 Fycin amgylch yn ddiweddol i'r 33nd meirnu i gyfyrdd Cymru cenedlaeth mewn sgotech chiw olio. Rwy'n gael ei wneud i chi'n i cyfnodol i'r gwbl blaen ffylgoedd o'r gallu fadebeth mewn pob cyfosio. Rydw i'r meirnu i'r meirnu i'r cyfeiriad, oherwydd erbyn i'r mwy. Mae'r newid yw'r honi'r newid yn dda i ddod i'r Ffuture MacDonald, sydd yn gael hwybl i'r meirnu i peirnu Muhetbarn i'n gael i'r cenedlaeth ei dychleidau any interests relevant to the remit of the committee? I'm not sure if that makes you Doc Brown, convener, but I have no interests to declare. Thank you for that, Mark. We move on swiftly to agenda item 1. Our first item of business this morning is to decide whether to consider agenda item 3 in private, and members have agreed. Members have indicated their agreement. Agenda item 2, our next item of business is to take advice, evidence, I should say, on filofiscal devolution from Elspeth Orcharton, from the Institute of Chartered Accountants of Scotland, Isabel Dynverno, from the Law Society of Scotland, Alexander Gardner from the Chartered Institute of Taxation Scotland hub. Members have received papers from each of our witnesses, so we're going to go straight to questions. As always, questions will begin with myself before opening out to other colleagues around the table. First of all, I'd like to thank our contributors for the excellent and substantive nature of their submissions. Actually, I have to say that there's plenty of meat in there for us to get tore into, so to speak. So, where shall we start? That's always a question. Well, let's look at the... As soon as they're in order, I'll do it that way, may as well. The Chartered Institute of Taxation, actually, and I'm quite pleased that you've annotated things numerically, so members can look quite clearly at areas where I'm asking a question on. The first question I'll just ask is with regard to paragraph 3.6. With regard to VAT, you're suggesting that we'd not recommend a sign of revenues being considered until it's clear that it's possible to measure to an acceptable standard of accuracy the revenue attributed to Scotland. We do not believe it's currently possible to achieve this for VAT or corporation tax. Of course, you'll know from Smith that, while corporation tax is not being recommended for devolution, a sign of VAT actually is. Obviously, I have some concerns. I'm sure that I remember due to your suggestion that it's not possible to measure to an acceptable standard of accuracy, so I'm just wondering if you can tell us what that standard would be and how it could be obtained. The Smith commission highlights the fact that the receipts will be calculated on a verified basis to be agreed between the UK and the Scottish Government. That highlights that there's an acceptance there that there needs to be some kind of basis and that is yet to be agreed. The difficulty with VAT is that there are a number of ways of looking at it. You have the VAT amount itself. You have the net position when you go all the way through the chain. You have the question of whether place of supply is relevant. You have various other ways that one could look at it. I don't think that I can give an easy answer to your question. What we were trying to do in our paper was highlight that there are a number of ways that one could skin this cat. It has been highlighted in Smith that there needs to be an agreed way of doing it and that it is yet to be seen what that might be. Elizabeth, do you get any comments that you want to make on that? The only statistical split that I have found so far to try to address this issue is a paper by HMRC, a methodology note that it produced in October. I don't know if the committee has seen that, where they start to address the issue of disaggregation of receipts. Their approach is to look at VAT from the consumption end. The way VAT works is that everyone who adds value in a supply chain has a net addition. Ultimately, it is borne by a consumer, basically the public, some also by partially exempt or exempt businesses, but broadly by the public. Whether that gives you a measure of the consumption by Scottish taxpayers and in Scotland, which I think it would give you, whether that is the allocation that you are intellectually trying to get to, if it was to be an allocation that you thought was more about the competitive capacity of the economy, it is not doing that, it is looking at the consumption end. I think that it is really difficult to know from the nature of the tax where the receipts are or which economy, if you think about it as Scotland or the rest of the UK, the tax generated is attributable to. I am not aware of any other methodology that tries to do that. It is a matter of deciding intellectually what you want to do or conceptually, and then looking at what sources of data might be available or what extrapolations or interpretations and analysis could be applied to that. It is probably going back to the principles. I am just about to add to that. Can I ask you something specifically on this? It was just following on from what Elspeth was saying. There are probably completely different approaches. You could, for example, say that traders had to indicate how many of their supplies were made in Scotland as compared to England. You could say to W. H. Smith, tell us what the supplies are from all your Scottish stores, and that would give you a split for them. Every trader would have to do that. That is looking at it from the supply side. Because vat has supplies and reclaiming vat on inputs, there is the completely different approach that Elspeth has outlined of looking at it on a consumption basis. However, the issue with looking at it on a consumption basis is how on earth would you verify that? The area that I was going to ask was about policy matters. Does the Law Society of Scotland have a view as to whether or not the Scottish Parliament should have any say in terms of the setting of vat policy at UK level to receive assigned revenues? I think that probably the nature of dealing with shifts of revenue by assigning the revenues is generally that it is not accompanied by a say in policy. It is only where the setting of rates or indeed dealing with the tax itself is devolved that you would expect that to be accompanied by a change in policy. I think that the Law Society is probably reluctant to be saying whether things should or should not be devolved, but rather just pointing out the issues with devolution. I notice that the Law Society has its bets a lot more than your colleagues on the panel there, I have to say. Alexander, in terms of paragraph 4.2, you have quite an interesting comment here. You have said that somebody is receiving funding from central government by way of refunds of tax outside the strict operation of vat system. It may be worth considering the extent to which similar powers could be devolved rather than devolved powers or changing aspects of the tax system. I am quite intrigued by that. I am just wondering if you can tell us a wee bit more about your thinking on that. I am going to have to hold my hand up here. I was thrown in at the last minute to stand in for the chair of our technical committee, and I picked up on this point as well. I had not been involved in this section, so I cannot give specific examples of what similar powers are being referred to here, but it is something that I tried to get an answer to and failed in time for this meeting and something that I can feed back. It would be interesting if you could provide some follow-up on that because it is an area of some interest. We will move on to yourself, Elspeth, in terms of your own submission, and very early on in your submission in the section on economic growth and job creation, you suggest that power could be devolved till the setting of a minimum wage for Scotland. Of course, that has not been recommended by Smith, but I am just wondering if you can tell us what you are thinking specifically on that particular issue. It is quite difficult to identify, I suppose, the more generic powers that assist economic growth and job creation if you are looking at job creation other than things that affect the employment market in itself. It seems to us that if you were to take something like the minimum wage, it should be relatively straightforward to identify who was employed in Scotland, barring the usual boundary issues, and to separate that out. That was a feeling that came from some of our committees that, particularly those who felt very strongly on the social justice argument, that was something that could perhaps be separable. It is not a tax power although it is administered at the moment by HMRC. Alexander, you set out your general principles at the very start of your paper. Do you want to be certain to proportionate the ability to pay convenience, efficiency, et cetera? You go on to talk about simplicity, stability, fairness and consultation. What is your view on that same issue, the minimum wage, which is something that you feel as an organisation should be devolved? I do not think that it is something that we particularly considered as part of our review of this in terms of the minimum wage position. I do not think that I have anything else to add on that. Is there anything to add on that? Again, it is not something that we had considered, but generally, if we had considered it, we would have formed the same view as I casted that it is something that would make sense and could be devolved. There is the whole issue of different prices and the different costs in Scotland and all the rest of it, so it makes sense for it to be devolved. Isabel, in your paper, in Alexander's particular, talked about this annual tax on enveloped dwellings, which is something that we talk about all the time here in the Finance Committee. In paragraph 17 of your submission, you said in the very last sentence, that we recommend that a amendment should be made to the Atheid legislation so that it does not apply to properties in Scotland. I wonder if you can give us some of your more specifics on that. I am very glad that you have raised this point because it is something that we feel very strongly about, even though the Atheid is perhaps something that we do not come across every day. We think that it is an example of tax being devolved to Scotland and then the consequences of that not being followed through at Westminster. STLT was devolved to Scotland or is being devolved to Scotland from next year. It is being replaced by the London buildings transaction tax. Atheid is very similar to STLT. It is an add-on to STLT, but it is not the same tax. It is not switched off by the Scotland Act and continues to apply to properties in Scotland. Why is that not appropriate? It is because the Scottish Government has its own view about how to deal with LBTT avoidance. We are probably not going to have any because it has a very fierce approach to it, but it has its own policy objectives. The way that the Scottish Government has decided to look at enveloping properties, that is buying properties through companies, is to have a possible charge on the transfer of shares in those companies. You would have LBTT on the transfer of the shares. Atheid is an annual charge that companies have to pay or other non-natural persons where they own residential property. It is just like having a Westminster tax on something at the same time as a Scottish tax. Really, Atheid should have been switched off for Scottish properties. The rates of Atheid used to be quite high, so it was £2 million, and there are not a huge number of £2 million properties in Scotland, as we know. However, the rates are now coming down, so it is more of an issue. In reality, regardless of what the rates are, you should not have a situation where a tax is devolved to Scotland and a tax that is pretty much an add-on to it still remains at Westminster. It is a conflict that we should not really have. Alexander, your paper, paragraph 8.5, you seem to take a slightly different view and you say that it seems logical that Atheid should also be devolved with the Scottish Government to be able to choose whether to operate a similar tax-replyr tenant or existing measures, but you also say that it would be possible to retain Atheid as a UK-wide tax but require HMRC to pay the tax in respect of Scottish properties. I think that it is just an example of the number of ways one can look at it. I would endorse what Isabelle said starting point is if you have a particular tax devolved, it is important to look at other similar taxes that may be covered elsewhere and that Isabelle makes a good point about the specific provisions under LPTT to deal with corporate structures. I think what we were trying to do here was just to say that if there is a policy decision to do something different, then there are other ways that one could look at it to try and within the overall structure to pass on some of the fiscal benefit through the allocation point. Equally, it is probably now that the rates for Atheid are coming down, as Isabelle said, and is potentially more relevant in Scotland. Given that there is a provision under the LBTT Act that could be utilised, switching it off is one that perhaps is the most obvious route to follow. It is also ultimately going to affect houses that are over half a million pounds. This is the first time that I have really come across this. It has been in two of your three submissions. I am just wondering why, for example, it was not near the ICAS submission in terms of the land-building transaction tax. At that stage, it is just such a new tax and it is not really considered to be widely applicable in Scotland. I was just flicking through the same tax estimate paper and the estimate of the amount of tax payable in Scotland for the current or for the year just finished is a million pounds. Just about half of that is rounding. It is not the biggest issue for taxpayers in Scotland at the moment. Having heard the discussions and the points, I think that our view would be that we would agree that we should keep it all together with LBTTs. I would be happy to agree with the Law Society's view on that. Sorry, but McGavin wants to come in with supplementary on that. You raised a very interesting point. I wonder if groups have raised it before. Have you raised it with the authorities? What kind of response have you had? It would be quite interesting to know. We have certainly raised it with HMRC on a number of occasions. The response has been that we have no plans to devolve any further taxes to Scotland and so on. The fact that it probably does not apply to a huge number of properties in Scotland but with the rates coming down, I think that there is an acceptance by HMRC that it is not really appropriate. I think that if ATED had been around when the initial discussions on devolving LBTTs to Scotland had been taking place, no one would have suggested devolving STLT and not ATED. It is the fact that it came along afterwards that has really caused the problem. I think that there is an important general point that we need to make sure that this devolution of taxes is to some extent future-proofed so that we do not have, for example, the devolution of income tax rates as were proposed under Smith but then have a Westminster different tax on a super-profit's tax, for example, which would not be caught by the rates being devolved to Scotland. I do not imagine for a moment that that might happen but it is an example of that sort of thing. It is very hard to predict what taxes will be introduced in the future but there needs to be a fair play clause or something like that. Mark, you were wanting to give me a point when you seated. I indicated that it was leading in that general direction. Obviously, the point that you raised goes wider than simply the tax powers and there are a number of powers that are proposed to be devolved. Some could be devolved earlier and we will maybe touch on that a little bit later. The general trend is that there will be a lag in terms of legislation going through, et cetera. You would suggest that there needs to be some sort of articles of good faith, if you will, that during that process new systems or new policy decisions will not come in which would either undermine that transfer or create a power that applies on a UK basis but which would not transfer when those powers are devolved. Yes, or that what was being devolved could be adjusted to take into account the changes in the interim, something along those lines. I was just going to ask one further question and then open it out to colleagues around the table but none of them have made any bids to ask any questions. So I shall continue until they do. Oh, suddenly they've all woken up when the hands are all going up. Good, I thought that would get them going. Okay, the last question that I'm going to ask before opening it up, as I said, is to yourself actually at Elspeth ministry regarding your paper paragraph 7.18. We're talking about demographics in this excellent section and you've said that other factors could influence assumptions made about Scotland's demographics to come. Policies that successfully increase the proportion of the population expected to be economically active or improve the predicted life expectancy and health life expectancy could in time change the analysis. I'm just wondering if there's any powers you feel are being recommended by the Smith commission that will allow Scotland to achieve this. I'm not sure that the powers in the Smith commission are necessarily intended to achieve this. When we're looking at what would increase the proportion of the population or economically active, it's probably looking at... Well, it could be pension age. I'll take that back. It could be pension age. But it's probably more how many people wish to work. It could be about getting the 18 to 24-year-olds into employment at an earlier stage. A lot of that sits under economic development, which is already devolved. In terms of life expectancy and healthy outcomes, a lot of that probably sits within the health regime anyway, in particular preventative health, which has devolved anyway. I'm not sure that these were issues or intended to be issues that Smith should be aiming at, but it was an observation that statistics and forecasts over time changed depending on what's happening in the underlying population and how they might be responding to initiatives on smoking or drinking or whatever it might be that are already in the sights of the Parliament. Immigration is obviously something that would impact on demographics. That's not worth the rate, really, of the two. Immigration is not something that's being devolved by Smith, so, without that control, it's very difficult to achieve any other. It was put to me yesterday that immigration isn't as much of an issue in Scotland as immigration of talent. I have no statistics on that, but I think there's probably the two aspects. It goes beyond population and immigration statistics, go beyond my area of expertise, but I think the general attractiveness of the jobs market, of the types of businesses that are attracted to being in Scotland, that whole piece is what will keep talented young people, talented middle-aged or older people for that matter, staying and working in Scotland. Ultimately, it's about economics. Scotland's been losing 30,000 to 40,000 people in the 20 to 30 age group each year in the last decade. That's clearly a major impact on the demographics for the future. Presumably, the power-to-set income tax rates could be used to try and persuade people to remain in Scotland. I don't know whether the Smith proposals would allow, for example, different rates of tax to be payable by younger people compared to older people. I don't know if that's even possible, but there's also quite a wide flexibility that one would have thought in setting the rates and having very low rates at lower levels. Even though the personal allowance isn't to be devolved, perhaps a very low rate on the first chunk above the personal allowance has pretty much the same effect. You would think that the income tax powers could be used imaginatively to try and reverse the brain drain. Alexander, do you want to comment on that? No, I just pick up again on the point that Isabel makes. That's the one that is there and that there is flexibility. It can be looked at in a number of different ways. I don't have specific statistics, but Professor John Key has put various figures out there about how much tax is taken in terms of income tax at the different levels. That suggests that the ability to have some imaginative use of flexible rates and bands starting right at the bottom is something that could be utilised and could impact on encouraging talent. I'm not convinced that there's as much flexibility as has been suggested. I might come back to some of those things. I certainly have a few things that I would like to ask, but colleagues may pick it up as we go along. Now that we have a plethora of members who are keen to ask questions, first of all, I want to be marked and followed by the deputy convener. Mark Ruskell. Thank you very much, convener. Thank you for coming along this morning. Thank you also for your evidence, which, as the convener said, was a meaty read. There are a number of issues within it that I wanted to pull out. In terms of the Chartered Institute of Taxation, at paragraph 5.5 you say, in respect of the block grant, it is important that the formula for reduction is transparent. Additionally, there must be coordination between the UK and Scottish Governments in relation to taxes. The first point would be, in terms of the transparency of the Barnett formula, do you think that there is a lack of transparency at present as to how the calculations operate within that? I think that there's certainly a lack of understanding and going forward with more variables in there. The point that we are making is that, as the flexibility increases going forward, the transparency point is a very important one. Do you perceive there being implications if that transparency is not dealt with given the devolution of tax powers that will be coming to Scotland? I think that if it impacts, it comes back to what is trying to be achieved and what all the knock-on effects are, to make it work and to see what happens with what is devolved at an early stage, seeing how that impacts on everything is important going forward. Obviously, I'm happy to take a view from the other panel members on this. As you mentioned, your stamp duty has been devolved in this to become land and buildings transaction tax. At present, there has still not been a resolution on the impact on the block grant. As a result of that, the Scottish Government still doesn't know if the way that they are structuring the tax will prove to be revenue-neutral because the Treasury has not given those figures over and we are fast approaching the budget setting. Does that give cause for concern that that process for the stamp duty devolution could be repeated in future for income tax, for example, and the difficulties that that might give our eyes to? I think that it's important that it is resolved and that there is clarity going forward and I'm assuming that coming out of this process that that will happen and that it will become easier going forward looking at other taxes. I don't know if colleagues have comments. To answer your first point, I have yet to meet anyone on the planet who could explain the Barnett formula to me, but maybe I should get out more or something. I don't think that it's well understood. I don't think that it's appreciated necessarily what it was intended to do, why it might work, why it might not work. So there's almost the groundwork and the homework to be done before a lot of the debate happens. It is really important that agreements are reached and I think that I've explained as to why the adjustments are the way they are and how the funding works because if we're not going to have the full accountability of the independence then I think that it has become much more important to our members, to voters and those in Scotland that they understand what the settlement is. On the other hand, there's a whole load of administrative provisions that sit around that as to how the tax authorities operate and how the parliaments work together. And certainly in our submission, at another point we'd said, we thought with that need to reach agreement on block grant, never mind the wider powers and making things coherent between the parliaments, that there might need to be different processes and mechanisms. It's very important, though, that a clear agreement is reached as soon as possible. I think, or we think, that there ought to be more of an agreed timetable for reaching agreement on the adjustments to the block grant because it's not really fair for a devolved administration to have to set tax rates before they know what the block grant adjustment is. That's back to front. How can you possibly figure out what will be revenue neutral if you don't know the basis of the adjustment? Obviously, this is all new territory, so it's not something that's been done before, but there seems to be an awful lot of brinkmanship and the LBTT draft rates have now been announced, but it's ridiculous to be trying to do that whilst not knowing what the basis of adjustment to the block grant is. I wonder if it's possible to have more of a... You know, these adjustments have to be agreed between the parliaments a certain time before the new tax comes into effect and in any event before the rates are introduced or something like that. Having said that, these things are never simple and the way that makes the most sense to adjust it for LBTT might not make the most sense for income tax, but I think it's the timetable that's not really right at the moment to be not knowing how it's going to be done yet when this committee has to consider the rates of LBTT. Turning to the annex of the Chartered Institute of Taxation submission at Para 5.3, you talk about the complexities that would arise whether there to be devolution of co-operation tax. Obviously, since the submission, I suspect, was being put together, there has been the indication from the UK Government that co-operation tax is to be devolved to Northern Ireland. Do you see this being the same scenario in that regard, or do you think that the scenario that you've outlined here is overcomeable? I believe that the scenario that we've outlined is realistic as to what the implications would be. Northern Ireland, I think, has certain particular circumstances, obviously, but looking purely at the Scotland and the rest of the UK point, if we look elsewhere, as soon as businesses start operating in different jurisdictions, there are most definitely complexities added, and I think it's very important to recognise the number of businesses that operate in Scotland and the rest of the UK. I think that, very importantly, the majority of those are not multinationals that are operating in multiple jurisdictions, but a lot of them fall into the very important sector in Scotland of SMEs and so on. I think that the point that we're trying to make here is the importance of understanding what the implications of looking at a particular tax, like co-operation tax, would be in terms of the complexities, in terms of both administration from the tax authorities' perspective and also the businesses themselves having to operate with that extra layer. Turning to the ICAS submission and part of 5.44, I think that probably best summarised the law of unintended consequences around the impact of tax changes on benefit recipients. I also sit on the devolution for the powers committee and we were having a discussion last week about some of the impacts around perhaps topping up of benefits or creation of new benefits might have in a similar context. What solution do you see? Now you talk about workable solutions. What kind of workable solutions would you be looking at in terms of ensuring that there was the flexibility to make changes without it essentially resulting in individuals being penalised through powers that exist elsewhere? I think that the solutions we're looking at and it echoes what Isabel was saying earlier is an understanding of where the consequences will pop out or where the interactions might arise and planning for them accordingly so that if there is to be a welfare power, for example, devolved that it is understood what the impact is on the recipient and almost that it's ring-fenced from the other Parliament system and vice versa. I think that anything can be catered for but you actually have to spend the time going into the detail looking at a lot of different scenarios and circumstances of possible claimants in this case. Looking at the interaction of the powers and scoping out, or in as a case may be, the impact you want on the individual from the other legislation. It's workable in the sense that it's about good implementation of policy but it requires agreement between the Parliament to make sure that the consequences sought from both sides are those that are actually achieved. In the ICAS submission you talk about borrowing powers being used or the allowance being given for borrowing powers to fund preventative spend, it's at paron 9.3. Do you think that the framework set out in the Smith commission, I think that it's 0.955 which deals with this? Do you think that the powers that are envisaged on the commission would allow for that? Or do you think that there would need to be some further work done to enable that to happen? Without being an expert on the borrowing powers tax, tax is more my area. They did seem to be in the right direction. It's difficult to see because I think it's probably at the extent it would need to have some numbers put on it. It's certainly something that I know a lot of our members have raised in discussions that further borrowing powers were required. I'm not sure of anything more to add to that in terms of the specific shaping of the policy. It would be quite interesting to maybe see some of the thinking that lies behind that but perhaps that's something we could come back to. Final question, if I may convener, turning to the Law Society submission at Para 14, the discussion of air passenger duty. We do not anticipate that devolving APD would result in technical difficulties or significant administrative or economic inefficiencies. We've seen a call from the three major airports in Scotland for there to be a transfer of APD as soon as possible. The Secretary of State said last week at the Devolution Further Powers Committee that this is a tax that could be devolved early. Is there a view from the panel, not just on APD but on other powers that are contained within the Smith proposals around the possibility of disaggregating some of those and transferring early rather than transferring everything in one package? I think our feeling on air passenger duty was that it could be dealt with more quickly than perhaps income tax rates where there is already legislation in place to deal with the Scottish rate of income tax, which one would imagine the Smith proposals would build on. Air passenger duty is a much simpler thing and could be devolved more readily. There's also a great deal of enthusiasm for it to be devolved, as you've explained. I don't see why it should all have to be necessarily done together. There are two things to think about. One is devolving the power over the tax, and the second, and it can be separate, is deciding how the tax should be administered. If you were assuming you wanted to give Revenue Scotland the administrative power over air passenger duty, it would take longer to transfer that out of HMRC to Revenue Scotland simply because they don't have the whole mechanism in place yet to operate it. It would set the power, which could be done at a Parliament level, and let HMRC administer and transfer over in due course if that was what was decided. With that, you could probably separate the administrative arrangements from the power over it or operate it on a transitional basis. That's a possibility to think about. If you wish to move all together, it took three years to set up Land and Buildings Transaction tax to be operational between passing legislation and it's actually starting, as we expect, in April next year. If you didn't want the same delay in air passenger duty and it may be a bit smaller, a bit shorter than that, then that would be an option to consider again. That's not for us to see how you should do that, but it would be an option if you wished to have a staged implementation or as early implementation as you could have of the individual powers rather than wait until the last one was ready and then switch everything on at the same date, because that could be some way down the line. I think on APDR thinking was that the legislation would be considerably simpler than the Land and Buildings Transaction tax. I can't say I'm familiar with it, but I don't think that it's very complicated. So, on that basis, to produce an APD or a Scottish APD or whatever it would be, it wouldn't take nearly as long as the LBTT process. Obviously, as Eleanor says, getting revenue Scotland geared up to administer that, that would need to be factored in. We commented on it being relatively easy to devolve, and again it was the point about the legislation around it rather than the administration. I don't know enough about the administration as to how difficult it would be for revenue Scotland to take that on, but I agree wholeheartedly that sufficient time would need to be allowed to ensure that it was effective administration from day one once it was taken on. Mark Ruskell, joined to be followed by Jeane. Thanks, convener. I should probably say I'm a member of ICAS so that will therefore make me probably more aggressive in my questioning towards the institute. However, if we're starting the others, I mean, I'm fascinated by this VAT question that came up already, the convener asked, and I suspect we're going to spend quite a lot more time on that because it does open up a lot of thoughts in my mind. If it's based on consumption, and let me take an example, I think that biscuits have VAT on them, I believe, and that I have a biscuit plant in my constituency, so if they make loads and loads of biscuits but they're mainly sold in England, we would not get any of the VAT on that whatsoever if it's only based on consumption because it's where the people that would buy, despite the fact that we actually added value in Glasgow, and the point of VAT is that you tax every time you add value. So there's two kinds of... If you just look at the consumption, you're going to miss all that kind of manufacturing side, but would it be horrendously complicated to take every step and allocate it? Because if it happened in Scotland and they made the biscuits, then we'd just take all of that. I mean, your first example of the consumption against the production is absolutely right, and that's why when I looked at the statistics that were being produced in the current HMRC analysis, and that's a process they are going through to work out what should be done, I raised an eyebrow because I wasn't convinced that was what was necessarily expected, which was probably much more about the productivity of the economy. In terms of how you would do it, I think it would start to get quite difficult because if you imagine your biscuit factory selling, say, to supermarket in England or to individuals in England, you could look at its VAT return, but it would have the sales value on the output, but it would have been able to deduct all its input. So to work out what was produced in Scotland, you'd have to go to probably an economic value added type measure, which doesn't necessarily come easily from the VAT returns. In terms of splitting the geography, you'd have to have quite a few extra steps in a VAT return to identify where your inputs were coming from. Or could you not just take for that factory, just take whatever the net VAT was because it's in Scotland, you would just take it for Scotland? I think it might get more complicated. I haven't thought this one through with would you have to consider where it was getting its inputs from? There may be a methodology in there that would actually work. If we assumed we could work it on the outputs, you're then looking at having to have VAT returns on a production unit rather than a corporate entity or group basis, which you have at the moment. So if you had a business operating across the UK and one VAT return, it might have four factories, but one VAT return, you'd then have to start doing splits from that in terms of the productivity. So whether there are other economic indicators that would serve as useful proxies, I'm not sure. You've got to avoid double counting because your biscuit factory sells it to the supermarket in Scotland and the supermarket sells to... So you don't want the... how would you make sure that you weren't getting the same VAT receipts? Well, this particular biscuit factory sends all its products to England and then they're driven back up to Scotland to the supermarket, so there's kind of odd things going on. Mr Godd, you raised this whole area yourself. If we don't get the VAT on production, then it wouldn't matter whether a factory was in Scotland or England because if we're only looking at where the consumer gets it, so that would seem odd if we had all these factories and got none of the VAT out of them. Yeah, I think that depending on which way you look at it, you need to look at it across the board, I think, but I think that the point is how do we... how easy is it to find a way of tracing it through. And all we see is this comment that the receipts raised in Scotland in Smith, so I think we could probably spend a lot of time trying to work it. Okay, thanks so much. The Law Society, one of the things you mentioned which we haven't touched on, was like gifted and possible complications people in England being members of the National Trust for Scotland and examples like that. Is the ultimate answer to this really that we should separate gifted from the actual rate of income tax which has been done in the past and just say well it's 20% and forget about what the actual rate of income tax is? I suppose that would be one approach. I think that the gifted issue is one that we had already with the Scottish rate of income tax, isn't it? There are bound to be difficulties in... The same as the income tax rate has changed when it was reduced and they didn't reduce the gifted and they at least delayed it. I think you could be right to protect charities from a reduction in income. There is also the confusion factor of people making contributions to different charities and so on and so forth. That might be if we're going to have differing rates between Scotland and the rest of the UK having a separate gifted rate might be a possibility that would simplify things. There was a lot of things that I was interested in but certainly the fundamental principles in section 3 and one of the things you raised and you've raised it a number of times is the whole timescale of all of this and there's widespread expectation that the devolution of further powers will be delivered quickly but expectations need to be managed and the time allowed to make sure that it's done in a sensible, planned manner. What are your thoughts on that? A lot of us think it's good to spend a lot of time thinking about things and we did that with SDLT and LBTT in all of that area and yet there's been a time commitment in here so do you feel the time commitment is very put aside and we should just take as long as we need to go through those things? It seems to me that if you don't take the appropriate amount of time the chances of coming to a bad outcome are much greater and by bad outcome I mean something that is inconsistent or not sustainable for the longer term and it has been a very common concern raised that if you think of the time of the years in both parliaments to try and get things right and still maybe don't have got there that this just seems far too rushed to be able to get something that actually makes sense what is the saying, marry and haste repent at leisure and you're almost divorcing in haste repent at leisure so it's really about taking the right amount of time and having the right resources into the process and it was really a concern that we certainly wanted to express that there shouldn't be a sense of having to be rushed and actually having a process and a timescale map might have given more comfort because there's a lot I know at some of the civil servants we speak to at the UK end in particular who have to do the transfer out who are still not clear on how I suppose the Smith commission which is the politicians rather than the political parties rather than the Governments reaching a consensus to move forward is actually going to feed through and I think the process between the parliaments a timescale, joint committee workings etc all that is still not widely understood and it would be helpful to have that mapped out likely timetables and processes to manage expectations as to delivery of the new powers I mean clearly things can be done quickly or more slowly but I think that all of you had input and that was much appreciated whereas at Westminster they just said Midnight Tonight will change the whole SDLT system I mean is one right and one wrong or is one better and one worse I think the well because they can I suppose it's not the first time tax powers have been changed overnight and it's something that a number of people raise their eyebrows at equally if you gave people three months notice it was going to change or six months you then get into the behavioural responses and I know that's been concerns before about how far ahead is the right time to announce for example the LBTT rates I know there are difficulties in making those revenue neutral but it was also the behavioural response impact on that and then the less said about political stunts the better probably I mean Mr Garden on that point can you do views on whether these things should be done suddenly or gradually I mean I think I ideally gradually and I think that the example of LBTT was the opportunity to start with a clean sheet of paper and create good new tax law for everyone across the board and to a large extent that was achieved and we were grateful for the level of engagement and consultation on that process okay there were maybe a couple of areas which were almost in the too difficult box and I think that's an example of one specific tax where even then and the time frame we talked about there was still not enough time I think to address all of the issues so I think that the importance looking forward for further Scottish taxes is trying to take the opportunity to create good new tax law that ties in with the points that we highlighted at the beginning of our paper with the Adam Smith principles and everything else so that they can actually do what they're meant to do there is certainty for the taxpayer and they collect the revenue in an efficient way for the authorities just around the issue around behaviour or response and I take the point that's being raised obviously the LBTT rates were announced in advance and I was just wondering may not be the area in which you have the relevant information or expertise but have you noticed any indication of a behavioural response given the advance warning compared to obviously the lack of any advance warning of the stamp duty changes south of the border I think the behavioural response that I have heard but it's purely anecdotally about the usual if you think you're going to pay more tax by waiting you don't wait but that would be pure anecdote rather than anything I can offer any evidence of on the moves in the market but you only have to read the newspapers to know what they say I think the surveying firms are definitely saying that there's an increase in market activity in the sort of bands where LBTT will be more than SDLT so it is quite how much of that is just sales chat one doesn't know but I'm sure that there do appear to be more transactions going through To pursue the whole timescale thing obviously there was the plan under the present Scotland act to have a little bit of control of 10p on the Scottish rate of income tax we're now talking about control of bands and rates so how do we do that I guess we're kind of suggesting step by step and possibly even if there was further powers that should be further down the line and yet is it better just to bring it all in as a one-hour and should we bring in the rates and the bands and the Scotland act put all that all together and bring it in in 2016 if that's possible I think this is where you have to take the tax separately to work out what is the right path to get as quickly as you know doubt wish, something that's sensible my understanding from HMRC and the team looking at how they will deliver what's in the Scotland act 2012 at the moment is that it is relatively straight forward for them to move from the lockstep proposals to rates and bands so that they could implement from 2016 so almost layer over the administrative proposals the fact that it's rates and bands rather than the rates in a lockstep now it would seem to me that if they've been geared up for the 2012 stuff and feel they are ready to deliver and go through the process the process for them isn't much different so why would you not let them go ahead when they were ready and have that as the timetable I don't think it can be brought forward but I would wonder why you would delay it further if they were ready to do it they might as well do the one exercise do it for what is now intended to be the outcome rather than move into 2012 with the lockstep and then move forward I think there's two aspects of course which is making sure the administrative arrangements are in place to deliver what Parliament wishes the second is what Parliament is going to do with the powers in terms of adjusting I think our feeling was it will be enough of an exercise it will take probably a year or two anyway until HMRC really has the right Scottish taxpayers coming through the system properly there will be a transition and a familiarity for taxpayers so sometimes the fewer of the big changes you inflict on a taxpayer population at a time the better but there's probably no right answer to that one but if they're ready to deliver why would you not have them deliver what HMRC is going to do in the meantime is play around with the codes rather than having a separate system with different rates or bands I mean I just wondered if we did something quite dramatic like going 10, 20, 30, 40, 50, 60 on income tax that would be very different from what's happening down south could they cope with that my understanding is that they feel they can because you've got the code identifier of the self-assessment system but because the proposals do not adjust anything before taxable income and then it's the arithmetic applied to it in rates and bands that they feel that payroll systems can cope and that their system can cope with the right calculation so the identifier of the Scottish taxpayer sends your taxable income number into the Scottish calculations and if it doesn't have that it goes into the rest of the UK calculations so my understanding is that they think that arithmetic box that part of their IT systems can actually cope with the rates and bands as well I think that's certainly our understanding of it as well it's not actually terribly difficult to have different rates and bands I suppose what is different is that with the Scottish rate of income tax it was probably not going to be a terribly great change for many taxpayers whereas this might be so the taxpayer education process and also the significance of whether somebody is or isn't a Scottish taxpayer and whether they when people become one or stop being one and all those sorts of administrative things that's probably going to be more of an issue depending on what rates are set but you could imagine that that would be more of an issue so we need to be sure that enough resources are being put into this by HMRC and even though it's not a devolved tax maybe there is going to be some of a role for Revenue Scotland in actually assisting with disseminating information about it because people are going to start thinking well you know I have a problem about my income tax I'll phone Revenue Scotland it might be a natural reaction for them to take so I think because it's rates and bands and not just the 10% thing it's more of a change for taxpayers and employers for that matter so it may be that more needs to be put into making it work but the actual payroll systems doesn't seem to be doesn't seem to be too much of a challenge The educational side of it I think is important because I think even sitting here today the number of people out there who have no idea that there is already that provision in the 2012 act for the Scottish rate of income tax but the other point which is going to have to be addressed anyway and is in the 2012 act is back to this identification of Scottish taxpayers and elsewhere said if HMRC was ready the latest thing I saw was their risk register in October which I think had changed their point about identifying Scottish taxpayers from an amber to a red I don't know whether that's just because the timescale is becoming shorter or because they are identifying that it is not as easy as one might have thought in all cases to be able to identify who a Scottish taxpayer is but as I say that's something that's going to have to be grappled with anyway because it is to come in in 16 at the Scottish rate ok thank you and my final point was under you've got a section on constitutional issues at scrutiny etc and 4.4 you talk about you know the fact that there's a majority party in Parliament and you question you talk about the ensuring that there's a satisfactory quality of legislation I just wondered if you felt that you know since 2011 there had not been a sufficient quality of legislation obviously especially for this committee for example SDLT landfill tax which are the legislation that we've dealt with it wasn't so much a concern about what had happened although I think there have been times which I've been a little surprised at what has happened in Parliament in terms of the votes going through without scrutiny in terms of the lots of questions being asked in Parliament and I don't think any of the tax powers had a lot of questions in the parliamentary chamber a concern that there have been issues in LBTT that the more difficult and the too difficult pile that still haven't really been finalised at this stage but it's difficult stuff to get right and that is not intended as a criticism of the committee but if we were to have a lot more to consider of a lot greater significance the question would be would there be sufficient time to do it properly and part of that should be if you're looking at accountability and scrutiny concerns raised by members that all of a sudden this huge workload would be landed it's not as if any MSP has been sitting doing nothing for a number of years since the Parliament was established a lot more work how is it going to get done and how is it to be done properly and it goes with the concerns we had about peace to consider things properly so it was getting to the concerns around the peace and the possible rush and wanting to get the best possible outcome and to have time to do with the opportunity as best you would wish I've noticed there's less time to sit around here and stuff but do either of the other two have comments on that kind of point? Just a recognition that there are a lot of things to think about or there will be a lot of things to think about because even with the income tax although it's Westminster legislation there's quite a lot of issues that this committee probably needs to be keeping an eye on and the costs apart from anything else of implementing the rights and bans and so on I'm just wondering if the Deputy Secretary knows one of the 1,260 ICAS members who participated in the survey No I didn't actually because I take the view that I'm here to listen to surveys and not to take part in them Internet, on the point of your survey I've noticed that 61% of people said that the speed of delivery of devolved powers to meet voters' expectations whether they're very important or fairly important Jean, to be followed by Malcolm Thank you a couple of points have already been dealt with but one of the things that comes through and I think is the kind of anxiety or certainly emphasis on co-operation between and not having dramatic differences in tax levels on anything I think or certainly on those that are being proposed When we were taking evidence for example on the landfill tax there was a suggestion of landfill tourism and crossing borders and so on How much is that really a consideration? I think that there is reference to the south of England and France for example on the different VAT levels and what that does to a market Northern Ireland, Southern Ireland and so on How seriously can you take that given that there are in some European countries very dramatic differences in VAT levels on different services and so on? Anyone really I think that there is evidence in a number of research papers about what goes back to the behavioural response to if I can get it my boo is cheaper by getting a ferry to France I will do it not that I've ever done it but that kind of scenario it is the premise I haven't honest out of places I don't try it's the whole do people do it there wouldn't be a call to cut corporation tax if there wasn't expected to be a behavioural response from doing that the question as to the extent and how much the tax difference has to be to have that behaviour I think that there's probably less direct evidence on so if for example tax rates move from 20% to 21% would you get a lot of movement across the border or would companies look at differently I suspect not it would have to be something more meaningful and more sustained to achieve that so I believe there is evidence out there but not as much on the degree I think tax rates if you look I think you're right there are variables and I think there are examples where certain tipping points excuse that phrase after your landfill tax example but there are various tipping points which can be reached so people and businesses will take a lot of things into account and one of them that they will put in the mix I think will be taxed and I think you're right they're always going to be differentials they're always going to be different ways of doing things so it's not automatically inferential that will lead to a massive flood of people going one way or the other but I think there will come a point where there will be greater evidence of people looking to behaviourally to take that into account I'm kind of on the same theme I know that in your submission to the Smith commission on economic growth and job creation there could be devolved to allow the setting of a minimum wage for Scotland and just in the same vein as that that has not as it happens it's not part of the political party's recommendation but I think I'm right in saying that for a large majority of the 18,000 odd and including your own submission it was something that was recognised as could happen I mean what about behavioural change in that instance and why would you be recommending it and why do you think it hasn't ended up being a recommendation I think in terms of behavioural change unless you were to cut it dramatically and almost become a slave economy I doubt if it would have much impact I really doubt if that's going to be in anyone's sensible proposals it comes into what's the ultimate cost for business as Isabel said wage cost and cost of living in the south-east of England are very different from the more rural parts of Scotland and it might have been that some flexibility was sought why didn't go through I think if I interpreted the Smith intent properly there was a wish to maintain a single UK jobs market or labour market and that's why national insurance didn't change and that's why employment law and minimum wage as part of that hasn't changed with competition across borders there is always the concern about the race to the bottom as being not great but this was an identifiable part of something where there could be made a distinct economic case for the rural Scotland cost of living in south of England it wasn't the single biggest thing that members said but it was an observation a number of them made okay thank you okay thank you welcome to floor by Gavin the Chartered Institute like others before them goes back to the principles of Adam Smith at the start of your review do you think that there are any descendable underpinning principles in the contemporary Smith I think in all of this we very strongly feel that these principles still apply and I think in looking at each of the individual taxes I mean I think subject to some of the EU laws and everything pretty much everything could in theory be devolved but I think you need to come back to these principles of cost benefit analysis what impact does it actually have on the taxpayer what is the efficiency of collection to get the result I'm assuming that in the Smith commission they were trying to factor some of those elements in and deciding what at this point was right to do bearing in mind those principles are there any principles that you would like to see there that aren't there I think that's quite a difficult one to expand on because there's so much can be interpreted into the Adam Smith principles what is convenient and what is efficient to collect for example I think the one we might put in would be about a coherence for as long as we have two parliaments setting tax powers in different ways or we will be there we'd like to see a coherence in terms of the business experience that they weren't overlapping they weren't too contradictory and they had as few interactions as possible in terms of the parliaments and the complexity because that brings complexity I think for all part it would be the fair play principle that was mentioned earlier that not to have a repetition of the eight head type situation would be a good principle which to some extent is mentioned in the Smith report but I do think it needs to be strengthened That's helpful, thank you I think one of the most interesting issues that's come up today is around VAT I'm sure a lot of us will go and do some more work on that but does anybody know the answer to the question of which would be under current circumstances would the consumption approach or the production approach be more beneficial for Scotland? Does anybody know the answer to that question or is that unknown? I would imagine it would be the supply basis that would be more beneficial or we'd have to all start eating a lot more biscuits I don't know the answer but if consumption depends on I suppose the income position then you get a different income profile at the very small number at the very high end in the south of England so if all the London bankers are eating lots of biscuits I don't know I don't know It's a good question as to what is the right method and I don't think perhaps some of the economists would have a better answer Maybe my logic is wrong but VAT is cumulative on every service that it's happening it's like value added on everything so presumably the top rate of tax is the final sale so it diminishes underneath that would that not make it? No, because you get an input with an input and everyone's making an input takes off their input so it is only cumulative value added but everybody who's VAT registered is paying more than they're really collecting they're rarely claiming back more VAT than they're charging because they presumably are value added therefore it's cumulative and that things Although some supplies are error rated so it's not a simple sort of area the only people that doesn't affect anyway Some previous witnesses have said it doesn't really increase accountability assigning VAT do you have a view on that or do you see certain advantages in VAT notwithstanding the difficulties you've described I must admit I think it's easier to see accountability when there is a particular voters experience of something and I'm not sure that they will feel the same experience of an allocation of consumption or production based VAT but that would purely be a perception problem and it's not something that's only studied in detail It's rather remote isn't it an allocation of VAT revenues without any control over the policy or anything like that so I don't see that it does I mean if it was the case that there was only VAT on alcohol and somehow you could influence how much VAT there was then you could see that it increased accountability but not when it's the whole of VAT I mean I suppose that I quite like to just in the sense that it could be related to the state of the economy but obviously you've there's different ways of looking at that as you've highlighted this morning in terms of production and consumption I mean I suppose another issue and this is a more general question is to what extent the actions of the UK Parliament could have a I mean I've obviously support optimum devolution whatever that is but I kind of worry about are there some actions of the UK Parliament that could have negative consequences of tax changes that they make I suppose one scenario might be if we don't have any assignment of VAT what if the UK Parliament suddenly decided to change the balance between income tax and VAT which has happened to some extent under conservative governments or I mean another scenario would be if the UK Government whether without changing VAT reduced the rate of income tax Jim and Margaret Cuthbert have written a paper about this which I won't attempt to summarise but they're arguing that we'd have negative consequences for Scotland so I'm just wondering whether there are any changes that the UK Parliament could make in its tax policies that could have a negative effect under the Smith proposals on our Parliament I suppose the main one under what they're currently proposing would be if they had a vastly widespread change to what was defined as taxable income because if we look at the income tax piece is that likely I would be I would be very surprised we're talking about everyone gets another 10,000 of personal allowance but I think if you have control over rates I think that's probably where your exposure would sit it would be if they vastly increased, let's say they doubled the personal allowance made at 20,000 a year I don't expect in any way or sense that they would but that elemental variability would have to feed through unless your rates and bans powers meant you could almost introduce a lower rate or a band that cut into the personal allowance and I'm not sure that that's been defined or not whether you could or not because I think at the moment the powers see personal allowances for the UK and then rates and bans is the assumption you probably have to look at whether you could actually eat into the personal allowance what does you believe? That's the other area I think of great importance and a certain amount of uncertainty around all this is the block grant adjustment but would the scenario that you suggest should theoretically the block grant adjustment not deal with that because that would change the income tax base in England should that not result in a better block grant adjustment for us as it were or are there some problems? I suppose that was going to be in my next question anyway we have a block grant adjustment methodology for SRIT the Holtom methodology does that translate simply and effectively into the enhanced income tax powers that we have or in fact are there lots of complexities that are introduced by having rates, bans and the whole understanding is that the block grant adjustment for SRIT has still not finally been worked out but I could be entirely wrong on that I think though what the debate is demonstrating is that there are a lot of possible consequences and adjustments at one end or one Parliament that could impact the financial position of the other and that the time has to be taken to think through all of these permutations and make sure that the framework for the block grant adjustment to take account of all the powers being devolved under Smith is clear and robust and understood and supported on both sides or otherwise it just becomes an arithmetic playing field in terms of what the adjustment should be and I don't think that's a healthy or constructive way forward for either Parliament so there's a number of things you haven't answered but we need to make sure that there's a mechanism to answer them I think it would be good if all the people who understand taxation thought of all the worst-case scenarios and then we could obviously try and avoid them in the legislation that goes here I think the other area is national insurance because national insurance is income tax by another name if the UK rates of income tax were dramatically reduced but national insurance was increased so that the UK Government got the same take how would that play out and again I suppose that comes down to how the block grant adjustment is made and the sort of fair play principle and all the rest of it so it's a bit chicken and egg I think your suggestion of a fair play principle is very important I mean it's highly subjective unfortunately but I think that is important Thanks Mark The VAT thing is important because of course in the 1970s when Dennis Haley was Chancellor he set two rates of VAT 8 per cent basic and 25 per cent for luxury goods and as I recall it was deep on pot work as luxury goods included fridges and cookers and washing machines etc and of course when Mrs Thatcher came in it was changed to 15 per cent across the board so there has been a history of differential it was just to pick up on that because obviously the assignment of VAT relates to the first 10 per cent the 10 per cent of VAT now at the moment the VAT is at 20 per cent so it's effectively half of the VAT coming to the VAT raised in Scotland being assigned the question arises whether there would be the potential as the community highlights of VAT being lowered substantially on a particular sector and there are a number of sectors who have made calls in the past for VAT to be reduced to for example 5 per cent in certain areas to stimulate economic activity obviously that would have a consequential impact on the assigned revenues without necessarily the Scottish Government having an input into the policy decision that lies behind that do you see that I realise we're at the risk of creating the Isabel Diwrnod Fair Play clause but at the same time in terms of the principle of fair play and the principle of more inter-governmental working do you see that being something that in terms of Malcolm's point about worst case scenario is something that really does need to be ironed out around those potential future decisions and the impacts they could have with the likelihood of reducing below about 15 per cent I think it's subject to a number of pretty strict EU conditions so we're not likely to see a lot of it the question would be would those calls be in an area where really Scotland was disadvantaged so see tourism beds, hotel beds I think as Ireland may have we're at 9 per cent would Scotland actually be disadvantaged or have the same or corresponding economic outcomes as the rest of the UK from it so one is the outcomes the second aspect is your choice of power I think that goes back to how the agreements are struck between the Governments to decide exactly how to implement the provisions here I think that those are all good questions that need to go into the working out what the principles of the inter-governmental agreements are going to be and what the four are going to be for actually deciding whether that's fair or not I'm happy with it and say we wish you'd done it years ago so they don't necessarily have to be negative so there's separation out of is it the financial effects you want to deal with, is it the process of agreeing what might be mutually useful you want to agree with and all of these have probably different solutions to them I mean the issue of course is it's hardly a debate between equals is it I mean the treasures get the whip hand and the UK Government's whip hand and what grant adjustment for LBTT already and that's a real issue of concern Gavin to be followed by Michael I find the VAT stuff fascinating and I think we're all very grateful for what you brought before us today in the Chartered Institute of Taxation paper though you make the point that we should look at other jurisdictions such as Germany where assignments of revenue are part of the settlement between national and local governments and take account of the issues I mean just was that really something for us really to consider or is there something in Germany or elsewhere where they've already wrestled with many of the issues that have been raised today and instead of completely reinventing the wheel out, are there sort of good models out there we can have a good look at to get a handle on things quickly I think it was trying to be illustrative I'm not an expert on how it does work in Germany but I know that there is a particular way of dealing with it in terms of how they within the federal system they allocate so I think it was meant to be illustrative but I think it is one that is worth considering in terms of the impact so that there may be okay thank you that's helpful anything to add to that point I mean I think all we've identified this morning is that there are different ways to do a VAT allocation and that probably I don't think we've got the answer but we think there's probably more out there could helpfully contribute to that and different methodologies to be developed okay thank you come on to a couple of points from the Law Society paper the convener might be the deputy convener asked about the gifted issue for income tax just to be clear how are the issues arising for gifted under the Scottish rate of income tax different to the issues that would arise from the Smith commission proposals or is it really the same issue magnified slightly I think it's probably the same issue magnified slightly because it'll be the whole of the the rates and bands being being devolved so I don't think it's particularly a different issue just to a greater extent the complexity is still there okay thank you and I was very interested in your comments on the ATED which again we haven't really I hadn't thought about it too deeply before I'm not sure if we had as a committee if I heard you right though I'm right in saying that in strict legal terms it's a separate tax but in conceptual terms it's one and the same I think in conceptual terms it's considered to be part of STLT if you go to the the stamp taxes home page it says STLT and ATED on it so it's the same people who deal with it in HMRC policy and it was part of the three pronged attack on envelope dwellings and all the rest of it it is a different tax return and so on but it's not that different really so that it ought to be dealt with in the same way I think it's more of a timing issue that if we'd had ATED at the same time if we'd had ATED already when the devolution of STLT was being talked about I'm pretty sure it would have also been devolved but sometimes you have to be careful of what you wish for because if ATED was devolved to the Scottish Parliament I think we'd want to probably avoid a situation where we were forced to introduce a Scottish ATED because the Scottish Government's already decided it doesn't want to have an ATED type tax or it appears to have done so and I think that that was certainly a bit of an issue with LBT wasn't it that the way in which it was devolved in the Scotland Act meant that it had to be a transaction tax and so there wasn't a great deal of flexibility about how to do it I believe that some of the wording in the Smith report have tried to say that the Scottish Government should be free to decide how it would introduce any replacement taxes which I think is a flag for it doesn't want to be a straight jacket like it was for LBT so anyway asking for ATED to be devolved is perhaps not what we want we just want it to be switched off for Scotland your sort of recommendation is that in April of next year on the same day is when stamp duty land taxes switched off in Scotland, ATED should be switched off just not apply to property in Scotland to residential property in Scotland okay thank you and in terms of the I think it was Elspeth Orchard and he put some numbers on it there were low numbers I think he said a million but is that when the and your view is that as it comes down to 500,000 then obviously it becomes more relevant that was the just quoting from the revenues HMRC's estimate of the tax in 2013-14 it will become a lot more relevant it comes down to 500,000 from 2016 17 I'm being told 17 not 16 but it comes down in steps it's it's history is quite interesting it was introduced as a separate tax to deal with stamp duty land tax avoidance although it was introduced as a separate tax and that is the the kind of joined but separate at the same time it's interesting from the HMRC UK Government because I think one of the statistics that came out in the autumn statement was it's already generated five times as much revenue for the chancellor as he thought it might generate which is a very nice tax if you just decide to introduce it but all the you know as it is growing and we're coming more used to it probably its role in the tax system is changing and perhaps I would agree with Isabel that not too embedded might be the time to raise it as an issue just to clarify matters and clear the whole landscape it was introduced to try and stop people putting properties into corporate envelopes it hasn't done that people have continued to put properties into corporate envelopes which is why the take from ATED has been so much higher than the government expected I think they raised the rates of ATED from next year anyway as well so they obviously see it as a good revenue generator but we just don't think it should be applying to Scotland okay, thank you and just a last issue I wanted to look at was income tax I think across the panel you put forward some pretty strong views about why the Smith commission agreement on income tax should be implemented alongside the Scottish rate of income tax in 2016 and then you put forward some strong reasons why you might want to delay it slightly do your organisations have a actual view on when the Smith income tax proposal should be implemented you've outlined both sides of the argument quite cogently ultimately though does your organisation have a view on the correct year of tax to be fully devolved the bans and rates to be devolved from my perspective I don't think that we have a clear view on an exact year but I think we tend to fall on the side of let the Scottish rate bed in for some of the points we made earlier about it just being over a certain amount get used to some of the difficulties we've talked about identifying businesses, payroll systems individual taxpayers having to self-assess a different rate of tax before the further powers are brought in I think from the grounds of practicality I think we would agree I think we would suggest that the process that is in train at the moment with HMRC aiming for 2016 is allowed to continue so that the whole administrative framework is set up it may be that when the powers on rates and bans come in you decide not to move them for the first year just till you make sure the whole system is working but with all new systems I think it is useful I think we think it is useful to give them time to bed down before there are perhaps more significant consequences from whether the administrative piece works or not because there's no trialling of this there is no system to be set up it will be switched on from that tax years so going ahead from that but if and when you decide to exercise the powers is something you have the opportunity to take more time about to make sure that some of the consequences are understood in the block grant adjustments and all that stuff that could come later I'm not sure we entirely agree I think we've always thought that the Scottish rate of income tax is rather odd power to have and could result in a lot of cost for the Scottish Government with precious little gain particularly if the Scottish rate was set as quite similar to the UK rate so I think although the time is relatively short given that it seems to be that the computer systems could cope with it I think we would favour moving straight to the Smith type rates and bands the Scottish rate of income tax is a very inflexible and strange proposal with a lot of cost attached but not much benefit grateful thank you thank you for that thank you very much convener it's been interesting listening to some of the analysis sometimes it's felt a bit like we're in a game of bulls eye let's have a look at what we could have won but I cast interestingly in your survey looked at some at least asked a question around powers that we already have and them not being used and there was a very strong feeling from your survey that there were areas where the Scottish Parliament Scottish Government had not used the powers that it already has even looking at what we might get of but interestingly for me the example that you use was of the council tax I find that strange given that if there's one tax that has featured very prominently in Government policy and with the amount of money that's been spent on freezing the council tax that seemed to me to be a very strange example to use of a power not used I think that the point being made there was not so much from Parliament to local authority level but in terms of I as a resident or any of my neighbours who pay council tax what changes have we seen not a lot in terms of the method and approach the valuations et cetera what properties are taxed in what way and appear to anyone to have changed more recently so that I believe is under the control of the local authorities downwards but dependent on the agreement from Scottish Government but it was interesting if you look at the amount of tax raised through council tax in Scotland I think it's about the £2 billion a year level there was felt to be you know that's almost it's not quite but it's at least of what is thought to be raised in corporation tax that you had something quite significant there under control that hadn't been altered or adjusted in a way that anyone experienced and it was being seen through that analysis and that lens that the point was generally made moving on from council tax you get to business rates and there's been separate discussions on that as to what is the optimum level of business rates and that is a direct cost in business in the same way as someone considered corporation taxes or employers national insurances so it was looking at those now I know there's a proposal being announced to look at some of those and that probably is the response that our members would have wanted to see that something in that area where there is tax coming out of the economy that that was an opportunity that didn't seem to have been exploited by the Parliament so far because I also found it interesting Mr Gablin that you had referred to local taxation in your paper and you had reminded us that there had been a consultation undertaken by the Government following their commitment in their manifesto to replace the council tax it never came to fruition but you raised it in the context of the implications of the transfer of funds to follow the council tax benefit or the council tax reduction as it is now there will now be a commission to look at the taxes could you expand on your considerations of what the implications would be in terms of the points that you made in your paper about taking into consideration the transfer of funds what sort of things would that commission have to look at and bear in mind when it's formulating its decision on what should replace the council tax I think that the general point that we were trying to make was in looking at more looking at tax generally take it to the next level and look at the local taxes and I think we wanted to make the point that there may be specific requirements in specific areas so having that ability to extend that responsibility and accountability was something that should be looked at here we were really just making the point that as part of the overall review of taxes we shouldn't just stop at a certain level that it's important to go down to that next level and look at the flow of funds and local taxes generally we've made very valid points we've helped to clarify the points made in your papers thank you just a couple of other points from me now that we've concluded questions from the committee in Isabel it's just that the back wanting into ATED I mean why would I mean I'm sure that one thing about it not being utilised by the UK Government but as you say in your quote your land tax through enveloping surely we would want to have this devolved as opposed to switched off completely because it was still bringing in some revenue for the Scottish Government and it would of course eliminate some avoidance I think that the problem with devolving it rather than switching it off would be that the Scottish Government would then perhaps almost be forced to set up a similar ATED type system most people think that it doesn't stop you putting properties into companies it hasn't had that effect so its objective was to stop that behaviour it hasn't stopped that behaviour that behaviour continues because people often put properties into companies to avoid inheritance tax and the rates of inheritance tax are higher therefore they're quite happy to pay the ATED so it doesn't achieve the objective the Scottish Government's approach of having an LBTT charge on the transfer of shares in companies that own residential property might be more successful in stopping the enveloping of properties if that could be made to work so I think that ATED is terribly complicated it has an awful lot of administrative paraphernalia because it captures every type of company with residential property and you then have to have lots of exemptions for people who are letting residential property or developers who are house builders or property funds or houses which are being used for trading purposes like hotels which are actually houses and so on and so forth so there's a whole lot of administrative nausea so you wouldn't really want I think that most people would think you wouldn't really want to be forced to have something like that in Scotland I guess it depends to some extent on how it was devolved whether it was devolved with sufficient flexibility that the Scottish Government could do its own thing but we didn't think it would be advisable for it to ask for it to be devolved and then have to do a Scottish ATED because that's a waste of everybody's time really for the amounts that it would actually bring in there are better ways of achieving the objective probably which are? one of them is the charge on transferring shares in companies with residential property okay now just again what impact do you think that the general anti avoidance rule in relation to devolved taxes especially with land buildings transaction tax and what role do you think revenue Scotland compliance officer should have in that? the Scottish GAR is obviously much fiercer than the UK GAR because it doesn't have an independent panel for revenue Scotland to refer matters to first and also because it's aimed at avoidance rather than abuse so it is fiercer and I would think that that would have an effect in stopping LBTT avoidance I think that revenue Scotland for their part can play a significant role if they do actually carry out inquiries assiduously and do follow things through because in the early days of SDLT there were very few revenue inquiries and most people knew that those designing tax avoidance schemes could say to their clients there's never been a revenue inquiry into these it'll be fine so we obviously don't want to have that sort of situation when LBTT starts next year so I think the landscape is different there's a stronger anti-avoidance power and one hopes that revenue Scotland will also do a lot more inquiries into returns than HMRC perhaps did with SDLT and I think on the enveloping of properties that could also play a role because it's one thing to have tax charges that apply to properties in corporate envelopes but it's another thing to make sure everybody pays it you need to have the administrative inquiry side of things also working properly general point on that, the Scottish general anti-avoidance rule sits there and I think it has consistently been said that it is setting the stall light as to what the level of as opposed as distinct from any targeted anti-avoidance rules that apply to specific taxes and I think the role of an anti-avoidance rule like that is as much as having it there hopefully as it actually being relevant in numerous cases to actually have to be actioned so I think that clearly has been a key message that has been put out there that this sets the bar and I think when you look at some of the specific taxes you have to look at what actually targeted anti-avoidance that might be or on the corporate envelope one whether transferring shares for example might be a mechanism to prevent people doing other things thank you I would add that it's absolutely right it was put there as a deterrent and I think it will be in terms of revenue Scotland's role they do need the information analysis and understanding of what's happening in the marketplace to be able to apply that role or put challenges that the guard should have applied when someone perhaps has thought it shouldn't or for some reason it didn't catch a transaction they've been involved with and I think it remains to be seen how they're actually going to monitor market activity and transactions taking place to weed out the ones that they think are able to be challenged or not and I'm not aware that they're quite settled on what that process is although we know they have decided that there won't be a disclosure of tax avoidance scheme type provision in place so apart from the returns going in seeing am I falling for all of the garr tick well nobody's going to do that because they think they won't be falling for all of the garr I'm not quite sure that for that slice of transactions they've yet determined their enforcement mechanisms although I think one advantage they do have is that they will be working very closely with the Registers of Scotland and one of the easiest ways of policing SDLT which HMRC could have adopted was just to go from the land registry and look at the transactions that were being registered and follow them through and check that the SDLT had been paid and there'll be a much closer link between Registers of Scotland and Revenue Scotland than there ever was between the land registry in England and HMRC and obviously registration of Scotland is more important than it is in England anyway but I think if people know that everything that's registered on the land register it is possible that Revenue Scotland will be picking things at random and following them through when LBTT returns that will give a more rigorous regime Thank you very much for that a lot of issues to ponder I'm just wondering if there's any further comments or witnesses would like to make before we terminate the session No? Okay, I think we've covered a lot of ground well thank you very much I really appreciate your involvement this morning in answering questions At the start of the meeting the committee agreed to take the next item in private therefore I'd like to close the public back of the meeting for five minutes to order members to get a natural break