As we are all present and correct, we will resume the meeting. Our third item of business is evidence from Revenue Scotland as part of our draft budget scrutiny. I welcome to the meeting Keith Nicholson, Eleanor Emberson and Robert Buchan. Members have received copies of a written update from our witnesses. Keith Nicholson has a brief opening statement to make before we go to questions.
This is the first time that a representative of Revenue Scotland has appeared before the Finance Committee following our go-live date of 1 April. As such, I feel it appropriate that, as chair of Revenue Scotland, I address the committee and highlight some of the work that has brought us to this point, before Eleanor Emberson, as chief executive and accountable officer, takes the committee’s questions.
Revenue Scotland has now been collecting and managing the two devolved taxes—the land and buildings transaction tax and Scottish landfill tax—for more than seven months. I want to reflect briefly on how we got to this point. It has been a historic journey from the passing of the Scotland Act 2012 and the three bills passed by the Scottish Parliament, through to the creation and establishment of the tax administration programme, the birth of Revenue Scotland and the collection of the first devolved taxes.
As the committee knows, an important theme throughout the journey has been collaboration and engagement with key partners, which is a key aspect of the Scottish approach to taxation. The Scottish Government consulted publicly on each of the three bills and on the subordinate legislation. The Government held workshops and meetings with interested parties, such as the Law Society and the Chartered Institute of Taxation, from a very early stage. It also established working groups to discuss the main policy issues.
The knowledge and expertise of the Scottish Environment Protection Agency and the Registers of Scotland, which carry out key functions delegated to them from Revenue Scotland, have been vital in the establishment of Revenue Scotland and its work since its launch on 1 April. Continued engagement is vital to our on-going success, and initiatives such as regular meetings of both LBTT and Scottish landfill tax forums, following from the devolved tax collaborative meetings, and a new programme of roadshows that will be rolled out in the new year, provide stakeholders with the opportunity to feed back and contribute to the efficient management of the devolved taxes.
Getting Revenue Scotland to this point has been a team effort. The Revenue Scotland board is now an important part of that team. We want to continue to build relationships with our key delivery partners to ensure that Revenue Scotland has a successful future. The team of staff who have set up and run Revenue Scotland deserve enormous credit for getting us to where we are now. I do not want to steal any of Eleanor Emberson’s thunder, but it is worth reflecting on the fact that, in the first six months, we collected more than £220 million in tax revenues, with 97 per cent of revenues made online. Those achievements demonstrate the value of the collaborative work that has been done at every stage, and they show that Revenue Scotland can face any future challenges with confidence.
Thank you for that opening statement. As usual, I will ask the initial questions before we go on to questions from others. I do not have many initial questions because the report is excellent and detailed; it has answered many of my questions already.
In paragraph 8 of the report you say:
“The total set-up cost for Revenue Scotland and collection of LBTT and SLfT is £5.5m. This compares to my estimate of £6.3m in February 2015.”
It is always good when such things come in under budget, rather than over budget. You have also given us a detailed breakdown of the costs in annex C. Can you talk us through that breakdown a wee bit?
Certainly. Two main things changed, one of which was more significant than the other.
When I gave the committee the estimate in October 2014, and the update in February 2015, I had taken a fairly cautious view about the set-up costs that would run on into this year, knowing that staff would still have work to finish up on the set-up in this financial year and would then need to find other jobs. In fact we were very efficient in finishing off the extra work and staff found other jobs very readily, having had the experience of setting up Revenue Scotland. That meant that we underspent on the staff costs because people moved on more quickly than I had anticipated.
The other element that is slightly different is the information technology procurement cost. That is an accounting issue and is to do with how much of the cost is capitalised and how much is spread over the lifetime of the contract. We were working on the assumption of one treatment, but the final decision on the treatment is that the costs come in as part of the operating costs rather than the up-front procurement. That is what has driven the change in the IT cost.
Does that mean that the costs for this year will be higher than anticipated?
We are absorbing that within our budget.
Fine. At paragraph 12, you say:
“we remain very alert to the possibility of tax avoidance but, as yet, have not had to use the powers available under the General Anti-Avoidance Rule.”
You say that you have not had to use anti-avoidance powers and you are obviously alert to the issue, but where are we with it? Is everyone who has submitted tax returns been doing everything in a hunky-dory way? Is the legislation proving robust?
I know that it was thought that there would be a wee gap between what was going to be collected and what should be, which would indicate some element of avoidance. Has that gap not happened? If you recall, we have had discussions about the size of the gap at previous committee sessions.
We cannot really estimate the gap. All I can tell you is that right now we are going after all the money that is due to be paid. Our job is to bring in the correct amount of tax, and we are using all the powers that the Parliament has given us to go after the correct amount of tax.
Right now, if I were aware of any unpaid tax, I would be using the powers that you have given us to go after it. The tax gaps that people talk about tend to be rather theoretical estimates. They tend to have been made retrospectively by looking at economic indicators and what that information might mean about the size of various markets compared to the amount of tax paid. They are generally done for past years and not for a current or a future year. It is notoriously difficult to estimate a tax gap with any accuracy.
Therefore, I would not read anything into the fact that we have not used the general anti-avoidance rule or think of that fact as having anything to do with tax gap. We have not used it yet because we have not had to. We are using all the other powers that you have given us, and we will use the GAAR if we have to. At the moment, we are entirely in the business of bringing in all the tax that is due. We may try to make retrospective estimates at some point, but it is really quite hard to do so accurately.
You have not had to use the general anti-avoidance rule, but you say in paragraph 18:
“we may generate between £800k and £1.5m of compliance yield in total by the end of this financial year and £3m to £4.5m . . . if we are able to retain the specialist compliance posts which were initially included in our staffing plans for one year”.
You do not have avoidance, but there are issues of compliance.
Yes, but that is what a tax authority does. We ask questions and we challenge things in the returns that people have submitted. If we need to, we open formal inquiries, which we have done in some cases. We do debt recovery work if people have declared and not paid. We do all the things that you would expect us to do to make sure that the money comes in.
Before I open up the discussion to the committee, could you talk us through the application of penalties, which your submission touches on in paragraph 17?
Yes. We have given the taxes an initial period to bed in, to let people get used to new arrangements and the new taxes. The Revenue Scotland board took the decision that we would start imposing penalties and interest for transactions from 1 October. That is in place now, and returns associated with those transactions have been coming in.
We have issued quite a large number—I think more than 300—of what we call pre-penalty letters. We ask people what was going on and why the return was late. I suspect that we will get to the actual application of penalties quite soon.
Thank you very much.
Ms Emberson, I congratulate you on the work that you have done. It has been a smoother transition than I think anybody imagined, and I have no doubt that that is partly down to you and to the Revenue Scotland staff team as a whole.
I want to focus on residential transactions for LBTT for a moment. My maths is shaky but, judging from the amount raised and the amount that was anticipated to be raised, even if I was generous and doubled the figure that is there, we are looking at quite a substantial shortfall of potentially over £40 million.
I am curious to know two things on the back of that. First, I do not know whether you are party to it, but there have been discussions with the UK Government about forestalling. I do not know whether a figure has been agreed, but obviously forestalling had some effect at the very start of the implementation of LBTT. Do we have a figure for that?
Also, anecdotally, I would have thought that house sales in December, January and February are pretty small. Have you done any modelling or estimates on what is likely to be expected in that period?
12:15
We are not party to the discussions on forestalling between the Scottish Government and the UK Government, so I cannot give you an update.
There is a point other than the forestalling issue that I should draw to the committee’s attention that is important in comparing our numbers to the forecast. In effect, our numbers are cash flow: they represent the tax declared and paid within a given month. Forecasts are on an accruals basis: they are transactions within a year.
Within the first year of a new tax, that effect comes into play far more strongly than it will in subsequent years because, during April and to some extent May, HMRC still collected some stamp duty land tax relating to transactions in March. We were collecting LBTT for transactions in April, but some will not have come in until May, because people have 30 days after the date of the transaction to submit the return and make the payment. There is a cash flow effect, as well as the other effects that people are trying to model.
We have looked at seasonality. Obviously, we do not have any seasonal pattern to go by on a brand new tax such as LBTT, but we have looked at SDLT. There is a seasonal pattern, with more sales in the summer months and a drop-off in the winter before sales pick up again. We are not forecasting: we have noted that there is such a pattern and we will see whether it is repeated for LBTT. It will take two or three years to build up a really good seasonal model for LBTT.
Do you have an order of magnitude for how much sales drop off, based on the SDLT information from last year?
I do not have a figure with me.
But it exists.
We are not forecasting—
I understand that, but there is an issue of planning. If there is a huge number of transactions, that has staffing implications; if there are far fewer, it is not something that you need to take additional measures to account for.
In fact, our workload is steadier than might be thought. Because we receive well over 97 per cent of our returns online, the flow of returns and of payments comes through fairly easily.
We manage our compliance work and the reactive work when people raise queries. That work is largely on the highly technical and complex transactions. It is driven by a whole range of factors but not by the volume of relatively straightforward residential transactions.
For work planning purposes, we do not estimate transaction numbers in quite the way that I can understand that you might think.
So even though yield may typically go down in December, January and February, there are lots of other things going on that people turn their attention to. That is helpful to know.
In the figures that you provided to the committee, you included LBTT for the first quarter. Do you have the figures for the second quarter? It was suggested that those might be available on Friday 13 November.
That was the date by which returns were due. We are now looking at what has come in.
We publish the statistics a few weeks after the end of the quarter. We do not have figures ready to publish yet, but we will issue a release some time in December. I am happy to provide a copy to the committee when it is available.
I realise that the papers we have been given were prepared in part by Ms Emberson and in part by committee clerks, perhaps drawing on other material.
When I compare the figures that we have received, on tax or anything else, with an estimate or forecast, it is good to have the figures on the same basis. I look to Ms Emberson, but the question may be for someone else. Having a full year on an accruals basis and six months on a cash basis makes the figures difficult to compare. I would like to see the figures on the same basis in the future.
For further clarification, I thought that house sales would be low in the summer as well as around Christmas, with spring and autumn as the peak times. Is that right, or is it not quite that way?
I am not the expert on this, but I think that we see a bit of a summer surge. The tax surge lags a little behind the housing market for the same reason that I explained previously. People have up to 30 days to submit the tax returns, so we might see the surge run about a month, or up to a month, behind the surge in house sales.
The convener mentioned paragraph 8 of the report, but I do not think that it was mentioned that staff costs for 2015-16 are projected to be around £227,000 higher than you estimated. Can you give us a bit of explanation on that?
It is just the difference between the theoretical estimate and the actual costs when we have the members of staff in place. We have had one or two extra temporary people in to help us out on a couple of things, but there is no particular thing that I could point to that would make the difference clear.
In other words, it is a one-off.
They are mostly one-off costs.
There is also the suggestion that staff costs are turning out to be higher than originally estimated. Presumably, that is because you are in a competitive market and you have to offer what people are willing to work for.
It has not proved difficult to recruit good staff.
Right.
We have staff coming in and we are on standard Scottish Government terms and conditions. We pay the same rates as the Scottish Government would pay.
So as things settle down we can expect staff costs to be closer to budget.
Yes. We should have more accurate forecasts.
Paragraph 9 states that operating costs for 2015-16 are 0.76 per cent of the £498 million tax revenue forecast. That is an interesting figure, and I would be interested to know how it compares with the position in other countries. Do we have such information?
The OECD publishes figures on that. Its latest published figures were released a couple of years ago, so the information is all retrospective. As you would expect, there is quite a broad range in the percentage concerned, but I think that I can say that broadly comparable jurisdictions might have figures somewhere between 0.8 and 1.2 per cent. Obviously, that is for tax authorities that might have a very different mix of taxes, so we have to approach the comparison with a bit of care. However, our figure looks perfectly okay internationally compared with some of the other things that we have seen.
Great.
A couple of the points that I was going to raise have been mentioned. However, I note that paragraph 13 of the report refers to applications to defer payment on LBTT. For what reason would people seek deferment? How many such requests have been received? If a deferment is granted, how long is it generally granted for?
Robert Buchan will say something on that.
If the consideration for a transaction was contingent on a certain event occurring, that would be one of the reasons why we would allow deferment until that contingency occurred in the future. We would take payment at the date that the contingency occurred rather than at the date of the transaction.
To contextualise that, what kind of circumstances are we talking about?
If I were to buy a property from you, and in the unlikely event of planning permission being granted on that property in 20 years’ time for me to build a wind farm on it, my lawyer might advise me to put a contingency in the contract to say that, in that event, a significant additional sum would be payable. That event is unlikely and no money is actually being paid, so although it is part of the consideration technically, we would not seek tax on it at that date but would wait until the contingency occurred.
Have there been many requests for deferment on that basis since LBTT came into effect?
I think that there has been a total of 10.
How many of those requests have been granted?
I can check that.
Perhaps it would be better if we came back to you on that.
Yes. You could also come back on the length of the deferments. The example that you gave, regarding a 20-year period, was fictional. It would be interesting to know where deferments have been granted and for how long.
We will have to be careful about protecting taxpayer information, but we are applying the LBTT legislation as set out—or we are doing our level best to do so.
I am very happy to provide that information, although it may not always be possible to give you the exact length of time because we do not know when the contingency will occur.
I am aware of the difficulties that can arise when we are dealing with very small numbers—individuals can be identified and so on. We would like to receive that information if possible, but I understand that there may be difficulties. [Interruption.]
We will stop for a minute.
12:25 Meeting suspended.
We will reconvene.
Jackie Baillie asked about the tax that has been collected so far. On a really crude analysis, halfway through the year, we would appear to have collected more than half of the target for non-residential tax and less than half for residential tax.
You added an important caveat that it is done on a cash basis not on accruals. I accept that entirely. Since you submitted your report, you probably now have some idea of what happened in October. Can you give us an idea of the magnitude—how big is the difference between cash flow and accruals? If we were looking at the figures now, would a couple of million pounds be added, for example, or a couple of hundred grand?
We have not done the analysis that would answer your question. However, we have provided a lot of data to the Scottish Fiscal Commission so I imagine that it will look into that when it reports to the committee. I believe that it is due to do that shortly.
That is fair enough.
On the seasonality point, you are absolutely right to say that with LBTT we only have the figures for six months. Stamp duty was volatile and depended a lot on the economy, but if you went back five or 10 years would there not be some monthly patterns in the figures that we could draw conclusions from? Even in a bad year, I presume that more houses are sold in September than in December. Could some work be done on that to give us some idea of where we are?
I agree that if you look at the figures on a cash basis, the analysis is crude. Perhaps the second six months will naturally be better than the first six months. Has no analysis been done on that?
The issue is more that Revenue Scotland has not done it. We are trying not to confuse the landscape on forecasting. It probably would not help the committee, or anyone else, if there was a Revenue Scotland forecast and a Scottish Government forecast and so on. We are not trying to do that; we are concentrating on trying to ensure that the money comes in. We will provide the data to the Scottish Government and to the Fiscal Commission, which will look at the forecasting. I am sure that they have looked at SDLT seasonality as a model.
I think that you are saying that the question would be better put to ministers. You are operational—you report what has been collected and you are going out there trying to ensure that everything is collected.
Yes.
I have one further question—it is slightly random, but it is on a point that intrigues me. There may be a good explanation. Table 3, on page 9 of your report, shows under August 2015 that the total non-residential tax liabilities are £15.5 million; it gives the total collected as £15.8 million. You appear to have collected more than the tax liabilities amount. Is there an obvious explanation for that?
It is partly cash flow and partly that the legislation—as you may remember—allows taxpayers to amend their tax returns for up to a year afterwards. If tax returns are amended, the liabilities and the cash payments start to get slightly out of step. However, as you will see, we have repaid the money now.
Okay. Thank you.
12:30
I remember various discussions that the committee has had over the past few years as you were working up to this. We discussed two things at length, the first of which was the new legislation that was closing loopholes, particularly around land transactions. There was great discussion about simplifying what was already fairly complicated legislation. The second thing was your being able to answer queries and deal with the public. A lot of that activity was going to be online. Can you give us a quick update on both those issues? Is the legislation as streamlined as it appears to be?
As you know, real efforts were made to streamline the legislation and I suspect that it is simpler. It has been aligned more with Scots law. However, to be honest, LBTT remains very technical and some property transactions are quite complex by their nature in the real world, so it is not always completely straightforward for anyone to arrive at the correct tax treatment for LBTT.
Sorry—what was the second half of your question on?
We had quite a lot of discussion around public inquiries and your being able to supply relevant information on the changes that have been made to any taxpayer or property developer who got in touch with you.
We have given you some statistics on the volume of calls that we receive, the correspondence that we receive and our response times. We look to respond to the more complex queries relating to particular transactions in a more secure way than through plain email. We are answering our phones and our correspondence.
In practice, most of our inquiries come from solicitors, landfill operators and those who are acting for landfill operators. We do not get a large number of inquiries from members of the general public, because most people use a solicitor when they are dealing with a property transaction and the solicitor makes the inquiries for them.
Thank you.
Thank you very much. That appears to have exhausted questions from the committee. Do you want to make any final points before we wind up this evidence session?
I am grateful to have had the opportunity to speak to the committee. I felt that it was important for us to do that, as it is the first time that we have appeared before you since 1 April.
Not at all. I am glad that everything is going smoothly, as Jackie Baillie said. I congratulate you on the excellent work that you are doing.
12:33 Meeting continued in private until 12:39.