 Good morning and welcome to the 15th meeting in 2014 of the Finance Committee of the Scottish Parliament. Could I please remind everyone present to turn off any mobile phones or other electronic devices? Our first and only item of business today is to take evidence on the implementation of the financial provisions in the Scotland Act 2012 from Edward Trout and Sarah Walker of Her Majesty's Revenue and Customs. Both the Scottish and UK Governments are published their second annual reports, as required under section 33 of the Act, and members have received copies of both reports. I would like to welcome our witnesses to the meeting and invite one of them to make a short introductory statement. Thank you very much, convener, and good morning. It's very good to be here again. As you say, you've got our second report, and I know you heard from Mr Swinney last week. I think I'd open by repeating the point that he made that the relationship between ourselves and the Scottish Government continues to be extremely good and that we're making good progress towards implementation of the provisions of the Scotland Act. In a way, this is a transitional year. Last year, the first time I came, we were getting everything going, and next year, the provisions of the Act will start to be in place with the two-track taxes devolved. It's been a year of good progress, and I think from the perspective of this committee, the most important thing to note is that we have been able to firm up or rather to revise down our estimates of costs, as you would have seen from the report, which is, as you recall when I was here last year, I was able to say that I hoped that costs would move downwards, and overall, our estimates have moved downwards slightly with the non-IT costs coming down, with a slight possible upward revision, our estimate, of the IT costs due to the additional expenses involved in dealing with pensions tax relief. Overall, I'm happy that we are both clearer about the likely costs of implementation and that the overall costs have come down. I'm pleased that the actual progress of implementation and the transition to revenue Scotland of the two devolved taxes, as well as the implementation preparations for the Scottish rate of income tax, are looking in good shape. We've had a further OGC gateway review just recently, which has put the overall project on amber green, which is about as good as any project gets. I'm very pleased overall with progress and I'm obviously very happy this morning to answer questions on any aspects of implementation. Thank you very much for that brief opening statement. Most of the questions that I'll be asking will be specifically on the second annual report, which I think is a really comprehensive document. It itself answers a lot of the questions that members of the committee might want to answer, but, of course, we'll have others in addition to that. We might want to tease out some of the points that are actually made in the document itself. I'll ask a few questions and then we'll open out the session to members of the committee. The first one really is on chapter 7, which is powers to devolve further existing taxes and creating new devolved taxes. In paragraph 46 of that indicates that the two Governments have agreed a process of creating new Scottish taxes and devolving existing taxes, as you have just mentioned. Then it goes on to say in the first bullet point that there's a need to ensure that a proposed tax would not impose a disproportionate negative impact on UK macroeconomic or fiscal policy or impede the UK single market. Do you have any examples of where that might happen? No, I don't think so. Obviously, at this stage, this is largely speculative, because, obviously, there are no specific proposals for further taxes to be devolved. The criteria set out here, which would be the context for any consultation, are intended to capture the broader points that would be taken into account any way in relation to any domestic UK tax proposal, but would also be relevant to the evolutionary tax. I don't have any specific examples, because neither we nor the UK Government have turned our minds to specific taxes to be devolved. In the following chapter 8, effective new powers on the Scottish block grant in 51, it talks about in the two or three transitional years starting in 2016-17. I'm just wondering whether you, given your experience and involvement so far, believe that it should be two years or three years, and why that should be the case? It isn't a matter for us or for HMRC. Obviously, this is a fiscal matter between ministers. The decision on two or three will be one to be taken between ministers. The UK Government is keen to make sure that the full provisions of the Scotland Act are implemented as soon as possible. However, there is a balance between speed and making sure that there is an orderly and stable transition of the impacts on the public finances. I fully accept that. I'm not trying to get you to answer a question that you may perceive to be political. I'm just asking your professional opinion as to what you think, given the experience today. It would be the most appropriate stage. I wouldn't want to be drawn on what was most appropriate. I go back to what I said about the implementation of the programme. So far, things have gone very smoothly with the implementation of the programme. I would hope that a shorter, rather than the longer transitional period might be possible. However, what is best is, I'm afraid, an overall judgment of a combination of political and fiscal considerations. When do you think that that decision will be made? I don't know. I don't know whether you did ask Mr Sweeney that last week, but in the sense that that is a decision for him and UK ministers to engage with. We will move on to chapter 8. Chapter 63 starts with the start of duty land tax and landfill tax. The two Governments continue to work together to consider how Scotland's block grant should be adjusted. There will be a one-off adjustment, as we know. In paragraph 64, it goes on to say that it has been more difficult to determine the nature of a one-off adjustment that is likely to be equitable to both Scotland and the UK in the longer term, specifically a one-off adjustment that reflects not only the revenues that are currently generated by those taxes but also the longer term prospects. How do you believe that that can best be achieved? I really don't want to sit here and be too unhelpful, but again, I'm not sure I can help with this. It's on the mechanics of calculating future revenue values. Although I'm responsible for the analysts who do the sums, the judgment as to the appropriate inclusion in any formula is not for us. I thought that I was going to say that, didn't I? Yeah, but one can always try. Paragraph 66 basically talks about a summer approach that we'll be taking for SDLT and landfill tax, albeit through making all Barnett consequentials slightly smaller. How much smaller, potentially, and what the impact of that might be? I don't want to go on saying I refer you to my previous answer, but I think that's probably the best reply at this point. Okay, well, I'm going to ask you something, which is the answer, which is already actually in the paper, but I'll ask you it so that you can expand on it a wee bit and hopefully that's where we will be. I'm going to open out the session to colleagues around the table. Some of them, for example, might want to drill down into some of the numbers, for example, which are in the paper. It's about pension provision. The port says that pension providers will be given until 2018 to develop systems to ensure that Scottish taxpayers receive the right amount of tax relief by adjusting the amount that pension schemes claim from HMRC on their behalf. It's just what's going to happen before 2018, and I know that there is a section on that, but I wonder if you can expand on it for the record. Well, Sarah May wants to go into some of the details, but, as the committee knows, because the benefit of pension tax relief is dependent on the rate of tax, if the Scottish Parliament chooses to vary the Scottish rate after 2016, effectively the benefit of the tax relief will be affected for Scottish taxpayers. For those taxpayers, which are the majority, who obtain relief at source, either the adjustment is made through the payment to the pension funds, that would necessitate quite a complex number of adjustments. What will happen between 2016 and 2018 is, effectively, that the cost of that will be borne by HMRC and by the UK Government should there be a variation of the rate to avoid the necessity for any pension fund to have to amend all of their systems at a time, which is quite a time of change for the pension industry generally ahead of 2018. No one will be disadvantaged or advantaged apart from the UK Government and HMRC, which will bear the risk in relation to that interim period. Sarah, do you want to add to that? Yes, I can give you a bit more detail about how it would work. Obviously, at the moment, where you make a contribution directly to a pension fund, so this does not apply to people who pay into their employer's fund, where there is a different way of giving relief. If you make a personal pension contribution, so you pay to the fund basic rate, you make a contribution and then the fund claims from HMRC the value of the pension relief at the basic rate on that contribution. In future, the value of relief at the basic rate may be different depending on whether you are a Scottish taxpayer or the rest of the UK taxpayer if that Scottish rate is different. In the long run, we will expect pension funds to identify when they make a claim for relief whether their contributors are Scottish taxpayers or not so that they can claim relief at the right rate. They need to be able to set up their systems to make that identification to distinguish between Scottish taxpayers and non-Scottish taxpayers. They will not be able to do that by 2016, which is obviously the first year where the rate might differ, so we are allowing them until 2018 to do that. If, in those two years, 16, 17 and 18, the Scottish rate is different from the UK rate, individuals who make contributions to pension schemes will be entitled to a different amount of relief. The difference in that relief will be given back to them by HMRC through an adjustment to their PAYE code or through their self-assessment rather than by a different rate of claim by the pension fund. The taxpayer will get the relief, but they will get it through a different route. I will open up the session to colleagues around the table. The first person to ask questions will be John, to be followed by Jamie. One of the very encouraging things in the report was that the costs under SRIT, which had been estimated at £40 million to £45 million, are now looking at £35 million to £40 million, so that is encouraging. Can you give us a little background and why that is going to be lower than we were expecting? I will allow—let Sarah talk about the details of that, because, as I said at the beginning, broadly, although the IT costs have moved up very slightly to reflect the pension relief that we have talked about, we have simply firmed up the various elements that are enumerated in Annex 6.4 of the report. I will not say that we have put overfull estimates in, but we have put estimates in that we have managed to bring down. In part, that reflects the fact that we may be able to take advantage of more automation, which will reduce some of the manual costs that we anticipated as we become increasingly digital. We can go through each of the individual costs, but perhaps I will let Sarah add anything on the details first. What we said that we would do was, for this report, provide a reasonably firm estimate of the non-IT elements of the costs. We will not have a quote from us IT suppliers for the IT changes until later this year, so what we have done is specify as closely as we can the non-IT elements. Those are things like writing to everybody who we think is a Scottish taxpayer, so printing and postage for that, dealing with responses because a proportion of those will focus up and ask questions, issuing new tax codes to people where they have a Scottish tax code, where they will have to send out additional tax coding notices, POIE coding notices and a certain amount of publicity. We will be using paid publicity to remind people of the importance of keeping their address details up to date with HMRC. There is also an element in that £25 million for additional work on address data to make sure that it is as accurate as we can make it. Some elements of that are pretty firm. Some of them are still contingencies for work that we may well do over the next two years. A large proportion of it obviously depends on the number of people who phone us up or dispute their Scottish taxpayer status and the cost of dealing with that. The Scottish Government will only be charged for the actual cost, which we will be keeping a track of. We will try to keep that to the minimum that we can. You mentioned the accuracy of addresses that you hold. Last year, when you came to us, you were not sure how accurate it is. Is that indicating that it was more accurate than you thought or are you still not 100 per cent sure about that? We are still working on that. We are still doing work to compare our addresses with other external databases. Post office, for instance, and other commercially available databases that show what address people are giving for different purposes. We are working on comparing those. The fact that our address does not match somebody else's address that somebody else holds does not necessarily mean that it is wrong, but it means that we need to do more work. I do not have a figure or percentage yet for how accurate our addresses are, but we are well advanced with the plans for the work that we need to do to do that comparison and to identify groups of people where we will need to make further inquiries. There are levels of confidence in the costs and about the unit costs. We have a firm idea of what it costs to undertake communications and particular activities. Indeed, we are continually driving those down. The two major levels of uncertainty are, one, how much work we will have to do, which comes out of the extent to which the data is good enough and we have to do further work to improve it. The other area is the extent to which the actual actions of contacting people result in responses. As you have seen, we are assuming a 10 per cent contact rate in response to notices. Obviously, if that is lower, the cost will be lower and if it is higher, the cost will be higher. Although we have experienced a whole lot of fields both with data and with contact, that is slightly unknown territory. There are elements of telling people that they are Scottish taxpayers, which are different from other things that we do. We do not know quite how the response will be. There will be a continuing level of uncertainty until we start undertaking those activities next year. In this whole area of addresses and where people live, there is a one-off starting-up position to get as much information as you can. Presumably, it is on-going because people will move around and new people come into the system and retire. There will be continuing cleaning from the initial start, but our on-going costs assume people coming and going from Scottish taxpayer status. The £4.2 million a year includes a cost of taxpayers joining and leaving the system on a continuous basis. I am not quite sure what assumptions we have made about how many there are, but I assume that there are some embedded assumptions about the degree of churn. We are reviewing that estimate of the on-going annual cost, the £4.2 million. We will have a better figure for that very soon, I hope. That will probably vary depending on whether there is a change in the Scottish rate in a particular year or not. One of the things that we are looking at carefully is, first of all, publicising and trying to change people's behaviour so that they do not remember to notify us when they change their address or when they move house. They should be, but in the past it has not affected their tax status, so we have not put a lot of effort into making sure that that is absolutely a requirement. We will be trying to change people's behaviour just to jog their memories, if we can. We are also trying to make it as easy as possible for people to notify us of changes of address, for instance, by doing it on a website rather than having to phone us up or write us a letter. We have no legal paths to require people to tell us when they change address and, indeed, to have a penalty for not telling us to change addresses would not be an efficient way of achieving it, as Sarah says. This is about making it easy for people to notify us and reminding them that they need to do so. That is the most cost-effective way of keeping the address book up to date. On the bigger point, you are overcautious, if you like, and you overestimated the costs. Do you normally do that when you are estimating costs? Can we expect all the other estimated costs to come down a bit? No, but obviously we are getting to less trouble if costs come down than if they go up. We have given an estimate that we have been able to bring down, but we do not want to be wildly out. I do not want to suggest that some of those were inflated estimates. I am quite comfortable that we have had a modest downward revision in the cost on the non-IT. Another area that has been raised has been that we have been telling taxpayers how much Scottish rate of income tax they have paid as compared to how much other income tax they have paid. I am right in understanding that that will be mainly done once a year, which will be around the P60. That was, as you know, a decision for the Scottish Government. Mr Swinney may have answered questions on this last week. Obviously, there are a range of options available from requiring the information to be given every time a payment is made, i.e. the PAY slips for employees, although for pensioners there is no requirement at the moment for any information about tax deduction to be given by pension payers, so it would have been a new obligation. That would probably be the most extreme end through to not giving any information at all, except on request. What has been chosen is the option, as you say, of including the payment on the P60, which will be an obligation on employers because it is for employers to produce the P60. That is followed as I understand consultation and discussion with employers and business representatives. Tax payers will have access through their annual tax statement online once that is fully up and running to go online and to see what their tax position is and how much Scottish rate they have paid as part of their total tax bill. Obviously, that is something that, in future choices, could be changed and it would be possible if the Government so wished to introduce an obligation to produce more regular updates of Scottish tax payments. From HRMRC's perspective, it does not matter whether people are told weekly or monthly or annually, but it would mainly be the employers that would have a problem because they would have to change their system. We do not have contact with tax payers on a regular basis. The whole principle of the PAY system is that the responsibility for tax payments is through deduction by the employer from payments and for the majority of individuals that, with the end of year reconciliation, settles their tax liability totally. Our only contact with the taxpayer in those cases is simply to issue an annual coding notice in the future to give them access to an annual tax statement online. Unless there is a new obligation imposed on HRMRC to provide information to employees, the question of one information that the employer gets is one for the employers and hence for business and employer burdens, which, as I understand it, is why the decision has been made just to provide annual statements through the P60. On land and buildings transaction tax, there is mention of the Scottish Government continuing to supply HRMRC with land transaction data. Can you just expand on why that needs to happen? Yes. For both tax administrations and for us particularly as continuing to administer the majority of taxes, the availability of data from all sources is a very important element of our compliance information. The fact that an individual has acquired a property is an indication that he or she has the means to do so, and that is a relevant bit of information for compliance of income tax. If an individual acquires, let us say, a £200,000 property, but is recording income of very little, that would raise a flag that they might have undeclared income sources that we should be investigating. The access that we have at the moment to the data on land transactions would have a significant impact on our compliance activities. One hypothesis is compliance activities relating to Scottish taxpayers as much, if not more, than English taxpayers. It is important for the purposes of compliance that we continue to have access to that data and the data feed, which will be established to replace the existing data access that we have, will ensure that we have that access and that compliance activities can continue robustly for the future. That is great. My final question on landfill tax. Again, it seems that the estimated costs were higher than what it looks like being. It says that the disapplication costs of landfill tax will not be passed on, so again, you would have expected maybe a little bit more costs? I may want to add on that. There are, as you know, a small number of landfill tax payers anyway for the whole of the UK because it is only paid by site operators. I do not have the exact number for how many there are in Scotland, but the costs of discontinuing them from our systems have been something that we felt that even breaking out the costs, I think, would hardly be worth it, so we have agreed not to pass on any of the discontinuance costs to Scotland. I do not think that it is a matter that is lower than we expected. I do not think that we ever made an estimate of specifically for the landfill tax costs. As Edward said, once we looked at it, we realised that, because it is such a small number, we do not have a bespoke IT system or anything like that. The costs are pretty much business as usual for us, so there was no point in us charging the Scottish Government separately for those. Thank you, convener, on one of the issues that you raised in terms of the cost implementation is communication with Scottish tax payers. I see from the report that a joint communication group has been established by HMRC and the Scottish Government and a framework for communicating information about the introduction of devolved taxes is part of its work, but it is not quite clear who this is to be communicated to, is this to tax payers generally or is this to specific groups? The main communications will be to solicitors who are the people who handle stamp duty claims at the moment in Scotland, so we will be communicating with them. We have not finalised the communications plan for the transition, so it may well be that we end up doing some publicity for people who are buying houses. I suspect from our side that people need to be aware that they will no longer pay stamp duty to the UK to HMRC. They will pay land and buildings transaction tax instead, and it may well be that Revenue Scotland will want to publicise that more widely, but in terms of making sure that the right returns are completed and they are sent to the right people, it is through the representatives and the solicitors who handle the transactions that we need to make sure that they understand what they need to do. Is that work underway yet or has that still been developed? Are people being contacted yet? We have a newsletter that goes round to people who are interested in stamp duty land tax, and we have had mentions in our regular communications to say that the transition is coming along. It is still relatively early days, and that will ramp up over the course of the year. I think that it has been engaged with the Law Society of Scotland and other professional bodies who do their own internal communications about this as well. Yes, indeed. We do have a consultation group of representatives of the relevant bodies, and they are being kept very closely in touch. That is good to know. I have already discussed with the deputy convener the issues around the P60 and the Scottish rate of income tax being reported on annual basis through individuals P60. You mentioned the Scottish Government consulted with the business sector in advance of that decision, but I see from the report that you, too, will be consulting employers on a specific change that is required for the P60. Is that underway yet or is that still in the presentation? That has not begun yet. Every time there are fairly regular changes to the format of those forms, we have a standard way in which we consult employers and payroll providers about changes to our standard forms. That will not be the only change to the P60, which is coming up for April 16. In fact, it will be in 2017 because it will be at the end of the year, so there is little time to go yet. It has not begun yet, and it will be part of our routine consultation. That is a general point on communication. We discussed last time that you need to get it right. There is no point in communicating too early, because people will then forget by the time that they need to do it. In relation to the employers, Sarah-Sazer says that there is an annual cycle or there is an on-going cycle, so that will be part of the cycle relevant for the P60s in April 17. Consultations are a routine thing, and that will be part of it. That is helpful. One last question. I was just returning to the estimated costs that the deputy team explored. It is a general question, and it is very positive that the estimated costs have been coming down as their scope for them to come down further still. We are always trying to reduce our costs, as I said when I was here last year. Indeed, overall, we are trying to reduce costs through the use of digital and automation. Generally, as you know, you only bear the direct specific costs, so to the extent that the investment that we have planned—we have had a lot of digital and other investment plans—reduces our overall costs and our unit costs. You will get the benefit of that, but we do not have anything where I can specifically say, yes, I think that this will come down. However, while I am not going to do as I did not do last year, I can promise one way or another that I will be disappointed if we cannot continue to put pressure on costs, because it is something that we do all the time. Mr Tripp, you said in your opening statement that we recently had an OGC gateway review, which is called Amber Green. Can you expand on what that is and what that means in practice? I will cover the details, but the Office for Government Commerce, as you may know, operates a series of gateways on all significant projects as they go through as an independent assessment to whoever is running the project of the progress. This is the second gateway review that we have had of this particular project, and very few get a clear green. Not too many get a clear red, but a lot of amber reds are amber green. As I say, it is about as good as you can get. It is effectively saying that this project is going well, but as you would expect of any examiner, they find a few things where they feel that we could make a few changes. Sarah May wants to say what are the elements where they put a bit of amber on. This is the second review that we have had at the programme level, so we are looking at the entire implementation. There has also been an external review of the income tax project, which is implementing the change of Scottish income tax, which again had a similar rating, so amber green. The report was very happy with the way in which we are working closely with the Scottish Government and the collaboration that is going on, and I was very pleased with that. The one specific thing that they asked us to pay attention to this time is to make sure that our plans for the closed-down of SDLT and the introduction of the Land and Millings transaction tax are kept under very close review and that we do joint planning with Revenue Scotland and the Scottish Government to make sure that that transition is smooth. Obviously, at the point where we are at the moment in the implementation, with now less than a year to go to that date, that has got to be a priority for us, so I am very happy with that recommendation. Just for completeness, the review that happened was in relation to the Scottish rate of income tax and stamp duty, LBTT and Lampus. It was all three taxes. Age 12 of your second annual report. We have had a couple of questions on costs already, but I just want to ask specifically about the costings for the current financial year. As Paragraph 14, HMRC has shared with the Scottish Government an estimate of £5 million to £6 million for 2014-15. Does that remain the case, that prediction? The only caveat to that is that the split of cost between 2014-15 and 2015-16 will depend on the scheduling of the IT changes. As I have said, we will not have a definite cost or schedule for the IT work until later in this year. In terms of how much of the spending falls in the current year and how much falls in the next financial year, that will depend on the scheduling that we do not yet have. Okay, thank you. There appeared to be no further questions from members of the committee. I will ask a couple of further ones myself. The first one is to ask what is the lag between the end of the financial year and the out-turn figures being available for the Scottish rate of income tax? When can we expect the first set of out-turn figures to be published? What we are hoping to be able to do is to publish in our annual accounts in the summer of 2017, so that will be in the summer following the end of the first year, an estimate of the revenue from the Scottish rate of income tax, and then a final figure a year later. It takes us about a year to collect and to reconcile all the figures for income tax revenue. The deadline for self-assessment returns, as you know, is January after the end of the year, so clearly most of that, we will not have hardly any of it immediately after the end of the year. For a PAYE as well, we do a reconciliation process, which is over the summer autumn to make sure that we have properly allocated people's income tax. In some cases, we will not be able to determine whether somebody's Scottish taxpayer status finally until after the end of the year, because obviously it depends on your residence for the year as a whole. We will publish the best estimate that we have in summer 2017, but we will have an accurate figure, which will then be the point at which it is used for the grant adjustment in summer 2018. That is two years or 18 months after the end of the year. As we get over 80 per cent of the tax in year, the summer 2017 figure will give a very good indication, and obviously the summer 2018 figure will give. There are always dribs and rabs, but it will be substantially all of the tax by that point. The first year's indication will be pretty complete as a combination of actual receipts and forecasts of the balance. Can you explain what the role of HMRC will be in making the forecasts of the Scottish rate of income tax and whether the Scottish Government has had any involvement in that? Well, the officer budget responsibility actually makes the forecast, but it does so working closely with the analysts in HMRC who have access to all the data and who make the initial forecasts. There is an extensive scrutiny and engagement process between the HMRC analysts and the OBR, but the forecasts belong to the OBR. I am not quite sure what involvement there will be from Scotland in that. I am also not entirely clear where your Scottish Finance and Fiscal Commission has got to or how that will work, but we will want to make sure that you are satisfied with the quality of the forecasting and are able to satisfy yourself that the work that the OBR and we have done is satisfactory. I believe that the Scottish Government does get involved in some of the meetings that are held with the OBR to discuss their forecast, though, obviously, they are the OBR's opinion. That is the concluded equation from the committee. I wonder if there is any further points that you would like to make to the committee at this stage? I do not think so. I repeat what I said at the beginning that we have a very good relationship with you. We are off now to see Revenue Scotland to discuss progress, but we will also talk about wider things. As I think I may have said last year, it is very much in our interests that Revenue Scotland is successful and forms a job well because this is very much a collaborative working relationship to deliver both the devolved taxes but also to make sure that the Scottish rate of income tax is delivered. We have a good relationship and I am sure that that will continue. Thank you very much for your evidence this morning. It is very helpful. That being the only item on our agenda this morning, I now close the meeting.