 Sgolwys i'r Caerdydd i ddechrau gyda Llywodraethau Cymru. Fy ffyrdd y ffyrdd am amddangosadau, a ffyrdd y ffyrdd ym Mhw sag o'r scrote ac o Horffy Epsin. Yn Mynd i'r Fyrdd, Bell Kid hwn yn yma yn ei ddod o'r panf tudanc o Horffy Epsin. Yr hollol o'r Llywodraeth, Epsin ac o'r Llywodraeth i gydweddarnau. The first thing we got to decide this morning on item 1 is a decision on taking item 3 in private. Do we agree to do that? Thank you very much, committee. It takes us neatly to agenda item 2, and I'm very grateful for our visitors this morning who are prepared to give evidence to us. We have a panel of four people, and if I could just go through who they are. It's Charlotte Barber, who is the head of taxation at ICAS. Professor Anton Muscatelli, the principal of Glasgow University. Gwyneth Scofield, who is the director of the PwC, Pricewaterhouse Cooper, and Steve Couch, who is a partner of the same organisation. Thank you everyone for attending. As usual, we will get questions around the room from my colleagues. Some of them will be directed to us as a panel, some of them are directed to us as individuals. We'll just see where that takes us. I'll kick off with a very general question, if you don't mind, though. You've obviously now had some of the chance to see the detail of the Government's draft clauses and taxations as part of the command paper, so it would be useful to have your views as a panel on how they're drafted, what practical challenges lie ahead by way of implementation of the new powers, and what do you think of them as a package and how cohesive are they all together? I know that's effectively asking you to make an open statement in its own way, but I don't know who wants to kick off with that. Morning everybody, I'm quite happy to start. I think that the clauses have been drafted with a degree of consistency with what we've seen in the past. There's nothing that's surprising that's come through in the way that the clauses are drafted, nor in the expectation of what will be needed as a further step in terms of full implementation. The one comment I would make, and this relates to a theme that may come through in terms of simplicity, if you look at the nature of the way the clauses are drafted and how they refer back to previous acts, whether that be Scotland Act or whether that be other income tax UK acts, there is a piece around just making this all simple in terms of the language that's used and the communication that's necessary to get this out to employers and to the public generally. What about the packages itself, more than just about the practicalities? I think there's a logical step on from Smith. I think that's well referred to in the document, accompanying the clauses, so I would say it's a helpful rather than an unhelpful step. Okay, Steve. Yes, thank you very much, chair. Perhaps I should just explain in the start I'm here in a personal capacity as opposed to representing the University of Glasgow, so I said that last time I appeared in front of the committee. I think there are a number of areas that I think need to be looked at very carefully as this command paper then finds its way into legislation. In relation not only to tax but also the interactions between the tax provisions and the fiscal framework section of the command paper. I'm particularly concerned, for instance, about the issues around boring powers, which aren't outlined at the moment within, of course, the command paper, but it does raise some really interesting issues, as I think I set out when I was last in front of this committee, because if one does devolve more taxation powers, the way one frames the fiscal framework in future for the UK has implications on how those fiscal powers can then be used by Scotland. I think there are some really interesting issues there that I think you may want to explore. I also have an issue in the way that the no detriment clauses might translate into the command paper. The Smith commission, I think, set out some very clear no detriment clauses, but how they were interpreted and practised as the paper recognises is actually quite complex. The paper gives a couple of examples of how this might work with income taxation and adjustments to the block grant, but in fact, as it recognises, it's more likely to be much more complicated in practice, so it will require a very clear understanding of how all this will be resolved between the two Governments going forward. I think this is one of the areas that needs to be looked at. There are some issues, which I appreciate welfare powers will be discussed at some other time, but similar interdependences between changes in welfare and the block grant I think will need to be recognised. In terms of the package, let me just say one thing. When I came in front of this committee, given that there seems to be much greater appetite for greater fiscal autonomy in Scotland and that seems to be clear, I think that one has to avoid situations where one creates potential clashes. I think that one of the concerns that I have about the Smith commission deal is that it reserved, for instance, the personal allowance, the fact that it reserved national income contributions. One of the big issues for me is in work benefits. Of course, by reserving universal credit, and I appreciate that you might want to consider that at another session, it means that the whole interaction between welfare payments around low pay and income taxation is therefore not brought into play. I do think that that will create potential tensions going forward. How that is managed within future legislation is usually going to be important. Thank you for having me. I guess that I am pleased to be invited. I think that, as an overall comment, the clauses do what Smith sets out to do in the main. There is plenty more for us to discuss as we go along and go further down the line. The income tax offers quite a brave and imaginative path between using existing machinery with HMRC and existing legislation but still building on what we have with the Scottish rate of income tax and bringing further powers into the Scottish Parliament. It addresses all of those three, on the other hand, given that it has got those three elements sitting together. They will still need to interact afterwards and we might come back to allocation of responsibilities in that way. There is a small bit about capital gains tax, which I think is just a necessary block to sit with the income tax. I do not think that it affects capital gains tax itself. It is an understandable bit that is there. The two small taxes that are being devolved are fine. They are relatively standalone. They are quite easy. They are like the ones that are already devolved and quite easy to devolve. The VAT offers more opportunity for discussion as to how it might be calculated. It slots in with the difficulties with fiscal framework and some of the no detriment issues because I am not quite sure how you calculate it. If you take a general estimation type of process, it will not marry up with giving you a true reflection of the Scottish economy. The better it marries up to the economy, the more difficult it is to calculate. Those elements might or might not run through how you calculate no detriment. There is one other point that I might make as an opening comment. The package that we have offers a variety of different taxes to be devolved and they offer different types of devolution. We have full devolution on the smaller taxes, such as aggregate, levy and air passenger duty. That lock stock and barrel comes here. It will be switched off from Westminster for Scotland and not quite you can do what you like with it, but you know what I mean. It will be Scottish full stop. The income tax is partially devolved, so there are going to be joint responsibilities, as Professor Muscatelli suggested. The UK will still have responsibility for large proportion of all the legislation in HMRC, so Scottish powers will need to interact with that and they will have to mesh together as well as going into the welfare side of it. That needs a bit of management. The VAT is completely different too because it is an assignment as opposed to having anything much to do with Scottish powers per se. I think that one of the issues that come out of that for me is that I am not sure that off people amongst the public have a full understanding of what Scottish taxes are or that they are different with different powers attaching. That is a very helpful opening. Can we take this in two ways? Let's start with borrowing powers and detriment is obviously in that element as well. If we started off in that area, I think that that would probably be because that is from the indications that we have had with the fiscal framework that will be required later. That is an area that we are going to have to get into in some detail. You had a question on no detriment issues. On the no detriment, none of you mentioned a moment ago the issue of the APD. It is something that we have discussed in this committee in the past. The issue of if APD is fully devolved and the Parliament has the powers to set its rates etc. The issue of the competition regarding the regional airports, particularly in the north of England. How does that stack up with the issue of the no detriment? The technical issue is a bit like the land and buildings transaction tax versus the stamp duty land tax. If you have got differentials, that is where it goes. I think that this is an example of how, for all these adjustments, do you adjust initially and then what happens? How do you adjust in terms of second and third round effects? As you say, supposing let's take an imaginary scenario where Scotland decides to reduce APD, that impacts, that leads to an immediate adjustment because there will be an impact on air traffic and then it might be, say, a year or two later some change in APD in the rest of the UK. I think that it depends how whether you just take those second and third round adjustments into account or not. My own feeling is that it is less serious to be honest around something like APD because of the point that Charlotte made earlier, which is that it is devolved fully. It is not a huge amount of taxation. I think that it is more likely to be serious around income taxation because it is just so interdependent and therefore there will need to be an eye as to how those second and third round effects, if you like, impact. If you look at, for instance, I do not want to shift away from APD but if you look at the discussion around box one, which is around income taxation, there is an agreement in principle as to how all this could be managed in terms of UK risks and Scottish risks. Then, of course, there are open questions around how long-term demographic trends should be adjusted. In the sense that APD is very similar to that, do you really adjust it once and for all of you then take into account other issues? I think that it is cleaner when it is a tax that is fully devolved because the argument there would be that you would have a once-and-for-all adjustment and, after that, it really would be up to Scotland to manage its tax base. In the issues that Professor Muscatelli just raised about income tax and no detriment issues there, Linda, I think that you wanted to— It's related—I was interested, Professor Muscatelli, about what you said about the issue, for example. It's all about interaction, but personal allowance isn't national insurance etc, not being part of the package. Then what has been said by others is that the fact that there's a zero rate that can be applied is something that can be worked with well. How do you perceive that interaction as a cohesion when there's the ability for that zero rate? As you said, the moment in which it's framed, I will lead to see how it's translated into legislation effectively. If there is the ability to set a zero rate, in effect, the personal allowance would be devolved, at least in terms of being able to raise the allowance above the UK level, if that's allowed in the eventual legislation. I think that it's just one example of situations that could emerge. Let me give you another example of the fact that, because this is partial devolution of income tax and national insurance, it could lead to conflict. The examples that are given, I think that it's on page 31 around—not that there's no detriment clauses—are pretty clean ones, because they relate to—it's page 31 around—I think that it's paragraph Roman numeral one and Roman numeral two and two, four, fourteen. In both of these cases, in a sense, these are the easiest examples, because they deal with decreases in UK income tax or increases in UK income tax when you're trying to deal with either an increase or a decrease in either devolve the reserve spending. That's pretty clean, and you can see how you can have a first round adjustment to take account of that, to ensure that the decisions are as compartmentalised in the rest of the UK or Scotland as possible. Imagine where, instead, you have a change in spending in the rest of the UK, which is financed using, say, a national insurance change. We've seen that before with health spending under the previous Government in the UK. That will now have knock-on effects, because national insurance, although it's, as I said in my previous evidence, is sometimes seen as a separate thing. In fact, it's part of the whole income tax structure. By not devolving national insurance, I think that it creates potential for conflict there, and it will impact on the Scottish tax base. This is one of the issues that I would have preferred to see a cleaner allocation of all income tax and employment income powers to Scotland, because it would have avoided those sorts of clashes. Here's an example where that interaction could create some difficulties for the two Governments in trying to trace exactly who did what and what the impact is on the respective tax bases. As other panel members like to reflect on what Professor said in any contrary views, or do you assure the Professor's view? I would not want to be too involved in the setup of the fiscal framework in terms of that matter for the Government and other parties to look at. I think that, from a PPWC perspective, we're looking at what results and what comes through and how that is implemented. Okay, sure enough. Can I just refer you to your paper that says, for reasons of legality, practicality and certain taxes are not suitable for devolution in this category and you included in that, so you could expand on the reasons of legality and practicality, why what's being just suggested would not be suitable for it? Yes, and what I would refer you to there is that we've looked at the transparency, we've looked at the simplicity, and at the time that paper was written, I think we were saying that the steps would be complicated. Do you think the views are changed to honest? No, I'm not giving any view in relation to what I'm saying now. I'm referring to your question on the paper and saying that at that time, when we were going through that paper, I'm not saying that the view is different now. That is what we conclude. I think that it's very difficult to pull any one part of the UK taxes apart, and it leads to these kind of setups as to whether national insurance and income tax go together. And certainly in the last few decades, our institute, for instance, has always said that income tax and national insurance might have been married up together because they look like one and the same quite often, and that could lead you in this direction. But equally, it could be the case that perhaps one ought to stop and have a think and say, well, should they be the same or do you want to do something slightly more radical and just work with the income tax? But they are all really finally interwoven. The different taxes in that includes national insurance in my book, except it's not everybody's book and other policies. During the course of the current government, there's been a lot of pressure to raise tax thresholds. That pressure inevitably will continue. However, there is a strong and growing field of opinion that says that we need to take our eye off tax thresholds and start looking at the impact of national insurance on the low paid. Now, if that had been devolved, would that not offer a very early opportunity for extreme divergence in the application of national insurance at the low end of wage scales? Yes, and arguably, I would be one of those economists who would argue, and there's been various reviews of the UK tax system that we should be trying to marry them up, because one of the biggest issues around income inequality, for instance, is around low pay in work. A lot of that is to do with very high marginal tax rates, as I said in my previous paper that is committee. Actually, it would have been interesting. It's a hypothetical scenario, but supposing national insurance had been devolved, it would have given Scotland an opportunity to look at that as a whole. Interestingly, I suspect that it might have also triggered a similar review south of the border because of the fact that then you could have quite substantial divergence. It might have led to that sort of change. However, it's engineered. I would be in favour of such a change, because, for the reasons that Charlotte has alluded to, the two things are becoming closer and closer together. The tax plus national insurance structure in the UK is hugely complex. It leads to a very strange pattern of marginal rates as you go through the earnings spectrum. Of course, the other point that you perhaps need to watch out if you're focusing on income tax and national insurance is that a lot of the measures that we've had in recent years with HMRC are not just national insurance versus income tax, but that package versus corporation tax and versus dividends. One of the things that I think needs to be perhaps watched here is that, depending on where income tax might go, it might have a knock-on effect in, say, family businesses. Individuals who think themselves to be self-employed, however one wants to define that, might want to work through companies or they might pay themselves dividends and head off into UK tax or, equally, they might want to stay with Scottish tax. However, if you've got differentials, you'll start bringing that into play. I think that what we hear from our clients is that they actually want it to be simple and transparent. I think that that came out through Smith's commission and the recommendations. By what is proposed, post-Smith is a further development of, in effect, the Scotland Act 2012, which, in effect, is a step-by-step approach. By bringing national insurance into that, it brings through complex issues and will lead people to try and decide whether they're employed or self-employed and how that interaction works. I think that there's a desire for business to become aware of the timing of those changes, how those changes are going to be communicated and to keep it simple and to take it in step-by-step stages. For me, to look at the income tax and being very clear about what that means for business and employers and how they implement that going forward is probably one of the key messages that should come out with Smith. Make it simple, make it clear and then move forward on that basis. I'll come back to shooting with me on the end of the session to let me sweep up, because I didn't let him in as a supplementary, but I see shooting with Maxwell. One of the questions that I had was that I didn't understand your comments, Steve, about national insurance contributions when it was asked by Duncan McNeill. It was quite clear in your paper that those taxes are not suitable for devolution for legality and practical reasons. Can you tell us what those legal and practical reasons are? I didn't understand the answer. The practical reasons, I think that we've had some hints of that in terms of what's come through in the discussion. Would you like me to comment further on practical reasons? Yes, I'm just trying to understand why you came to the conclusion. In terms of what can be devolved most easily when you look at the list of taxes, which is what we've done, national insurance raises complexities that aren't present in the same way in relation to income tax. We've discounted corporation tax because it raises complexities as well. I understand that, yes. What's the legal problem? Do you want to comment on that? Yes, it's really the linkage between national insurance and the welfare, and if you've fully devolved that, it's around the fiscal powers and actually getting that a little bit clearer, because there is quite an interlink between the two, so it makes it complicated for it to be actually further devolved. In Smith, if you think about it, welfare and the taxing powers sit in two very separate buckets, I think, as the way I'd describe it, and the bringing those together through the further devolvement of national insurance would be inevitable because they do sit together. I'm struggling a bit on this. I still don't understand what the legal problem is. I understand that there are complexities, and there are complexities even with the proposal that's on the table just now from the Smith Commission and the draft parts that we've had already. I apologise if it's me that's here, but I'm struggling to understand what the legal problem is because, of course, there'll be complexity. Of course, there's the argument about no detriment, and of course, there's the argument about, in terms of what we're struggling with, we're straining to welfare, but if a welfare change is made here, then how does that affect other benefits? How does that affect—are they taken off at the other end? I understand that there's complexity, but I'm just trying to make clear or understand what the legal problem is with the devolution of national insurance contributions. I wasn't involved in the context of writing the paper, but my suspicion is that thought is around European law, and some of the— Steve, maybe—and if you weren't involved in the paper, we understand— So, I'm happy to give a follow-on answer. Okay, but if you can't, we could always follow up and write in that way. No, I will follow up on this point in writing, but what comes to mind is the interaction of social security regulations across the European Union, which is a different set of criteria compared to the interaction of income tax across the European Union. So, for example, with social security, we have different rules for cross-border workers compared to the rules that we have for income tax. So, how you contribute when you're working abroad to a social security system is different to the rules for income tax, and I suspect that some of the legal complexity around the interaction of the European Union rules on social security and the UK rules on social security are behind what we're saying there. I knew this was going to be complex, so it would be helpful. I'm very happy to come back once I've got it in writing. I'm sorry, I just don't understand what the particular issue is. So, there's a set of social security rules? No, I understand the general point. I just don't understand the detail of why it would lead you to this position, so it would be helpful if it was more detailed. Very happy to hear that. I think that would be helpful. Wanda. I would like to move away from that. We bit and come back to the personal allowance aspect of what I asked initially. Personal allowance has not been devolved, but the ability to have a zero-rate income tax. I'm just trying to bottom out both the interaction with welfare but also the no detriment clauses. Perhaps, to make it simpler for me, a scenario where a future Scottish Government said, right, okay, we can't play around with the personal allowance, but we know the UK issue, for example, is £10,000 for personal allowance before you pay tax, so what we are going to do is apply a zero-rate up to £20,000. I know that it's just looking at a crystal ball in a way, but how would you imagine the no detriment principle applying there and the issue of how that interacts with welfare? I would expect if it's a Scottish Parliament decision to effectively take the personal allowance up to £20,000, that's a decision that has been made here in exercise of your share of the powers, and therefore the reduced income that you would get would sit here full stop. What I think might be more interesting, and I haven't completely got my head round yet, I might pass it along the line, is say for some reason we went back to having lower personal allowances, and the UK set it at, say, £5,000 for argument's sake, keep it in round numbers, then what you do and how that flows through, I don't know, because your calculations might have started today at a kind of £10,000 benchmark, and I think all those no detriment things flow through, and it's also quite interesting because it's not just no detriment, is it? It's also whether your taxes are almost becoming hypothecated, and it's not just the complete bucket that income tax pays for at the moment, but if Scots are voting on a particular Scottish rate of tax, say, for their income tax, and it's spent on education and health, then perhaps other elements go somewhere else, that there's quite a bit underneath it all with the joint responsibilities. I mean that's a very good answer actually, but it's a very good answer, but one of the issues that arises is exactly that, I mean supposing if there is an increase, if there's a zero rate, it's exactly that, it's a reduction in taxation in Scotland, it would need to be absorbed within Scottish spending, and that's how it would work. However, I mean if you look at a cut reduction in personal allowance, that would then be the example on page 31, because it would, the question is why would the UK Parliament be doing this? This is an attempt to try and reduce taxation and therefore reduce spending, and you'd be then in that sort of territory, but it would definitely have an impact because it would force the hand of a Scottish Parliament if it say it started with a zero rate, it would really, I mean it would almost certainly force that, because otherwise you would end up having a really odd tax structure around that. So it's an example of where income tax thresholds have been devolved, and you would think that Scotland then has the power to do what it would like, but then as soon as somebody were to reduce the allowance and impose a different tax structure at the bottom of the tax plan, it would force Scotland's hand, and I think this is where it gets, you know, this is where it's a bit messy, I think frankly, by not devolving the personal allowance. Perhaps I can give a comparison. I don't know if you recollect a few years ago, there was small companies, their corporation tax rate was reduced to zero, and that was just meant to be a reduction in tax rates, wasn't it, to encourage business, whereas in fact every man and his dog incorporated, and then there was a loss of tax take as well, and then the whole thing was reversed. I actually think it's quite difficult, and again it comes back to this point of your tax responsibilities and income tax are shared, and over and above that income tax interacts with other taxes. I don't think there's a lot of scope to radically change what you've got here, and that's not just a Conservative accounting speaking. I think that that's a very interesting point about what scope you've got. In any constitutional arrangement, a radical shift on taxation that can shift people across orders and decide whether they would pay tax would be the same, irrespective of the constitutional position, would it not, whether it would be independence, devolution, light, heavy, whatever, radical shifts would get that outcome? Is it not an improved situation if you can influence through inter-governmental relations and agreements? We can actually affect a situation but not tip the situation. That's getting that balance, isn't it, of doing what you want to do without tipping the balance through unforeseen consequences? It depends creatively on what the inter-governmental arrangements are, if there is an ability to influence. We haven't counted that yet, but I think that in three committee meetings that's becoming more important. I'm going to let Stuart McMillan finish off this little section, and then it's quite important that we get into the inter-governmental relations, because that's the issue about the fiscal framework and how it's going to work. Just one question before you wrap up, convener. It's to do with the point that Linda was raising about personal allowance and no detriment. Am I right and am I understanding that, if, let's assume that the Smith commission proposals come into effect and income tax has devolved, personal allowance remains at the UK level. If a UK Government goes into election and says that we're going to raise the personal allowance because it wants to reduce the amount of income tax that people pay and they get elected on that basis and they raise the personal allowance, that's a political decision they've decided to reduce the amount of income tax they get, they may get tax from other taxes from somewhere else, pretty much, obviously, taxes that are not devolved, but does that then effectively reduce the amount of tax that's taken Scotland to the Scottish Government? Does that then, automatically followed, that is a no detriment? Sorry, the no detriment clause comes into effect. Would the UK Government then effectively have to pay the balance and otherwise raise the block grant element, or would the Scottish Government have to find some other barriers and raise the income tax somewhere else? According to what's said in page 31, that would be a decrease in the rest of UK income tax and I would expect, therefore, there to be an adjustment to compensate because that's what no detriment would imply. What you cannot have is a situation where the rest of the UK decides to change its taxation and erodes to the Scottish income tax base. That would go against the no detriment clause, so how that gets implemented is absolutely critical. Is it clear that that is exactly what will happen? No, it's not clear. At the moment, it's not having been laid out in legislation. If there's an answer to that. I think you're planning to move on to the next question, which is probably part of the answer to that. We've identified an issue that we can't resolve around this table. Okay. Let me let Stuart McMillan come in and sweep this area up about no detriment and then we'll come into a discussion about the block grant adjustment and fiscal framework and how you think that might basically be together. Thank you. It's earlier on, Mr Barber, that you mentioned also the issue of the differential in terms of business. It struck me when you gave that explanation earlier on that in terms of elsewhere in the world where there are devolved parliaments and assemblies where the powers that they have may or may not be similar to what we have here, but also with the proposals that we have. However, elsewhere, is there any evidence of, as a consequence of, maybe some additional powers that they have, is there any evidence of businesses moving from one part of a nation state to another part of that same nation state because of the taxation situation? It could be improved. Obviously, it's going to be better somewhere in one place or another if there's differentials and how much of a driver that is. I'm not sure. Stephen, you've worked to cross you. I can give you a straight example, I think, so that when we see people moving to Switzerland, we will see choices to where people live while they're on international succumbent based on the approaches of the different cantons. Choices will be made in other places as well. New York has a city tax, so you might choose to live outside of New York. There are examples where people will look at what the impact will be on quite a close geography. Okay, quite a close geography. Do you understand what I mean by that? Okay, that's helpful. Certainly, in the PwC paper that we have under the income tax section, it's part of your four, but it starts off with the timing of the introduction of the new rules. You're going to have to talk about the plans to implement the changes already in the Scotland Act 2012, so on page one. Timing of the introduction, yeah? Yes. Okay. That particular sentence. How do you feel of what you believe in terms of what Smith is proposing, how that will actually affect what has passed beforehand and also with the situation with those issues being fully rolled out in Scotland and also with Smith? You discussed the issue of your clients preparing for all those rules from 2012. Our clients are actually preparing for Scotland Act 2012 and the changes coming in obviously with the rates possible changes in 2016. I think they're using their experience from real-time information and from preparation for auto-enrollment to basically communicate with their workforce to get their payroll and their systems right and to look at their policies to make sure their consistency with the changes that are going to be happening and how they manage that. And I think it is quite clear that employers and employees need a timing to almost make those changes and work them through, but to communicate them effectively. And if you look at that in respect of the changes post the Smith commission, it's almost for them as a business, it's the uncertainty around when those changes will happen and how they will then implement those changes and plan for those. So business generally needs a leading time to get their systems correct, to communicate across the workforce and to work out if initially, even if not longer term, what the additional administration burden is around those changes and how they will actually plan for that. Certainly we've already heard this morning that in terms of what's proposed it's not a huge change, although some of the income tax has been interwoven, as we've already heard, but it's not a huge change. So you use words there like administrative burden and uncertainty, but because it's not a huge change then it really shouldn't be as much of an amendment or of an additional burden to use your terminology as a consequence of Smith. I'd say what I would say around that is, I think it's very important, as we've seen when you look at the experience around real-time information and auto-enrollment, you tend to find that in effect there have been different deadlines for different types of size of employers and complexity and almost that's been a way to embed the change in and to actually learn what the practical issues are. So if you think about it with Scotland Act 2012 and the embedding of that change, that's almost a forerunner for your changes for the post devolution in Smith commission changes to learn what those things are because there are generally tweaks along the way to make it actually practical for business and for their employees and that's been tried and tested through those two changes. Can I ask you a supplementary to that? Are you in effect arguing that the 2012 Scotland Act changes shouldn't be implemented in 2016 but to wait until we see what Smith's like? I just so I can be absolutely clear because that's the logical end of many arguments. Sorry, I obviously misled you. I know what I'm saying is, you know, to actually let the 2012 Act changes come through and learn the practical issues from those changes to actually have enough leading time to build those in to the Smith commission changes as probably the right thing to do and probably what business would cope with, but in effect you need to be clear about your timing and when they will know what those changes are going to be. It's a communication exercise as well. So it's learning from 2012 before implementing Smith is what you're saying? Exactly, yes. I just mentioned, certainly ICAS would completely support that. I think some of these processes, you're absolutely right, they're not difficult, it's just an extension of what we've got and in theoretical terms it's perfectly straightforward and simple, you just tweak the computer and stick through a different rate but do you know what I mean? Having said that, in pure processing terms and getting your IT up to scratch, payroll tends to be collected by employers, by pension providers, they all need to get their systems in place and there is a long lead time on that. HMRC, who will be administering it for us, they'll have a long lead time too and they've got quite a lot on their plate between staff cuts, bringing in digitisation, trying to transform a lot of their processes. So you don't want another, oh just change this on top of it and I think it would be really important to try and bring 2012 in 2016 and get that properly bedded in and then maybe two years later for argument's sake you can then extend your rates and bans. It's quite an important point you just made there, Charlotte, because it took four years, sorry, four years from 2012 to 2016 but you're arguing, you think it could be done in two years now instead of the four-year time scale that was there previously, that's quite helpful. I think quite a lot of the work towards having Scottish paycodes has been put in place and this will just expand it slightly, I mean I do think it's largely system changes. The other thing that I think is really important too is that the public are aware of what's coming in because I'm not sure that everybody knows they're going to have Scottish income tax as of 2016, let alone anything different. I think they're only looking to know if it changes, that'll be the... then they'll know about it. Just make sure that the rest of the panel agree that two-year period would be long enough. Sorry, my facial reaction on that was we're in 15 and we're looking at 18, so I'm not sure how the month's set but we may have longer than two years to look at that. I know the legislation hasn't come through but in terms of preparing the public for that as part of what's coming through on preparing the public for 2012, we know that more is coming down the track. So 2016 we passed the legislation spring and in 2018 we stopped setting rates at that stage? The second change will not have as much impact in terms of change as the first change will have. Okay, well that's helped to give us some clarity about industry and business. Is it okay if I move into the block grant adjustment area? Mark, I think you indicated if I've got that right that you would... Yeah, obviously we've seen a sort of microcosm of what might be to come with the recent tax powers that have been applied, particularly land and buildings transaction tax, which was to replace stamp duty. We saw that the Scottish Government consulted early with a view to announcing its proposed rates and bandings in the draft budget. We then saw an autumn statement that made changes to stamp duty, which led to further complications around the block grant adjustment, which took some time to resolve. We saw the Scottish Government announcing a revised rate. There have been some concerns expressed to the committee by, for example, Professor David Heald, that the requirement of the Scottish Government to declare its hand early, if you will, in relation to taxation might open up the possibility of treasury gaming around tax. I wondered what your views on that would be and whether you see that as a potential risk to the Scottish Government and to the tax system. I mean, I'm happy to start. I mean, I think this is one of those areas that will be absolutely, could be subject to gaming. I think this is why there have to be very clear understandings of how these issues are resolved between ministers on both sides. I suppose, as an economist, I would quite, I mean, there's quite a lot of emphasis when there's a talk about the fiscal framework and trying to create some independent assessment of the whole fiscal framework, as we know through the OBR and the UK level with the Scottish Fiscal Commission here. I wonder whether one way out of this to avoid conflict, because more often than not what you'll have is governments perhaps taking different interpretations, might be to try and find some role for these independent experts to be able to give some sort of judgment, which will inform those interministerial discussions. Because I do think there might be situations there where there will be, you know, there might be conflict. Because it's really, I mean, at least with those particular taxes, as was said earlier, they were completely devolved. And at least there it's about first and second round effects from that. When you're dealing with income tax and with other forms of expenditure, including elements of expenditure that are not within Dell, so it's a very different process, I think that the danger is that there will be very different interpretations as to what's going on, and I think that that could lead to some difficult discussions. Obviously, the point has been made that, for example, if the UK Government took a decision to radically increase the personal allowance, that would impact on the Scottish tax take without the Scottish Government having any influence on paper on that decision to be taken. And while the UK Exchequer would have, obviously, a full range of tax levers at its disposal, so it could essentially offset the decision that it had taken through other tax increases, that flexibility would not exist at a Scottish level to the same degree. And that then brings in, I think, the question around no detriment alongside that. So one of the points that's been made at the finance committee by the Law Society of Scotland is that there should be some form of essentially financial fair play agreement which would prevent such scenarios arising. Is that something you could conceive of, and is it something you would say would be a good thing to introduce? I personally, I mean, it sounds sensible, but again, it would be what evidence would be brought to bear to that sort of financial fair play, because again, it could be an issue of interpretation, which is again, I wonder whether there might be a role for the OBR and the Scottish Fiscal Commission in those circumstances to be able to say, well, we think this is a fair play, sort of, this is sort of evidence based on which that fair play might be discussed, because otherwise I think it's inevitable you might get some gaming happening. I don't know if any of our other witnesses have anything to add to Mr Perheader, Mr Caddelli's comments. I can't discount the comments that Professor Heald meant, but I think that it needs to go further. I think it's in line with the Smith recommendations in relation to improve intergovernmental working, et cetera. Can I just come back to some of the general points? I mean, you know, I think the fair play and some of the, you know, the recognition that there needs to be some sort of discussion and we accept that it's all difficult, but again, coming back to any given constitutional situation, independence, full fiscal autonomy, you know, whatever, surely difficult discussions and relationships are better than no discussions. The impacts would again still be the same, would they not? A smaller country, a dominant economic partner, making decisions on taxation, whatever, in any of these areas would have an impact. One difference is that if there were two countries side by side, one big, one small, they would have a full range of, one would have a full range of fiscal levers here. It's a not, it's not an equal situation. So you need, I think, a framework to have those discussions. At the moment, you know, the Chancellor of the Exchequer is able to make their autumn statement, have a budget, which without too much reference to what's happening in Scotland. I suppose what I'm saying is you need to have some sort of structure which has consultation before that, if there are differences of opinion in some way of resolving those differences of opinion. So it does bring into play a very different relationship between the two Governments. It should. Do you agree then that difficult discussions are better than no discussions that you've just described? Absolutely. Well, I think that difficult discussions and a framework for trying to resolve those, if there is no agreement. Well, that's helpful. That's helpful in laying out a potential framework for these discussions to take place in. But of course, as parliamentarians, whether you're at the House of Commons, the House of Lords or here in the Scottish Parliament, knowing what's going on in these discussions and if there are tensions existing now, no Government's going to give away a pre-negotiating place. But would you agree that if these discussions are going to take place in a sort of structure that Professor Anton Muscatelli described, that needs need to be as transparent as they can be otherwise the gaming element will be even stronger? And have you any idea how we can make these more transparent? Part of your transparency is a really clear understanding of how the technicalities and administrative sides of tax interact, because over the course of my professional career, I think that one of the things that's quite difficult is that, coming back to that corporation tax example, perhaps people don't always completely appreciate the behavioural consequences that come out of one tax changing and affecting another. We gave the example earlier on of if income tax rates were to move, one might look at running one's business through a company, as a far instance. And it's a clear understanding of how pulling different levers might make people go and do something different. Okay, that's effectively saying, yes, transparency is vital in this process. Who wants to go and tell me how the block grant works then? You know? Because until such time, it's that we've got real transparency around that mechanism and how it changes. Perhaps I can come back in on that, because that is a very relevant point, and particularly in relation to the VAT, which ought to bring you in quite a bit of money, because I don't think it's obvious how that's going to be calculated just as a standard number now. Never mind taking it on and looking at its effects through the economy or through the block grant adjustment. I'm not going to put my head above the parapapap with block grant adjustments. I don't think that there's anybody in the country who could put their head above them. Could I just add one thing, which I think is important, why might the UK be different from other countries? I think that one of the issues is that the UK has had such a centralized system of tax and review setting, that there is a different psychology in the Treasury about these things. I think this is an issue which needs to be overcome, because we're now trying to put in place a structure, which is much more akin to a federal country. Now, it's how you do that and you overcome and you create more symmetry in the power structure within the instruments of government, let alone the political scrutiny of that. I think it will require quite a psychological change if you like in Treasury in terms of how it considers preparing for a budget, consulting on this, and I think that this is one of the big issues. It's a big change of culture, if you like. One last supplementary from me on this, and I'll go to Alex. I know that Linda wants to touch on VAT. Alex, Linda and Stuart. First of all, this structure, to be made transparent, to make it work, to give business a certain date, to know what's going on, how soon do we need to see those structures beginning to emerge to make sure that all works? I'll ask Waterhouse Coupers to begin an answer on that one if they can. I'm not going to give you a calendar date, I'm afraid, but I think that the initial steps around informing business of what's going on, that ball's rolling. I think there's a piece around individual members of the public in relation to some of the tax changes that are proposed, most obviously in relation to the place of residence that haven't started yet and people don't know what's coming. Talking to friends, people in the street, there's still no great sense of the potential for income tax changes. I would say that there's a lot to do in terms of the process and specifically the points that you're referring to. It needs more of a sense of purpose of where we're going to get to when, a project plan, if you like, rather than what's expedient for a particular day. I think that we've got a clue yesterday in John Swinney's speech when he told us that the fiscal adjustment regarding land and property tax in Scotland was dealt with by, after a two-year stand-off, they agreed to spot the difference between the two estimates. I take it that you would agree that that's not a basis for progress in this area. You might not feel comfortable putting that out on a transparent basis, I don't know, but... How do you see the strengths within the partners who will be negotiating this? What I'm talking about here is the strength of the framework that's required, but do you see it as a situation where any Scottish Government having to negotiate with the Treasury is going to start off at a position of disadvantage and therefore requires an extremely strong framework within which to operate? I'm only going to comment in very general terms on that, but I would look at where similar arrangements have worked in the past internationally. Have you any examples? Do I check us back in? Pardon? Do I check us back in? Mm-hmm. There are two different states, though. They weren't, but they now are. Okay, so it's what they did before. But I think that they might be learning them. What about Canada? I'm not in a position to comment on Canada. I'm not worked in Canada. Okay. I think that we should learn from other states. I think that Canada might be useful to look at, although, of course, it's a bit different because they do their horizontal equalisation a bit differently from having a block grant, which is based on a historic formula. I think that there is an issue about the symmetry of power here, potentially, because of the resources available to both sides. I think that culture is something that you can't change centuries of history of Treasury being in the centre of UK fiscal decisions. Therefore, I would like to see if there was some way of creating arbitration. That is why I brought in to play the possibility of OBR and Scottish Fiscal Commission possibly working together to try and adjudicate whether there are very different perspectives. Now, how do you embed that into legislation is another matter because it becomes an administrative convention, perhaps, between the two Governments, but at least it might resolve the issue of things trundling on for several years after every budget bill on how do we adjust the block grant? The quicker the two Governments can talk to each other and become to an agreement on what the framework looks like and what the different institutions involved in it to make sure that it's got that strength is important. Linda, I think that you've got a supplementary and a VAT issue today, so I'll go to you first. With the supplementary or both? Do the supplementary and then get into VAT. It was just a supplementary struck me when Professor Muscatelli used the effort on federalism. All those constitutional academics and others that we've listened to, when they discuss federalism, they describe it as power sharing. I just would like an opinion as to whether what's an offer in the draft clause is in fact power sharing. Right, I'll go on that. Federalism is a very difficult word to decode because there are different fiscal arrangements in different federal countries. However, coming back to the discussion that we've just had, given the interdependence that the fiscal structure that's proposed from Smith is suggesting, I think that if there isn't some form of power sharing around those decisions, I think it will create real difficulties and really will. It's part of the fact that we have never had to have that in the UK because fiscal powers have been so centralised, but if we don't find some element of power sharing then I think it doesn't amount to federalism. Federalism, by definition, as you say, is about distributing power. This is about trying to adapt what is a very centralised structure to do something a bit different. I think that it will take time, but it will also be very difficult unless there is the willingness on the part of Treasury to share some of that power. I was just going to say that the emphasis has to be on sharing because the taxes that are fully devolved are quite small taxes, but you're not going to run a country on the strength of those finances. Some of them aren't even designed as moneyraisers, but landfill tax is an environmental one, rather than money-raising per se. The income tax has joint responsibilities in it, so it has to be a sharing one. Therefore, one way or another, folk will have to pull together in making it work. Charlotte, it was something that you said right at the start in the opening statements about VATs struck me. What you said was that the VAT calculation that's going to come, being an assignment of tax, wouldn't give any reflection of the Scottish economy. I would like you to explore that a little bit further. Where am I coming from? It depends on how you measure VAT, but conceptually, the way VAT works, there's a bit of tax added at every stage in the process. If you make the assumption that your economy, you get wrong materials, you make widgets and then you add something of value to them and then they go to distribution centre and then they go to shop. There are various stages in the process and at each stage you're adding value. The idea behind a VAT of value added tax is that you're measuring your taxing, just that bit of value that's added in each stage in the process. Just like we've been talking about having a centralised treasury, we've quite a centralised or integrated economy, so there's no guarantee that everything that's done in Scotland is going to stay in Scotland. There was an interesting discussion, for instance, in the finance committee about making biscuits in Glasgow and then they were made here, they went to distribution centre in England and then they were distributed all round the place. There's two questions. First, where do you measure the VAT? When you make something here, is it when you sell it there? How do you measure output tax and input tax to get the Scottish bit? It can be done because we measure how much VAT is in the UK, so don't get me wrong, you can easily do it, but we don't do it just now. There's borders round it in order to measure the UK element going into Europe or out of Europe and you would need to do something like that in an administrative sense. I don't know if traders would be keen on doing a lot more administration around that and I don't know how you measure whether your outputs are here or there. You can certainly do a broad estimation of 8 per cent of the economy and that would be absolutely fine and we'd welcome that from an administrative point of view, but if you just take 8 per cent of the economy, then it doesn't really completely reflect economic policies that are being undertaken here to boost, you know, there's not such a direct money up. The more accurate your measure, the more intricate it is to calculate it. Back to the principle of no detriment or the principle of whether you gain or whether you lose. To put it in simple terms, absolutely. You could end up in the situation that you have a Scottish Government that is doing loads to boost the economy and unless the intergovernmental relations and power sharing are adequate, they could get no benefit from the measures that are taken. It might be difficult to measure the benefit and it's not just intergovernmental relations because it's traders who collect all your VAT so they're the ones who would be doing a lot of the administration. HMARC will obviously be doing some of it as well so you've got all those kind of features to factor in. Of course you can measure the economy and how much goes into the VAT. It's just the intricacy of how you get there and if you're going to factor in no detriment as well, it just adds to the calculations. I don't know if we've got the machinery at the moment to do those. It's exactly the same area because I picked up exactly the same point. Again, I'm struggling to understand how there will be an agreement to measure the impact of Scottish Government actions. I either positively or negatively on the economy in relation to the tax take from VAT because it's clearly not a direct impact or connection between the two things. For example, if the Scottish Government invests heavily in education or research or something, there's an impact on business, which then has an impact on VAT take, etc. There's lots of different complications there. Can anybody on the panel see either a straightforward or, in fact, any way that this could be accurately calculated either positively for the Scottish Government or negatively for the Government? How can it be done? I certainly think that you can do it accurately. You can do what you want. It's the burden that goes with it. The point that I made about the direct causal effect between one action and the other. I think that that's very difficult to measure. I think that it will be difficult to measure, which is one of the reasons why when you see around the world a signation being used, it's more really a way of trying to hand over tax powers that can then influence the tax base. It's more as a, well, here's your share of the tax take and you can use this on spending decisions. I think that you might be able to do it. I think that to impose administrative requirements that require value added to be tracked at every single stage would be hugely burdensome. I think that the only way one could try to capture what you've just asked, which is how could you, in the medium term, take into account the fact that the Scottish Government might have been successful in growing its economy, is to try and look at value added in different parts of the UK and then in some way linking the take to that. Therefore, recalculating the share at the moment, the first 10 per cent point and the two and a half from the 5 per cent reduced rate, saying, well, okay, GVA in Scotland has grown by 10 per cent. It's grown in the rest of the UK by 8 per cent over this period of time. Let's try and adjust over time to take account of that. I think that that's the only way in which it could be done in an approximate way. I have one further question. It's to do with the PwC paper and the conclusions page. It's on the point that Professor Marcatelli just raised about the purpose of assigning taxes, but that's your share, effectively. One of your bullet points says that assigning tax revenues as an alternative to devolution may seem an attractive compromise. Our concern is that this would increase both administrative complexity and exposure to tax volatility without any commensurate increase in the direct control of the Scottish Parliament over revenue-raising. Accountability would not be enhanced. Is that the reason that you said that, effectively, that's your share, as opposed to the actual devolved control of those taxes? Exactly, right. Exactly, right. Okay, thank you. Alex. Just very briefly, Professor Marcatelli actually came up with what I was going to ask there, but just to clarify, if we were to take the simplistic approach that was suggested a moment ago, that we just have a percentage of the UK economy and allocate VAT according to that. Professor Marcatelli suggested that that could be potentially, I think that's what you said, is variate according to economic indicators that we, in many cases, already have for Scotland. Always looking for the simplest approach is a set percentage, which is then varied according to relative economic performance and approach that would work. I don't see why it shouldn't. I think that it could work. I think that one of the interesting issues that it then raises longer term is what is the purpose of the block grant. As I said, in the UK, essentially it's a historic allocation. If you look at other countries that make a lot of use of tax assignations, Germany being one example, it then has a different mechanism for horizontal equalisation. It may raise that issue that if you have divergence in the UK, supposing that the Scottish economy grows faster than other parts of the UK, then it may raise over time the issue, well, how should this be taken into account in terms of burden sharing around horizontal equalisation? The administrative complexities of trying to do it any other way, but trying to estimate value added in different parts of the UK would be quite considerable. I want to dig a wee bit deeper on this. Do we know if there are any figures available that show the various, and they probably don't exist, what the various VAT takes from either the regions or the nations of the United Kingdom? Does that exist anywhere? Well, it is estimated within jurors, for instance, and I don't know enough of the detail of how those things are constructed. It is estimated at the moment as part of jurors, but also as part of what is possible. I would guess, then, if we are going to start with a percentage element to begin with and then an adjustment afterwards, that would be pretty crucial for Scotland to know in terms of the decision about where that percentage level lay at, because we could either start off with an incredibly advantageous position or a very difficult position, so that first calculation will be vital in ensuring that the interests of the amount of money coming to Scotland is maintained, I would have thought. If there are any help after today that you can consider, as far as I am concerned, the game is here to make sure that Scotland gets the best out of this deal, and, therefore, if there is any particular methodology that you think might be helpful after today that you can let us know about, that would be very helpful, because I know that it is very detailed. Bill? Thank you very much, convener. Right. This might sound a wee bit wtrous. I don't know or it might be something that is actually already in place. Is there a potential, might I ask, for some independent body tax, ZAR type of thing, to establish what has been the benefit to an increase in Scotland? Potentially Scotland was outperforming the rest of the UK economically, but something was being done at Westminster, which caused detriment to Scotland in terms of taxation raised. However, you do not want to have an argument between two parliaments, one saying, well, this is the way we are doing it and you are just going to have to put up with it. Would there be a potential for someone then to actually arbitrate over that? Or is that something that would have to be completely new? I can't immediately think of any parallel that I can give you that is on all fours with what you're saying. I think that this is something that should be, it's a possible outcome of inter-governmental discussion, along with other potential outcomes. I think that Anton already described the structure of the Fiscal Commission and OBR in some way of working together that might give us that arbiter, but it's not what you're asking for as a sort of court of final appeal. Something that would be on-going throughout the fiscal year, because it would be unreasonable to wait until something went wrong before he actually started to address the issue. So it was basically just to ask if it seems reasonable to anyone that there would be an on-going calculation and someone would be able to say, well, this has been to detriment and therefore that needs to be equalised or set correctly. I don't know if that's possible. I think that's a reasonable approach. I'd suggest that, as the convener said, something which builds on the fact that already Scotland and the UK have the OBR and the Scottish Fiscal Commission. In a very different context, not around taxation but around spending, of course, Australia has the Commonwealth Grants Commission, which is there to try and make a recommendation to Parliament around allocation of grants across the federal state to try and depoliticise it in some way. One could think of something similar where if the two Governments can't agree, maybe there's some way of bringing together the OBR and the Scottish Fiscal Commission to say, well, in the absence of agreement, we suggest that this is an interpretation of what is actually happening here, but that's just a suggestion and maybe better mechanisms around it. Well, thank you very much. Thank you for that. Yeah, it's a very helpful suggestion, actually. We're going to do a bit more examination of that. Stuart McMillan. Thank you. Thank you, convener. Section 17 of the Smith Commission talks about the issue of the changing needs and aspirations of the people of Scotland within the UK. As a result, it may be appropriate to devolve further powers beyond those set out in the heads of agreement, who are doing so would aid the implementation of the consensus reached by the parties in this report. Following on from the discussion that we've had earlier on this morning, Ms Barber and Professor Murskatelli have both of used the words of centralisation in terms of the treasury and the taxes, while the powers that are to come. They're not really going to income-generating powers. I also mean that the VAT acts that are an assignation. Bearing in mind that section 17, are there any taxation powers that you think or any other powers that you think that should come to Scotland to deal with section 17 of Smith? Do you want me to go first? When we put in our original submission to Smith, we were focusing on income tax because it kind of flowed from the changes that are already afoot. One of the things that we had commented on in that submission was that we didn't think the general population were particularly aware that they already were getting the Scottish rate of income tax, and Smith expands on that or takes it further down. I think that there would be a lot to be said for seeing how all of that works before one looked at further tax powers. I would have thought that you'd have quite a lot of responsibilities with income tax. We've got the individual taxes, and it's been interesting to see how the land of buildings transaction tax is starting to have an impact even though we haven't got it yet. All of those, perhaps we ought to work with them before looking at other taxes to devolve. They might be for later, and they might be something too that you would look at more across the UK about how you devolve powers to Wales, for instance, for Northern Ireland. I know that this sounds really perverse, but you want some kind of overall control about how you devolve your powers, don't you? In terms of maybe corporation tax going one way, income tax going another way, it seems a bit disjointed. The way that corporation tax is being devolved to Northern Ireland, some income tax here, Wales is getting some powers too following. It seems perverse to say that you want some kind of oversight of how you hand out powers, but maybe if all regions nations—I'm about to put my foot in it, haven't I? If everybody has income tax powers, for instance, it would make it much easier to negotiate how power is properly decentralised. In a sense, I set a lot of this out in the paper that I submitted to the committee back here. I think it was November. In my view, the cleanest solution, given that there does seem to be a strong appetite in Scotland now for greater fiscal autonomy, would have been to have a package that would involve not only complete income tax devolution, including the personal allowance, but national insurance contributions, and perhaps some flexibility around employers' national insurance contribution to try and affect employment, since this is one of the issues that is particularly concerned, seems to be of concern to Scotland. I also suggested that areas such as VAT would be subject more to assignation because of European rules. I suggested that, perhaps on corporate taxation, there might be some flexibility around that. In a way, perhaps to avoid the minister of complexity linking in more to employment decisions again around where companies are deciding where to locate in the UK. That was something that was suggested by the whole thing commissioned in Wales. I think that some of those things could have been explored to go further than the current set of powers that I proposed by Smith. We are back with what we have begun. We mentioned earlier this tipping balance and, of course, the devolution of more powers and getting a balance in that to the full fiscal autonomy and the impact on the Barnett formula. Would anyone want to comment on that? There has been some serious concerns about the full fiscal autonomy and the end of the Barnett formula, which would be exactly a happy place to be at this point. I was arguing for a more rational package, which was, I think, to try and avoid some of the splitting taxes in half. I was suggesting to my last submission in November how that might be achieved. I did say at the beginning of that paper, if you recall, there is no correct answer. It is about the political economy of this. It is about the will of what the Scottish people want. If Scotland would like more fiscal autonomy, then this is the logical way to progress. Those are the taxes that you would start with, and those are the ones that you would have last. I suggested that you could even do some things around corporation tax. What you do with a block grant, I think, absolutely does depend on how much fiscal autonomy you have. If you have almost complete fiscal autonomy, then, by definition, the only issue around a block grant is would you want a block grant that equalises horizontally across the UK, across the nations, to provide some insurance mechanism? Barnett is a historic construction that is there because of how the history of fiscal allocations happened in the UK. Clearly, if you had 100 per cent fiscal autonomy, then you would not have the block grant that is currently constituted, but what you would have is perhaps something to equalise in some way to to burden share or share insurance. It would be a different grant, and that is what they have in countries like Germany, that is what they have in Canada, for instance. It depends on how much fiscal autonomy or taxation a Scottish Parliament would raise as a proportion of its total spend. What comes first, then, federalism or fiscal autonomy? In terms of the German example and the other examples, we have not got a structure that says that we do not pay taxes into the centre or national insurance into the centre or whatever, but we want some form of safety net through Barnett. I think what we have discussed today illustrates that if you give more fiscal autonomy, and even in the form in visits by Smith, you need to have more decentralised power structures because otherwise it is likely to create more political tension across the UK. I think that the two things go hand in hand. Clearly, you can have federal states across the globe with very different visions of how much equity and how much accountability you have. That is the examples that I gave in my paper last time. Germany is very different from Canada, for instance, because they have a different concept of where they want to sit on that spectrum between fiscal autonomy and equity. Certainly, I would say that if you decentralise fiscal powers—this is one model, and you could go further—you need to decentralise administrative and political power because, if you do not do that, you could end up in conflict situation between the two Governments and the two Parliaments. We would not want to be there. We would not want to have some form of determining solutions to where conflict might arise. That is back to the earlier discussion. We are moving away a bit from what we are supposed to be doing, but I understand why we are doing that. It is an interesting discussion, but I think that we are trying to get back to what our main purpose is, Steve. Then I will come to Alison Johnstone. I will comment on the tax question, which hopefully will play to your question as well. We should not lose sight of the fact that there are pressures for more uniformity of tax rates, for example, cries for uniform corporate tax rates across the European Union. When you are looking at what happens between the rest of the UK and Scotland, you need that context as well. Alison Johnstone Obviously, the Smith commission was all about compromise. Compromise was required to enable there to be any sort of agreement, and the visions of the parties going into that were markedly different. You have people who write Richard Murphy suggesting that Scotland's tax solution is very challenging. It is not all that it could be or should be. You have been speaking this morning about concerns about putting the devolved tax systems in place and running those two domestic-related systems side-by-side. It seems as well that we have a cultural lag. Do you think that we can address that? Is it possible to get those systems up and running as we need to, when we need to, when we still have a lot of political discussion carrying on? Alison Johnstone I do not think that there is any reason why you cannot make it work. The SDLT is to be switched off. LBTT is coming in. Focor learning as the process goes along. Do you know that it is coming on 1 April? We will have it and it will work. One way or another. Likewise, with the income tax, we have that coming in in 2016. No, no, no. I think that if you want to do something, you can do it. You need to be aware of the costs and the administrative burdens. A lot of taxes are not collected by the state. Realistically, you know that they fall on employers or the self-employed. They are self-assessed taxes, so your citizens are going to do it. You need to be aware of the impact. I think that that is what we have been trying to talk about this morning, in part, and how it will be received, because not everybody is excited about taxes as others, and that is just a fact of life. I think that you need to go canny with some aspects of it, and you need to appreciate some of the burdens that business might feel. Business does not always look at where their tax comes from, so they have had auto-enrolment, RTI and a lot of system changes in recent times. It needs to be recognised what it will do for them. Do you think that off-attentions have been given to making sure that they have the resources and information that they need? With regard to Scotland Act 2012, I think that the awareness level is starting to rise. It probably is not where we would all like it to be. I think that some of that plays into the fact that we are not all tax geeks, if you like. However, I think that they are on a journey, and it is moving in the right direction, which comes back to the point that I made earlier. I think that to embed Scotland Act 2012 to then take them on the next journey, Paul Smith, when it comes to income taxes, is probably the right thing to do, because they seem to have learned from lessons before and taken it in bite-sized chunks, because, as Charlotte said, they have had a lot of system change. I think that Scotland Act 2012 will probably be the embedding of the systems to actually do the changes for the further to evolve powers, but I think that it is possible. Okay. Duncan, do you have a question about parliamentary issues? Just following on from that about the culture and the change, it would be necessary to open this process up. Already we see, and I have had some criticism of the Smith commission itself, about politicians behind closed doors. We are in another phase now, where we are talking about inter-governmental relations and government officials in closed rooms. I am starting to get nervous about where the role for parliamentarians are in that. Never mind getting communities and raising awareness at that level. I do not know that it is a bit off what we are doing this morning, but whatever happens, as Charlotte said, that things are changing and different challenges will be there. The role of the Parliament and the challenges that the Parliament faces—the Parliament was set up, who have not really changed the procedures radically in the 15 years and the responsibilities that we had them—there would not be greater responsibilities on the Parliament. I do not know whether you have any comments. Some of the other witnesses and some of the other sessions had some comments about the importance of open and transparent dealings and accountability. I am wondering whether you recognise any of the challenges that we have as a Parliament to keep pace with the change and ensure that we can ensure transparency in open government. I should say that I am not an expert on parliamentary procedures, so you probably need a constitutional lawyer here. However, I would certainly agree with you absolutely. Clearly, if you start having inter-governmental discussions around budget bills well in advance of budget bills, the scrutiny that is currently applied by the finance committee or by the Treasury Select Committee will need to adapt to that, because otherwise you cannot have proper parliamentary scrutiny. At the moment, the Treasury Select Committee will scrutinise UK legislation around budgets and will not pay heed to the fact that there are these interdependencies. Again, it is a change of culture, but you would expect to find some way, perhaps, of the finance committee here and the Treasury Select Committee finding some way to co-operate on that parliamentary scrutiny. I want to take a step back from the detail that we have been looking at and comment on one or two of the things that have been said. There is obviously ambition for more power in Scotland, but history is beginning to build up and it shows us something about that ambition for power. That is that once the power is devolved, it does not mean to say that it is going to be used. We have had the power to vary income tax for 15 years and it has not been varied. We have more recently watched John Swinney go through the process of trying to set the new land and property tax. His primary driver has been to minimise the fiscal variation. He wanted it to be revenue and he has talked about that all the time. Looking at the powers that are being proposed, how do you feel that they will deliver for Scotland? Are we going to see an appetite for divergence or are the pressures for convergence going to cause future Scottish Governments with a large basket of powers to spend their time trying to make sure that things are no different north and south of the border? Do you want me to first go or do you want you to go? Rather than commenting on that, can I come at your question from a slightly different angle and just say that there are a number of points that perhaps need to be addressed on a wider canvas in terms of public awareness? Hacking back to what I said already, I am not sure that people are well conversant with what powers we already have and the fact that they have not been used or they have been used. I do not know how you make tax more exciting to non-tax practitioners, but it is something that perhaps needs to be changed. It becomes exciting to tax payers when you start increasing it. That is a part of what needs to be looked at. How do you make it of more relevance? It is your accountability mechanism and it needs greater awareness. The other thing that you notice over the years with tax is that if I use colloquialism, how do you pluck the goose with the least amount of hissing? People do not really like to tell you how much tax you are paying. That needs to be thought through as to what you are telling your electorate or your population about your taxes. I will go with a no-politician piece, but I think that you look at the powers and then you look at how you exercise the power separately. It is looking at why those powers have not been exercised or why Suini is looking for fiscal neutrality currently. I think that there is an element of the public education in relation to taxation. To give an example of that, as an organisation, Price Waterhouse Coopers has been running citizens' juries where we bring members of the public into a jury of around 20 people. We inform them on some of the background and the detail of some of the tax changes that might be proposed or some of the discussion around tax. Then we look at the decisions that come through and what people say. The broad conclusions from that, and we mentioned it in the submission we did to Priest Smith, are that people are engaged in that process. We do not pick random off the street, but people become more engaged in the tax process. People are more engaged in the process. People take different decisions based on that increased understanding and feel more involved in what is going on. The sense is that, without making everybody tax experts, that the involvement that people have leads to a stronger debate and a better basis on which to, in our case, advise government, but in your case, act on what the citizens' juries or other public forums and your other means of understanding public representations, what those give you. The strength of that is that you can, in government, make decisions that are important to people but feel as though they have been more informed, whether that is on something that I think is more sophisticated than polling in terms of informing decisions. Maybe we are making a mistake in asking you to or you appear to be trying to interpret this politically. I will try and simplify it. I will ask you in a slightly different form that should have a simple answer. Nothing that we have done so far has provided a system that generates the momentum that overcomes the gravity towards convergence. Do you see this package as achieving the level of momentum that will move us from a position of instinctive convergence to one in which divergence is possible? I would say that it is more likely to than what has happened in the past, but I cannot go further than that. I would agree with that. I think that one argument about why existing powers have not been used, as I know that some of it has a lot of currency, is the fact that, because the powers have been very limited and because of the potential interface of the Scotland Act 2012, essentially it is a flat tax superimposed on the existing UK system, then there is a fear that it will create the wrong sorts of trade-offs. By definition, if you give more levers, then it will allow for a more acceptable package or acceptable packages to be put by the political parties to the electorate. I do think that there is a psychology of taxation issue that Steve mentioned that needs to be overcome. It is interesting how much debate there is at the moment in the current political situation around what the priorities should be around different public goods, health, education. I wonder whether we have seen the year of people focusing solely on taxation as a big issue. We might be beginning to see some change there where people are willing to say, well, actually, I would like more public goods, thank you very much, and I am also prepared to pay for it because I recognise what economic reality of that is. We may be having political debates like that quite soon. I always get a smile when the IFS does the study of what has actually happened to taxation post UK elections when you realise that, in fact, on average, I think the estimate is around £5 billion. After every election, taxes have gone up more by any promise that was made before. At the margin, there are clearly attempts to do that, but there is a psychology issue there that has to be overcome. The sort of things that Steve was talking about are very interesting. Linda, supplementary. Just again, something that Anton said, after every election, taxes have gone up. In fact, income tax is very different, so most taxations are direct taxations. What level of financial leaver is income tax? This is one of the substantial levers. One of the ways in which, for instance, in the UK taxation has gone up was, for instance, the fact that the 40p tax rate has not kept pace with inflation. Often, it is used in that way, as opposed to we are going to put in our manifesto that we are going to put up 2p on the whole range of income tax and we are going to pay for this. Often, the discourse is a bit more muted, but we have seen, for instance, in the UK income tax burden rising slightly over the last Parliament, and that has been largely done through the way in which the tax bans and thresholds have been used. I think that we have reached the natural conclusion of this discussion. I am very grateful to you. One of the jobs that I wanted to make sure that we achieve today is that we could signal up where the challenges lie. I think that we can put an achieved technique next to that because you have managed to do that quite successfully on us. We know now where we need to go in terms of further discussion. Thank you also for coming along and citing us about tax. It is certainly an area that has become more fascinating as I have begun to dig into this. I am very grateful to all our witnesses coming along today and contributing in the way that they have. It has been very helpful and I wish you the best for the rest of the day. We are now moving to private session. Thank you very much.