We were delighted to have Professor David Bell speaking at our Senior In-House Lawyers Forum which took place at our Edinburgh offices on 5 March. For those of you who were not able to make the event, we attach copies of his slides and some background handouts that we provided to attendees as a reminder of the terms of the Smith Commission Agreement and a summary of the relevant UK Government’s published draft legislative clauses to give effect to that agreement.

Some highlights from Professor Bell’s presentation are set out below:

Drop in the value of oil revenue quantified by income tax
Professor Bell highlighted that the Scottish Government predicted oil revenue of £6.8bn for 2016/17 (in its November 2013 white paper ‘Scotland’s Future’) based on the then price of oil and used this as a basis for its future spending plans for Scotland.  He contrasted this with the revenue of £2bn currently expected as a result of falling oil prices.  As an illustration of the scale of the effect this would have had on those spending plans, he mentioned that the difference between those two figures happens to be coincidentally close to the £4.7bn amount raised by the first 10p slab of income tax revenue (which will be devolved to Holyrood under the Scotland Act 2012 which will take effect from April 2016).  Therefore, to have made up the difference between the predicted oil revenues and actual oil receipts now through income taxation, this would have required raising all income tax bands by roughly 10p!

Effect of 1p increase in income tax
Professor Bell also explained some of the research undertaken by the University of Stirling’s Centre for Constitutional Change which looked at the effect of a 1p increase in all income tax bands in the context of the changes under the Scotland Act 2012. The results took data on a cross-section of Scottish households and put them into order based on net income.

The effect of a 1p income tax rise showed how much the top 1% would be affected and relied upon to raise revenue. Professor Bell emphasised that these results could not anticipate the behavioural response of additional rate tax payers, particularly given that this group are likely to be the most mobile. The research also highlighted that the category of household type most affected by uniform tax rises is ‘couples under pension age with no children’.

One of our delegates asked whether a drop in the top income tax band could attract more additional rate payers to take up Scottish tax residence and raise revenue as a result. Professor Bell replied that, although this would likely increase revenues as a whole, it is difficult to see how the political obstacle of a tax cut for the most wealthy could be overcome.

Block grant mechanics
Professor Bell also highlighted that the detailed mechanism for adjusting Scotland’s block grant to give effect to the further powers contained in the Smith Agreement has not yet been agreed. The first year adjustment would be the same as the tax raised by the Scottish Government (to the extent that rates levied in Scotland were not different from the rest of the UK).  However, if the block grant adjustment continued using that method, it would provide no incentive for the Scottish Government to grow the economy.

Therefore it is likely that the adjustment to the block grant beyond ‘Year 1’ would be determined by the percentage change in comparable tax receipts between Scotland and the rest of the UK (produced from the use of the same rates as levied in the UK). The adjustment would therefore increase by the rate of growth in those income tax receipts in the rest of the UK.

The rate of growth in Scotland and the UK as a whole have been similar in recent years.  But going forward, if Scotland’s economy does not grow as fast as the rest of the UK, it will lose spending power.

While the talk had began by highlighting the ‘vertical fiscal imbalance’ in Scotland (it currently controls little revenue in relation to the level of its spending), by the end of the presentation it became clear that an increase in amount of revenue raised in Scotland will lead to a greater block grant adjustment and consequently higher levels of risk.  Scotland will have the power to make different tax decisions to the rest of the UK in the future, but it will bear the effects of those decisions – whether positive or negative.

If you have any questions arising from this event or any of the attachments or in relation to the proposed new powers generally or their likely effects then please get in touch.

We will be continuing to keep our clients updated on the development of the further devolution powers following the UK General Election in May.

Link to slides
Summary of Relevant Smith Commission Recommendations and UK Government’s Published Draft Legislative Clauses
Summary of Smith Commission agreement
Draft command paper clauses