 Felly, wrth gwrs, cynnwys y gynhyrchu ein bod yn gweithio i'r Eisteddfodol Cymru, ac yn gynghwilio i ddweud, o hynny, i'w ffordd i'w niol Bibby, ac mae'n rhai ddweud i'r ddweud i'r ddweud i'r ddweud i'r ddafodol o'r ddweud i'r ddechrau. Rydw i'n gwybod i'r agenda oedd yn rwynt i ddweud i ddweud i ddweud i'r ddweud i ddweud Focuss on Incorporations. We are joined for that purpose by Charlotte Barber, who is the director of taxation at ICAS, Alex Cobham, who is the chief executive of the tax justice network, John Cullenen, who is the tax policy director of the chartered issue of taxation in Richard Murphy, from the director of tax research UK. I warmly welcome all of the witnesses to help us in the proceedings this morning. I just want to kick the proceedings off and we'll go to Marie, who's going to kick off the proceedings. Thank you. Thank you, convener. Good morning and welcome. I just wondered, there's obviously been a change in the level of incorporation in the UK as a whole over the last few years. Some of it because of tax planning and some of it probably because it's precipitated by the financial crash in 2008, where many people were lost their employment and became self-employed. I just wondered if you folks have any evidence at all on whether that change is levelling off or whether it's likely to continue and grow. I know there's been some recent changes from the UK Government in terms of dividends and things, so is that likely to impact on the level of incorporation in future? Evidence to hand, but I think the Office of Budget Responsibility, the UK level, did project that the trend was likely to continue. Clearly, the change that the chancellor made to dividend tax in the last UK budget was intended to try and reduce that, but if you look at the effective marginal rates of tax on incorporated versus unincorporated business even after that change, it hasn't levelled it up. It's probably moved, it depends on the income level and all sorts of other things, but it's probably moved about one-quarter in the direction of levelling it up, so I think it's kind of unlikely that, of itself, it will extend that flow. Dad, as long as your rates are different, I quite like the way the Institute of Physical Studies paper discusses all this problem and I think they've got some interesting statistics in their paper. As they rightly say, you're at the confluence of income tax, co-operation tax and national insurance, and my reading of it in broader terms, is that as long as there's differentials, people are always wanting to save tax, well, not all, people always, but the majority tend to want to minimise their costs around there, so as long as there's differentials, I think that incorporations, for instance, might continue to apply because it's cheaper, ultimately. I have studied this data and written a couple of papers on it. The change in the incorporation pattern in the UK happened when Gordon Brown introduced a 0% effective start rate for corporation tax, which was in 2000 or 2001 from memory. At that point, we have 1.5 million companies in the UK, and now we're on about 3.8 million. Now, that does not mean they're all the same, the turnover is quite phenomenal. A very large number of companies in the UK last four or fewer years in their life. Quite a significant number lasts less than two years, which may well indicate a pattern of tax evasion, by the way, because I think they're extensively used for tax evasion, which is a much bigger issue than the differential on the rates. But that pattern of using companies for tax planning really started in about 1986-87 when national insurance first encouraged incorporation and the payment of dividends, which it did from then on. It was a well-known pattern throughout that period and simply became more attractive under various rule changes that have happened until the dividend tax came in. The dividend tax will not change that, as John and Charlotte quite correctly say. There remains a differential. It still is cheaper to incorporate and pay yourself by dividends than it is to trade as a sole trader, or as a partnership, or as an LLP, and therefore, incorporation remains for tax purposes attractive. But I don't think that's the only reason. I think we have artificial disguised employments now being run through companies, and there's an enormous pressure from many companies to actually have their disguised employees incorporate so that that does create an incentive for incorporation as well. These are not genuinely trades, these are simply people who are being exploited by the employer as much as they are exploiting the tax system, and we are seeing significant patterns of tax abuse through companies as well. I've just added on that last point, and I think that the difference that we've seen, if you talk to people in the financial services sector, for example, is a switch from people setting up companies to take their income because their mates are doing it and you're seeing it in the sector to a refusal to employ people other than through a company structure. We've kind of locked it in, it's become a systemic behaviour, which I think is much harder to unravel than changing the incentives of individuals if it's the employers themselves who are demanding this, as they often are in financial services in Edinburgh, for example. How you unravel that, I think, is a different kind of problem from how you change the decisions individuals might make about how aggressive to be on their own avoidance, and that's the kind of thing that comes back to policy makers much more clearly. I think that we're discussing two slightly different things. Your point there is a situation where people have been employees or are employees, and I think that the elephant in the room is probably national insurance because employers find that expensive, and then if you amalgamate it with employment rights and other things like that, there's a question as to whether you can have those employees, if that's the word for it, costing less, and then you take them off payroll, disguised remuneration, those kind of situations, and those kind of people, you get them at the bottom end of this pay scale and you get them at the top end of the pay scale. That's one sector of people that we might want to look at, and then there's a completely different sector where you're running a genuine business, an accountancy practice, making widgets, doing whatever you do, and if you start up, you start up and you just work on your own and you get on with it, and you reach a stage where you think, is this the way to go about things, and you might stay on sole trader or partnership, which is in income tax, or as you get bigger, you tend to be encouraged to head towards corporation tax and incorporating, and a company is a part of that package and the overall decision, but they are slightly distinct, and you are looking at slightly different sectors of people, and then maybe the other rider that we should put in here is that this is a UK problem. Anything that we do here in Scotland is an element that interacts with it, it's not a Scottish problem as such. Thank you very much, and on that note, on the particular challenges for the Scottish Parliament, I wanted to ask you all another fairly general question, so clearly income tax was not fully devolved to Scotland, there are limits. I'd be interested to hear your thoughts on the limits in terms of which aspects of income tax were devolved, and you mentioned there, Charlotte, the confluence between the other forms of taxation that people might face, so corporation tax, dividend tax, national insurance. What limits does that provide for the Scottish Government in terms of altering income tax when they have no control over all those others? There is a specific problem for Scotland with the devolved regime in this regard. What you've got control over is the main income tax rate, which is the main tax that you will pay if you are a self-employed sole trader, whereas, obviously, corporation tax hasn't been devolved and neither has the dividend tax rate, so if you've got these two choices incorporated or unincorporated, one side will be heavily influenced by what the Scottish Parliament does, whereas the other side won't be influenced at all under current rules. It's difficult for you to think about how, in the Scottish context, you kind of balance that up without a change in the rules or without some idea of what the UK is going to do. You probably have as much flexibility with income tax as the UK Parliament does, and it's really politically driven, isn't it, as to how much you can raise rates or how much you can lower rates versus spending? I don't think that the devolution of income tax rates and bans gives you huge—can you have a radical approach to Scottish taxation? Yes, you can, but in political practical terms, I don't think that around income tax there's as much flexibility as it would initially look in relation to the amounts of money that actually come in here. There are a number of areas where—let me be honest—I agree with John Charlotte with regard to the practical current constraints to some degree, but let's look at what those mean and what that actually also implies. First of all, let's go back to incorporation. Scotland has a dire record on incorporation. According to the records of companies' houses, which are Middleies in Wales, there have been no prosecutions in Scotland under Scottish law for breaches of the Companies Act since 2008. In those terms, Scotland isn't the Wild West, Scotland is the Wild North. Why there is no enforcement of company law in Scotland is a good question, and one that I think you might want to follow up, because that appears to be the case. Maybe the prosecutions are under other law, but perhaps they're just not taking place at all, and the number of prosecutions anyway is tiny. Let's also put this in the context of the fact that Scotland does not appear to be enforcing the law that exists with regard to the submission of company accounts, and my research shows that companies that don't submit company accounts also don't submit company tax returns. Let's put that in context. At least one million of the companies that are in existence each year in the UK do not submit corporation tax returns. 600,000 of those are by consent of HMRC, because when a company is incorporated, it is sent to form, and that form says, does your company trade? If you tick the box saying no, you get a letter back from the revenue saying, thank you very much, we'll contact you in five years. Most people take that as an invitation to make no declaration, so there is a procedural change that can be made straight away in Scotland if you so wish to discuss this with Revenue Scotland about changing that approach and demanding a corporation tax return from every company that has a registered office in Scotland, for example, what would be one way of tackling this issue and trying to collect the tax that is not paid. The second one would be demanding that the Scottish register of companies, and of course there is a Scottish register, does actually insist that the accounts that are due are filed because that does not appear to be the case at present. So I think there is a lot that can be done at the basic level of incorporation in Scotland because there is Scottish law on this issue which needs to be looked at and administrative practices need to be reformed. Then you're in the problem that in fact tax systems do not work in the way that devolution has taken place on taxation affairs. Nobody in the real world of accountancy, and I'm a chartered accountant as well as an academic and so on now, but I'm still a practising chartered accountant. In the real world you think about tax systems as a whole. You have been devolved to some very small parts of a total tax system with which you can do very little bluntly. What you can do very often will actually end up making it look as though you've made things worse because that's the way it was designed to be, I suspect. What you cannot do is actually play between the interaction between income tax and national insurance and yet that is key with regard to this issue of incorporation because you don't have power over national insurance which makes little sense because it's the easiest tax to devolve because it's easier to identify where employees are than just about anything else. You can't play with the difference between income tax on earnings and income tax on non-earned sources and yet in this current situation of incorporation quite clearly somebody can opt in or out of Scottish taxation by choice now. If they decide to pay themselves a salary from their company they're within the scope of Scottish income tax and if they decide to pay a dividend they're not. We could not have come up with a more absurd tax system for Scotland than that. So frankly my suggestion is you need to go back to the negotiation table as soon as possible after the 8th of June and say can we have a better supplement. Whoever the future is, whatever the party is, you have been left with a very poor foundation for this. Yes, that will spark up a few supplementary questions. Can I just take you back to the point about enforcement to make sure that I've understood it correctly? Is your claim that there have been no prosecutions against companies incorporated in Scotland under UK companies law or is your claim that there have been no prosecutions since 2008 or is your claim that there have been no prosecutions specifically in the Scots courts, notwithstanding the fact that this is a reserved, company law is a reserved area of the law? I'm working on the basis of the information supplied by companies house which has consistently said since 2008 there is no data on any prosecutions in Scotland under company law. So it may be wrong but that's what they keep on telling me and I keep on asking them and I don't get any other information. Do you ask the follow-up question as to whether there are prosecutions brought against companies located in Scotland in the courts in London, which is where I would expect those prosecutions to be brought? I have not asked that question. But I don't actually understand why that would be the case. They tend to try and bring the prosecutions in the area where the registered office is. It may be for reasons of legal expertise in the relevant courts. It may be. But it would still be surprising that Scotland has no legal expertise in that case. I would still raise that question. Any other supplementaries in that area before I move on to some of the more behavioural stuff that was underlining some of those questions, right? Murdo? Thank you, convener. Good morning. I wanted to—I mean, it's really a follow-up one from some of Marie Todd's questions about look at the question of behavioural change and maybe start with yourself, John Cullin, because you mentioned this in your written submission. What we've seen is the Scottish Government deciding to go down a different path in terms of income tax for higher earners. That's had a immediate impact in the current financial year. It'll have a more significant impact as we get towards 2020-21 if we continue the current trajectory. To what extent do you think that differential in terms of income tax rates between Scotland and the rest of the UK is likely to drive behavioural change in terms of taxpayers? Would, for example, that lead to more higher earners in Scotland going down the incorporation route? Anytime anybody wants to put up a tax or lower a threshold, the obvious kind of response is that people will vote with their feet in various ways. It's quite important to try and get as much evidence as you can to what extent that is in fact the case, because it's all about how much. I think that it is actually very difficult to be honest, because even if you look at the UK level, when the rate went up from 45 to 50 per cent, it was there for about two years. A lot of the evidence of what behavioural adjustment there was was really around temporary adjustments of people managing to accelerate dividends at one end or postpone them at the other end. There's a difference between temporary effects around the change and the sort of on-going effects. You do hear a lot of people saying, well, I could go and work in England if you're close to the border or whatever. I'm not sure when the rate in the UK level went up to 50 per cent, there were really as many of the kind of permanent on-going reactions as was trailed, but then again it was in for such a short time. Of all the different reactions you can think of, if it's there for a long time and it's expected to continue or deepen or widen the difference between Scotland and the rest of the UK, you might expect that, at the margin, some investment decisions are affected, you might find people looking out more, but of all the various ways and means that people might go about trying to get out of an effectively higher tax burden, I would have thought that the incorporation route would be the one that was most likely to be taken. As Charlotte was saying, if you're a growing business, it's an issue that comes up anyway and for reasons of legal protection and a whole lot of other reasons besides tax, so it's kind of on the agenda anyway for a certain type of taxpayer. There is evidence over a long period, and again Richard was saying, going back to the beginning of the century at the UK level, of people reacting to a lower tax burden in that route elsewhere. Of all the various ways and means or behavioural responses that might come about, it's one of the easiest to see that it might happen, but that's hunched, to be honest, or it's based loosely on just historical evidence at the UK level in the last few years. One of the problems is getting the direct evidence. By the time you've got it in an assessed it, you're five years down the track with the issue. It's actually quite a difficult problem. The underlying dynamic here is worth thinking about, which is that politically it is always very appealing to talk of competition and that talk goes well beyond any evidence in favour of it. I think that the risk that presents here is exactly that, in a sense, the ideological lure of thinking that you're competing on tax by cutting is not borne out by the evidence, but as John says, you go a long way down the road, you give up a lot before you find that. If we look at the UK at the moment, the extremely ill-advised moves on corporation tax cutting the statutory rate, the Government has continued year upon year with a policy which its own analysis, never mind that of the office of budget responsibility, shows will have a predicted effect of zero in terms of increasing investment or increasing the tax base. In other words, they're making this decision to put cut beyond cut beyond cut on the basis of their own analysis, showing that this is a pure giveaway with no expected economic benefit, and yet the rationale, the justification rather given, is this one of the most competitive tax rate. That sounds, in some sense, appealing, but without the evidence behind it. It is a very extreme position The risk when you have, as Richard was saying, very fragmented tax powers, only a part of the overall picture, is that that type of political demand may be relatively appealing, so the prospects of falling towards a race to the bottom evidence aside are probably rather greater than the prospects for, with the narrow powers that exist, being able to take on the more progressive taxation, which there is a clear public demand for both here and in the rest of the UK. The position that I think you face is one where you have an unfortunate choice between trying to pursue something more progressive that does reflect public demands here, but is difficult and perhaps impossible to deliver within the limits on the powers that you have, while facing, on the other hand, this risk that potentially there is more likelihood of falling into a race to the bottom. For that reason, you see in the European Union, for example, things like the state aid rules very early on put in place to try and limit the competition between different jurisdictions. For that reason, all things being equal, you probably wouldn't want to see a further splintering of tax powers, but obviously the political context may well be one that demands it because the divergence between public views here and political positioning in Westminster may become an irresistible case for further devolution of tax powers. There are a couple of evidential sources that suggest that incorporation is easy in the sense of an existing source of income. When we know that, I don't actually think that the changes in Scottish tax rates really increase the attractiveness of incorporation, frankly at the moment. That trend is already there. There is very little evidence that it will change that very much. What there is evidence on is that people will not fundamentally change their lives for taxation. Whilst incorporation is easy, moving for tax is something that very few people actually do. It was widely discussed that a lot of people would leave London, for example, and go to Switzerland in 2010 because of the onset of a 50% tax rate. There was actually thought to be one very easy measure of this, which was demand for places in English language schools in places like Geneva. The demand actually went down rather than up, which was quite interesting. There was no surge of people leaving London for that reason. The number of tax exiles is tiny. There has been quite a lot of research done in the USA where there are lots of tax borders that make their full research a lot easier. There is no disintensive to moving across a state border because of cultural and other changes. It has been found that people will not move 20 miles to reduce their tax rate. In some states where there is an income tax of up to 8%, and in the neighbouring state there is no income tax at all. There might be a sales tax, but you can overcome that by moving back to the state you just came from. So there are massive opportunities for arbitrage. People will not move, lift their children out of their schools, leave the golf club, whatever it might be, to actually save tax. Those things are much more important than tax. Much as I think tax is important, I wrote a book, The Joy of Tax, Shameless Plug. However, it is not that important to people after all. That is sad. One needs to be careful that we do not overemphasise this point on incorporation, because about 85 per cent of people pay income tax to employees. We know in Scotland all our figures for self-employment are slightly lower than in the rest of the UK. It is not as though you can just automatically flip out of employment into a company. It is not as simple as that, and there are plenty barriers to it from a whole host of reasons, including psychological ones, behavioural ones, employment ones and all the rest of it. We need to be careful that we do not get too caught up in that one. It is a factor that you need to be aware of, but it is not to be all and end all. The other thing that I might draw attention to is that in looking at the different powers that Scotland has, I accept that we only have part of the toolkit and we do not have national insurance or corporation tax, but that does not mean that the glass has to be half empty. It could mean, for instance, that you still have control over the amount of income tax that comes in, and it might be—we have discussed it quite a bit at work recently—that you will start to see a pull apart from income tax and national insurance. For decades, we have all argued that there are six to one and a half, but it does not. They are just a tax on income. However, if one has become a devolved matter and one of a reserved matter, there is the possibility that they will start to pull apart more. It sounds like what you are all saying is that the behavioural drive towards greater incorporation is likely to be only a very marginal impact. I am no greater in Scotland than any other part of the UK, if that is a reasonable summary of what I think your position is. Can I ask a slightly different question? I agree with all the comments of my colleagues about that. I do not think that tax drives everything, but I do think that if you are self-employed and you have a growing business, incorporation is not like moving your kids out of school. Incorporation is on the agenda anyway. I also agree with the comments that were made earlier that if you are a maybe large company trying to force down your employment costs and thinking that it is a nice idea to get people off the payroll, once you have done that you will not leave them as self-employed contractors. You will say to them that you have set up a company so that I can deal with a company, because then it is believed to be safer against an audit by HMRC as to the employment status because you are paying a company. It is not actually as simple as that, but I think that the two phenomenons are quite closely related. If you look at the last UK budget, there was the national insurance change that was withdrawn about the imbalance between tax on employment and self-employment, and you have the dividend tax change. Those are the two biggest measures. It is clearly concerning policy makers at UK level, even with all the concerns about Brexit and so on. Those are probably two of the biggest issues for the UK tax system at the moment. Not that the world will fall apart if it is not fixed, but those are threats to the UK tax base that are likely to continue for some foreseeable time, because it is not obvious how the imbalances are going to be resolved. I agree that the extra Scottish dimension probably is not significant at the moment, but it is a kind of unhelpful feature that you have control over one side of the equation but not control over the other. It is a bit of a specific warning for Scotland, even though it is not a Scottish problem. It follows up very neatly on what John Cullin has just said. I want to ask about the question of alignment between employment and self-employment and incorporation, which you have touched on. It was something that the chancellor tried to address in the budget, and such was the reaction that he then had to make a swift retreat from that. How realistic do you think it is that a Government is able to bring about this alignment, given the political backdrop? At one level, one could be even more pessimistic than that, because the change that she was trying to bring about was really tiny compared to the size of the imbalance. As one of my colleagues said, I am not sure whether they use this expression, but the kind of elephant in the room is employer's national insurance. If you compare a situation of an employer or an engaged employer to try and use a more neutral term employing somebody versus taking on a self-employed contractor if they can actually lawfully and properly do that, the biggest element in the equation is employer's national insurance, which is over 13 per cent of payroll. That is a clear driver for employers to seek to minimise their employment costs. The one thing that I would say that is more hopeful is that the UK has this terrible tradition of budget surprises. It would almost be a disappointing budget unless you produce several rabbits from a hat. If you were a self-employed person and facing a couple of per cent extra national insurance over a couple of years, you probably would have first heard about it on news at 10 that night. There would not have been a big warm-up of a Government consultation to say, look, as nobody is fooled, we have got this huge imbalance in the tax system, what are the options for doing something about it? There is no attempt to do that. You just spring a surprise and then you are yourself surprised when there is a kind of very adverse and to some degree sort of slightly ill-informed and hysterical sort of reaction. We at the Charles Institute certainly believe that if there was a much more thoroughgoingly consultative approach, you could engender a much better public debate. Obviously, no one is ever going to, I do not know if they are ever going to view it as joyful to pay tax, but I think that people are realistic. If you look at things like the increase in the state retirement age that has been over the last few years, people have not rioted in the streets about that. People can accept unpopular or difficult things, but they need to kind of understand the reasons and time needs to be taken and there needs to be debate. I think that that is probably the main lesson that comes out, to try and move away from these terrible surprise budget measures. You are hinting at one of the key issues that has been suggested should be a basis of the Scottish taxation, which is of course the ability to pay. In this sense, alignment requires that a person on the same level of income should pay the same level of tax. That is one of the fundamental principles. Horizontal equity is necessary within a tax system if you are also to deliver vertical equity, which is what proportionality requires. That is going right back to Adam Smith. There are a large number of threats within the UK tax system to that alignment. One is obviously this issue of incorporation versus employment versus self-employment. I actually think that there are good reasons why the self-employed do not pay as much tax as the employed. I have been self-employed and employed. I am in the curious position of currently being employed after 35 years of self-employment. The novelty of having somebody putting money into my bank account at the end of every month without having to send them an invoice, threaten them with legal action or anything else is really quite amazing. I enjoy it enormously. The difference is staggering. I let me assure you that being self-employed is not the same thing. I do actually see some reason for non-alignment there because the risk profile is genuinely different. We do have many other areas of non-alignment, and I will go back to some of the issues that are important. For example, I now go back to tax evasion, and that is very important here as well. The OECD has just issued a paper in the last two weeks pointing out the massive imbalance in a society where the tax authority does not pursue tax evasion with the right amount of vigor. I do not believe that the UK does. I believe that there is a massive understatement by HMRC of the scale of tax evasion in the UK economy. The fact that a million companies do not submit corporation tax returns a year suggests to me that there is negligence. I will use the word quite carefully. I am suggesting that there is negligence on their part with regard to the administration of corporation tax and that they do not pursue that issue properly. When I checked how many of the penalties for non-submission of corporation tax returns were collected, in one year, I think it was 2011, 99.9 per cent of the penalties were not collected, which shows that it is a pretty meaningless exercise to issue them in the first place. They are just not doing their job. The OECD has argued that this could increase productivity by 1 per cent as well as obviously improving the tax yield. The reason for productivity is that it provides a level playing field between the cheats and those who are honest. That is a most critical alignment. If you believe that the private sector is a foundation of the economy, then to treat it with respect by collecting tax from those who are cheating as a fundamental principle to taxation, I would suggest. This is another part of horizontal equity that is essential, but at the moment we have not got that horizontal equity. It could be created, but it cannot be created by the dividend tax either, because the dividend tax is only on one source of investment income and targeted very specifically at dividends clearly from incorporated entities. Let us put this in context. Going back to the numbers that John was talking about with regard to this abuse, we may be talking at a loss in the UK tax system at three to four billion as a result of incorporation at the present point of time. That is a half of 1 per cent of UK taxation. I am not saying that that is not an issue, but let us put it in its context. There are other more important issues, perhaps, where we should be looking for alignment clearly. Rental income, which is now encouraged to be put into companies because of the changes in tax relief on borrowing, is another area where it may well be essential to create alignment as well. The question of alignment between incorporation and self-employment is not the only issue to be looked at. There are many more before you can create a tax system, which accords with this principle of proportionality. I am sensing that there is nobody else going to respond. Ivan, you have got a supplementary question. Thanks, convener, and thanks panel for the discussion so far. There were a couple of areas that I wanted to touch on, both things that we have looked at already. The first was round about the differential income tax, bands in Scotland now and the behavioural impact that might drive. I welcome some of the comments that you have made on the unimportant to a large extent of those small differentials in behavioural change. If you look at that tax, differential amounts to about £400 per year and affects 10 to 15 per cent of the tax-paying population. I was thinking that it would be nice to add some evidence of another tax differential of about £400 that affected people. We have had that in place in Scotland for a number of years now and it affects a much larger number of people, which, of course, is the council tax differential. I wonder if you would like to comment on whether you have seen any evidence of people moving from England to Scotland to say £400 on their council tax. Following on from that, talking about another impact, there could be businesses deciding where to set up. I have been in the position on several occasions to spend on other people's money and my own money deciding where to set manufacturing businesses up across Europe. I can tell you, certainly in my experience, and I like your comment on that as well. The differential in income tax is well, well, well down the list of things that you look at. You look at logistics, supply chain, whether you are in a single market, availability of skilled labour, where your suppliers are, etc. Again, I would be interested if you would get any comments on that as well before I move on to the second part of my question, which was about incorporations. Will I come back on that initially? I agree with you. You do not hear a lot of people really doing much about £400 difference in the income tax. We all need something to grumble about, and there is one of the things. I have no statistical evidence on that, but what I do hear a lot more in general comment is not specifically income tax, but, say, the council tax change is increasing, LBTT being slightly higher, and, as I say, it is only anecdotal evidence, but the suggestion would be that, rather than looking at taxes in isolation, it is maybe the overall package. I am coming to your second point about businesses. Yes, I agree, tax is not the ultimate driver of in isolation as to whether a business will or won't invest, but there are courses being offered to people to look at where they would like to invest and what are the factors that they might consider, and tax is an element. The international evidence is very clearly in line with what you said. It is one of the few places where everyone from McKinsey to the international monetary fund to the tax justice network is in an entire agreement that tax just does not feature in the location decision. The decision is made and then maybe companies go lobbying for tax breaks, but they know where they want to be and it is on the basis of those much more substantive elements. The risk of Brexit, of course, is that it takes us out of the state aid regulation and opens up the UK as a whole, certainly to lobbying by businesses for tax breaks in a way that before they had been batted off as illegal, and that is one of many risks there. Can I just mention a comparison with the Irish situation? When you are discussing corporation tax, it seems almost obligatory to do so. I declare an interest, I have an Irish passport, not surprising with my name. In that case, we see something which is quite different from what we have just been discussing. Real businesses do not locate on the basis of tax. You will not find many substantial businesses in many of the world's most recognised tax havens. Pharmaceuticals are not developed in Cayman or Jersey or the Isle of Man or anywhere else, although vast numbers of patents for those products are in those places. There is a disconnect between the substance and the form in which a lot of the world is taxed, and corporation tax makes that possible because the legal form of a company lets you separate the substance of the transaction from the legal form in which it is taxed. There are some countries, and Ireland is a perfect example of this, which have encouraged the location of profits, but without attracting much substance in terms of people. I accept that some people go to Ireland, but not that many in relation to the profits that are apparently recorded there, which is why we ended up with what Paul Krugman called leprechaun economics with regard to Irish GDP, which can be so massively restated depending on whether Apple decides to record its profits in or out of that country. That has nothing to do with the productivity of Ireland as a whole. We have to be very careful here to make sure that we are looking at substance. If you are interested in having substantial real economic activity, then incorporation, taxation and other things make very little difference. You are looking at infrastructure, people, quality of the law, health services so that people turn up in the morning fit for work and everything else as the basis for locational decisions. If you are looking at opportunities to provide tax abuse, then go by all means into tax competition, but you are going down a very dangerous path indeed, because a lot of the world's tax havens at present are looking decidedly dodgy with regard to their own finances. I have just fallen up on some of the comments on incorporation as well. Clearly taking a step back, incorporation is a good thing, because it is a signal of people's innovation, entrepreneurship, starting businesses, creating wealth and so on. At that level, it is one of the measures that we use to see the health of the economy. We are creating enough start-up businesses and so on. Clearly, we have identified an area where there is that overlap where people should be employed but are using incorporations as a means to avoid tax. I welcome the comments by Richard Murphy around about the risk profile, because having been in the same position as you on both sides of that fence, whether you are going to get paid and not knowing if you are ever going to get a holiday is worth quite a lot. There needs to be some recognition of that in the rewards side as well as the risk side. I just wanted to probe a bit more on that. Clearly, there are rules around that. Rules that I have been tightened all the time around are about higher 35 or whatever it happens to be, what side of that fence you are on. Is the problem that the rules are not strict enough in allowing people to move from one side to the other? In that experience, they are fairly strict and you need to demonstrate certain things to several customers. You provide your equipment in order to be treated as a legitimate corporation. Are the rules not strict enough or are they not being enforced properly? Where is the issue? Frankly, some of the examples that you mentioned—I hear about clearly their employment and I am very surprised that people are able to incorporate to do some of the things that they do in my experience of having worked in business. I agree with some of what has been said about tax having no impact at all other than extremely abusive cases. There are situations in which, yes, there are lots of other factors that come into play, but it is a kind of quantifiable difference and it will have an effect. I think that that may be true with some of these things about Ireland as well. Outside the purely abusive area, there is a kind of weighing up. If you are even in a very mobile business and you want to calculate the tax quite finely, you face a big problem, which is that there are a lot of countries in the world and they change their rules and the rates all the time. It is not kind of minutely calculated and mechanistic, however sophisticated you try and be. It goes a lot, I suppose, by feel and a sense of the direction things are going in. That is why quite often the countries obsess a bit on the headline rates, because they believe rightly or wrongly that that is more of a visible signal than some of the more detailed rules. When it comes to IR35, we have imposed that UK-level and the public sector are much stronger anti-avoidance around tax motivated getting people off the payroll and then incorporating them. Given the demise of the Chancellor's attempt to level the self-employed playing field the other way, if you got out your crystal ball, you might suspect that that anti-avoidance will get rolled out to at least the larger private companies before long, because what UK Government is going to sit there and see an erosion of the tax base without doing anything about it. As a sort of institute without members of tax advisers, we do not take a political position as to whether there should be a differential between the employed and the self-employed and the tax system, but we do say that if you want to have a differential you ought to have a much more clear, even if it has to be a bit complicated, a kind of decision tree, a clearer set of rules. Part of the problem at the moment is that it is based so much on case law and so dependent on a variety of facts and circumstances that it is very easy for an employer to convince himself that somebody could be classified as self-employed, because there are so few hard and fast rules. There are cases that go different ways. If you wanted to maintain some differential long term, you ought to be a lot clearer about it, and that would help. Where do you start on this one? I would suggest that you again need to stand back and look at this question, because what we are dealing with here is a beast that is wholly unsuited to the modern world, the limited company. It was not designed for the 21st century. It was designed in the 19th century when you had separation of capital from management, where there were meant to be distinct rules that governed the conduct of directors who were accountable to the shareholders who were not the same people and so on. It was never envisaged that we would have a company, which was one person who was simultaneously shareholder, director, sole creator of value in the company. This just was not the beast that was created in the 19th century, and the UK is pretty much responsible for that beast creation. What we need is a form of incorporation that is suitable for business in the 21st century. Scotland does have some distinct and separate forms of incorporation. We know the Scottish limited partnership, although we probably know it best at the moment for the fact that that is also being abused. Scotland could look at whether there is a suitable beast that could be created to encourage enterprise, but which is also significantly less open to tax abuse—the obvious way to do that is to create a larger company that is for those businesses that require a certain degree of capital intensity and which may therefore still be subject to a corporation tax, but a smaller company that provides the protection of limited liability, the separate entity principle, which allows it to contract in its own right, whilst being a see-through entity as a limited liability partnership is, with regard to taxation so that the profits are automatically attributed to the members to be taxed by them as income tax, and therefore there is no arbitrage available between the different corporation tax, national insurance and income tax. We know that LLPs have been abused because they have been extensively used by offshore companies incorporating in the UK to then not pay tax in this country whilst appearing to be a UK entity. That would therefore require some degree of withholding tax to prevent overseas abuse of this structure. However, I suggest to you that Scotland could look at whether an innovation is possible to come up with a new hybrid-style entity that encourages enterprise, which is fully accountable and puts its accounts on public record, but which provides a degree of tax neutrality that would stop this game playing, which is largely for the benefit of the accountancy profession. Is that something that is possible within the devolved settlement? I am not entirely sure that it is possible at the moment. I presume that devolved settlements are always available for negotiation. I am sorry, but I think that everything in life is up for negotiation. If we are coming back to the devolved tax powers, we are looking at income tax. Coming back to my earlier point, we can overemphasise the point about people incorporating, because, as you rightly say, it is not that easy just to step out of employment and become self-employed or become a company. That one needs to be kept in perspective, and we also need to keep in perspective to that a lot of our higher paid people are in public sector as well. Again, they are the least likely to be able to do this kind of tax planning, if that is the word for it. We have to be careful around that. I think that, too, we need to be mindful that companies do not automatically equal good or bad. There are other forms to OTS, the Office of Tax Simplification, said about 10 per cent of businesses as a partnership. I think that there is a really sound form of business, and maybe there should be a strong emphasis on some of those in self-employment. Last but not least, just in terms of the conversation that we have just been having, I think that some people, not all of our members, question the lowering of corporation tax rates. On the other hand, most of our members emphasise that companies contribute a lot in other taxes, whether it is employment taxes or collecting VAT national insurance, and we should not forget that end of it, if we want to encourage businesses to set up here. Okay, we have covered a lot of that area now in terms of the discussion that I have had. Some stuff around the economy that I do not want to explore with you. Thank you, convener. I wanted to take you to the relationship between tax, the powers that we have in this Parliament, and a number of things that Mr Murphy, that you have been talking about, do not fall within the competence of this Parliament, but the relationship between tax, the powers of this Parliament and the nature of the employment market in Scotland. We all hear a lot, as politicians and as policy makers, about the changing nature of the employment market, the rise of the gig economy. The first opportunity here is for one of you to put your finger on that label, gig economy, and define it, because I am not sure that it is used in a consistent or even coherent way. Picking up on a number of things that Charlotte has said over the course of the morning, it is still the case in the UK generally and in Scotland, specifically that 85 per cent are bouts of workers or employees. Is that the right balance for the economy if not should we be seeking to increase that percentage or decrease that percentage and what can we do within our competence if we should seek to change it to try to encourage or facilitate those changes? Should we be making it easier for people to move from employment status to self-employed status or should we be making it more difficult? It seems to me that the picture that the panel is painting is not entirely clear on that. What is the relationship between the tax powers that we have and the nature of the employment market in Scotland at the moment? If I start on that one, I think that from the perspective of ICAS, we would not necessarily comment on whether one should be pushing towards more employment or self-employment. Our remit is primarily to look at the operational aspects of how taxes work, so I perhaps ought to say that for starters. In terms of a gig economy, I quite like the way the OTS has tried to analyse that in the Institute of Fiscal Studies in that I think that one of the difficulties all around the sector is that there are rights for employees and employment law and then the tax law versus some around employment and self-employment is different and it is how all those bits kind of fall in the middle, so gig economy to my way of thinking you've got employees on the one hand, you've got completely self-employed on the other hand and you've got folk that kind of fall somewhere in the middle where they're kind of quasi-employees like the Uber case taxi drivers and it's quite difficult to really shunt them one way or the other and the Taylor reports looking at that and it'll be interesting to see what comes of it and hopefully that might help set the direction travel for teasing those things out and I think in terms of tax powers because they're income tax powers only you're looking primarily at employees and it's a question for you as to whether you want to use those tax powers to try and retain employment because that's the easiest way to pick up the income tax from it under PAYE for instance and from 85% of the population or whether tax is just one element and hopefully it'll pan out. Thank you. I'm not entirely sure that all the things I said are not within the scope of this Parliament remember you're responsible for income tax and what I'm actually suggesting in ways in which you can identify those who might pay income tax and Revenue Scotland clearly has a relationship with the Scottish Government and a responsibility to it to collect the tax that he's owning under income tax rules in Scotland so there is a I'm sorry I'm correct. HMRC collects it. Revenue Scotland is responsible for taxes which are devolved in full. I'm sorry in full yes so but there is still a dialogue to be had about the taxes that are collected on behalf of the Scottish Government where it has got the right to make decisions over the taxes that are due and a lot of taxation in my experience is based upon soft negotiation not hard legislation and I think all four of us sitting at this end of the table will be used to having regular meetings which would be described as soft discussions about how the tax system should work but which don't actually result in legislation or anything else so I think that in this area of the gig economy you have the power to actually make representations on how you want things to be managed to ensure that income tax is paid and I think you should be encouraging people to adopt the right form and Scotland should try to make sure that self-employment work is the right thing for somebody is something that they can pursue whether as a self-employed person as a partnership or as a company or whether there's other forms of company that might in due course be allowed but you should also be encouraging HMRC to make sure it collects income tax where it's due on behalf of the Scottish Government because that seems to me to be incredibly important if that's a lever which you're using as part of Scottish policy then to make sure that HMRC is using its powers for that purpose seems to me to be a fundamental part of the duty and it doesn't require devolved powers it requires discussion and pressure to be brought to bear I was just going to say I would definitely second the fact that because I think it's a UK issue this kind of gig economy and how all the different taxes kind of converge I think in terms of policy here it would be helpful to continue Scottish Government officials and Revenue Scotland and everybody else working as closely as possible with HMRC but I think they probably do that anyway Alex, do you want to go on? There's a point on incorporation and a point on tax. On incorporation I think you know Ivan raised earlier this and Richard the origins of incorporation in terms of spurring entrepreneurship by providing limited liability the quid pro quo for that was always the publishing of accounts to guarantee that those people whose liability was being allowed to be limited who were getting that benefit were also accountable to other people operating in the market to suppliers to customers and so on and that transparency of their accounts was what provided some guarantee of that in some ways you know so that goes to one point there's a risk that because we allow through bad enforcement but also through other forms of incorporation we allow that quid pro quo to fade away and that undermines the efficiency of the market because you have some actors within the market who don't face the same accountability as others but the gig economy takes us to the other side and in this way you know very much agree with Richard that the corporate entity as we think of it isn't really structured for this type of economy instead of thinking about how people might be using companies to avoid their accountabilities of one sort or another we also need to be thinking about how companies are used to impose a worse settlement on the people doing the work through that company and that's a very different type of accountability problem from the one that was originally considered in the limited liability creation the and you know obviously a lot of this goes well beyond what this parliament is able to to take action about but I think it's worth having in mind the tax side of that is just to say you know it there's abundant evidence that paying tax is a social act not an economically rational one people in every jurisdiction and in every type of tax you can look at pay more tax than they should do if we think that how people decide how much tax to pay is on the basis of whether they'll get caught and how much they'll have to pay if they get caught people consistently pay well beyond that because they're taking part in in tax as a social act now what that means among other things is that there is a power with the parliament well beyond the devolution settlement in terms of the type of positions that you express about the social acceptability of particular tax behaviour and in particular you might want to consider the kind of positions that you're stressing about the appropriate use or otherwise of incorporation in different ways and you might expect at least to an extent for that to have an impact beyond any legal power that you may actually have to back that because you provide an expression of social acceptability when you make that kind of statement and that does influence behaviour I think about the gig economy if more people in society want to be their own boss happy to take the risks that Richard mentioned and either because they think they can make more money building up a business or indeed because of a lifestyle choice that they can take time off when they want and so on if people want to do all that genuinely you know it's not the job of the tax system to say that's a bad thing it's the job of the tax system to accommodate it but I think where the tax issue comes in is partly if as a matter of fact doing things that way is more likely taxed rightly or wrongly than employment then the policy makers have got to say well somehow or other the money's got to be made up and we would suggest some kind of public debate around that would be the best way forward and the other point is when there's not really such a dramatic change in the underlying lifestyle but where people are being shoehorned maybe with pressure from the employer into the form you know that sort of structure where you know arguably it does become more abusive and it's kind of very unlikely that the policy makers are going to want to sit there and say we just accept that this tax is being you know paid a result so I think it's I think the tax system has to react as it were to the kind of to the the the social pressures a little bit. I hope for thank you very much. We've had a wide region discussion now I want to try to if Willie I think you want to get into the area of actually at the end of the day what does this all mean for the for the Scottish block and for the through the fiscal framework and what that actually means for the amount of money in Scotland we've got to spend so if that if you tease some of that out then I'll come back to others to the color that other wider areas I want to talk about we really need to get some of that on the record. Yeah, thanks convener. Both Richard and John mentioned the imbalance in terms of the powers that Scotland doesn't have. You talked about power on one side of the equation and not the other John and Richard you were talking about being exposed to a small part of the system about which we can do very little and we should go back to the negotiating table but I wanted to ask you what's your view of the fiscal framework in that regard does it provide any counterbalance for Scotland where adjustments may need to be to be carried out is it strong enough or to be genuinely in your view need to go back and renegotiate this arrangement? Can I say a little bit into that as well in terms of that whole wide question because it strikes me that if we have the difference in the number of incorporations self-employed etc between Scotland and the UK what impact will that potentially have on the block grant in your view if you've looked at that issue would be useful for us to hear because at the end of the day it might mean that we have less or more money to spend than we expected if there are more incorporations proceeding in the rest of the UK compared with Scotland for instance so when you're dealing with Willie's questions you could pick that up as well I think that would be useful. So are you asking about the kind of no detriment element? Yes I think one of the things and maybe Richard you might want to pick this up was when it comes to accountability and the transparency of the fiscal framework and being able to see what goes in and how it gets mushed around and comes back out as no detriment or equally I think it's quite difficult to quantify how much stems directly from Scottish policy and how much stems directly from UK policy and I think on picking that actually will prove quite difficult. Do you see any mechanisms in the framework that will attempt to deal with that kind of scenario? I haven't investigated the actual machinations of the calculations no sorry. I mean our members are tax advisers dealing with tax issues on the nitty gritty level day to day so that's where a kind of our expertise as an institute comes out we're not you know constitutional experts to be quite frank and I would sort of tend to think you know no system is ever going to be perfect I mean if you had sort of full and complete tax powers over the whole tax system you would still have to react to kind of decisions that neighbouring countries and jurisdictions made because you know behavioural effects go across borders and you know and equally if nothing was devolved that probably wouldn't be perfect you know either there'd be no responsiveness to local you know Scottish concerns so nothing is going to be perfect but I think my impression is there's been an attempt made with the relatively new powers here to kind of had more of a debate of this nature about you know what the way forward is and I think part of the problem is this historic you know lack of consultation and the spring of surprises at UK level because after all until recently the UK level there has been complete powers more or less over the you know virtually all the tax system you know the EU limitations are really quite limited and yet we've allowed these big imbalances to grow up and I think partly that's because the system's got ever more complicated this tradition of surprises being sprung on budget day so the decisions are all made by a very limited number of people who may be very expert but they clearly don't see all the ramifications because of the secrecy and the hurried nature of those deliberations so you know we've even allowed these imbalances to grow up with a system where there is complete control over more or less everything so I think you know more debate at the various different levels you know has got to be encouraged and more attempt to have a more consistent you know sense of directions rather than being kind of so reactive but if you wanted to do that I think you'd need to start by having a much broader kind of public information programme because certainly I speak to people about Scottish taxes and like Richard the joy of tax I find it all very exciting but I'm in a minority and most people think Scottish taxes on you go Charlotte and actually we've got a really interesting set of different powers that have been devolved whether you know it's partly through income tax which gives you a kind of it's a version of the block grant in many respects and you'll not change it radically and then we've got the properly devolved taxes like LBTT in this landfill tax and there's quite a lot you can do with that and there's the capacity to meet new taxes and there could be some imaginative thinking around there and I think if one was to start taking that out and about and explaining it to people and the different elements of it then we would take our debates a lot further and you know it would help to filter through the fiscal framework so that people could then say well what's that about now how does it work and where does this no detriment sit and the no detriment in itself is interesting because if you took it to the nth degree you wouldn't devolve the powers would you? There was quite a surprise from yesterday as well but Richard, why do we need to then go back to the negotiating table in this matter if there is such an imbalance in the powers that we have? Well there are extraordinary imbalances in the relationship and I mean a few weeks ago for better or worse I wrote a blog about GERS government expenditure and revenue Scotland statement for which my Twitter timeline is still suffering I can assure you that I have never met anywhere which is more interested in national income accounting than Scotland you have turned it into a national obsession it seems I was a little surprised by the reaction so I walk with a little trepidation knowing full well that someone somewhere will have a lot to say about what follows the simple fact is that the amount that is known about Scottish taxation is very little indeed let's put it bluntly inside GERS 25 of the 26 income figures are estimates and as Graham Roy has said at the Fraser of Allander Institute and he was responsible preparing it for seven years they are prepared on the basis that Scotland is a mini part of the UK and the figures are simply an apportionment of the UK as a whole so in other words Scotland is not an independent entity and yet I'm sitting in what seems to me to be the Scottish Parliament which clearly recognises that Scotland has some independent as an entity and is being given devolved taxation powers but is not being given the data to make decisions upon that was the core argument that I presented and however you look at GERS and yes I am quite sure that those who are tasked with preparing it do it with all good faith and with due diligence on the data they get from the ONS and elsewhere but nobody would ever prepare the income statement for a region a devolved country administration or whatever else on the basis of samples and statistics if you could actually collect the population data you know as in statistical terms you'd always like to know the real figure not the statistical estimate of what that might be and if the GERS statement was so good as a basis for estimating Scottish taxation income then the UK would use that system as a whole but I assure you it doesn't it actually uses the data on the amount of tax collected which is obvious direction of travel so if Scotland is going to get a fair deal on tax under whatever system exists however it's framed whatever the rules on detriment and so on then Scotland needs the data to make decisions to see how these issues do impact upon it and it's no good just having information on income tax which is obviously an income tax from employment which is obviously the one area where there now looks to be a reasonable chance of the quality of data improving because as we're seeing what's going on here is an arbitrage between one tax and another tax taxes that will be subject to Scottish rates taxes that we will will not be national insurance corporation tax and so on and there who knows whether or not you have Scottish registered businesses or not does of course even potentially have impact upon the VAT collected in Scotland as well and it could quite easily have that as well because if there isn't business in Scotland there will be less VAT charged as such on a differentiated business framework in Scotland and that does have an impact so one of the things that you need to do if you're going to get this framework right is to actually say for heaven's sake can we please have real information and I wouldn't make this request just for Scotland I think Wales needs it, Northern Ireland needs it, I can see good reason why you should be cooperating with colleagues in other parliaments and assemblies for that reason indeed I can't actually see why the new mayor of Manchester won't want this if he's going to ask for taxing powers it is going to be a he I'm not being gender specific here why London may not want it and so on because the data should be collected but Scotland very definitely needs it because you have taxing powers and at the moment you simply do not have the right information I tell my students when I teach them about the quality of data that they're going to interpret to actually look at whether it's good information or not and the phrase I use is crap crap is a technical term it stands for completely rubbish approximations and that's what you get to assess your tax system at present I might just add on that a broader point not that I want to join in the fun of Richard's Twitter timeline but you know internationally it's it's very clear that control of data is associated with the strength of fiscal decentralisation you know and at the extreme you have something like Sudan where you know I was apparently person a non grata for a while for doing research using their regional state data because it demonstrated a deliberate decision to exacerbate inequalities but the data had been kept hidden nationally until we took it from the IMF and and then republished it into Sudan that's not to say that Scotland's in that position but it's worth saying you know you have that that relationship does broadly exist and in terms of the willingness of people to pay tax the two things it rests upon fairly consistently from evidence of both experimental and actual are the sense that other people are paying their taxes and the sense that taxes that are paid are being redistributed effectively if people don't have confidence in the data about where money is coming from into Scotland or about where it is then being spent how inequalities here might compare with those in the rest of the UK or that entirety of that process what you're doing over time is eroding rather than strengthening the relationship between state and citizen and therefore the likelihood of paying tax as a social act so this isn't just a an argument that takes place on twitter about some technical accounting issues right you know that data question is fundamental to the politics and the social engagement okay okay patrick where to begin joining the conversation after this long that there's been an incredible breadth let's just say you know my my view is is that the strongest evidence that we've had so far from this panel is that we are a very long way from having either a taxation system or a company law system that meets the the needs that i think most of us would subscribe to of sharing the wealth of the economy properly as well as ensuring the adequate revenues for public services we're not going to fix that in this committee meeting we're not going to fix that unilaterally at the moment maybe that one day this parliament will be in a position to make many more decisions about this it maybe that one day will be in a position to have a negotiation with the UK government without being told that now is not the time to resolve some of those questions where we are right now i'm keen that we focus on some specific actions that this parliament may be able to recommend in relation to some of the problems let's assume that there is a broad policy agreement from the Scottish government and we may have to ask them this and test this that they agree that the phenomenon of people incorporating specifically to move what most people would regard as their income out of income tax and into corporation tax let's assume the Scottish government believes that that is a bad thing and it should be tackled and reduced does any of you have any information about the scope of the Scottish devolved public sector the Scottish government local government health boards public agencies that the Scottish government is responsible for either their direct employment arrangements or the contractors that they work with the private sector organisations they have relationships with procurement what is the scope for using the power of the current devolved government to limit or eradicate these practices at present or indeed as as alex coven i think was talking about stigmatising them further creating additional disincentives to this behaviour are there any specific actions you can recommend that we could take right now an interesting approach and i think tax should be part of your your wider policies and it's just one element of it and you're absolutely right there are other elements that sit with it and if we're coming back to the powers that you have here and now and you're looking at a Scottish approach to taxation then i think you can usefully build a bigger picture and have a very positive approach to taxation by setting out broad principles that you might want to follow over the course of the parliament a roadmap call it what you will as to how you would like to things to go about i completely agree with you alec there can be far wider messages about whether you do or don't want tax avoidance i mean that came through quite strongly didn't it when you were doing the revenue scotland tax powers act as to having a general anti avoidance rule rather than an abuse rule and making it slightly broader and i think all that kind of messaging can can help set drain about this i know this kind of this sounds a bit wet but i do i do sort of think that uh public debate and indicating sensitive direction are quite important because certainly when we surveyed our members to go into the input the original evidence we gave um there was quite a strong emphasis on stability and simplicity of possible and set you know in sense of direction because i think um in in the kind of UK tradition which you need scotland a way as part of that is inherited um you tend to get these kind of suddenly announced changes and each one tends to make for a more complicated system and people don't know whether you know if it's an adjustment on employment or self employment that's the end of the agenda or whether it's a signal for new things so if at least the the government tried to give some broad indications of you know where it was trying to take the devolved powers over time and you know as and when resources permitted so there's a clearer sense of direction it enables people to you know understand where they are a little bit and i think that does affect behaviours as well if if people for example get the sense that uh that over time the policy will be to try and get a more level playing field between the corporation and non-incorporation if that you know was to be your policy i think you would find even with nothing else changing there would be less tax motivated incorporations because people would be less inclined to go through a lot of hoops for something that maybe had a more limited limited shelf life that's a useful phrase go through a lot of hoops can we put more hoops in place can we make this a more difficult process to go through or one where we put more disincentives in the way of that behaviour well i think what i mean i think one of the issues is that although you know you have power over the Scottish rates of income tax you know that those don't extend to some of the detailed rules so that you know that again i think is kind of quite is quite difficult but i think you know i think adopting a more consultative debating sort of approach would have a knock on effect at the UK level because there is just a growing body of opinion that this tradition of secrecy in surprise you know has just gone too far and is not serving you know serving any purpose so i think even where you know you would need co-operation or or you know some kind of co-operation or change or whatever at the at the UK level to give a sense of what direction you would try to take things i think would be you know very helpful you know to you and probably the rest of the UK i think there are a number of areas where some quite specific actions can be taken first of all um and i haven't read the rules for a couple of years i confess this but Scotland has quite different rules on procurement from the rest of the UK and the way in which taxation was built into those rules on government procurement were different from the rest of the UK as i recall it they were more specific that tax was to be considered a factor in procurement more specifically than has been done for UK local authorities for example um and that is a route where some action could be taken the current indication is that people are only willing to discriminate in procurement when there is clear sign of abuse that might be for example a referral to under the gar whether UK as a whole or scottish um or some form of sanction has been imposed now those are varied very high level hurdles to jump over because frankly nobody's ever been referred under the UK gar rules um so you know frankly that's a meaningless test at the moment um it's existed since um 2013 and never been used so that cannot be the criteria so you could however think about other criteria we now know as from literally the fifth or sixth of april um we have these new IR 35 rules which are going to apply to public sector bodies um hiring people who are on disguised employment contracts you could say nobody from the private sector can be employed to substitute for a public sector service if they are using arrangements which would not be acceptable in the public sector for taxation purposes obtaining an unfair competitive advantage as a result purely by exploiting the tax system that is an entirely possible thing for scotland to do and look at and it's within your powers that could be in the public procurement process i'd also talk about um something again slightly softer um but the largest company to have a fair tax mark and i will disclose i'm a director of the fair tax mark is a scottish company it's sse um which has been a pioneer in talking about tax responsibility and has done a good job on that particular task in promoting publicity around its tax affairs the scottish government could look at how it could encourage other companies to follow their example to improve the quality of their disclosure to disclose what they're paying how when where and why and to therefore actually show that they're paying their tax in scotland for that and i might ask alex coblin to respond because he was talking about these the social values attached to tax as well one option for that would be the scottish government's business pledge which is intended to promote ethical behaviour around living wage and another other factors not exploiting younger workers and so on promoting gender diversity there's a range of things there are clearly areas where that kind of pledge could go further and could become a precondition to accessing state funded forms of business support services could we add in a tax ethics aspect of that kind of measure that makes a lot of sense but i would you know we've talked about debate we've talked about changing rules and at the at the risk of coming over all to any Blair you know there's a there's a third way here which is you know through the middle of this pledges and debates take you so far rule changes are harder to achieve in the middle is the data and you know i was sitting here thinking what a good question you asked and then i realised actually that it's a slightly shocking question it's a good question for me to ask and i'm thinking well you know you could go to all the public bodies and with freedom of information you could start putting together this information but from your side of the table already yeah right exactly so you know having data in the public domain for every scottish public body on the proportion let's say of their spending which goes through certain types of structures the proportion of their procurement spending which goes to companies with the fair tax mark that kind of information allowing whether you do it yourselves or you allow civil society to put together the rankings that are going to start putting pressure on those who are at the extremes seems like it uh you know it doesn't have the the difficulties of making hard rules but it is much more likely than discussion alone to drive behavioural change and if that information actually isn't available to you now it really should be and then to everyone else i think that's very helpful thank you anybody got any supplementaries in that because i was gonna if not i was gonna go to ash because i think she had some wider questions as well ash thank you it's been a very interesting discussion this morning so thanks to the panel for that but my particular question is with regard to richard murphy's evidence that you put in the principles of scottish taxation so in that you suggested that scottish principles might be in your word for that was insufficient so i appreciate your thoughts on that but also you spoke about scotton's current tax powers which you described as being largely symbolic and potentially also booby trapped so i wonder if you could explain a little bit about what you mean by that i have a feeling my twitter timeline is about to explode again um that's all right that's life um i was concerned about this suggestion that we go back to 1776 and we use adam smith as the basis of the principles for scottish taxation and that he was a good scottish moral philosopher he wouldn't have recognized the term economist at the time um but he didn't know most of the taxes we're now talking about yeah the tax system at the time was fundamentally different and adam smith's understanding of tax is i would suggest out of date um now i argue for something called modern taxation theory um which argues that taxation has and and alex is i think it's fair to say broadly in the same space um that taxation has a very large social and macroeconomic role as well as being a purely technical technical function of revenue raising i actually argue it doesn't even raise revenue but that's a secondary issue we'll leave aside i think at the moment um and therefore the tax system has to be reflective of its true social function which again alex and i have been saying uh regularly here um i'm not in any way arguing with the colleagues from professional institutes who are looking at the tax technical aspects but tax is much much bigger than that um you know of the reasons for tax redistribution repricing market failure these are really really important raising representation in a democracy people who pay income tax actually vote if you're interested in engaging people in the political process actually taking people out of taxes not the right way to go um rather bizarrely but nevertheless certainly true now for that reason i suggested that these four proposed these four proposed bases are not sufficient for scotland um tax is a part of the management of an economy and therefore you have to put it fairly and squarely into macroeconomic policy as well and most of the considerations of efficiency certainty which is a very deeply ambiguous word as alex has explored in his submission and so on are too micro focused so you have to bring it up to talking about what a what is the government trying to achieve what is its social and economic policy and how can tax help implement that the whole thesis of my book the joy of tax is that tax has the greatest it is the tool that has the greatest power to change the shape of society available to a government and therefore the principle should do that the system should therefore reflect the priorities of the scotish people was my next suggestion rather than anything technical and it should encourage the engagement to people in the democratic process which is why i was talking about and the alex is talking about in this sense data and the availability of data to encourage people to understand the process of government of which they are a part and which they need to be encouraged to take their part and so i felt those were really important before we came down to the more mundane things like talking about minimizing opportunities for abuse and so on so i didn't feel as though and i read much of the evidence that was submitted to you in the autumn of last year and i felt that a lot of it entirely missed those points and that the evidence provided was not about the foundations of scotish taxation was not about principles but was about administrative tools and how they can be structured but that's some way operationally after the strategic goals and foundation principles for the tax system so i think that to me was quite critical having done that i've completely forgotten what the second part of your question was and i'm terribly sorry ash for saying that it was about the largely symbolic nature nature of the you know income tax that's been devolved yeah when you devolve a very small number of tools you have to look at the decision that has been made by the person devolving them as to whether they are setting up the person who's been given a responsibility is designed to succeed or fail and i would say this if i was looking at the business you know i have seen managers in businesses who've devolved responsibilities as members of staff who can only fail as a result of making any decision that is being given to them they have been booby trapped um has scotland been booby trapped by being given a very limited range of powers and my answer is yes i mean if you're trying to create a fair tax system you can't do that by changing the tax system for income from earnings alone um we only have to look at incorporation to realise that how daft is it that a person who has incorporated their business in scotland can decide for themselves whether they are within the scotish or the uk income tax system by deciding whether to pay themselves by way of salary or by way of dividend one is within the scotish rate system and one is without that is a booby trap because it immediately might encourage some and there's some evidence of this by the way in academic research that some people who don't like the scotish devolved situation will choose to incorporate and pay dividends simply to deny a source of income that is clear that this happens in the states by the way the tax gap increases in states which are the opposite from the federal government in power so if it's a republican state it will have a higher non-compliance rate when there's a democratic president and maybe vice versa i say maybe because more democrats tend to pay employment taxes than be self-employed but certainly there's clear evidence of a political process even in tax payment and so this decision to simply give this tiny range of powers to scotland leaves it with a very limited range of choices where the changes are i mean i'm not saying 400 pounds a year is symbolic because it's not symbolic 400 pounds a year is real but in relative terms to the overall tax liability of those paying it it is a relatively small part but does create the potential for a significant backlash um and political for ory where frankly very little is really due and i felt that that was there for the provision of powers which were tinkering at the edges of the system when what were required were the rights to actually ask deep fundamental questions of how scotland really wants to create as i've reflected the attack system that really reflects the social priorities of scotland which i do not perceive to be the same as those of the uk necessarily as a whole i mean i think that's probably true i've only have to be here i'm here quite often i realise that this is different uh scotland is not the same as london for example so in that sense the powers granted did not let you achieve the result and that's why i called them booby trapped i also want to reflect on on the first set of questions first for ash ask the follow-up right ash on you go i want to say that um you know you feel that scotland should have a much broader range of taxes devolved but then you also mentioned um scotland should be benefiting from qe issuants i wonder if you could just explain that well one of the problems that you have is that of course you are required by the rules that exist to effectively create a balanced budget this is a constraint that does not exist for the uk government first of all it can borrow but secondly we now know that it doesn't have to borrow because it can cancel its own debt it's not widely recognised that qe cancels debt uh but it does and the evidence is very clearly available just go and look at the whole of government accounts for the uk government and you will discover that in fact uk government debt is not at the present point of time some 1.7 trillion or so as is regularly rolled out in news bulletins it's 435 billion pounds less than that because the debt has been cancelled by qe um and so for example in the last year whilst it is expected that the final figure for borrowing by the uk government will be 51 billion in fact 60 billion of debt will have been cancelled under qe and therefore actually overall uk government indebtedness last year fell even though there was a deficit now scotland is not in that position because none of that qe capacity is devolved to scotland but the benefit could be considerable now i'm well aware that Jeremy Corbyn once borrowed this idea but didn't use it for very long and he called it people's qe i didn't write it for him i make that clear um he borrowed it and i was quite happy for him to borrow it but the idea was to use qe as a proactive measure to provide an investment fund to ensure that there could be a long-term infrastructure programme to develop the economy of the uk and scotland and others i do not see why scotland could not go to the uk and say hey hang on a minute 435 billion even if we just apportion that on the basis of head count that's a mighty lot of money which could have been given to scotland to provide a fund for investment in this country which we've not had available to us now that is a soft discussion it's not within devolved powers it's not being discussed by anybody else either but it's the sort of issue that i believe needs to be on the table because this is part of the whole macroeconomic debate tax does not even exist in isolation within macroeconomy taxation money issuing qe are all fundamentally related subjects completely and utterly incapable of being considered in isolation and so if you're considering tax you have to consider the right to cancel debt which is a substitute for tax in terms of the means of payment and therefore scotland has to demand that qe be on the agenda and the right to have the benefit from qe has to be devolved to this parliament i suggest okay is anybody else going to find himself a mentor before we wind this session up it's not so much a supplementary convener but just some questions around i'm slightly concerned there's an awful lot based on perception and there seems to be an underlying perception in some of the papers and indeed some of what we've heard today that people incorporate for reasons to do with tax planning tax avoidance and some of the terms that have been used around that abuse social acceptability a bad thing tax ethics betrays an underlying perception is there any data or is there any breakdown or analysis that's been done of how many of the limited company contractors are incorporating for tax planning reasons as against those who are incorporating because it's the best way to sell their skillset for example how many are doing it is avoidance and how many are doing it because it's the right way to model their skillset their business the office of tax simplification has studied it quite a lot and the office of budgetary responsibility have looked historically at the problem and the erosion of the tax base and the likelihood of it continuing i think i think that it's very difficult even theoretically to kind of draw the line between what's tax motivated and what's not because to the in the typical case there's going to be a mixture of motives and considerations i would i would suggest that so even if you could actually get inside people's hearts and sort of you know measure exactly what they were thinking you'd probably find it was a bit of a mixture so i'm not i'm not sure how easy it's ever going to be to take it that step further and answer that specific question Judith Friedman's done a lot of analysis on this from the oxford business school and yes i agree there's a lot of sources on it the house of commons treasury committee is running an inquiry with elements of this in it just now as well so it's obviously an issue that a lot of people are thinking of and that's why i think you as part of the solution here is by working on a UK basis because it is a UK issue and i don't think you can pick out and say somebody incorporated purely for tax purposes i mean as accountants if we were advising folk you have a checklist that covers kind of limited liability lots of people would prefer to be a managing director than just charlotte barber you know and on it goes and there's a raft of factors that are weighed up tax is an important element because it's got a specific cost but of course on the other side as well there's a whole raft of reasons for not incorporating like having to do separate accounts and once your money goes into a company you've got the kind of difficulties getting back out because it is a separate legal entity there's quite a lot of factors in it i accept that and i'm grateful for the answer because isn't that the fundamental data that is required before you say this is the number of people incorporating is a bad thing and we must change it we must do the government must do something to remodel how the outcome presents itself surely the data should be established it says what proportion of people incorporate for tax reasons to avoid tax to pay less tax and what proportion actually are doing it for if i go back to argument mckay's point for good economic reasons that actually drive a particular economy studies that are being undertaken attempt to try and tease that out because when we went back to our earlier discussions as to there's two elements to this one being people who maybe are pushed out of employment because of the nisc costs now now in those instances where they're forced into incorporation in personal service companies i are 35 kind of companies i think one generally accepts that in broad terms it's maybe not a good thing because it's often largely tax driven it might also kind of negate some of the benefits that you would have as an employee and people tend to look at that as a bad thing but if you look at the other kind of incorporations which are people who run a proper self business do you know what i mean making widgets and employing people and having a factory or a kind of office and all that kind of stuff those kind of people the decision will never be purely tax as much wider and incorporating might be a good thing at a certain size or not again one of the things that i think is quite interesting is in the office of tax simplification study on partnership i think people forget what a lot of strengths there are in other types of vehicle and there has been a drive towards incorporation but you get it from the government too i mean Gordon Brown when he instituted a zero rate of corporation tax sends out a certain signal there's some reliefs that you only get if you incorporate and they send out signals too so it's quite a complex picture that's right if i may convenient because it is nuance and a number of you have made the point about people being pushed out to incorporate employee people who would otherwise be employees being pushed out and being forced to incorporate because an employer decides that that's they want to strip out overhead for example but again is there any data that suggests how many of those people those otherwise employees have been forced to incorporate by the employers because i'm not persuaded it's there no i don't think it is there um in fact i know it's not there you cannot be sure of this although there is quite an easy way to collect it and i have proposed it several times i'm not quite sure why frankly we're not willing to make the change to collect it it's very simple on a corporation tax return and indeed actually on a self-employed person's tax return you ask for the taxpayer to disclose their turnover by their top 10 clients customers or whatever if you discover that 99 of their turnover is going to one customer it's highly likely that's a disguised employment it's very obvious in that case if you discover that in fact it's going 99 for four months to one and then it's going 99 for the next four months to another that's a series of disguised employments but they're still disguised employments this data could be easily found with very you know just a little bit of political willing to change the corporation tax return and we would then know precisely which companies should be targeted by the revenue to deal with this issue in other words they could improve the rate of tax compliance enormously by one simple change of the tax return but it's not being done so we don't have the data the consequence is also that some people who are genuinely self-employed taking the risks running a diversified business are being stigmatised with tax rules which frankly are unfair to them and that is also a consequence we must take into account because there are people who will be selling their skills through a limited liability entity who have a range of customers but who will nonetheless now potentially be at risk of being penalised for example when contracting with the public sector as a consequence so we do need to make that change to collect data comes back to that same point that Alex and I have been making data data data and it's not hard to get we just have to ask the right questions they're fairly simple and actually the questions if they are simple in themselves signal the behavioural change we want we don't want people to incorporate to disguise an employment if we ask the question that indicates you will be found out if you do this you discourage the behaviour in the first place and there is a lot of evidence again mainly from the states that if you ask for the right information then by and large you get the behavioural consequence you want not entirely because no tax system is perfect but it's a long way. Alex and John also wanted to come on that. I'm just I can see why you'd want to get to that specific division good incorporation bad incorporation but I don't think the world is actually like that and you know as Richard's going to give me some good ideas for how you'd go further down that road but actually from a policy perspective you're probably more concerned with the aggregate impact you know we don't ban private property because there are burglars as it were there is always some abuse in in respect of any particular regulation you might have and that on its on its own isn't a reason to prevent the possibility but it goes to the balance the risk you have here you know there's two things one is it undermines the point Ivan made earlier that you can you know if all incorporation is good then incorporation is a good measure of the economic vitality of of your society but the more that you're seeing incorporation for bad reasons the weaker that relationship becomes and the less you're confident in that particular measure of growth and the wider benefits of incorporation in terms of the best impact numbers that there are you know these are clearly the ones in terms of the tax base erosion from the office of budget responsibility as we see consecutive years of multi billion pound undershoots projected in different forms of tax particularly income tax due to incorporation we don't necessarily need to be arguing that any incorporation which reduces income tax is a bad thing but the further that we're seeing incorporation on its own associated with that income tax fall rather than any wider economic growth impact the more we think the quality of incorporation in the aggregate is a problem you can you know then go to different types of corporate entities and say that something like Scottish Limbs and Partnerships is of course much more likely to be associated with particular forms of abuse because of the lack of transparency and so on with it so you can get a bit more granular but I think it's probably not helpful to think that you really want to say sheep and goats here you need to be thinking about the overall quality of incorporation to understand what your stance as a policymaker should be in terms of how you might want to limit it overall rather than how much you might want to go after an individual bad guy if that makes sense yeah I would just say even if all incorporation was good incorporation if if operating a business in that way made meant you got less tax of a certain type and you know that that's got to be made up somewhere so there's an issue at UK level as to where it would be made up and there was an issue at Scottish level as to whether that solution works you know given the pattern of devolved and undevolved powers and the block grant and so on so I think there would be an issue even if it was all good I agree with Alex's comments that it's very difficult to segregate 100% good 100% bad it's a bit of a spectrum I don't think you'll get you know hard and fast facts well partly for definitional problems as to what's good and what's bad but I think if you look back at some of these analysis and you see a big spike in company corporations when there was a 0% rate of small companies corporation tax or if you notice that the trend accelerates as the corporation tax rate is mean coming down and promised to be reduced further you can get a feel which is you know sometimes as much as you get that you have to base policy on and you very rarely have perfect information at any one time so I think there is enough to say that it's in any event an issue for the tax base and that obviously some of it is to some degree tax motivated and you know will be will vary in amount according to what signals and what rates are changed but that doesn't make it the wrong thing to do and then this is a problem that it seems to me there's an awful lot of subjective assessment of whether this is a good or bad thing driven by what is the ultimate income tax take whereas actually that's coming at it from the wrong end surely what should be driven is the right model whether it be self-employment incorporation employment for the outcome for the economy and and that's just the final question I want to put up and I'll do it very quickly which is simply around isn't the solution lest to be doing something with what is a to me to my mind a very blunt instrument of tax and much more around a number of you have alluded to IR35 and it sounds to me that the disguised employment that Richard Murphy is talking about it seems to me that what you are suggesting is the IR35 legislation is not working sufficiently to pick up illegitimate if you like disguised employment and so surely rather than using a blunt instrument of tax to force a behaviour change you simply tighten up the IR35 legislation discussions for years about tightening up IR35 and you need a bigger HMRC to police it if that's what you really want to do but coming back to your earlier part of your question would I pick it up correctly to suggest that really the issue is not how you police it or whether tax is directing it but more you should be looking at whether there's differences in tax because the drivers of this are that you've income tax corporation tax and national insurance come in at different rates so if you manage to level those out more there would be no incentive to go one way or the other and then you could pick the true economic vehicle that you wanted for your business for other reasons yes and that's why I suggested you need to look at having a new type of incorporation for the 21st century because we've just got the wrong tools available to us the choices for businesses at present are simply wrong we're forcing people into the wrong models okay thank you very much that ends that session I'm very grateful we've covered a lot of ground there it's an interesting ground and a lot for us to consider again thank you very much I close this session of the committee