Finance and Public Administration Committee

Meeting date: Tuesday, November 14, 2023

Official Report 645KB pdf

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Scottish Fiscal Framework: Value Added Tax Assignment

The next item on our agenda is a round-table discussion on value added tax assignment in Scotland. For this session, I welcome to the meeting Charlotte Barbour, who is deputy president of the Chartered Institute of Taxation; David Phillips, who is associate director of the Institute for Fiscal Studies; John Ireland, who is chief executive of the Scottish Fiscal Commission; Professor Mairi Spowage, who is director of the Fraser of Allander Institute; and Mark Taylor, who is an audit director at Audit Scotland. We have around 75 minutes for this session. I would like it to be a discussion between us all. If witnesses or members would like to be brought into the discussion at any point, they should indicate that to the clerks and I will call them.

Initially, I will ask a question to Charlotte Barbour, and then anyone else who wishes to comment should let me know. The discussion will proceed in that way. It will be somewhat different from the last session.

In your submission on behalf of the Chartered Institute of Taxation, you said that

“the lack of a suitable model for identifying and assigning VAT revenues raised in Scotland, the lack of policy autonomy that would be afforded to the Scottish Government from a policy of ‘assignment’, and the introduction of additional risks to the Scottish budget”

mean that, in your view, this would be a highly risky adventure, so to speak. Will you expand on that?

Thank you very much for inviting me to speak and to make a submission.

I think that the passage that you read out summarises what our submission says about where we are. We spoke at a previous round-table discussion on VAT assignment, and we had reservations about it at that stage for those three main reasons. There has been some interesting work in the intervening period, but the reservations remain. Broadly speaking, VAT assignment means taking all the VAT in the UK, trying to work out an allocation—a divvying up of the kitty—and giving some to Scotland that is meant to represent Scottish VAT.

I am not convinced that we have an assignment model that makes it clear that any actions that the Scottish Government has taken have a direct influence on the VAT that comes back. It is very difficult to see the connections between the two. Obviously, in very broad terms, if the economy grows, you would hope to have more VAT, but I do not think that there are close connections. I also think that, because the process involves assigning part of UK VAT in its broadest sense, you will not have a lot of influence on policy over VAT. That, too, is questionable if you are trying to tie tax and policies together.

Last but not least, as was discussed earlier, any modelling will bring in risks, so further risks will be attached. The last time we looked at the models, it was clear that the more you try to pin down where the risks sit and identify them and tighten them, the more complicated you make it, and the more complicated you make it, the less transparency and visibility you have. This discussion is not dissimilar to some of the forecasting discussions that took place earlier.

I turn to John Ireland. In its submission, the Scottish Fiscal Commission says:

“we are still in a situation where the estimates of VAT raised in Scotland are too volatile to be suitable for the purposes of VAT assignment.”

Yes. As far as the Fiscal Commission is concerned, we would want to hold back on the political debate about VAT assignment, but for us the practical issue is how we would forecast what is assigned. For us, that is difficult, for a couple of reasons. First, we still do not have absolute clarity on what the VAT assignment model is. The best information on the model that we have is the 2018 paper from the Treasury and HM Revenue and Customs, but that still leaves lots of important details unclear. There is a lack of transparency about what the assignment model is.

Since we last had a round-table discussion, a lot more assignment data has been published by HMRC. That is helpful. That allows us to get a better sense of where our forecasts work or not. However, there are problems there. That data is back revised. As you can see from our submission and the charts and figures in there, the most recent publication had £0.3 billion for each year for most of the back series, and then for the last observation, it had a revision of £1 billion. Again, that level of volatility makes it hard to forecast; it also makes it hard to operate the reconciliation process, so there is an issue there.

The final issue for us is that, because we are forecasting the output of a model that, by definition, includes a lot of random error, we have to forecast not only the real economic VAT—the notional VAT; if our forecasts are going to be accurate, we also have to forecast that forecast error, and that is very difficult, too.

There are a severe number of practical issues around the VAT assignment model that concern us.

Before I get trampled by people wanting to come in, because no one has so far, I will add to what you have been saying there. HMRC did a presentation this morning and it said that the changes between each publication in the past year were, indeed, the highest that they had been in the last decade at 9.81 per cent. Mark Taylor, you said:

“The implementation of VAT assignment would further increase the uncertainty, volatility and complexity of the Scottish Budget.”

Absolutely, and we are used to those things now in the fiscal framework. The fact that those things exist, per se, is not problematic. Our entry point is that, for this to work, there needs to be that public confidence in the robustness of how it works and that the benefits that it brings in terms of the aims of the Smith commission around accountability and the like—and we heard discussion about those aims this morning—are evident in the model. More information is needed to understand that.

Stripping back from that, the other thing to flag—I am sure that we will get into more detail about this—is that although in other areas of the fiscal framework there are risks of estimation—there is a small amount, for example, in the Scottish income tax outturn—in terms of scale, this is all estimation. Therefore, it brings in a new and fundamental issue with estimation error, where we will never know how much that error has played out in any of the outturns because the outturns themselves are estimates. That is a new thing to understand and deal with.

11:15  

Since we last discussed the issue with the Finance and Constitution Committee in a similar round table, more information has become available from the HMRC, and that helps to give more of a sense of the scale of those risks and the estimation error. However, we are still a long way from understanding how much that plays through.

The final thing is that the resource borrowing powers are not available to give the ability to manage that estimation error. They are available for forecast error, not for estimation error. There will be a lack of clarity about the volatility and how much of that is due to how we have measured this and how much is due to performance of the economy and how it plays through the model. We will never know that and the Government will not be able to use any stabilisation mechanisms or borrowing powers to adjust to that. It adds an extra layer of risk on top of the volatility, complexity and uncertainty risks that already exist in the fiscal framework.

I will bring in one of my colleagues in a minute but there are a couple of others who want to speak so I will bring them in first. First of all, David Phillips, to add a wee bit more to the mix here, you said that

“VAT has properties that make it a relatively poor candidate for devolution”,

although we are talking about assignment at the moment. Then you go on to say:

“The administrative difficulties of devolving VAT to Scotland should not be overstated”.

The model of assignment that has been suggested for use if VAT is assigned to Scotland is a statistical model. It is not one where you work out exactly how much VAT was collected in Scotland. You do not assign a tax base to Scotland. You try to estimate a share of the UK tax base that can be reasonably apportioned to Scotland. That comes with a number of issues, as we have just talked about.

There are ways in which you could perhaps now reduce measurement error, particularly on the consumer side. Rather than just relying on the living costs and food survey, for example, there is now scope to use credit card and debit card data and real-time information from banks and so on to improve the modelling of that side of things. That mechanism would always be a statistical mechanism and, as has been pointed out, you never have an outturn; you just have an updated estimate. You have a forecast estimate and then an updated estimate.

I talked about VAT being a relatively difficult candidate for devolution or assignment. The alternative approach would be to split up the UK’s VAT and try to assign the tax base more directly to Scotland, to ask companies to split out their sales and transactions, not just with other companies but for transactions within the same company when items move from, for example, a warehouse in Northumberland to a warehouse in Fife or from a warehouse in Fife to a shop in Northumberland.

If we asked companies to do that, it would allow you to do a full assignment and without those forecast errors, but it would also mean a lot of additional administration and compliance costs for an assignment model. Even for a devolution model. it would only be worth going through that if one would expect there to be notable, significant changes in tax policy rather than just changes around the edges. That was the point I was trying to make.

We should not say that VAT cannot be devolved to Scotland. If Scotland wanted to make substantial policy changes, it is a tax that can be devolved. We see subnational taxes in other countries, although they are generally sales taxes as opposed to VAT. Substantial policy change can rationalise that, but if it was to be devolved or assigned and we made very little change, it would not make sense to go down the route of trying to split the tax base up.

That leaves you with a statistical methodology, which I think can be improved upon, but I still think that it will be in a situation where knowing to what extent changes from year to year occur because of economic fundamentals versus changes in the measurement error, which could be an issue of financial accountability for the Scottish Government under the assignment model. I have spoken about a lot of issues there, but I hope that my points make sense.

There are two things about the sense that the idea makes overall and the practical difficulties of doing it. Others have said in their submissions and comments that the extent to which the VAT that is generated is related to the economic activity that the Scottish Government might have control over in terms of generating or supporting in the Scottish economy is questionable. There are also lots of issues around the distributional effects of VAT and the things it is levied on and so on. I question the extent to which it makes sense that this is a tax that would be assigned in order to incentivise support for or growth in the economy and so on. It opens up a large proportion of the budget to significantly expanded risk.

However, the biggest problems are about the practicalities of assignment and the fact that, after almost a decade of work, no model is sufficiently accurate or can estimate these things with a precision that is suitable for this purpose. As David Phillips has pointed out, the ONS is looking into potential improvements to consumption data for issues around estimating and consumption in the national accounts. Those investigations have been going on for some time and there are lots of issues with using scanner data, credit card data and so on because it does not identify individual products and things like that.

That is not without its challenges, but estimation of the household proportion of VAT could improve over time. That is possible because it seems as though there is data that could do that. However, the rest of the model is subject to quite a lot of national accounts data, which is open to revision in perpetuity. Some of the questions I would have about this is not just the extent to which there would be volatility in the estimates but the time that those estimates will be open for revision and reconciliation. The entire series of national accounts is revised quite often, particularly the areas that are using national accounts data for financial services and so on. That is open to revision, methodological changes and so on.

Overall, I do not think that there is a way that this could get to a point where it was suitable for the purpose, so I do not think that it is a good idea.

I am not hearing an overwhelming endorsement from people around this—I was going to say round table; it is more of a horseshoe, to be honest. Everyone is all bunched together.

I have a couple of questions, and David Phillips may have partly answered the one I was going to ask him, which was what he meant by the phrase

“I think the noise versus signal ratio would adversely affect the financial incentives”

and so on. My other question was to Mark Taylor. You said that you thought that this would be difficult to audit. I wondered what that meant.

I will start with that one. The starting point is to recognise that, on the back of what I said about transparency and the importance of that, it is important and valuable for the Parliament to have something that says, “We have looked at this and we think it is right”. We have had initial discussions with the Scottish Government and the National Audit Office about the shape of that and what it might look like, and there is a long way to go before we will be able to resolve that question.

The fundamental challenge is that this a statistical estimate and such estimates do not get audited. What happens in income tax and devolved taxes is that the audit process confirms the existence of actual transactions and some estimation and balances. Effectively, actual things that happen are recorded and are capable of being audited. In a statistical estimate, it is not an accounting discipline. There is not that same recording of financial transactions where you would end up with an audit opinion in the way in which we have an audit opinion from the National Audit Office on Scottish income tax and teams within Audit Scotland on Revenue Scotland’s taxes, social security expenditure and the like.

That gives a fundamental challenge: what do we mean by audit for this figure? In that initial reflection we recognise that Audit Scotland has to explain all this, to set out the process, to make some comments and to give transparency and assurance that it is well managed. We could do something like that. We also think that we could probably work with colleagues in the National Audit Office to do something that ultimately says that the process works as it was planned to work, the way it is set up is the way in which it has been executed, and possibly even that the numbers that come from these places have been input correctly into and reflected properly in a process. There are different flavours of audit among that.

What we are clear about and have said in our paper is that the opportunity to have a firm audit opinion on a number that we have in other aspects of the fiscal framework seems very unlikely. We need to get into the detail. We need to have much more discussion. We need to have a model that is agreed. We are talking in hypotheticals at the moment because there is still not an agreement, but that is the sense of where we are in and around that at the moment.

In statistical models and statistical publications such as this, there is a role for the Office for Statistics Regulation in accrediting that statistics are produced free from political interference, to good standards and they provide public value. I presume therefore that the OSR would have some sort of role in something like this in order to ensure that it was accredited as a national statistics publication, and that certain methods have been used—not quite over-engineered to the extent that the current VAT assignment model is—but to estimate statistics that are accredited, such as “Government Expenditure and Revenue Scotland”, and the country and regional public sector finances that the ONS produces.

Those estimates of the VAT that is raised in all the 12 regions and nations of the UK are probably good. They are good enough for statistical publication, but they are not precise enough for budgetary purposes or for a VAT assignment. It is not that the estimates are not good; it is just that they are too imprecise for the purposes of budget setting, in my view.

Charlotte Barbour, you have said that

“VAT is the only ‘assigned’ tax in the package of taxes that fund Scotland”,

that the UK Government would retain

“full legislative and administrative responsibility”,

and that

“The aim of VAT assignment is to bring greater accountability to decision making in Scotland. However, the Scottish Government will have no direct controls over VAT rates and policy.”

That goes back to what you were saying initially.

It is what I mentioned at the outset. Perhaps I could make two points in response.

If only part of the kitty is divvied out to you, you will obviously have little direct influence over the wider kitty. You will not be able to change the rates, you will not be able to decide what should or should not be taxable or what rates you would charge—and on it goes. I do not think that that is necessarily an attractive way to make a Government accountable for its economic policies. We often talk about how much taxpayers do or do not understand tax—I do not think that such an approach draws those connections any closer. I will just leave it at that, convener.

The other point I wanted to make follows on from what David Phillips said. We have been talking about an assignment model and I would not like to leave what has been said just on the table. You can devolve the tax as you do with income tax—say, on rates—or you could fully devolve it as you can with others that are still in the making. However, I would have grave reservations about suggesting that we go down that route for two reasons. The first is that I think that VAT is designed to go across a bigger single market instead of being chopped up for bits of market, with everybody accounting for different rates or different things in those bits. Our economy is quite highly integrated, and John Mason and I have discussed in the past what you do about products that are at various stages in their production and what happens when you are in and out of this or that rate.

I am not sure our major retailers will want to account for different rates of VAT in different parts of the UK. That would be quite a hurdle to get over—unless, as David Phillips has said, you radically changed what you were doing with your VAT policy. If you did that, you would open up the doors to competition between different regimes. Competition is one side of the equation; the other side is avoidance.

The practical issues that Charlotte Barbour has set out feel huge to me. I have to say that I was far from privy to any of the discussions in the Smith commission, so we will just have to assume some of the motivations in this respect. Perhaps income tax was not felt to be a sufficient indicator of economic performance and, therefore, the desire was to have a basket of different taxes that would be indicative of how Scotland was performing. I am keen to hear people’s views on whether having just the one indicator with regard to income tax performance creates a very limited set of incentives for the Scottish Government and institutions to drive activity in one particular way within our economy and whether that perhaps skews some of the incentives in the way that Government might act.

11:30  

I think that you are right that having a broader basket of taxes can give you a broader basket of incentives. I would just highlight, in particular, the personal allowance, which has risen substantially since 2010—although it has been frozen again—and as a result, has taken perhaps around 40 to 45 per cent of adults, particularly those on low incomes, out of income tax altogether. It means that even those above the threshold pay relatively small amounts until they have substantial incomes. Income tax, therefore, means more exposure to higher-income people, while VAT means that more of your tax performance depends on what happens to lower-income people, too. You might think that that is a good thing if you want the Government to consider income inequality as well as growth at the top of the income distribution.

There can be a rationale for using tax assignment. Other countries do use it to give the incentives that we have been talking about, even if there is no power to vary the rate. As a result, I am perhaps not quite as down on tax assignment as a methodology as some people are, but in the current context, the practical issues are difficult to address.

As for the incentives provided by VAT, they would depend very much on how VAT was devolved, if you were to devolve it. Let us say that it were devolved instead of assigned, and devolved in the same way as it is across international borders; the fact is that, with international borders, something that is exported is subject to zero VAT, with the VAT becoming fully charged only when it is imported. If you did that for Scotland, too—that is, if you treated the Scottish-English border as an international border for VAT purposes—there would be an incentive to grow consumption in Scotland, because everything consumed in Scotland would be what drove your tax base.

If, instead of treating the border like an international one, you were to do this so that the amount that people could reclaim in VAT depended on who they were buying from—in other words, an English business buying from Scotland could reclaim the Scottish rate of VAT, while a Scottish business buying from England could reclaim the English rate—the incentives could be quite different. Instead of being an incentive to boost consumption in Scotland, it would be an incentive to grow value added in Scotland. You can therefore design VAT in different ways that, within the UK, either provide an incentive to boost consumption or to effectively boost value-added production. However, as I have said, given the administration and compliance costs involved in companies doing these things not just on their own transactions but on their intra-company transactions, you will be able to do that sort of thing only if there is a substantially changed policy.

I think that you are right, though, that one of the ideas was to give a broader basket of incentives. However, part of it was, I think, referenced to the question of the share of taxes that would be devolved to Scotland. Some of it was just about saying, “Let’s get a certain share of the budget devolved to Scotland” instead of any full appraisal of the situation.

But was it not the case that devolution was not considered, because we were part of the European Union then and it was not permitted to devolve such things to sub-state legislatures?

Yes, exactly.

As a result, assignment was the only way in which VAT could be considered.

Yes. Of course, that is one of the things that could change post-Brexit. As I have said, though, the compliance and admin costs are potentially quite large.

One of the things that you have suggested in your paper is a sales tax rather than VAT. Can you talk to us about that?

The complexity with devolving VAT is that it is charged not just at the final point of sale, but on each transaction. If company A sells to company B, company A charges VAT and company B reclaims it. Company B charges it, and company C reclaims it. It is only at the final stage—with the consumer—that it cannot be reclaimed. It is what is called a fractional collection system. As a result, it is quite complicated to devolve, because lots of goods are transacted across borders not just from company to company but within companies, and you would need to take that into consideration.

That is not the case with a sales tax, which is just charged on final sales to consumers, hence you only have to think about where something is being sold to a consumer. That is how it works in the United States; you will see very local-level sales taxes, with perhaps individual cities of 5,000 people having a different sales tax from their neighbour.

There are two challenges with a sales tax, however. The main one is that you need to distinguish between consumers, who pay the sales tax, and businesses, which do not. Although such an approach solves the issues with intra-company transactions, the production chain and so on, it opens up a new issue around potential avoidance and evasion, with people claiming that they are a business to avoid having to pay the sales tax when they go to a store.

The other issue is that, instead of being collected as a fraction across the production process, the tax all comes at the final point of sale. As a result, if there is any evasion, you lose all the revenue instead of the revenue from that one transaction in the chain. If you wanted to devolve a tax to Scotland, or even within Scotland to different local authorities—indeed, local sales taxes have been discussed in England and Wales—it would be easier to do so with a sales tax as opposed to VAT. However, it brings challenges around evasion, even if it makes the general administration and compliance burden lower.

There is also the issue of cross-border purchases and so on, but there are sales taxes in the United States and Europe. They are quite common around the world, aren’t they?

In the United States, yes. In Europe, there are sometimes particular taxes for particular services—for example, a tax on sales of tourism services. It is really the United States and some countries, traditionally India and Brazil, that we are talking about; some of those large federal countries have sales taxes that vary right down to sometimes local levels.

We have four political parties represented around this table as well as five experts on this issue. Who thinks that assignment of VAT is a really great idea at this time? [Laughter.] I thought that John Ireland was about to come in there heroically. You should remember that this is like an auction—if anyone twitches, they will be called to speak. David Phillips had his finger on the button of his microphone at one point, but he desisted.

We seem more or less in agreement that this presents considerable difficulties across the board, whether from a forecasting point of view, a practical point of view or an audit perspective. Does anyone see any real benefits to this approach or any way in which we could eventually reach a benefit? Is there any perfect way of getting to that point, or will this always be a bureaucratic and costly distraction that will not add any benefit to Scotland? Does anyone want to contribute for or against that?

Is it not the case, convener, that previous finance committees have come to exactly the same conclusion that we have, which is that there are strong reasons for this being so complex and difficult and that the practicalities are just too great?

The finance committee from 2011 to 2016, of which I was convener, looked at the matter briefly and we took the view that there was not enough on it. The Scottish Fiscal Commission was in an embryonic stage; we were not at the stage that we are at now; and it was hoped that, in future years, we would be able to look at the issue in greater depth. I should say that our predecessor committee in the last session of Parliament was very sceptical about this as a practical way forward.

However, it remains part of the Smith commission’s work. I take the view that the Smith commission is not necessarily set in tablets of stone. It happened some years ago now; I think that we have to evolve beyond it in some areas, and this might be one of those area where we have to say that this approach will not be a runner in the foreseeable future. Scottish Government officials are looking at the matter, yet, given that we can see no practical or pragmatic way forward, one has to wonder whether that is a good use of public resources.

I believe that the principles that we have talked about in the committee this morning about the devolved institutions in Scotland having economic responsibility to focus more on how we grow the economy and how we get money in people’s pockets to generate the taxes to provide the public services that we need are right, but it is fair to say that, over some years, the institutions have had a good shot at trying to develop robust mechanisms to project and deliver some mechanism by which VAT assignment might be achieved. It does not feel to me that that work is bearing fruit.

When we took evidence about this from HMRC in private, I was less than convinced by its ability to produce reliable forecasts on the basis of survey data and some other indicators alone. There is obviously a stream of activity that it is funding and supporting with a view that this is continued Government policy. I think that we could reasonably ask whether that is money that is being well spent.

My general, broader opinion on that is that I agree with David Phillips about the need to ensure that we have a focus on a broad economy that takes a different form. Rather than taking a very narrow view of one part of the tax base, we need to understand the role of people who are not earning high levels of income, whether that be wealth, whether that be people who are living in relative poverty, whether that be pensioners, students or people at the bottom end of the income scale. We do need to think about how the Government incentives are structured properly to do that. It does not feel to me that this is a practical means to do that at the moment.

Yes. For example—and, John Ireland, I do not know how you would feel about this—HMRC said that its survey would be 2.3 per cent plus or minus at a 95 per cent confidence interval. It would be looking for just a ballpark prediction, but we have seen the revisions that I mentioned earlier—9.81 per cent out in the current year, which is the highest for over a decade. It almost seems as if volatility has increased rather than decreased as it has progressed with looking at this. How would you feel about that? I know that 2020 was an outlier; I appreciate that.

It is hard to unpack what happened in the pandemic from the more embedded uncertainty. It worries me that there is still a lot of uncertainty in HMRC. The other thing that worries me, to be frank, is the lack of transparency. We have made no real progress at all in understanding what is in that assignment model.

That is an issue that Mark Taylor is specifically concerned about as well.

I do not understand why HMRC is being so secretive, but I am sure that it has its reasons.

An issue that one needs to remember here with the confidence intervals is that this is not just a case of trying to estimate the underlying population from a sample of data. There is not just a sampling issue here; there is fundamentally a measurement issue. There are errors around what we are trying to measure. Are the proxies that we are choosing doing a good job of proxying VAT? Working out what the errors are around those is very difficult compared to standard statistical uncertainty.

We queried that. I specifically asked about Scotland relative to the other 11 nations and regions of the UK, because our geographic and demographic profile is very different. For example, our rurality is quite different from that of the Midlands, for example.

I will let John Mason in, but we have talked about VAT assignment, and everyone seems to think that it is a dead duck, for the reasons that have already been discussed such as the fact that the Scottish Government would not have any control over it. Do people feel the same about the devolution of VAT at this time or do people have different views on that?

I am happy to come in on that subject, actually, because I was just going to make a comment. When VAT assignment was first announced, I thought that it would be a good thing, partly because, as David Phillips explained, there are different models. I assumed that, if we attracted a factory to Scotland, that factory would add value. The whole point of VAT is that it is a tax on added value, so attracting more factories—and we have been quite successful at inward investment—would allow us to build up VAT in that way.

However, as we heard in the briefing this morning, clearly, that is not the model that is being looked at. It is purely about the end point where consumers spend their money. Like everyone else—I agree with what Michael Marra said—I am very sceptical about this going ahead as it is. I am not quite as sceptical as Charlotte Barbour, who said that it would be horrendous to devolve VAT. Clearly, other small countries—not just sub-nations but Norway, Sweden, the Netherlands and Denmark—all operate their own systems, I assume, even though they are in a single market. It should be possible to devolve it and then, as and when we become independent, we will have our own VAT system. That is not unmanageable, but I accept that, at the moment, the costs are probably outweighing the advantages.

Are there any further comments from anyone?

11:45  

One of the other interesting things in the talk leading up to Brexit was what people across the UK were looking for once the UK had control of VAT and could do what it wanted with it. Everybody was asking for reliefs; there did not seem to be requests for anything other than reliefs on lots of different things. If you were thinking about whether to devolve and whether it would be worth the bother, and if, as David Phillips said, you needed to do something quite different with it, you would need to think what the difference would be. If you introduced reliefs, you would have less income. Maybe it would generate more businesses coming in. That would then have a flush-through in the Barnett formula, because you would be depriving it from somewhere else, I guess. There are quite a lot of intricacies in there and, if we were going to do something different by charging more, that, too, would be interesting.

Is the issue for you that it would perhaps skew economic activity as well? For example, if food is VAT zero rated and in other areas of the economy VAT is 20 per cent, that would perhaps skew Government policy and decision making, if it were devolved, into areas where it was likely to have a VAT return.

If you were collecting your own VAT, you might be driven in part by the things that attract VAT and take your eye off other things that do not. That would all be part of the mix as to whether you did want to devolve it and then do something radically different.

The other thing that we have learned over the past 10 years is how inextricably interlinked all the taxes are across the UK. There are different taxes across the UK, and it is quite difficult to do something distinctly different with the way the economy is currently structured. I would say that that is one of the lessons learned over the past 10 years.

I will make two separate points. First, on VAT assignment, I am not saying that we should go ahead with it, but it may be worth looking further at how other countries do it—maybe it has been done already, but it is something that I have struggled to do. For example, Belgium, Italy, Portugal, Spain and Germany have VAT assignment. I have tried to find information about exactly how it works there and how they estimate the assigned shares.

Unfortunately, the information that I found was nearly all in the languages of those countries and it is quite hard to translate. I tried to get ChatGPT to do it for me, but it did not quite do it correctly. Maybe this has already been done, but if it has not, it might be worth while looking at exactly how they do it—not the high-level information that you often find on the Organisation for Economic Co-operation and Development website but the exact methodology that they use. In Germany, I think that it is not just down to the regional level but down to the local level. It is quite detailed there. Do they go through the rigmarole of making companies split their tax base up in order to do it? Have they thought that it is worth while in their more decentralised systems to do that, or do they use these statistical approaches?

The second point that I will make is to echo what Charlotte Barbour was saying. What you tend to find is that, post-Brexit, there was a lot of discussion about further tax reliefs. In the context of an independent Scotland, I would imagine that the reference point of what has been happening in the rest of the UK would not be quite such a strong reference point as it is currently. In an independent Scotland, you might not see the same pressures to do things a bit differently from the UK. I agree that it is important to be mindful that there would be risks to the tax base associated with political lobbying. That is something that we see a lot of with VAT.

Thanks very much. There will be no fact-finding visits to Italy, Belgium or Germany. I want to make that clear.

My understanding is that that is what happened at the start of this process. In particular, it was the Canadian model of tax assignment that was looked at. Canadian statistics are much more bottom up and there is much better data at a local level, but my understanding is that the VAT assignment model is broadly based on what they do in Canada. HMRC and the Scottish Government together have looked at other jurisdictions and this was one of the reasons for looking at doing it this way. They also had the VAT total tax liability in existence already to try to estimate the VAT gap for the UK.

My concern is that it has been eight years. I do not know how much money has been spent on trying to develop this. I would say that it is not an insignificant amount of money, including the boost to the LCFS—that is good for other reasons, but there has been a lot of money spent and the improvements in precision have not come. There have been issues about the 2020 data that are specific to that year. As Michael Marra said, they have given it a good go, but we are at the point where it cannot be done to the precision that is required.

Therefore, everybody should just agree that it should not go ahead. My understanding also was that the reason was partly to do with having half of Scotland’s budget being determined by revenues not that they had control over but which were in the Smith commission and previous devolution settlements. It was about getting to that 50 per cent mark rather than about the taxes themselves being sensible for assignment.

Yes, I think that there is an element of that. There was a lot of politics in that. I suppose that the Scottish Government felt under a duty to follow the recommendations of the Smith commission and to look at them in detail. It has done that, but how long can you flog a dead horse? That is probably the issue here. There is no enthusiasm certainly for assignment anyway. I do not think that there are many people who are shouting from the rooftops for devolution of VAT either at the present time, unless I am mistaken. No. Does anyone else want to comment on this? It is a nice, cheery session, isn’t it?

It has been a very constructive session because, as has just been said, we have had eight years talking about this and if we, as a finance committee, with the unanimous support of our witnesses and across the political parties, are saying that assignment should no longer be looked at, that is a very strong message that we are sending to the Scottish Government on this.

Unless anyone has any further points that they want to make, I will wind up this quite short round-table session. I had expected it to go on a wee bit longer but, because of the unanimity of views that have been expressed through very detailed and high-quality submissions, I think that we have come to a very strong and unanimous conclusion. Does anyone else have anything to say? Going once—okay.

Thank you very much to everyone for attending and participating in today’s discussion. It has been very useful.

That concludes the public part of our meeting. We will continue to take evidence on the fiscal framework, and we will certainly convey our views to the Scottish Government regarding VAT assignment. We have the Deputy First Minister in next week and no doubt we will put these issues directly to her.

The next item on our agenda, which is a discussion of our work programme, will be taken in private. We will have a wee five-minute break to enable our witnesses and the official report to depart. Thank you.

11:52 Meeting continued in private until 12:27.