Our next item of business is to continue our scrutiny of the Scottish rate of income tax. In this session, we will focus on the views of representatives of the business community.
I welcome to the committee Rain Newton-Smith of the Confederation of British Industry; David Watt of the Institute of Directors Scotland; David Lonsdale of the Scottish Retail Consortium; and Susan Love of the Federation of Small Businesses. I thank you all very much for coming along—it is appreciated. When we look at something as important as the Scottish rate of income tax, the views of the business community are important.
We have all your submissions, so I will not ask for brief statements. We will go straight to questions. In the Finance Committee, I start with some opening questions and the session is then opened out to colleagues around the table. Richard Baker has already indicated that he wants to come in, so he will be first to ask questions after me.
Who shall we start with? Eeny, meeny, miny, moe. What about starting with Susan Love?
Andy Willox’s letter of 31 August 2015 said that most small businesses were unaware of the change. Is that still the case? He also said of the FSB in the last paragraph of that letter:
“we have not expressed a view on the best tax rate for small businesses but are likely to consult with our members on the matter nearer the budget.”
Has that consultation taken place? If so, what are FSB members’ views on the SRIT?
Since we made that submission at the end of August, we have done a little bit of extra work with our members to see where they are at on both those questions.
It is clear from most of the submissions that awareness about the onset of the Scottish rate of income tax among businesses and taxpayers is pretty low. We polled our members at the end of October, which was before any of the letters went out or any of the publicity started. That indicated that fewer than a third of our members were aware of the Scottish rate of income tax. Fifty-nine per cent were unaware of it and 28 per cent were aware of it. It is therefore clear that the majority were not aware of the change that is coming, but that poll was taken before the letters started to go out to taxpayers. It should be borne in mind that a lot our members will be self-assessed, so they will get one of those letters, and that that was before any of the publicity. I expect that the situation will change nearer the time, but we always expected that there would be a relatively high level of lack of awareness among small businesses.
We have not taken a formal view on what the rate of the tax should be—we would not generally do that—but we have just done a temperature check of our members to see what they think at the moment about the change. We may well do some additional modelling once the tax is in to assess what the impact would be on small businesses, but we have not done that yet.
10:45We did a quick and dirty poll of our members in the early summer in which we presented them with options around the Scottish Parliament having control of income tax and asked what their preference would be. The options were: maintaining the same tax rate as that in the rest of the United Kingdom, increasing tax to increase investment, or decreasing tax to encourage entrepreneurship. Perhaps surprisingly, the vast majority of respondents indicated that they would like the rate to stay the same—two thirds said that they wanted to keep the tax rate the same, at least for this year, and as many said that they would like the tax rate to be increased as said that they would like it to be decreased.
You will find that there is not one homogeneous view from small businesses. Small business owners take a range of views on what should happen with tax. However, the clear preference at the moment is to keep the rate the same.
That is great—thank you for that clarity.
Rain Newton-Smith’s submission is also clear on two points. On the first issue that I asked about, you said:
“employers would have liked to have seen a greater level of communication at an earlier stage to raise awareness”,
which echoes what Susan Love said. You also said:
“our members believe that it should be maintained at 10%”,
so you are in agreement with the FSB and the Scottish Trades Union Congress on that matter. Will you talk us through the CBI’s thinking on that issue?
One of the main reasons why we recommended maintaining the current rate is that the Scotland Bill is still going through Parliament. As Susan Love said, it makes sense to maintain the current rate, particularly if more changes and more devolution of fiscal powers are potentially coming down the track. To our mind, the most important thing is that the Scottish Government sets out a business tax road map, so that businesses are clear about how the new powers will be used and there is a clear direction. Our members tell us that, to create jobs and invest, they need certainty over the long term. Therefore, it seems that now is not the right moment to change the overall rate.
To echo a point that Susan Love made, we do not normally express a view on what the overall personal income tax rate should be. We are most interested in having stability, certainty and a long-term plan.
Yes. You add in your submission:
“Frequent changes to the rate add complexity and uncertainty for businesses”.
I do not think that the Scottish Government or anyone else has proposed frequent changes to the rate, although obviously you would not be in favour of that.
My next question is for David Watt, rather than David Lonsdale. We get a lot of Davids at this committee, you know. We had a panel that was all Davids last week. The submission from the Institute of Directors states:
“there ought to be a greater incentive for migration to Scotland if the SRIT were to be set below 10%.”
Are you saying that you would like the rate to be set below 10 per cent initially, or would you like Scotland to move towards that?
I do not think that we have taken a view on what level it should be set at. We were just pointing out some of the potential consequences of tax changes. One reason why people set up businesses in a certain place obviously relates to the business taxes map, as Rain Newton-Smith said, as well as the individual taxes map. If Scotland became a very low-tax economy, people would be tempted to move to it from all over the world, including possibly other parts of the UK. It is also true that the opposite could happen if the tax levels were set higher. We were just pointing out the implications, rather than making a comment on the level.
Okay, but if we reduce the Scottish rate of income tax by a penny, that would cost several hundred million pounds—it would cost the Scottish economy somewhere between £280 million and £400 million. Basically, the question is what the elasticity is. Does the Institute of Directors have any information to say that, if there is a 1 per cent reduction, we would have X number of additional people coming to Scotland and therefore the impact on tax would either be neutral or slightly positive?
The research—or rather, I should say, the anecdotal evidence that we have had—indicates that a difference of 1 or 2 per cent up or down does not really make much odds: nobody is going to move house because of a 1 per cent tax difference. However, they might do so if the difference was 10 or 5 per cent, particularly in the case of higher-rate taxpayers. Most people do not have the option to move. A teacher, bricklayer or bus driver would not move depending on whether their tax went up or down; I imagine that they would not have that option, unless the difference was substantial in either direction. What kind of change do you believe would make a significant difference either way?
Your analysis is accurate. Quite a number of people cannot move their jobs, especially at the lower end. Their jobs are not moveable. Indeed, as we have pointed out in relation to the Forth road bridge, the jobs are sometimes not gettable-to. For many people, moving jobs is not realistic.
We do not have any specific evidence on a certain figure at which we would really start to see movement. There has been evidence from previous changes by the UK Government between the 50p and 45p rates that reducing the rate actually increases income. Indeed, there is more of a temptation at the higher end: more mobile people can move to other countries or tax jurisdictions, as they do in certain cases. I do not know the actual figure for that.
People seemed to indicate that, once tax reached 50 per cent of their income, that was a significant level, which they were not really prepared to accept, although for some reason they would accept 45 per cent. It is difficult to know exactly why that is—there seems to be almost a mental barrier.
Tax levels in this country have not changed substantially. If they were to change substantially, people would take a different view of both Scotland and the UK. Income tax is quite a sensitive tax and it is a very personal thing. There is not necessarily a massive amount of logic to the way in which people behave. I have just given the example of changing between 50 and 45 per cent.
You are right that a psychological issue might be involved.
The Scottish Retail Consortium said:
“we would caution against any moves which would lead to those working in Scotland having to pay higher taxes than elsewhere in the UK ... If Parliament was determined to vary tax rates then we would prefer it to fall rather than rise.”
Do you share the broad consensus on the panel that rates should remain the same, at least for the initial year? Does your organisation wish taxes then to fall gradually? Could you give us a wee bit more information on the Scottish Retail Consortium’s view on that?
Thank you for the opportunity to be with you here today.
As you have rightly alluded, we do not make a firm recommendation in our paper. Contrary to the committee adviser’s summation of our submission, we have not been an advocate of lower taxes, other than in due course. Once the lockstep ends, it is worth considering the impact of the tax burden on lower earners.
We are very conscious of other factors that the Cabinet Secretary for Finance, Constitution and Economy will have to take into account when he sets the new Scottish rate of income tax in due course. For example, there is a lot of focus on replacing or reforming council tax. We hear quite a lot about interest rates rising in due course, possibly towards the summer of next year. At the same time, all of us, as individuals, are expected to pay more in pension contributions through auto-enrolment and so on. There is a graduated step change there. Various other factors need to be taken into account before a decision is made to flex up or down the new Scottish rate of income tax.
You are obviously concerned about whether there is a reduction or an increase in spend in the Scottish economy. Obviously, that depends. If, for example, taxes are raised and money is redistributed to poorer people, would they be more likely to spend it on retail goods? Going the other way, if taxes fall for higher earners you might suggest that they are more likely to spend money on foreign holidays, cars and so on. Where do you see the retail industry gaining or losing in the context of this tax issue?
I will ask you a wee bit more about other tax issues, but for now we are talking specifically about the Scottish rate of income tax.
There are two elements, or two sides of the balance sheet. There is post-tax income, but there is also the cost-of-living increase. It is difficult to model or forecast what will happen if we either increase or reduce the tax rate, because of the variety of other things that are happening to which I have alluded, which will affect consumer spending in the future.
For us, it is very simple: we want a sustainable, growing economy.
Don’t we all? How we achieve that is always the $64,000 question.
It is. As Rain Newton-Smith suggested, we do not want great swings, booms or busts, or whatever the language is. A sustainable, growing economy is the optimum scenario for the retail industry, with, we hope, a growing population and growing incomes.
A variety of factors need to be taken into account by Mr Swinney. What we have said is, “Don’t add to the burden by taking money out of the pot that people have.” At the same time, we have not made specific recommendations about lowering the tax burden.
The SRC has said that “ideally” it wants to see
“a clear vision and sense of the medium to long term direction articulated in the upcoming Scottish Budget.”
What do you really want to see in those terms? How do you see that clear vision, and what is your clear vision of what Mr Swinney should be doing a week from today when he announces his budget?
It is pretty much aligned with what Rain Newton-Smith suggested with regard to the complexities for businesses as employers.
We have not suggested doing what the UK Government has implemented—I think that it has changed the law to say that there will be no income tax or VAT rises going forward—but we would like some sense of the Scottish Government’s approach and sense of direction regarding its objective with its new tax power.
I think that I am right in saying that Mr Swinney articulated something similar when he set the new land and buildings transaction tax and the landfill tax—was that last year?—when they were first introduced.
It was 1 April.
In that sense, the finance minister has form in setting out his sense of direction. That is what we are looking at..
In effect, the panel is looking for Mr Swinney to say, “This is philosophically what the Scottish Government believes, this is the direction in which we should move and this is what we are doing to get to that goal.” Is that an accurate summation?
It is, if he also takes into account the various other factors that I mentioned earlier.
Your submission says:
“The SRC believes policy makers can enhance Scotland’s prospects further by using the new devolved tax and fiscal powers including SRIT to positively support the economy and consumer spending.”
We will move on a wee bit.
The Institute of Directors says that it is “understandably concerned” that the introduction of the SRIT
“does not impose additional costs on business unless these costs are purely incidental and immaterial.”
That is at the beginning of your submission. What costs do you worry are going to be imposed? Are you talking about the administration of the SRIT specifically? Later in your submission, you query the figures that were given by Her Majesty’s Revenue and Customs on what its costs would be.
It is not really about that; it is about the potential for additional costs to employers. Initially, it will largely be about the mechanical entry of a different tax code.
Were there to be a different rate of tax in the future, collection could become more complicated. The costs for businesses would be a concern. David Lonsdale has just enumerated a number of the costs that we all face at the moment and, to be blunt, we do not want any other, unnecessary costs to be imposed. Collection costs are certainly an issue. For some smaller companies, there might be so few people, if any, that it would not be an issue, but for some larger companies it could be quite complicated.
I realise that you have not had feedback on it yet, but Susan Love made an interesting point about self-assessment. How that will pan out is also significant for our members. We have all been receiving our letters that tell us that we will have an S in front of our code in the future. That is fairly straightforward for someone who is employed singly for one organisation, but many people are not in that position and for them it could be quite complicated.
In addition, some people will no doubt appeal the decision on whether they are deemed to be a Scottish rate taxpayer. They may not do so in large numbers just now if the level is seen as the same, but if the rate is changed, a number of people—such as those who travel up and down the country weekly—may well rush to say, “No—I actually live in London, not in Edinburgh”, so there might be more of a challenge in the longer term.
In the short term, that will probably not be a big issue, but it is something to watch out for. If the levels were to change, the situation could become quite complex for HMRC and for employers.
11:00
I have a question for Rain Newton-Smith. In section 2 of the CBI’s letter of 30 July, headed “CBI Response To Scottish Rate of Income Tax—Technical Guidance on Scottish Taxpayer Status”, you asked a number of questions. What response have you had? Is the CBI satisfied with that, or are there outstanding issues that concern you?
We still see that as an outstanding issue. One issue is that there has not been enough guidance on complex cases; that relates to David Watt’s points on whether an individual counts as a Scottish resident for tax purposes. In most cases that is straightforward, but there are more unusual cases in which people work in different places and are resident in multiple jurisdictions, or are getting income from different sources. That makes things more complicated, and at this stage there has not been sufficient guidance.
Another issue relates to overall communication. More could be done to make it clearer that individuals are responsible for determining their own residency and that they need to report that to HMRC. Revenue Scotland could do more to direct people towards HMRC—for example, through links on its website.
It may make sense for HMRC to contact smaller businesses individually to let them know that the changes are coming. Businesses have a role to play in communicating with their employees about the changes.
Is HMRC in discussion with the CBI regarding a timescale for resolving the issues prior to 1 April next year?
Not that I am aware of directly. I can check with my team, which has had such discussions more regularly, and get back to you.
Before I open up the session to colleagues round the table, I have a question for Susan Love. In your submission, you state:
“In January 2015 the FSB hosted a roundtable discussion for the main Scottish business organisations and HMRC to discuss communications with the business community.”
How have things progressed since that meeting happened almost a year ago?
We have had updates from HMRC, and we have been invited to participate in conference calls. I was on a conference call with HMRC and employers last Monday. The points that we have raised with HMRC over the past couple of years have all broadly been taken on board. We have started communicating to raise awareness among our members about the change and what they need to do.
We made a particular point to HMRC about the need for the right information to be available to employers before the letters for taxpayers started arriving. Information went out in October in the employer bulletin from HMRC, and there is information available on direct.gov for employers to look at.
Arguably, HMRC could have done more to raise awareness with employers in advance. However, on the flip side, employers should not, other than responding to questions from employees, have to do or change a great deal, and we do not want to alarm them by suggesting that they will have to change or do something imminently when that is not the case.
At present, we are relatively satisfied with what has happened, but additional questions may start to arise from employees as a result of the communication that is going out. At that point we may hear more from small businesses that they do not feel that the information that is available at present is adequate, and additional work may be required.
I will open up the session to colleagues.
There are a few questions that still remain to be asked, so I will take the opportunity to come in. I want to investigate further the points that Susan Love discussed with the convener.
You said that most of your membership who responded to your consultation do not at this point want the SRIT to vary from the UK rate. Did you get a sense from the responses of whether that is because they do not want the potential impact on business, or because they feel that the overall income tax burden is broadly correct at this point?
The way that we asked the question was in relation to maintaining a single tax rate across the UK. The premise on which we asked was about keeping it the same and that was the option that our members went for. It is difficult to interpret the exact motivations behind answers to a simple survey, but my instinct tells me that at the moment a lot of small businesses are quite cautious about change and their reaction is to stay steady as she goes.
Is your instinct that that attitude might change once the SRIT becomes established, or do you think that there will be continuing concern about variation because of the impact on business? Is that difficult to assess?
It is very difficult at the moment to tell what might happen. As I mentioned, we may, once the SRIT is in place, do some modelling looking specifically at what the impact might be on small businesses.
Thank you. David Lonsdale raised the issue of forecasting future SRIT levels for businesses. You talked with the convener about the philosophical direction, and about how the Government might indicate its approach. Would it be helpful to hear from Government about more than the philosophical approach—for example, for it to say what it anticipates the SRIT levels will be over the term of a spending review, or a session of Parliament? Would that be desirable and achievable?
That would be helpful. As I understand it, the spending review at UK level is over a three-year period.
It is over four years.
The spending review period is four years—as I have just been corrected by the convener. I am not sure whether that timescale would give the finance secretary latitude to do what you suggest. I hope that it would.
I will answer a question that Susan Love was asked, and say that the responses of our members show a pretty simple view, which is that the focus of substantial tax reform should be other taxes. I will not bore the committee about non-domestic rates, but business rates are obviously up there as something that our members think need substantial reform. We are conscious that many of the parties round the table, and the Government, have commitments relating to council tax and air passenger duty. If you were to put a list of the top tax issues in front of our members and ask on which there should be serious action, change and reform, the SRIT would not be at the top of the list.
That notwithstanding, do you think that business organisations such as the Scottish Retail Consortium will have more to say on SRIT in the future, or will there always be a reluctance to comment on it compared with other taxes that are under Scottish Government control?
I am sure that we will have more to say in due course. Once the tax rate has been announced and it captures the public’s attention a bit more, I suspect that we will be in receipt of a lot more views from members, as will other witnesses and, indeed, MSPs from your constituents. The issue has yet to capture the public’s attention, because we do not have clarity over the tax rate and something for people to get their teeth into.
That is an encouraging response. One of the concerns that I have had as we take evidence is that we will have new tax powers, but we have very little evidence or encouragement from people who are involved in the economy and stakeholder groups that the SRIT should be changed or varied—there is a real fear about doing that. Is that something that witnesses think will change in the future, once the SRIT has been introduced? Clearly, David Lonsdale does. I ask the question of David Watt.
I will echo points that have been made already. David Lonsdale earlier made the point very well about the bundle of taxes, the cost increases and pension contributions that individuals face in their lives. That point is also true for businesses.
Income tax is an individual tax, but it has an impact on where bright and entrepreneurial people and leaders decide to live or set up in business. If there were to be a substantial change in the SRIT that would be a disincentive to such people setting up in Scotland, we would be against it. Equally, you could argue, as we did in our submission, that we need to lower the SRIT and attract people to Scotland.
We are very active in the post-study work-visa space and the immigration space, and we would be very positive about people coming into Scotland. It would be brilliant if there was a way of doing that through tax, but at this point in time it is probably unrealistic. The convener made a point about how expensive it is, relatively speaking, to lower the rate. Overall, it is important that the Finance Committee, Parliament and the finance secretary understand that business costs make a massive difference to where businesses locate, and they have an effect on the economy. If there are higher costs, we will be less inclined to do business in Scotland—that is the bottom line. To be honest, I do not know whether income tax is at the top of that list.
You are saying, however, that it is a factor and has an impact on business.
It is absolutely a factor, as part of an overall package.
That helpfully leads me on to my final question, which is to Rain Newton-Smith. If I heard her rightly in her response to the convener, she said that the CBI does not normally comment on personal taxation or income tax and that it focuses on business taxation more generally. That is understandable, but given that the Scottish rate of income tax will be the major power over taxation that the Scottish Government will have and that it will impact on business and the economy—as we have heard in evidence from other panel members and in the submissions—might the CBI comment in the future on issues regarding that tax and its broad effect on the Scottish economy?
First and foremost, our businesses are more concerned about the overall rate of corporation tax and, in particular, business rates. That echoes what other panel members have said. The overall burden of business rates in the rest of the UK and in Scotland has increased significantly since 2007, which is causing real issues for businesses—especially high street retailers. That comes across in a lot of our consultation with our members.
The overall direction of personal tax becomes an issue only when it starts to affect international competitiveness or the ability to attract people with the right set of skills into businesses. We know that their having the right skill set is a big issue for businesses in Scotland and in the rest of the UK. A survey of some of our members suggested that more than 60 per cent of businesses in Scotland cannot find the right people with the high level of skills that are required for the business to expand.
It depends—if the tax rate here becomes very different from that in the rest of the UK, or it becomes very uncompetitive internationally, we might get to a tipping point where the issue moves up and on to the radar as a concern for businesses. However, at present, businesses are much more concerned about some of the other areas of taxation and they see personal income tax as an issue for the Government to decide.
That is helpful. Thank you very much.
I will build on some of the points that have already been made.
Paragraph 4 of Mr Lonsdale’s written submission states that
“The retail industry takes a great interest in personal taxation issues for several reasons”,
and lists them in three bullet points. Broadly speaking, they are customers’ discretionary spending and disposable incomes, the impact on retail industry employees and the potential knock-on implications for other taxes that affect households and businesses. It is interesting that you did not mention what the money might be spent on—for example, a better-educated workforce. Is that a factor, or do you feel that your workforce is overeducated, which means that we could afford to cut back a bit on education?
That sounds like an invitation to go somewhere that I probably do not want to go, to be honest.
Later in our submission, we mention what would happen if the Government was minded to vary the tax upwards, and we clearly indicate some areas in which the money could and ought to be spent to enhance the productive capacity of the economy—for example, we talk about skills development, transport and digital infrastructure.
Okay. If we were going to raise income tax by, say, 2p, would it make a difference to your view of the SRIT if we said that it would be ring fenced for education, for example, so that you would therefore, in a few years, get a better-educated workforce?
That would be to hypothecate tax rises for a particular purpose.
Yes.
11:15
That might make an increase more sellable. We have not consulted members about that as an option; we have not asked for feedback on that. We are very much in favour of having a high-quality supply of staff. That is one of the changes that is affecting the industry at the moment.
There have been a number of announcements, including this year, to do with the national living wage and the apprenticeship levy. The industry is going through a degree of turmoil and change at the moment. Most retailers are trying to get their heads round the changes and most indicate to me that they will end up with fewer—but hopefully better-qualified and better-paid—staff. We are always in the market for more educated better-quality people so that we can deal with changes that have come about through the digital economy.
Retail is changing profoundly because of how people shop; black Friday was emblematic of that. Last year, we saw queues of people outside shops looking to get a good deal. This year, there were not queues, because more people were buying online. The industry is changing greatly, and we want people with the appropriate skills involved.
Rain Newton-Smith also mentioned skills. Would it be better if we could raise tax and hypothecate it for education, say? Would that be more favourable?
We would like there to be a vision on an overall road map for business taxation and, along with that, a vision for how revenues will be spent. In our business manifesto, we set out some areas where we see how spending helps to drive the productivity of the economy in Scotland generally. The ones that we highlighted included specific infrastructure projects—for example, the city rail link to Glasgow airport. It would be helpful to set out a long-term vision in that regard. We also mentioned digital connectivity.
On skills, curriculum for excellence presents more of an opportunity to focus on vocational training. That comes up a lot among our members. We need to ensure that people have the right vocational skills.
It is very early days with the apprenticeship levy, and it is not quite clear how, in practice, that will work to ensure that we have the right quality of apprenticeships. That is clearly one area in which there is a real need to build the right skills that we need to create jobs over the long term.
Am I right in thinking that businesses are happier, and might be willing to pay a bit more money, if they know where the money is going? I am thinking of the business improvement district—BID—scheme, which I think has been accepted in some areas, where people clearly see that a bit of extra money will be spent on infrastructure in their area. Is that a model with which business is happier?
I suppose that showing that the money will be well spent on infrastructure projects can help to garner some public support for them. However, I cannot really speak about individual schemes.
Do either of the other two witnesses wish to comment? Would your members be happier about hypothecating or ring fencing tax for infrastructure?
To be honest, we would be a bit cynical about that. It is not a good prospect at UK Government level, although perhaps in Scotland we could consider ways of doing it. Hypothecation has only generally worked while the Government that implemented it is in power. If a finance minister changes or there is a regime change or change in the governing party, such policies tend to disappear. I have that concern even with the apprenticeship levy that the UK Government is putting in. We might ask how that is going to pan out.
It is not a simple question. If you want to promote business, it might well be best to hypothecate money for improving infrastructure, rather than for increasing skills, because there is already a pretty strong agenda on that. We could have an interesting debate about how to spend the extra money. It all tends to go into a big pot and to get spent, to put it bluntly, so I am not sure that the idea would be sustained.
Fair enough.
There is probably a difference between businesses understanding the importance of investment and spending, which might necessitate a tax rise, and its welcoming and advocating for that tax rise. We asked our members about it, and they recognised the benefit that a tax increase could bring in terms of additional spending, but I would probably not get the same result if I asked them tomorrow whether they would prefer an increase. I agree with David Watt: overall, hypothecation is not how things tend to work in practice for a large pot of tax such as income tax.
More generally, it is not so much the broad area of spending that would matter to small businesses; it is how the money is spent. For a small business, the proposition to spend more on a business improvement district, for instance, is much more real and immediate; the owner can sense the impact on their business. On a broad area like skills, although all businesses would recognise the wider benefit to the economy of a better-skilled and educated workforce, the extent to which that money supports small businesses and their skills needs may vary dramatically. How the money is spent, what type of schemes it is spent on and how they serve the needs of small-business employers are big questions when it comes to the effectiveness of hypothecation.
That is helpful. Thank you.
The SRC’s submission mentions—David Lonsdale also mentioned it in a previous answer—that business rates and other forms of taxation are a challenge for you and some of your members. The other suggestion that we have been given by previous witnesses is to leave the expenditure side the same but to switch round how we raise the money with taxes. For instance, one option would be to cut business rates and raise income tax. Is that something that your members would be happy with?
We said in our submission—I am conscious of this, and I think I said this earlier—that we are alive to a number of ideas that are kicking around at the moment that will affect consumers in the near term.
As I understand it, we are on the cusp of hearing the recommendations from the Commission on Local Tax Reform. As I understand it, most of the political parties are represented on that commission, so it is a reasonable assumption that what comes out of the commission and sees the light of day will probably be either a replacement for the council tax or a reformed council tax. I am so far none the wiser as to the total tax take that will result from that. I think that, at the moment, council tax generates £1.9 billion or thereabouts. Will the new reformed council tax or replacement for the council tax take less money out of household expenditure? Will it take more?
One of the arguments that has been advanced is that the commission may give councils other powers—over bed taxes, tourism levies or whatever. There are a number of taxes and ideas out there—for example, a deposit and return scheme, in which the idea is to charge consumers more for drinks cans and containers and so on. Some people have advocated a sugar tax. A number of ideas for new and replacement taxes are bubbling up.
I think that Professor David Bell suggested that we should be slightly cautious about moving income tax at the moment, given some of the other factors.
I think that it is in the IDS submission, Mr Watt, that Professor Bell is quoted. He said:
“there is a strong case for moving cautiously when considering changes to the higher rates of income tax in Scotland”.
What do either of you think “cautiously” means? Would 2 per cent, up or down, be cautious?
I have spoken with David Bell about this and have read his report. Nobody even knows, to be honest. I have had at least three different estimates of how many people pay the 45p rate of tax in Scotland. David Glen from PricewaterhouseCoopers will tell you that there are 12,000 people, HMRC says that there are 15,000 to 16,000 and I have heard politicians saying that there are 19,000. The situation is not absolutely clear. Even if such individuals were taxed a good deal more, what would be the actual revenue increase, if any? As I mentioned earlier, taking the UK example, we would actually raise less revenue. In addition, as we mentioned earlier, those people are more mobile.
The implications of tax rises are quite complicated. That is the point that David Bell has also been making, particularly regarding that group. As we quoted, and as he illustrated, that group of higher-rate taxpayers contributes a significant amount of money to the Scottish income tax take. We need to be very cautious about the potential to frighten them away.
Does being cautious mean that we do nothing, or that we do just a little and be careful about it?
I think that being cautious means understanding the implications. Sadly, in a whole variety of ways, Government quite often introduces legislation that has unintended consequences. That is why David Bell is saying that we should move cautiously. He is not saying that you should not do it; what he is saying is that you—the Parliament—have the power to decide, but you need to be aware of the implications.
I have talked to an accountant from a worldwide tax manager who has advised both in this building and at Westminster, and in his view and mine, tax levels get to a certain point where, as I said earlier, you see the law of diminishing returns. However, politicians sometimes ignore that. We have two parties in this Parliament that believe in a 50p tax rate, in spite of the fact that all the evidence, not just from the UK, shows that it will produce less tax. The view that we need a 50p tax rate is simply not borne out—it will not bring in more money.
You are right that it could be argued that 1p or 2p might not make a massive difference, but if it went beyond that, it might make more of a difference. Whatever the increase is, nobody at this point in time definitively knows the potential impact.
I suppose that there are two opposite dangers: that we rush into things without thinking, and that we never move for fear of unintended consequences.
Absolutely. I take the point.
On that point, Ms Newton-Smith, the CBI’s submission states:
“we would advise allowing more time to focus on the implementation of SRIT and the additional income tax powers that are likely to be devolved”.
Are you saying that we should not move it at all? I am not sure what “implementation” means if it is something other than raising or lowering the tax.
There are a couple of things to say about that. Our view is that, given where we are now, it would make sense to maintain the SRIT at its current rate, particularly as it is likely that next year or the year after, there will be more discretion over the full range of rates as well as the bands. Adding another element of change at this stage does not, in the view of our members, make sense.
My other point relates to the period up to implementation. I know from talking to some of my members over the past couple of days that they have only just received their letters about being Scottish residents and the new S tax code. We know that some smaller businesses do not know enough to know that this might be implemented in the forthcoming budget; indeed, HMRC has said that one in 85 residents was unaware of any potential change to their tax. The other opportunity with the Scotland Bill is to have more time to inform businesses and individuals of the potential change in the tax rate and more guidance to ensure a smoother transition. From that point of view, having more time also speaks to the matter.
Would people realise that something was happening only if you actually changed the rate?
Possibly, although, speaking as an individual, I think that people do not always pay much attention to individual fluctuations. I do not know whether that would be enough. It is much better to do it properly, have the right opportunities for HMRC to contact businesses and individuals and give individuals a fuller opportunity to take it in. I feel that there has been a missed opportunity in relation to how well the information has been communicated up to now, and there is an opportunity to improve that.
The other thing that a lot of people here have spoken about is how businesses are dealing with a lot of other changes at the moment. The apprenticeship levy, set at 0.5 per cent, is coming in. The levy board will help to determine how some of that money is spent both in Scotland and in the rest of the UK, but clearly there is a lot of uncertainty around that. We have also seen the introduction of the living wage, which is a huge change for a lot of businesses to take forward. From that point of view, having a bit more stability at this stage could be helpful.
We have only a matter of months in which to get the SRIT absolutely right. We will hear about a potential rate next week, and absolutely everything will go live in April.
The range of views with regard to HMRC among the four of you is interesting. To paraphrase slightly, the SRC seems to think that HMRC is okay; the FSB seems to think that it is good; the CBI has concerns; and the IOD thinks that it has been woeful, or woefully inadequate. I was surprised to hear those very different experiences.
I suspect that HMRC will be either watching right now or reading the Official Report of the meeting. If it was here today, what would you highlight as a handful of things that it must focus on at present to get not just pass marks from all of you but 100 per cent pretty much perfect results come April? Are there any big measures or practical things that it ought to be undertaking right now to make sure that we get this right in April? I would be interested in hearing a brief view from each of you.
I find it deeply troubling to be defending HMRC, as that is not usually the FSB’s position. However, we have to be fair and make it clear that, in our discussions and dialogue with HMRC to date, all our questions have been answered and all the suggestions that we made were taken on board. Despite some bad headlines, the National Audit Office report on HMRC’s preparations so far was relatively good.
In our view, there are a couple of things on our worry list that need to be dealt with now. First, there are a couple of outstanding technical details that have been raised with employers but which have not quite been answered yet. For example, the guidance is very clear that employers negotiate with HMRC regarding Scottish taxpayer status, but under the real-time information system, employers must make a change in address that any employee might tell them about. My understanding is that the way in which the dialogue between the employee and HMRC and between employer and employee works across those two systems has not yet been worked out. There are some little technical glitches that still need to be sorted out, and advice needs to be given to employers.
Moreover, the website could have clearer information for employers. One question that has come up in the past few days concerns the lack of a phone line for employers. If questions arise from employees, there is at present only a website and the contact centres, and we all know about the difficulties that employers face in trying to get through to an HMRC contact centre. Sorting out the glitches, improving the information on the website and possibly putting in place a phone line for employers might be useful.
That is helpful.
I suppose that, with regard to the phone line, HMRC would argue that there is a lot of information on the website. Nevertheless, you are right: there will be questions that the information on the website will not answer. Your view is that, certainly in the short to medium term, a dedicated employer phone line might be needed, if only for six months until the system is up and running—
It is a suggestion. At present, HMRC has said that all contact centres are fully briefed and have the right answers to employers’ questions, and this is just a suggestion in response to concerns that we are aware of from small businesses about the ability to get through to HMRC.
I do not have too much more to add. I started this job at the beginning of last year, and I have mentioned in my introductory meetings with members that the devolved income tax is coming down the track. We must bear in mind that Calman was six or seven years ago, and since then, we have had the Scotland Act 2012. Those of us trying to keep abreast of public policy know that the SRIT has been coming, and I have been flagging it up; indeed, it was in our budget submission to John Swinney in summer last year. Our members have been reasonably up to speed with the fact that it is happening.
So, over and above what Susan Love said, there is nothing specific that you would ask HMRC if it were here today.
Nothing.
Generally, we always try to make the case that HMRC needs the resources to do its job properly. We would like to see from HMRC more guidance on the interaction between the Scottish rate powers and other elements of the tax system, particularly double taxation agreements. As I have said, inquiries directed at Revenue Scotland are redirected to HMRC, and simple things such as putting a link on the Revenue Scotland website can be done. Moreover, it needs to be made clear that it is up to individuals to ensure that their correspondence addresses are up to date and accurate, and HMRC needs to examine its records for individuals. Our submission highlights those points as things that could be done.
That is helpful.
In section 2 of your submission, you provide a helpful list of more complex situations. Have you submitted those to HMRC, and is it actively answering those questions?
We have shared with HMRC some of the questions on which it would be helpful to have more examples and guidance. It could not only provide that guidance but make it more public.
I found the list hugely helpful. Of course, we will never get an exhaustive list but is this list exhaustive as far as you are concerned, or do you have a bigger list somewhere on which you are also working?
We do not have a bigger list hidden under a table somewhere. Having read the guidance, our tax experts, in consultation with our members, highlighted those questions as areas in which it was not clear what the ultimate decision would be. Therefore, it would be helpful to have more guidance on some of those complex cases.
I hope that I have not portrayed HMRC as woeful; I have had positive engagements with it over a long period, almost from the day when the concept of the SRIT came along, and have been involved in some of the debates on how we define Scottish taxpayers. However, you have highlighted some of the issues with it, Mr Brown, and you have mentioned the list in the CBI submission and some of HMRC’s practical difficulties.
To be blunt, the letters arrived on our doorsteps this month—some people are still getting them, I think—and we start in April, so there is not a lot of time to deal with complicated cases. There will be a lot of such cases, including those involving people who are non-executive directors in London but who live in Scotland. There will be some fairly complicated issues to address, such as time allocation. The concern is that such individuals will not be ready if a different rate of income tax is levied in April, and I am not totally sure that all the issues will be covered or sorted out by then.
This is probably more of a personal point, but the Government and HMRC seem to believe that, if they put something on their website, it is solved. However, that is not true. To be frank, most of my members simply do not spend their time surfing the web; they will do so if they find the time or have to do it. A big organisation has a human resources department and a finance department, and they consider such issues and will find out the information. However, many others struggle to do that as regularly and in as timely a manner as they should. The other point that we mention in our submission is the cost to employers of substantial changes in the income tax rate. The complications might increase, and that is when the cost would start to rise. Those areas have probably been mentioned already.
I have to say, though, that I am not all that clear about the dispute procedure. I absolutely accept that it is down to the individual, but I imagine that, at some point, HMRC will come back to individuals and say, for example, “We do not agree that you live in Kilmarnock; you actually live in London.” How that works out will come out a wee bit in the testing.
In paragraph 2 of your submission, you say:
“We are sceptical, however, that additional implementational issues will not emerge over the next four months which necessitate further implementational changes.”
Is that just a general scepticism—in other words, you think that we should be ready, simply because things always go wrong—or is there anything specific that you think will go wrong and would like to flag up publicly?
This is a general comment but it relates to my point that a number of our members are complicated people. They might be self-employed and working in a variety of businesses, or they might be a non-executive director for a company and be employed by another company. That makes things slightly more complicated, and it also means that their residence is likely to be slightly more flexible than it is for some other people. As the convener mentioned, a bus driver or nurse will be location based; however, many of my members are not location based.
That is helpful. Thanks very much.
I guess that most of your members will see themselves as unpaid tax collectors, in a sense. Many small businesses use that phrase. I probably should declare an interest: I am a member of the Federation of Small Businesses. Beyond what I said, the burden of being a tax collector really will not be affected one way or another by the income tax rate. That is one of the questions about the Scottish rate of income tax. Whether it went up by 2p or 3p, as far as the employer is concerned, it is about the structure and identifying members of staff, but even that will not be down to them. Is that right? Do you agree with that?
Who specifically are you asking about that?
I will just dive in. Since the Scotland Act 2012 was passed, our focus has been on how the tax would be implemented and trying to minimise its impact on small businesses as employers. That ultimately resulted in the arrangement whereby the work is essentially between HMRC and the employee. That is where the main negotiation lies, rather than it being up to the employer to determine residency and notify HMRC. From our perspective, that was helpful, as it minimised the additional burden of the tax change on small businesses as employers.
Generally, it is the structure rather than a change to the rate that creates an issue for employers. It is possible that rate changes will result in additional work for employers if there are more questions from employees. They might not have expected that, and there might be extra work but, by and large, it is the structure rather than the rate that creates an issue for employers. However, we have minimised that as much as we can in the approach that has been taken with the Scottish rate of income tax.
Obviously, it rather depends on the size of the employer. In companies where everything is automated—at Standard Life, for example—an S code goes in and the computer is programmed to work for X thousands of people. In such cases, the matter is probably fairly straightforward and your point is valid. There would not be a lot of work. However, many businesses still do things manually with an Excel spreadsheet.
Your point is interesting. There is always a danger of forgetting that. I regularly refer to one of our members who runs an engineering business in Fife and employs 100 people. In his view, he employs 10 people who do nothing but cost him money. One collects taxes and does returns for the Government; another does health and safety and so on. There are issues. We must always remember that all those things potentially add costs to employers, and anything that makes the process apparently even slightly more complicated will not be welcome.
Your point that the process might not be seen to be more complicated until the rate changes is possibly valid. It might just be about the S in front of the person’s code, but the process can become a little bit more cumbersome if the rate changes, details are manually entered for 100 employees, there are problems and complications with individuals and they start to appeal. There is no question about that.
It confuses the issue if we start to talk about other taxes, does it not? It confuses the issue if we talk about business rates and the Scottish rate of income tax in the same debate, for example, as they really have nothing to do with each other. It seems to me that the message about the Scottish rate of income tax is directly between the Scottish Government and the Scottish people—the workforce. They are both affected. The Scottish Government would potentially have more income and the workforce would pay slightly more tax. Do you agree that their relationship and that communication will be more important at the end of the day?
To a certain extent the main communication issue is about taxpayers understanding the difference. However, the issue came up earlier that the extent to which taxpayers notice or care will depend on whether the rate changes, and even then they might not care which Government has put up or put down their tax.
There is still a job to communicate with employers regarding the change, in case problems arise between now and April or after April. We think that, broadly, we have done what can be done, but there are those little glitches that may create additional problems. There needs to be communication with employers so that they are aware of what is going on.
11:45
The Scottish Government has declared a minimum living wage, which it is encouraging all employers in Scotland to pay their staff. It is not the so-called “living wage” or the minimum wage that has been set in Westminster. If you were an employer, would you think that the right time to increase a rate of tax is when the Government is trying to make sure that everybody employed in Scotland is earning a wage that they can live on?
Who wants to go first?
That is not really what this session is about, Jean; it is about the Scottish rate of income tax. I think that that would be digressing a wee bit, but if panelists want to answer, they can.
All I would say—other than commenting on the correlation between the national living wage, the living wage and rises to income tax—is that those pay increases and discussion about wage levels are a serious preoccupying factor for employers at the moment in Scotland. That may make them slightly less receptive to discussion about the Scottish rate of income tax. As you will know from speaking to businesses in your local area, for those affected, managing the increase of the national living wage and pension auto-enrolment are the dominant concerns of a lot of businesses at the moment. That is where their heads are, that is what they are concerned about, and they are probably less concerned about the Scottish rate of income tax at the moment.
That is all I had to ask.
I have one question, which relates to discussions or concerns that have been raised about payroll. I suspect that the CBI and the SRC represent a number of businesses whose payroll function is not located in Scotland and, therefore, that payroll function will have to administer both the Scottish rate and the UK rate. Have you heard any concerns from your members about the administrative impact of operating those two rates through the same payroll function?
From an FSB perspective, I am aware that a lot of small businesses outsource their payroll to companies that offer only a payroll function. Many of those companies are in a similar position in that they offer that function across the whole of the UK rather than purely on a Scottish basis. Specifically in the FSB context, have any of your members who employ such a function had any indication that they may face additional cost burdens as a result of the SRIT? Although there may not be an upfront cost burden, that is not to say, for example, that organisations or businesses will not attempt to put up the rate that they charge Scottish companies on the basis that they would have to administer any future SRIT changes.
You are right; obviously companies have to make sure that their payroll systems are prepared for and can administer an S tax code. That is true for businesses located both in Scotland and in the rest of the UK.
Our members have expressed more concern about making sure that they have the right guidance from HMRC on some of the more complicated cases, as I have suggested. Some of our other concerns are the lack of public awareness and that it must be clear that it is the individual’s responsibility to determine their tax status. Those are issues that our members have mentioned more often.
Sure, but I just want to pick up on that issue. I have no examples to give, but I suspect that there are a number of companies whose payroll function is located south of the border. Are you aware of whether HMRC has done any work with regard to such circumstances?
There has been an effort to ensure that we as Scottish taxpayers know what our rate will be. I suspect that businesses that are located in Scotland will have had communication to that effect. What efforts—or otherwise—are you aware of by HMRC in order to ensure that companies whose payroll functions are administered outside Scotland know what is happening?
We have picked up that there has not been enough communication and awareness around that particular issue.
We do not represent the payroll sector per se, but from the various meetings that I have attended, certainly over the past 18 months, my understanding is that there has been significant engagement with payroll software providers in particular. In the latest update that I read, HMRC felt that that angle had been pretty well covered and that those who deal with all the software products that businesses use—regardless of where they are based—are up to speed with the change and capable of dealing with it. The issue of payroll software has not been on our list of specific concerns.
Picking up on the point that I raised with Susan Love about companies that offer payroll functions for small businesses, has there been any indication at all that those companies are passing on an additional cost burden as a result of the SRIT, or anything along those lines?
Not at the moment—I have not heard anything about that. Half of our members have pay-as-you-earn done externally and the rest do it internally, either through software or by using tables and doing it manually. We have not heard anything yet to suggest that that is happening, but we will obviously keep a close eye on the matter.
And from your perspective, David?
We have members who are headquartered in Scotland and others that are headquartered elsewhere in the UK. In our submission we point to “some disquiet” about the lateness of the technical advice. You have put your finger on the issue: the disquiet came from HR and finance teams outwith Scotland.
We need to bear it in mind that the change does not just involve Scotland setting a Scottish rate of income tax: Wales will get control of income tax too. It was announced in the autumn statement that that will no longer be subject to a referendum in Wales.
For payroll managers and HR directors, the picture with regard to income tax is increasingly complex. There are aspects such as the apprenticeship levy, as others have mentioned, for which each constituent part of the UK will have its own approach, and there are a range of other issues to the fore; we have talked about the national living wage and employer pension contributions, for example. It is quite a noisy period for people who are in a company that has a pan-Great Britain or pan-UK operation. The very nature of the retail sector is such that someone can quickly develop quite a sizeable business because of the nature of the industry, and they may have 10 or 100 shops.
I am conscious that I have not brought in David Watt. Does the IOD have a view on the matter from its members’ perspective?
I do not think that there is anything to add. In a brief conversation with colleagues down south, there was a bit of concern expressed. HR departments that are headquartered in England or in the rest of the UK tend to be less informed than people in Scotland, to be honest, but that is a small issue. Again, such companies tend to be larger employers, so they are probably more able to cope with the change relatively easily, in terms of not only software, as Susan Love mentioned, but personnel.
There is a middle swathe of businesses, and we have a lot of those in Scotland. As an illustration, an engineering company might have a few challenges if the situation gets more complicated, as David Lonsdale described. It is part of an overall complication that businesses are facing, to be fair.
We have to be realistic: everything is not going to go perfectly in April. Some of the procedures and processes that have been agreed between employers and HMRC will turn out not to be the right way to go about things.
For example, one issue concerns the coding notices for new starts in businesses. At present, the advice for employers is that, if someone does not have a P45 and an S code, they should be started on the UK code until HMRC informs the employer that the employee has an S code. Once the rate is introduced, most employers will want to code automatically with an S code because they will know that the person lives in Scotland. However, that is not the advice, so they will have to change the code once they are notified by HMRC.
With those little process issues, once the rate is implemented and systems operating, we may all decide that there is a better way of doing things and that we need to change what we are doing. We just have to be realistic about the fact that there will be problems that arise after April. That is just a natural part of the process.
That concludes questions from the committee. If witnesses have no further points to make, we will wind up. I thank you all for your contributions, and I thank Alison Wilson for clerking the meeting.
Meeting closed at 11:55.Previous
Draft Budget Scrutiny 2015-16