are printed and published for transparency.
If the hon. Gentleman will forgive me, I want to deal with the amendments first, as I stated in my opening remarks. I will then deal with some of the questions that have been raised as a consequence, and touch on some of the administrative consequences of the changes.
We made it clear in the Command Paper that accompanied the Bill that if the Scottish Parliament is not ready to introduce the smaller taxes in April 2015, we would consider delaying the switch-off of the UK-wide versions of the taxes in Scotland. That said, we must be clear that clauses 29 and 31 enable the disapplication of the existing tax in Scotland. Should the Scottish Government and Parliament decide that they do not wish to put in place a Scottish version to cover the existing tax base, we will not leave the current stamp duty land tax or landfill tax in place. It will be for the Scottish Government to decide what, if any, arrangements they wish to put in place in this area once it is devolved to the Scottish Parliament.
That is clear. The problem arises if the timing is wrong. Why would the Minister disapply the existing legislation and leave a gap for the Scottish Government to fill at some point in the future? Why should disapplication not happen until the Scottish Parliament gives its explicit consent? Making that happen properly would match the respect agenda and avoid any difficulties.
The Scottish Parliament has made it clear that it supports the proposals. We are setting them out some years in advance. My understanding is that there is a consensus on the proposals, and it is for the Scottish Government to ensure that there is no gap after 2015. We have made it clear that we will work closely with the Scottish Government as we move towards full implementation of the measures set out in the Bill. This engagement will ensure that the Scottish Government can keep the Scottish Parliament apprised of implementation work in good time. I consider the additional requirements to be unnecessary, and I therefore urge the hon. Member for Dundee East to withdraw the amendments.
I shall deal briefly with Government amendments 61 to 66, and new clause 18. These are minor and technical and ensure that we have a proper parliamentary process attached to the provisions that bring into effect the provisions of the Bill. Government amendments 61 to 64 amend the existing provisions in the Bill to bring into effect the provisions in clauses 26, 29 and 31. The amendments make it explicit that the days or tax years appointed by the Treasury under these clauses will be appointed in orders made by the Treasury. New clause 18 ensures that these Treasury orders are classed as statutory instruments and are therefore printed and published.
Government amendments 65 and 66 both amend the existing provisions in clause 38 relating to commencement. These should be read in conjunction with new clause 18, which ensures that the order-making powers provided for by the Bill are all statutory instruments and therefore subject to the applicable parliamentary process. The amendments do not have any substantial effect on the provisions in the Bill, and are simply drafting amendments. I commend them to the Committee.
A number of hon. Members asked about the definition of a Scottish taxpayer. Let me say at the outset that the Bill sets out a definition of Scottish taxpayers, as opposed to Scottish residents, and can therefore apply, notwithstanding the absence of a statutory residence test. It might be of help if I set out how that will work. The definition of a Scottish taxpayer will determine which individuals are liable to pay income tax at the rate set by the Scottish Parliament. It is based on the definition included in the Scotland Act 1998 for introducing legislation on the Scottish variable rate, a point made by my hon. Friend John Stevenson. However, we have taken the opportunity to review the definition to make it easier to administer and simpler to apply, and to remove some of the potential unfairness that could arise from the application of the definition provided for the purposes of the Scottish variable rate.
Following the recommendation of the Scottish Parliament Committee that examined the Bill, which was endorsed by the Scottish Parliament on
A Scottish taxpayer will be someone who meets two tests in a tax year. The first test is that the individual in question is UK resident for tax purposes. It is important to emphasise that the definition does not disturb those rules or increase their complexity, but merely sits on top of them. We are not replacing the underlying rules of UK tax residence with an entirely new concept of Scottish tax residence. The second test is whether the individual meets any one of three conditions—A, B or C.
Condition A is that the individual has a “close connection” with Scotland, which is defined in proposed new section 80E. For the majority of people, it will be a straightforward question of whether they have a close connection with Scotland. If they have one place of residence in the UK and it is in Scotland, they will have a close connection with Scotland and will therefore be a Scottish taxpayer, provided that they live there for at least part of the year. This last condition—that the individual lives in the place of residence—is a crucial part of the definition and ensures that it is simple to operate. Someone may stay in a place of residence which is not their home, perhaps while on holiday or as part of their work, but such nights away are disregarded because those are not places where the person lives, but merely places where they stay.
Let us consider the example of sales reps who have one home in England in which they live with their family at weekends, but who spend their working week in Scotland. While they are away, they stay in a variety of hotels. Because the family home in England is the only place in which they live, they will not have a close connection with Scotland and will therefore not be a Scottish taxpayer, even though they physically spend more nights in Scotland than they do in England. That is all they need to do; there is no requirement for them to keep a detailed record of the number of nights they spend in each part of the UK. This is one way in which we have sought to improve on the definition of a Scottish taxpayer set out in the 1998 Act, which would have required people in such a position to keep records of the days they spend in each part of the UK.
I want to offer the Minister a note of caution, as the understanding of where a person lives and where they stay is slightly different in Scotland. I hope he will come up with something that is legally a little more robust than the simple distinction between staying and living. The nods from Scottish Members, who understand the vernacular, verify the advice that I am trying to give him.
I am always grateful for advice on Scottish vernacular, and to the right hon. Lady for her comments. If I may complete my explanation, I hope that things will prove to be reasonably clear.
If someone has two or more places of residence in the UK, the question of whether or not they have a close connection with Scotland will depend on whether their main place of residence is located in Scotland for at least as much time as they spend somewhere else in the UK, again provided that the place of residence is where they live. This will apply to those who split their time between a house in Scotland and a house somewhere else in the UK, both of which can be described as their main place of residence. It will also apply to those individuals who sell their homes sometime during the tax year and move from Scotland to somewhere else in the UK, or vice versa. Within that year, they will have more than one place of residence in the UK, and which of those will be their main place of residence will effectively depend on what stage in the year they move house. In the case of someone who starts the year with their home in Scotland but moves to England after eight months, their Scottish home will be their main place of residence for longer than their new home in England. Such individuals will therefore be a Scottish taxpayer for the full tax year.
Condition A has been designed to enable the vast majority of people to decide whether they are a Scottish taxpayer without the need to consider the other two conditions. After all, most people will have no difficulty deciding where their main place of residence is located.
I have been listening carefully to what the Minister is saying but am still a little puzzled. I understand the example of a sales rep who might use hotels or temporary accommodation, but if the other residence is another house or flat that the resident has registered for council tax or for the purpose of being on the electoral register, for example, does that come under that definition? My father, for example, could self-declare his home in Scotland as his principal residence, even though he might spend a minority of the time in a year there.
The ordinary meaning of the main place of residence is set out in case law. It is not necessarily determined by the number of days one spends at a location. To use the example of my hon. Friend’s father, if a commuter has his family home in Hamilton and stays there every weekend, although he might spend more time at work in London, Hamilton would be his main residence. HMRC guidance will provide a number of worked examples of that. I am reluctant to give too much information that could constitute specific advice, as I obviously cannot comment on individual cases, but I hope that that is helpful.
I will come to condition C in a moment, which I hope will provide the hon. Gentleman with the answer that he and others are looking for.
Having dealt with condition A, it would be remiss of me not to address condition B. It is possible for some people with two or more places of residence in the UK to be unable decide which is their main place of residence. I do not think that that applies to Mr Stewart senior, but it might apply in some cases. It is for such people that condition B has been designed. Someone who cannot determine under condition A which part of the UK they have a close connection with will need to count the number of days they spend in Scotland, compared with the number of days they spend elsewhere in the UK—in other words, a straightforward day count test. If they spend more days in Scotland than they do elsewhere in the UK, they will be a Scottish taxpayer. If they spend more days elsewhere in the UK than they do in Scotland, they will not be a Scottish taxpayer. We recognise that it might be onerous in some cases to have to keep a day count record, but the number of people within that category should be relatively few.
To deal with one question that my hon. Friend Iain Stewart raised, for the purposes of the day count, an individual has spent a day in Scotland or in any part of the UK when they are present at the end of the day—in other words, at the stroke of midnight. That is consistent with the existing and long-standing rules that determine presence in the UK for the purposes of tax residence.
Condition C, which I suspect is of particular interest to a number of hon. Members, is set out in proposed new section 80D of the 1998 Act and is very straightforward. If someone represents a Scottish constituency in the Scottish, UK or European Parliaments for any part of the year, they will be a Scottish taxpayer for that tax year, provided of course they are UK resident, which I assume will generally be the case. The definition has also been designed in such a way that an individual will be a Scottish taxpayer for a full year. They cannot be a Scottish taxpayer for part of the year and not a Scottish taxpayer for the rest of the year. That again helps to reduce unnecessary complexity in applying the definition and understanding of whether or not an individual is a Scottish taxpayer.
It is envisaged that the new Scottish rate of income tax will first be applied from
HMRC has therefore established three technical groups with representatives throughout the UK, including a pensions group, charities group and an income tax group. Those groups are reporting to the high-level implementation group, which the Secretary of State and I established last summer. We are discussing with the technical groups the implementation issues—for example, the application of differing rates throughout the UK on tax relief for contributions to pension schemes and on gift aid. It is also conceivable, given the lead time to implementation, that there might be changes in the business or tax environment or to processes.
As we discussed when considering the earlier amendments, the clause includes a number of supplementary powers to allow certain modifications to be made at a later date—for example, enabling certain types of income or relief to be included or excluded from the Scottish rate to provide the flexibility to respond to stakeholder input and to the changing environment.
I shall pick up on some of the questions that I have not dealt with in my explanation, which I hope the Committee has found helpful. A worker who spends significant amounts of time on an offshore oil rig or another place of work off the UK coastline will not usually need to count the number of days they spend there to determine whether they are a Scottish taxpayer. The oil rig is not likely to be their sole or main place of residence in the UK, so any time spent on it can be disregarded when deciding whether they are a Scottish taxpayer. The only exception is if the location of the individual’s main place of residence is genuinely unclear. In such cases, whether someone is a Scottish taxpayer will be determined by the day count. If the oil rig is in Scotland, those days will need to be included for the Scottish count.
We continue to look, with the Ministry of Defence, at the issues surrounding our armed services, and we will come to a firm conclusion on that in the near future.
The question was raised of whether a personal representative of a deceased person will be a Scottish taxpayer, and the answer is no. A Scottish taxpayer will be an individual, and after their death that will not extend to the personal representative. It follows that any income arising during the administration of the deceased’s estate will not be subject to the Scottish rate of income tax.
I was asked whether it was fair that people will not receive split-year treatment when they move between Scotland and the rest of the UK, and I touched on that briefly a moment ago. No split-year treatment applies to those leaving or arriving in Scotland: an individual will be a Scottish taxpayer for a full tax year or not at all. There is no prospect of double taxation when someone lives part of the year in Scotland and the rest of the time in another part of the UK. It would be administratively much more complex were we to try to split the year.
On whether proposed new section 80G is too broad, that goes back to my earlier discussion of the amendments in this group. The power in the new section is needed to deal with mainly technical changes and to decide which reliefs should be taxed at the variable or UK rates. That is almost a mirror image of the power to deal with the consequences of setting the Scottish variable rate, which is already in section 79 of the 1998 Act. It is worth pointing out, as I said earlier, that we have set up three technical committees, on charities, pensions and income tax, to discuss the impact that the Scottish rate of income tax will have on the wider tax system, and to consider where modifications might be required. Therefore, we need the power to deal with that situation.
I reassure the Committee that the Treasury does not seek a general power to impose retrospective legislation; the measure set out in proposed new section 80G is limited to the start of the tax year. If we need to make a consequential change, we will ensure it takes effect at the same time as the provision to which it is consequential. We think that that will be helpful.
A point was made about what HMRC and the Government will do to support employers, and about the concern that the measure might be administratively difficult for employers when identifying who is and is not a Scottish taxpayer. Let me assure the Committee that it will be HMRC’s responsibility to identify who is and is not a Scottish taxpayer. Scottish taxpayers will then be given a Scottish tax code by HMRC, and employers will use it in the PAYE system, just as they do with other employees. It is also worth mentioning that there will be an awareness campaign in Scotland and in the rest of the UK ahead of the system’s introduction.
The rights of appeal will be based on existing mechanisms, but they might need to be adapted, and HMRC will discuss that with the professional associations in due course through the technical groups that it has established. The self-assessment form for the self-employed will need to be altered to reflect the existence of Scottish taxpayers.
On condition C, which applies to Members of Parliament and of other elected bodies, the question was asked, “Why not Scottish judges, other senior members of the Scottish civil service and so on?” We have singled out only elected representatives; others will be subject to the same rules as other Scottish taxpayers. We think it appropriate that there is no ambiguity in the case of elected representatives, and those representing Scottish constituencies at whatever level should be Scottish taxpayers.
That is a rather lengthier speech than I had hoped to make, but a number of questions were raised and I wanted to provide as many answers as possible to what is one of the most technically challenging aspects of the Bill. The solutions that we have reached are those that improve what we are building on, and they should provide as much clarity as possible.
May I welcome you to the Chair again on this Bill, Ms Primarolo? I also thank the Minister for a full explanation of the various technical measures, and for his response to the questions that have been raised in the debate. I appreciate that it might not have been the most exciting debate; indeed, it might have rendered some Members closer to sleep than the Caledonian sleeper could have done. Nevertheless, it is important that we have on the record the Government’s response to a number of key questions that, when we come to implementation, will impact on many hundreds of thousands of people. It is important that we have as full a picture as possible in our debate this evening.
I accept the Minister’s comments about amendment 68 requiring the Scottish Government to consult such persons as they consider appropriate. The taxpayer would anticipate and expect the various business organisations and tax specialists who are generally consulted by the UK Treasury as a matter of routine and good practice to receive the same approach and level of consultation from the Scottish Government. I am sure that the Scottish Government, of whichever political hue, will want a full consultative process. The Minister noted that the Scottish Parliament has a specific power to lay this down in Standing Orders, and I hope that it will give recognition to what has been said in this debate.
I note the Minister’s comments on amendment 69, which have been helpful in clarifying the Government’s approach and the fact that they already have a number of mechanisms, with the Joint Ministerial Committee and the interchange of work with civil servants on both sides of the border, through which they can consult Scottish Ministers. That is a very strong and robust system, and it is important that it is maintained and enhanced as we go through this process over the next few years, when it will be important that all parties work together as closely as possible to ensure that policies work.
This debate has shown up the complexities regarding residency. My right hon. Friend Mrs McGuire was right to point out how the interpretation of where someone stays or lives can have different connotations. Those of us who have represented a constituency for a number of years will recognise the complex personal lives that some of our constituents have. They may sometimes be a bit reluctant to tell people where they are staying or living at any particular time of the week or month of the year.
That brings us to how the questions are phrased on any self-assessment form and the guidance that is provided to individual taxpayers and to their employers. Obviously, employers will have a high level of responsibility in advising their staff about whether they will be covered. The Minister cited the example of a travelling salesman, but there are many other examples of staff who travel the country from time to time. Some people’s lives are entirely peripatetic—entertainers, for instance. I remember many years ago, when I was a lawyer, acting for entertainers who spent the summer season living down in Blackpool and then came back up to Scotland for the winter season.
Indeed. The hon. Lady attracts me into an interesting debate on the difference between residency and domicile, but I am not going to bore the Committee—I can see that the Under-Secretary is getting a bit concerned—about the distinction between the two. That sort of thing keeps tax lawyers very busy.
Indeed. Travelling down there on the train to the Labour party conference on a Glasgow holiday weekend was an interesting experience. One could easily distinguish between those who were delegates and those who were on their holidays. I remember one occasion when people had brought along half a band, which was playing on the train.
Iain Stewart and others commented on the Caledonian sleeper. Let me say that the Caledonian sleeper provides an essential travel service for many of us, and long may it remain so, because otherwise our travel plans would be even more difficult than they are given that certain flights will be withdrawn at the end of this month. That brings to mind a story that I recall being told about a colleague who represented the city of Glasgow many years ago, and who was a member of the railwaymen’s union. He regularly managed to sleep on the train. One night, he asked the guard to make sure that he was taken off the train at Motherwell, not Glasgow, because he had to address a union meeting just before the workers went on shift. There would be several hundred people there, and it was absolutely essential that he got off. He duly woke up in the morning and found himself at Glasgow Central station. The guard opened the door and said, “I know you’re really angry, but you’re not as angry as the man we shoved off the train at Motherwell.” I am sure that there are many such stories about Members of Parliament.
I note the Minister’s comments regarding residency of Members of Parliament. Some people might think we are getting special preferential treatment so that we can easily distinguish whether we are UK tax residents who are not living in Scotland or vice versa. However, I do not object to the definition. Perhaps it makes things a little easier if, when the Bill becomes law, we are asked awkward questions about our own position. I am sure that some of the points raised today will be considered by implementation committees.
On the Minister’s comments about armed forces personnel, we need to be able to define this at a fairly early point. It would be preferable if at some point during the passage of the Bill—certainly before it comes back from the Lords—we knew about the position of the armed forces. Will the Minister ask his colleagues to ensure that we have a definitive response before we reach our final conclusions on the Bill?
The Minister’s comments on amendment 70 were helpful in defining the circumstances in which retrospective amendments may be made. I acknowledge that there will be limited circumstances where that is appropriate. Given the timing of the Budget, it is almost inevitable that this may occur from time to time. His clarification helped to show that he regards this as a de minimis clause rather than one that will be used to the maximum extent. However, I hope that he can assure us that Scottish Ministers and the Scottish Government will be provided, at the earliest opportunity, with information about how this is likely to impact on them. Perhaps it is part of the Exchequer’s standard consultation process and pre-Budget report that it is fully engaged with the Scottish Government so that they are able to make appropriate contingency plans should a clause in the Finance Bill then be passed by this House and by the House of Lords.
I believe that we have had a reasonable level of reassurance from the Minister on those questions. These are primarily probing amendments. Accordingly, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.