Finance and Constitution Committee

Meeting date: Wednesday, August 19, 2020

Official Report 560KB pdf

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Subordinate Legislation

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Land and Buildings Transaction Tax (Tax Rates and Tax Bands) (Scotland) Amendment (No 2) (Coronavirus) Order 2020 (SSI 2020/215)

Good morning and welcome to the 16th meeting in 2020 of the Finance and Constitution Committee. Jackie Baillie has given her apologies for the meeting.

The first item on our agenda today is to take evidence on the Land and Buildings Transaction Tax (Tax Rates and Tax Bands) (Scotland) Amendment (No 2) (Coronavirus) Order 2020 from Ben Macpherson, who is the Minister for Public Finance and Migration. Mr Macpherson is joined today by Ewan Cameron-Nielsen, who is the team leader in devolved taxes at the Scottish Government. I welcome the minister and his official to the meeting, and I invite the minister to make any opening remarks.

Thank you, convener, and good morning, everybody.

The order provides for the temporary changes to the land and buildings transaction tax rates and bands that were announced by the Cabinet Secretary for Finance on 9 July. It increases the starting rate for residential LBTT from £145,000 to £250,000 for transactions with an effective date of between 15 July 2020 and 31 March 2021.

That is a significant change. It will result in taxpayers saving up to £2,100 in tax on a house purchase and will mean that, excluding the additional dwelling supplement, an estimated eight out of 10 home buyers and an estimated nine out of 10 first-time buyers will pay no tax.

It reflects our assessment of what is needed to support home buyers and the housing market in Scotland at this difficult time, and takes account of house prices in Scotland and the specifics of the Scottish market as a whole.

The committee will be aware that this is the first time that a change to rates and bands has been made outside of the Scottish budget process; it is clearly not usual practice. However, the Scottish Government’s view was that it was necessary to act, and to act quickly, given the immediately destabilising impact on Scotland’s housing market of the United Kingdom Chancellor of the Exchequer’s 8 July stamp duty land tax announcement.

I note that the UK Government had weeks to prepare for its decision to increase the stamp duty land tax starting thresholds, yet we were given no advance notice, aside from the speculation in the media. That was not helpful and it meant that we had to respond like never before; no change to LBTT has been delivered as quickly as this. All the relevant policy, analytical, legal, operational and other tasks that were required to deliver the change were completed within five working days of the cabinet secretary’s initial announcement.

I thank Revenue Scotland staff for the effective and efficient way in which they worked with us to ensure that they were operationally ready to put the revised rates in place on 15 July. I have thanked those staff members personally, but I also want to put my thanks on the record.

The Scottish Fiscal Commission has estimated that the total costs of the measure will be £33 million in the year 2020-21 and £15 million in the year 2021-22, the latter as a result of transactions being brought forward. Those costs are subject to significant uncertainty, as the estimates rely on pre-Covid transaction levels. Post-Covid transaction levels are currently hard to predict with certainty, as I am sure that the committee understands.

I hope that my opening statement is helpful. I look forward to taking any questions on the order from the committee.

Good morning, minister. I am interested in hearing a bit more about the costings of the policy and how they relate to the potential block grant adjustment. You said in your opening comments that you expect the policy costs to be £33 million in this financial year and £15 million in the next financial year. Do you have an estimate of the impact on the block grant adjustment of the changes that were announced by the UK Government for the equivalent tax in England and Wales?

On whether the policy will have an effect on other spending areas, the answer is no. As a result of changes to the block grant adjustment and consequential implications, no spending reductions will be required, because we will receive the appropriate block grant adjustment to meet the costs of the policy.

Thank you, minister, but that was not my question. My question was this: do you have an assessment of what the level of the block grant adjustment will be? I am looking at the paperwork from the Scottish Fiscal Commission, which says that the Treasury’s initial costing estimate of that policy was £3.8 billion for England and Wales; however, it says that the Office for Budget Responsibility’s estimate is the much lower sum of £1.3 billion. When it comes to the block grant adjustment, is there a figure on which the Scottish Government is basing its working?

It is important to clarify that, until the Scottish budget process, we will not have the final block grant adjustment numbers, and a decision will be based on an assessment in that process. I will bring in my official, Ewan Cameron-Nielsen, to add anything further. Perhaps, as we get towards the budget process, we can come back to the committee with further detail on that point.

Good morning. We will see whether we can write to the committee with further detail on that but, as the minister said, we will not have final BGA numbers until further along in the UK and Scottish budget processes.

One point to note is that, when the chancellor made his announcement on 8 July, the costing of the SDLT impact was in the order of £3.8 billion but, a few days later, the OBR reduced it to £1.3 billion. That was a significant change. However, I understand that the final BGA calculation will need to be done at a point further in the future. If it would be helpful, we could provide further information.

Yes, thank you; it would be helpful if you could do that. The point that I am trying to get to is that, in order to know whether it was an affordable policy with regard to the Barnett consequentials, the Scottish Government must have done an estimate of the block grant adjustment before agreeing to make that change. As we know, the UK Government’s changes to SDLT for England and Wales increased the nil rate band threshold to £500,000; the Scottish Government took the decision to increase the equivalent to £250,000. Clearly, the higher the figure, the more the economic stimulus would have been created. Given that the block grant adjustment is therefore likely to be much higher than the cost of the policy to the Scottish Government, it looks like there was more headroom to have increased the threshold for LBTT in Scotland, perhaps even to the same level as in England and Wales. Why did the Scottish Government choose the £250,000 level and not a higher figure?

Thank you, Mr Fraser; that is an important question. If the committee is happy for us to do so, we can take a few minutes to answer that in full. Again, we give an undertaking to Mr Fraser and the convener to write to the committee on Mr Fraser’s previous point, when more information becomes available.

The measure that we have taken is based on our view of what is necessary and most beneficial to provide targeted support to the market in Scotland and to taxpayers in Scotland, recognising that the market here is different from that in England and Northern Ireland, where SDLT applies. For example, according to the UK house price index, the average price of a property in Scotland in March 2020 was £152,000, compared to a UK price of £232,000; that is a difference of £80,000, with property prices in Scotland being on average around a third lower than the UK figure. We had to consider that as part of our policy analysis in relation to the measures that we took.

You talked about headroom. It is important to remember that the measure that we have taken will take 80 per cent of residential property buyers in Scotland out of paying tax, and will take out 90 per cent of first-time buyers.

10:15  

Over and above that—this goes to the crux to your question—is that, in addition to the change in LBTT, we have announced £50 million of funding this year for the first home fund, which is a shared equity scheme that provides first-time buyers with £25,000 to buy a property. The additional funding will support first-time buyers, a group that we, as a society, particularly want to help. It will support an estimated 2,000 first-time purchases and it increases the total in that fund to £200 million.

Within the spirit and structure of devolution, we have made the policy choices that we think are the most targeted, effective and beneficial for the people of Scotland and for our housing market.

Minister, you began by saying that the tax change would save a significant number of people money on their tax bills. That is not really the case. They will not be better off as a result of this. They will simply be able to bid up a little higher on the property that they want to buy—the Scottish Fiscal Commission’s report makes that clear. This is a classic kind of tax cut that will end up being capitalised into property values and the commission says that it will increase house prices.

Why should we make houses more unaffordable? Why should we further inflate a property market that a great many people are already locked out of?

Support for first-time buyers is important. It helps people in challenging situations to obtain the necessary resources to get on to the housing ladder.

The wider rationale of the policy, both at a UK level and here in Scotland, and in the tight timescale that I spoke about in my opening statement, is not only to give a fiscal stimulus to assist those who are buying; it also has a wider multiplier effect on the economy. It gives people extra resources to undertake work that they may do on their new property, such as putting in a new bathroom or kitchen. The extra resource that people will have creates wider economic activity as they move into their new homes.

As has also been noted, the change has an impact on the building trade and the construction sector, which helps with job creation and wider economic stimulus.

Are you rejecting the Fiscal Commission’s view that this will simply lead to people spending the money that they would have spent on tax on a higher property price instead? What is your evidence for rejecting that view?

There will be an effect on house prices. That has been stated. However, the change brings economic stimulus at a time when we are trying to create demand in the economy in order to support both job creation and the recovery process. We want to maintain the productive capacity of the economy. Helping to create demand in the housing market is part of that. It is a measure that is proportionate to current circumstances.

There was also consideration of the wider situation in that the change to SDLT in other parts of the UK created a distortion in the market such that we believed that, to continue to have that demand effect in Scotland as well, it was necessary to act.

Again, I ask what your evidence is for the effect that you say will happen and your answer is simply to say that the effect will happen. It seems to me that actions at both ends—the first-time buyer end and this tax cut for LBTT—is going to increase housing costs rather than create a stimulus, but your response is simply to say that it will create a stimulus. I do not see the evidence for that assumption. Of all the forms of tax cut or spending increase that the Scottish Government might choose to use the consequentials for, why is the best effect that you can think of to cut taxation for people who have the wealth to buy a £250,000 home?

Like I said, it was a consideration in a context of distortion in the UK market as a whole, which we are part of in the current constitutional circumstances. I am not doubting the Fiscal Commission’s analysis—I do not mean to do that—but in terms of both the analysis that has been made previously and supply and demand economics, providing this fiscal stimulus is designed to have a multiplier effect in terms of the wider economy through the extra resource that new house buyers will now have to spend on improving their houses.

What taxation policies were considered as an alternative to this one that might have provided a stimulus effect but also benefited people who are in greater need?

Those are questions that we all need to ask ourselves in the run-up to the Scottish budget. However, the measure before us was a change that we made in response to a UK Government decision whereby the market was significantly distorted. I look forward to the discussions on LBTT and wider taxation policy as we go into the budget process.

Okay. It is clear that the measure is just a policy decision to follow in lockstep with UK Government taxation policy. Finally, on timing, at the moment the measure is due to last until the end of March 2021. Is that a fixed and unshakeable position, or will the Scottish Government consider continuing as opposed to ending what is supposed to be a temporary move? What criteria will apply for a decision by the Scottish Government on whether we revert to normal or extend the measure?

As things stand, it is fixed on the timetable in the order. Any new LBTT policy beyond what was agreed in the most recent budget process would be agreed in the forthcoming budget process. The measure is indeed a temporary one.

So the Scottish Government’s current intention is clearly to revert to normal, as opposed to having this temporary position, during the next budget process.

Yes, but the normal position will be whatever the Parliament agrees in the next budget process for commencement on 1 April next year.

I will follow up on the previous two lines of questioning, especially Murdo Fraser’s. When I read that there would be a £48 million tax cut, I was a bit concerned that that would mean a cut to the national health service or local government. However, if I understand the minister correctly, he is saying that he is fairly sure that enough money will come from Westminster through the block grant adjustment. There seems to be quite a lot of uncertainty, though. Are you very certain that enough money will come in to cover the tax cut?

We are as certain as we can be that the Barnett consequentials will be passed on as we expect. As I said earlier, we do not expect changes to other spending, or spending reductions as a result of changes to the block grant adjustment because of the changes that we propose in the order.

I certainly welcome your being able to give that assurance, even though there is quite a lot of uncertainty.

In response to Murdo Fraser’s argument, I say that, if there was any headroom, I would not be keen on a further tax cut but would much prefer that the money go into the national health service, which clearly needs it. There would not be any more tax cuts, at least until the budget, would there?

Indeed.

I refer members to my entry in the register of members’ interests.

Good morning, minister. My recollection is that, when the policy was initially announced, the changes were not to start immediately, unlike in England and Wales. It was only after pressure from organisations in the sector that you did a U-turn and changed the commencement date. At what point did you realise that introducing a tax saving but delaying its commencement would have a negative effect on consumer behaviour?

That is an unfair assessment of the situation, but I am grateful to Mr Burnett for his question. The Scottish Government acted as quickly as it could. As I said in my opening statement—I say this in good faith—we were, unfortunately, not made aware of the SDLT change that the UK Government was making, beyond having seen some media speculation in the days beforehand. The UK Government had weeks and weeks to plan its changes, whereas we in Scotland had to make decisions and then implement the required actions in a very short time.

It is a tribute to my civil service team and to the strength and performance of Revenue Scotland that, within five working days of the cabinet secretary’s announcement, they managed to organise the systems to undertake the change. We acted as quickly as possible—within five working days—to put in place the required administrative and systemic response. That was a very quick turnaround, which I say again is a tribute to the strength and performance of Revenue Scotland as an institution.

I appreciate that a lot of administrative detail is required to implement such a change, but my question is one of common sense. Again—at what point did you understand that your introducing a tax saving but delaying its start would have a negative effect on consumer behaviour? Do you understand that now?

We did not delay when it started. We implemented it—

You changed it later.

Pardon?

The start date was due to be later, but you U-turned and brought forward the date when the change would kick in.

No—that was not the case. We sought to implement the change as quickly as possible and, obviously, with consideration having been given to how quickly that could be done systemically and administratively. Revenue Scotland, to its credit, was able to perform that task within five working days.

Good morning, minister. I have two questions. The first is a follow-up on your exchange with Murdo Fraser regarding the difference between the property markets of Scotland and England. I appreciate that in England there are different thresholds—[Inaudible.]—the property market. However, I am interested in understanding how that actually plays out in transactions. I understand that in Scotland, about 80 per cent of transactions would now be exempt. Is that similar to the situation in England, if we are looking to maintain a level of parity?

Yes, the figure is broadly similar. We have taken additional action to take an estimated 90 per cent of first-time buyers out of tax completely.

10:30  

So, ultimately, the measures are having the same behavioural effect, albeit that property prices vary in the different parts of the UK.

My second question follows on from what Patrick Harvie asked about, which was the risk of inflation of house prices. Surely, as the furlough starts to unwind and unemployment rises, there is also a significant risk of a decrease in house prices, which will potentially leave people with negative equity.

That is something for all of us to consider in all our aspirations as we come out of this situation. Tom Arthur and Mr Harvie have asked important questions. How do we continue to do what we can to make housing more affordable for more people? We also seek to stabilise the market to help people to enter the market as they wish—especially first-time buyers—while giving people capacity and additional resource, in the current difficult circumstances, in order to stimulate demand in the wider economy.

Those are important questions both for avoiding negative equity and for increasing affordability. We all have to think about that in the years ahead.

I see Alex Rowley indicating that he wishes to speak. Remember to put that in the chat bar, Alex.

Are we in danger of overestimating the behavioural effect and impact of the land and buildings transaction tax on the housing market in general? I would not like us to do that. Are we not talking about supply and demand? Is the real problem that there are not enough houses in Scotland? If we want to encourage more people to take the first steps up the housing ladder, house building needs to boom across Scotland. That would drive the economy, too. Is there a joined-up approach to all the issues so that we can get the housing sector moving throughout Scotland?

That is another important question. As we go into the next phase of recovery, and as has been the case during all the years of the Parliament, our housing policy is an extremely important aspect that the Government, along with local authorities and other organisations, must seek to deliver strongly.

As Mr Rowley and the committee will know, and as I certainly know from my constituency experience, there is a need for increased capacity in the affordable housing sector and in the wider housing market. We have a programme for government coming in the weeks ahead; I do not want to make statements prior to that on what will be taken forward, but I urge Mr Rowley to look at that document with interest regarding this area. He is right to emphasise that it is an important area for us all to consider as we go into the next phases of recovery.

No other members have indicated that they wish to ask more questions.

We therefore now move to item 2, which is consideration of the motion on the LBTT instrument. I invite the minister to move motion S5M-22290.

Motion moved,

That the Finance and Constitution Committee recommends that the Land and Buildings Transaction Tax (Tax Rates and Tax Bands) (Scotland) Amendment (No. 2) (Coronavirus) Order 2020 (SSI 2020/215) be approved.—[Ben Macpherson]

The question is, that the motion be agreed to.

I am sorry, convener, but someone has put an “R” in the chat function.

I cannot see an “R”.

It is Patrick Harvie.

Patrick, I see that your hand is up.

I have put an “R” in the chat function. If you cannot see it, convener, and we are using the chat function to vote, I hope that my vote will be recorded.

I record my opposition to this policy change. The minister has stated clearly that the Scottish Government’s intention is to make housing more affordable, but he has been unable to convince me that I am mistaken in concluding that Government action will increase house prices and housing costs.

There seems to be a desire to be in lockstep with a UK Government whose tax policies should be rejected. That is not a progressive move. LBTT is a very modest improvement on the previous transaction tax in Scotland. It is not a good or progressive tax, and tax cuts of this kind against a regressive tax are not themselves progressive. I will not agree to the motion and I encourage any member who shares the desire to see action to reduce housing costs, rather than tax gimmick giveaways, to consider opposing the motion.

Does any other member wish to comment?

The point that I tried to make in my question is that the impact of decisions based on the tax can be overstated. Tackling the housing crisis in Scotland is a bigger issue than can be dealt with simply through this tax. That is why I will support the motion.

Minister, do you want to conclude before I put the question?

I am content to move to the question.

I confirm to Patrick Harvie that I got an indication in my chat function, which had not previously been updated. We should be okay as we go through the next process.

The question is, that motion S5M-22290 be agreed to. Are we agreed?

Members: No.

There will be a division.

For

Adam, George (Paisley) (SNP)
Arthur, Tom (Renfrewshire South) (SNP)
Burnett, Alexander (Aberdeenshire West) (Con)
Cameron, Donald (Highlands and Islands) (Con)
Constance, Angela (Almond Valley) (SNP)
Crawford, Bruce (Stirling) (SNP)
Fraser, Murdo (Mid Scotland and Fife) (Con)
Mason, John (Glasgow Shettleston) (SNP)
Rowley, Alex (Mid Scotland and Fife) (Lab)

Against

Harvie, Patrick (Glasgow) (Green)

The result of the division is: For 9, Against 1, Abstentions 0.

Motion agreed to,

That the Finance and Constitution Committee recommends that the Land and Buildings Transaction Tax (Tax Rates and Tax Bands) (Scotland) Amendment (No. 2) (Coronavirus) Order 2020 (SSI 2020/215) be approved.

I thank the minister and his officials for their evidence today. The committee will publish a short report to Parliament in the coming days, setting out our decision on the instrument.

I suspend the meeting for around five minutes, to allow a changeover of witnesses.

10:42 Meeting suspended.  

10:47 On resuming—