Item 2 is to conclude the evidence taking on our Scottish variable rate inquiry. First, I welcome to the committee three former finance ministers: Andy Kerr MSP, Tom McCabe MSP and Jack McConnell MSP. I invite the former finance ministers to make opening statements.
I want to outline briefly, mostly from memory, what took place in summer 1999 when I was appointed as the first finance minister in the new Parliament and the new Scottish Government. I should probably say by way of a preface that I had throughout the 1990s been involved in the design of the legislation that created the Parliament, and specifically in the discussions about the tax power. I therefore had some experience in advance of May 1999 of why the power had been created and the democratic purpose for which it was designed.
My evidence will be brief. I refer members to the note of 7 July 2003 from Richard Dennis. Following the election in that year, I had a straightforward role, which was to make a decision based on the advice that I had been given. In his note, Richard Dennis talked about maintaining the 10-month state of readiness and said:
Good afternoon, everyone. Papers on the Scottish variable rate that the former finance ministers who are present today have requested and papers that the Scottish Government has released show that the Scottish variable rate was always in a state of readiness from 1999 until the current Administration took over. First, that was because the Scottish Executive was obliged to maintain that state and to inform Parliament how that would be done. As the record shows and as Lord McConnell has outlined, that is exactly what was done. Secondly, it was because 10 months is the minimum statutory period in which any incoming Scottish Government could implement the SVR.
The cabinet secretary will have the opportunity to respond when he appears before the committee.
I should probably answer that question, given that I presented to Parliament the bill to establish the budget cycle back in 1999, as you will remember. The budget cycles in Scotland are similar to those in the UK, although our procedures differ. Provision is made for an annual budget and annual expenditure decisions. However, in the past year, the new UK Government had an emergency budget shortly after the election—outwith the normal budget cycle—to implement decisions that were in the coalition parties’ manifestos for the election campaign that had just concluded.
I am sure that the committee understands the chronology, but it is probably important to clarify it. An incoming Administration may announce its intentions in May. Those intentions will then shape the draft budget that it presents later in the year. That is the right order of events.
I have a fairly simple point to add. If a party campaigns to either increase or decrease taxation in Scotland, it will present a budget in some form that would achieve that objective. I think that your question is based on a technical premise, but the politics would dictate that an alternative mechanism would be deployed, such as an emergency budget.
I am sorry to come back in again, convener, but it is important to remember—I have always been keen to ensure that we are clear about this—that it is possible for parties to campaign on a reduction of income tax in Scotland and not just on an increase. Given the opinion polls at one point in 1998-99, there was a very real possibility that the party that became the largest party in 1999 would be one that advocated using the power to increase tax, but there is always the possibility that a party with a commitment to decrease it might win a Scottish election, and if it wanted to do that, it would want to act as quickly as possible. We were therefore keen to have the infrastructure not just for tax increases but for tax decreases, and that is why it was important to have the possibility of immediate decision making leading to immediate implementation the following April.
Given the evidence that we heard from HMRC, it still bothers me that, time-wise, the bits do not quite fit.
The arrangements comprise the following: the creation of the legislation, which happens in the cycle every autumn, as you say; the possibility or—in my view—the duty to make parliamentary statements on the matter and announce the decision properly to the Parliament; and the ability within 12 months to implement the decision that has been made. In 1999, 2003 and 2007, that opportunity was available to the incoming Administrations.
I throw the questioning open to members.
I am looking back to 1999, so I think that my question is for Lord McConnell, but if I have got that wrong, the other former finance ministers might want to answer.
I will comment on what happened in the year before the Scottish election in May 1999. I do not have access to the papers on that, because the Parliament had not been created at the time—the minister responsible, I think, would be Henry McLeish—but my memory from the discussions back then is that Henry McLeish, as the minister for devolution, approved the creation of the infrastructure at some time around mid-1998 or autumn 1998. The infrastructure was then put in place, and obviously there was a cost for that.
I want to widen the question and ask about the other money. I think that we reckoned that, over the piece, £25 million was spent on the SVR. When that money was allocated, was anyone else made aware that maintaining the system might well involve receiving a very large bill and that we were paying for something that would not be usable in the future without further investment?
We should bear in mind what Lord McConnell said in response to your previous question about predicting the cost of information technology systems, which is a difficult thing to do. Costs can come down as well as go up. The note from Richard Dennis of 7 July 2003 indicates that the cost of maintaining the system that was payable to HMRC had come down to £200,000 across the lifetime of the Parliament—some £50,000 per annum—as opposed to the £10 million that, according to my note from 2003, it would have cost to reintroduce the scheme, had the decision been taken to cancel it. That would have been rather strange, given that the financial wherewithal to reintroduce it might have been lacking.
As I said, I was aware that discussions were on-going. I was never under any illusion that if there was to be a substantial overhaul of the infrastructure for collecting tax throughout the United Kingdom, a cost would be attached to that. I have enough experience in Government to know that any time an IT system is substantially overhauled, significant costs are incurred.
That deals with the issue as far as the capital is concerned. At the end of the day, we had no assurances.
Who is Sarah Walker?
She is from HMRC—she gave evidence two weeks ago.
That is different from what the convener said. The convener said that HMRC’s evidence was that if a decision had been made in May or June 2007, it would have been possible to implement the variable rate in the following April.
I might be able to clarify that. As I said, the position was that the discussions were on-going. Officials were not in a position in which they felt that they could brief ministers on the stage that the discussions had reached. It was always clear that there was time for an incoming Administration to take a decision to implement the SVR. I was told that if that were done before 7 June 2007, it could be collected at a rate of at least 90 per cent. As I said, everyone is aware that substantial powers are available to HMRC to collect unpaid taxes in subsequent years. On that basis, it was acknowledged that an incoming Administration, if it wished to, could implement the SVR and achieve a collection rate of 90 per cent, and that the missing money could be recouped by HMRC. There was never any question about the ability of the SVR to be fully implemented in subsequent years, had the decision to do that been taken before 7 June 2007.
Let me clarify something. Tom McCabe said to Sarah Walker:
If that is what she said, convener, she may have been confused. Her reply contradicts the ministerial briefing note that was given to incoming ministers on 14 May 2007, which specifically said that full functionality would be available in financial year 2009-10.
That will be noted in the Official Report.
I think that we are taking off, because that was not the point that I was trying to make. My question was whether given Sarah Walker’s evidence to the committee that there was not full functionality—Mr McCabe has said it was 90 per cent—all the ministers are confident that there was 10-month functionality in each of the years that they were making payments to HMRC.
Yes.
Yes.
Yes.
That is useful. What checks did the ministers make over the years when they were making payments to HMRC to ensure that there was 10-month functionality, given that we know that there was not full functionality at the end of the period in 2007?
There was a memorandum of understanding, and the basis of the payment was that there would be functionality. The difference in 2007 was that the organisation that collects tax in the United Kingdom decided to overhaul its entire IT system—that was the material difference in 2007. It had not made such a decision in previous years, so the understanding and agreements between the Scottish Executive and HMRC were obviously always in place.
My question was specifically on what checks were made to ensure the state of readiness. It was maybe just convenient that the changes did not happen two years before.
What checks were made? We had an agreement with HMRC to undertake the work and, if any substantive change required us to be notified, that would have been done. There was certainly an assumption, and reality, that we would expect the service to be delivered because nobody told us otherwise. It was not as if there was some secret arrangement between Governments: it was a clear arrangement that was high up the agenda and, if there had been any difficulty, we would have been advised of it.
I must say that never at any time during my tenure was there an indication of anything other than a 10-month state of readiness. I would have fully expected senior civil servants to inform us if anything other than that had been the case—and they never did.
I can add to that. I do not recall, in any discussions that I was involved in back in 1999 or subsequently, the decisions on principle being affected by whether collection rates would be 90, 95, 98 or 100 per cent. From the beginning—this is true of the initial decision to make the investment in 1998, before any of us was an MSP, never mind a minister—and subsequently, the decision was one of principle. It was based on securing agreement with the then Inland Revenue and on the potential for a political change in Scotland to lead to a tax change, should the electorate and the elected MSPs want that to happen. Although the technicalities and practicalities are obviously an on-going and important matter, the one fundamental thing that did not change over the eight-year period was the democratic principle that the power should be available for quick implementation.
Computers were essential to the working of the system, and computer programmes are notorious for delays whenever we try to change or patch them. Was there no hint that you should be checking up on the issue? You had the agreement, but surely somebody should have been alerted that it was fundamental to the whole system.
They did check and they did know the current state. As I said, officials were in discussion with HMRC in March and April 2007. As a result of those discussions, they presented a ministerial briefing note on 14 May 2007 to incoming ministers that told them that there was 90 per cent functionality for 2008-09 and 100 per cent functionality for subsequent years. Those were the checks that were made. As a result of the on-going discussions between the Scottish Executive, Scottish Executive civil servants and HMRC, civil servants produced a note to new ministers to inform them of the up-to-date situation.
What was delivered?
Not very much, because of the decision that the incoming finance minister subsequently took.
I will come back to what the incoming Government would have been briefed about and the direct relationship with the outgoing Government, but I will first touch on a more general point. What level of information on this issue was brought to each of you as finance minister? What level of information would you expect officials to bring to you? On the policy area, what would you expect to know and what would you believe should be done simply at official level without it being necessary to bring it to ministers?
As I indicated in my statement, two issues were raised with me immediately that I became finance minister. One was the need to prepare legislation and present it to Parliament quickly to establish the financial procedures in advance of the first budget of the new Parliament in the winter of 1999-2000. The second was what to do with the infrastructure that had been put in place.
To answer the question directly, I was quite happy not just with the written information that I received, which is contained in the note of 7 July, but with the discussions that I had with officials regarding the whole mechanism. I recall having a meeting with officials regarding this matter. Also, due to HMRC’s significant presence in my home town and constituency—East Kilbride—I took up the opportunity to visit it, not just to discuss this matter but to discuss the economic impact of having a big public sector organisation such as HMRC in East Kilbride.
Similar to my colleagues, I was obviously aware of the agreements that were in place and the approach that had been taken. I was a member of the first Cabinet when Lord McConnell as finance minister brought the proposals forward and subsequently took them to Parliament. I was also a minister before I took on the finance minister’s role.
As you will have seen in the papers, there were times when the Cabinet Secretary for Finance and Sustainable Growth and his special adviser were in discussion on the matter.
The cabinet secretary is trying to throw red herrings into the situation. I would have had a lot more respect for him if he had simply come to Parliament and acknowledged the decision that he had made. Like my colleagues, I have personal awareness of the post. It is one where decisions—at times, serious decisions—are often required. Just because someone has been made a finance minister does not mean that they are suddenly endowed with the wisdom of Solomon. They will get most of the decisions right, but they will also get some of them wrong. The cabinet secretary making an error in his decision making at the time was not a capital offence. A simple and sincere acknowledgement of the error would have been enough for the Parliament.
This question goes to the heart of the matter. I refer the committee to the statement that I made to the Parliament on 24 June 1999. I opened the statement, which I think was welcomed by all parties at the time, by saying:
The Scottish Government has used the term “mothballed” about the power. In looking through all the documentation, it is interesting to note that there are only a couple of references to the term. In terms of readiness, was the provision mothballed by the time you left office?
Before those who, as finance ministers, dealt directly with the matter come in, I will give some political background. Much of the comment on the decisions that were taken in 2007 are based on whether a new Administration would have considered using the power. It is clear that, following the 2007 election, neither of the two main parties proposed to use the tax power. That might be what lies behind some secret decision to mothball the power. However, in the winter of 2006-07, when I was First Minister and preparing for an election campaign in May 2007, I was acutely aware of the possibility that one or more of the parties might propose a tax cut at the last minute in the election campaign. We were in a time of relatively high public spending in Scotland rather than relatively low, which was the case back in 1999. Therefore, there was a possibility that one of the parties, either for reasons of principle or to seek political advantage, would propose a tax cut. That was why the idea of mothballing the power would never have been considered. We had to be ready for proposals to increase tax not just from very small parties, but from one of the four main parties that might be involved in coalition negotiations after the election.
I am looking at the note from 2 December 2010 about a teleconference meeting between HMRC and the Scottish Government to discuss the SVR. Paragraph 4 is all about mothballing. Referring to the SVR system, it says that HMRC
That is loose language that does not describe the situation in any way. I would like to question those individuals who used that language. I would not have signed away £200,000-worth of Scottish taxpayers’ money for a mothballed system, but I would have signed money away for a system that would allow the tax-varying power to be used within 10 months. If you are suggesting that the term “mothballed” means that we were incapable of doing anything, that was not the case. The system was in a state of readiness and the word “mothballed” was not used in any items of correspondence available to me when I took the decision. If it had been, I would certainly have investigated and removed it because it does not describe accurately the facility, which is about the system being in a state of readiness, contingency planning and allowing others to take decisions in the future. In my view, underpinning in that way the democratic decision that was made by Scots in a referendum and parliamentarians in this building is money well spent. It is not mothballing; it is having a system available so that we can make our democratic decision happen within 10 months of the button being pressed. If that is a description of mothballing, it is not one that I understand.
I suggest that we write to HMRC for clarification of exactly what it meant.
Mr Kerr summed it up when he spoke about loose language, which was being used to try to obscure the situation. When I was growing up, we used a mothball to preserve something that we regarded as precious. The term could be seen in a positive sense as well as in a negative one.
Clarification would be useful.
I want to ask about “Funding the Scottish Parliament, Welsh Assembly Government and Northern Ireland Assembly: Statement of Funding Policy”, about which I asked the Secretary of State for Scotland last week. The Scottish Government has a dispute with the UK Government about that statement. I was reading the briefing note that the Cabinet Secretary for Finance and Sustainable Growth would have received on coming into office. Did any of you see it, as part of an incoming Government?
No.
What advice were you given by officials on the statement of funding policy? The briefing to John Swinney of 14 May 2007 says at paragraph 5:
I was responsible for the negotiation of the statement of funding policy in 1999. The statement of funding policy is clear. However, the difficulty with it is that, as with all forms of words, different interpretations can be made of responsibility in specific situations. I can remember a number of occasions over the eight years in which I was in various ministerial positions when discussions took place about the origins of a decision. A highly publicised example is the introduction of free personal care for the elderly. There were also challenging negotiations on the cost of security at the Gleneagles G8 summit. The statement of funding policy is clear that those responsible for a financial cost to the public purse are responsible for meeting that cost. If there were discussions, they were usually about when the decision had been taken that had led to that cost in the first place.
I am wondering whether the briefing to John Swinney in May 2007 is identical to the service level agreement that preceded the Government. You will have read the briefing that he received. I am not sure whether the advice that he was given is consistent with the advice that you were given immediately prior to taking office.
It is entirely consistent.
I suspect that most of my questions will be for Mr McCabe, because I will focus on issues relating to February and March 2007.
I could not be precise about dates but I knew that discussions were under way.
The notes are quite interesting. Each side gave its own little spiel before the start of the meeting. HMRC’s perspective was that
No, there was nothing in that detail. As I said, I knew that discussions were on-going. As I said earlier, I did not inquire about the position for any incoming Administration. I was given the assurance that there would be operability of at least 90 per cent of the SVR but that discussions had not concluded. Every indication that I had was that a decision would be required—you mentioned June or July, but it was never indicated to me that a decision could be taken as late as that; it was always indicated to me that it would need to be before June.
Helpfully, we have a minute of the next meeting of this group. It looks as if the same people were in attendance, with apologies from the same people, strangely enough. The meeting was held on 23 March, and there were updates on the state of readiness. The “SS” in the minute refers to Sandra Stewart from the Scottish Executive, who advised that
No, there was no formal minute. However, as I said, I was aware that discussions were taking place.
What is your response to Mr Swinney saying that he inherited a system that was not fit for the purpose of introducing the SVR?
My assumption is that, because he could not collect 100 per cent of the tax, Mr Swinney determined that he had not inherited a functional system. Perhaps it would have been more accurate if he had inserted the word “fully”, but he did not.
The Scottish Government has released quite a large amount of documentation, which I presume the panel members have seen. Some of your answers have indicated that you were aware of it without necessarily following it in your respective times as finance minister. As far as you are aware, is that documentation complete? I appreciate that you cannot necessarily be definitive on that.
I have two concerns about that that I wish to put on record at this meeting. The first is that the Scottish Government circulated to me in advance of circulating it to the committee and in advance—I think—of publishing it on the web site, the documentation that it said related to my time as finance minister, which covered a period of 18 months in 1999 and 2000. I was provided with maybe seven or eight documents, almost all of which relate to the call centre that had provisionally been established in East Kilbride in 1998 by the UK Government and to the discussions that took place with South Lanarkshire Council about the possible use of that call centre. The Scottish Government has provided me with no papers in relation to the decisions that were made in June 1999.
The substantive documents relating to my involvement—the minute that I received and my response—have been produced. All that is missing are the arrangements for the visit to East Kilbride, which I expected to see. I cannot remember when I made the visit, but I was definitely there and there may have been some correspondence to that effect. It is not there, but it is not substantive to the issue.
There is a slight difficulty in answering the question. I have no reason to suspect that any papers have been deliberately omitted, but finance ministers receive an enormous volume of paper, not all of it 100 per cent necessary. It would be near impossible for any human being to say with 100 per cent certainty that every piece of paper is there.
David Whitton referred to the service level agreement, which lapsed at the end of July 2007. It may not be central to what we are looking at just now, but one thing that puzzles me is why that agreement, which spanned the second session, was not signed until March 2007. HMRC was unable to answer that question when it gave evidence to us. Are you able to shed any light on the matter?
It may have been a simple oversight—the agreement was in operation, but at some point someone may have discovered that there was no signature on it. There was always clarity that the agreement was in operation.
At the debate on the SVR in November last year, the cabinet secretary made the point—I paraphrase—that, regardless of decisions by the Scottish Government, the power to vary the basic rate of income tax remains under the Scotland Act 1998, so the power has not lapsed. If a service level agreement were not in place and the Scottish Parliament voted for a Government resolution to vary the basic rate of income tax under the 1998 act, which is still there, presumably the rate would be varied, but what would happen? Presumably, HMRC would have to collect the tax, because the measure would have the authority of a Scottish Government resolution, under the terms of the 1998 act. Would we then face the sort of issues to which Mr McCabe referred, to do with the percentage that was collected, and disputes about how much had to be handed over to HMRC to finance that?
At no point did I understand that HMRC was unwilling to collect the tax. From a purely practical point of view, it always made clear that the infrastructure to allow accurate collection would need to be in place.
I refer back to my first statement this afternoon and my first statement back in June 1999. I have not been provided with the papers from the period concerned, so I speak from memory, but I am pretty clear about the fact that, in my first discussion as the Minister for Finance with the First Minister and the Deputy First Minister in early June 1999, there were four options on the table. One was to maintain the full infrastructure, and one was to abandon all the infrastructure. Our discussion focused on the two options in the middle. One was to have 10-month readiness, and the other was to have 18-month readiness. The second of those options would have been cheaper, but we decided to go for 10-month readiness, on the basis that we were tied into a four-year electoral cycle and not having the power available in the first full financial year following an election would severely constrain the work of an incoming new Administration. We could have saved another £1 million a year, perhaps, but we chose to go for what we thought was the more democratic option, at a cost of about £2 million to £2.5 million.
Members have seen various versions of the statement of funding policy, but you have the advantage of having experienced how it works in practice. We can understand the principle behind the devolved Administration bearing the cost. If the Scottish Government says, “Right, we want to exercise the SVR,” the costs that are attributable to the exercise flow back to the Scottish Government. That is fairly straightforward. However, if HMRC says that it is changing its computer systems, should the cost of that not pass back to HMRC? The Scottish Government has not asked for the change.
If I had been involved in a discussion on the topic in advance of or following the election in 2007, I think that I would have said to our civil servants, “Your starting point in the negotiations is that it is the UK Government’s responsibility. Let’s see where we end up.” That would have been a reasonable starting point.
Such discussions happened fairly regularly, for example in relation to national negotiations. We would have an input into the negotiations and state our position.
I concur with what has been said about negotiations at different times. The G8 meeting is a good example. It is fair to say that discussions on the matter were pretty robust. In a negotiation we play our hand as far as we can. If we reach a point at which we think that the hand that we are playing will negate a power that is available to the Parliament, we have a call to make. If we had played our hand in a way that could have brought the G8 summit to a halt, we would have had a call to make, because big issues were involved. In a negotiation, we need to know when to fight and when to run.
Jack McConnell said that there are papers that, for whatever reason, nobody has been able to put their hands on. However, will you try to fill in some blanks from memory? At the end of June 1999 there was a £2 million call centre in East Kilbride, which we had paid for, but it is clear from the documents that by 2001
No. I was minuted in as Minister for Parliament. That is part of the minuting process when such matters are discussed in Government. However, I was outwith the process—
So people did not mean it when they said that you were an innovative and inspiring leader of South Lanarkshire Council.
Oh, they meant that—I think I wrote that. [Laughter.]
I have seen some of the paperwork on this. I have not seen some of the early paperwork relating to decisions that Mr McLeish made before the election in 1999, and the final decisions that were made do not seem to be on the file, but some of the papers are available, and they record the discussion that took place in the summer of 1999 about what to do with the facility. As I recall, the Labour Government had established the call centre as part of—
The UK Labour Government?
Yes. It established the call centre before the election in May 1999 in order to provide a facility so that, if the new Scottish Government that was elected decided to use the tax-varying power, the call centre would be available to answer inquiries from members of the public and businesses about how they would be affected. That was obviously sensible preparation for all eventualities.
First, I know from the minutes that I have seen that we reduced the cost of the capacity to call down the system and put it into use within the 10-month notice period. Secondly, HMRC, or the Inland Revenue as it was, was taking its own efficiency measures at the time—although it could still guarantee us the capacity, which was the key issue—and that also reduced our costs. I was fairly happy with that.
Has the call centre been maintained, albeit that it might be mothballed? I use that term in the positive sense in which Tom McCabe used it. He said that it can be a good thing. Is it still there?
To be honest, I am not sure whether that part of the Inland Revenue offices is still there, but there was a physical space to allow the call centre to be used.
Right. That would be before—
Sorry, but may I ask a question about that? Capacity is one thing, but would there have been compatibility with HMRC’s system and with other computer systems? That is essential.
It was HMRC’s system that we were paying for, convener. It had capacity, because the system emanated not from the Scottish Government but from the Inland Revenue, which is now HMRC.
That is why it was in East Kilbride rather than in Edinburgh.
Mr Kerr, you would have visited before February 2001, when it was clearly stated:
Sorry?
A letter from the Inland Revenue to the Scottish Executive in February 2001 said:
I did not see a traditional call centre.
Okay.
I did not see a room with desks, headphones and computers. I saw a space that a call centre would occupy, should it be required.
That cost us £2 million.
No, it cost us £50,000 per annum, which was £200,000 over the lifetime of a Government. That was a price worth paying to support the principles of the referendum decision in 1997.
HMRC confirmed that the facility cost £2 million as part of the £12 million infrastructure cost.
I am referring to what I know.
That is fair.
The note from Richard Dennis of 7 July 2003 said:
Before infrastructure can be maintained, it must be supplied. Perhaps HMRC was talking about the capital cost rather than maintenance.
It is possible that setting up the centre might have cost £2 million before 1999, but I do not know where that number has come from.
An important point is that if I had not decided to spend £50,000 per annum, retrofitting to allow the SVR to be used would have cost us £10 million. The decision was good financial management and judgment.
I admit to becoming a bit confused. I am sorry, but there has been much information to take in. Is the £50,000 a year that Mr Kerr talks about not the £50,000 a year for database maintenance that we have heard about before?
Yes, it is. We paid to maintain a state of readiness, whether that capacity involved IT people, resources or database maintenance. The £50,000 cost allowed us to introduce the variable rate.
That included the use of the appropriate call centre.
Yes.
I am sorry, convener; I know that we are running out of time. I will ask my final question. Mr McCabe said that ministers were not necessarily informed of discussions with civil servants at HMRC or the Inland Revenue. An e-mail from HMRC to the Scottish Government last year said:
According to the briefing note to incoming ministers on 14 May 2007, the answer is yes, because that note directly contradicts the view that you have described. Ministers were told of 90 per cent functionality in 2008-09 and 100 per cent functionality in subsequent years. You have seen that note, as have I.
We have a time problem, because Mr McConnell must go. Malcolm Chisholm has questions—
No—I am okay.
I must have asked all Malcolm Chisholm’s questions for him.
Do our witnesses have any final statements to make?
No.
It has been a pleasure.
I thank the witnesses for their presence and their evidence.
I welcome our second and final panel of witnesses. John Swinney MSP, Cabinet Secretary for Finance and Sustainable Growth, is accompanied by Richard Dennis, head of the civil law division in the Scottish Government. Mr Swinney, do you wish to make an opening statement?
If I may, convener. Thank you for the opportunity to give evidence to the committee today. As the committee is aware, on 24 November, I set out to Parliament a detailed account of the key events involved in this issue. In support of that statement and to assist the committee inquiry, I have ensured that all relevant documents have been published on the Scottish Government website.
In evidence to us, the secretary of state, Michael Moore, has said that, in effect, power to use the SVR is lost for one year after the election. Given that it is for Parliament to decide whether to use the SVR, what arrangements should be put in place to ensure that the Scottish Parliament can always exercise the power?
The key consideration is that there has to be a practical and operable IT system that can be used to collect the Scottish variable rate, should Parliament decide to use it. After an election, unless an Administration wishes to act outwith the budget cycle, the earliest that an announcement could be made of a decision to use the SVR would be, in the normal course of events, the September of the given financial year. Given that the SVR has only ever operated on the basis of 10-month readiness—it was founded on that proposition—it would take effect in the financial year after the one for which an immediate budget was set, unless, as I say, a decision was taken outwith the budget cycle.
In your speech in the debate in November, you made the point that the Scottish variable rate remains on the statute book under the Scotland Act 1998. In your opening statement today, which in large part replicated that speech, you made the point that in July last year HMRC asked for additional money to maintain the ability to use the SVR in practice. What basis could it have for asking for that money, given that the Scotland Act 1998 is still in force and the Scottish Government and Scottish Parliament could still decide to exercise the SVR?
HMRC asked for more money in the summer of 2010, but it had already asked for more money in the spring of 2007. As I recounted to Parliament, I faced three financial options in May 2007. If I had wished to utilise the Scottish variable rate in April 2008, I would have had to pay an additional IT cost of £3.4 million. If I had wished to use it in April 2009, the figure that I was asked for was £2.9 million. If I had wanted the work to be undertaken during the parliamentary session so that a 10-month state of readiness could be maintained, the cost of that would have been £1.2 million. The request for money in the summer of 2010 was not new; it had been on the stocks since the spring of 2007.
In November, you said that you could not agree to that and that if you did not agree to the £7 million demand that had been made in July 2010, the earliest that the SVR arrangements would be available to us would be the following year—2013-14. You said:
My officials raised the cost issue with HMRC in August 2009. In her message to Ron Powell of 7 August 2009, Sandra Stewart said:
I appreciate that it was sensible to try to reach an agreement with HMRC, but the Scotland Act 1998 does not say that the basic rate can be varied if HMRC agrees. It is a decision for the Scottish Government and the Scottish Parliament to take.
I think that members can see from the correspondence that we have had to go to considerable lengths to make progress with HMRC on securing the operability of the system. Maintenance of the Scottish variable rate system is not exactly top of HMRC’s list of priorities, so the development of a positive working relationship in trying to make progress to determine these points was important. In my first days in office, the question weighed heavily on me whether it was appropriate, in one of my first acts as a minister, to agree a demand for £3.4 million. We need to bear in mind the fact that £12 million had been expended in establishing the system.
In your speech in November, and in what you have just said, you have been pretty robust in saying that the basis on which HMRC asked for additional money was—to put it politely—not well founded. Why, then, are you using HMRC’s request for additional finance as a justification for not progressing the matter? If, under the provisions of the statement of funding policy, your case is sufficiently sound, surely you could have escalated the matter to a dispute between the Scottish Government and HMRC.
There was no mechanism that was in any way functional for the resolution of disputes between Administrations until the change of UK Government in 2010. As a matter of process, the dispute resolution procedure has been put in place only in the past few months.
On what basis would it have the authority to say that to you?
That question is not for me but for HMRC. That is my assessment of how HMRC would have handled the issue.
The core Scottish Government argument is therefore that you have been unable to reach agreement with HMRC on how much money—if any—you must hand over to ensure that its system can cope following changes that it initiated. That is why the SVR will not be available in the early years of the next session of Parliament.
My core argument is that, when I came to office, I did not inherit a system that could operate without payment of further capital investment that HMRC was requesting.
If HMRC makes a request, you do not need to accede to it.
I need HMRC to operate the system and to undertake the IT development. We do not control the system; it is controlled by HMRC. HMRC had made it clear that, through the viability assessments that it had carried out, the system was not functional without further capital investment. That opened up the question of how the system was to be delivered. That is the question with which I was confronted when I came into office.
So HMRC and not the Scottish Parliament decides whether the SVR is implemented.
What I am saying is that we are dependent, as we always have been, on HMRC to operate the system.
Even if the computers were compatible and capable of handling the work, what would be the consequences of the UK budget cycle being out of synchronisation with the Scottish Parliament budget timetable?
I think that that would not necessarily have any effect. The key issue is having a workable revenue collection system. There is also the question whether the Scottish variable rate element of the system is functional.
Thank you for that clarification.
I come back to 2007. In your statement to the Parliament, you said that you wanted to progress on the basis of keeping the state of readiness. However, the information that has been provided to the committee indicates that, after you received the briefing, you made no response to HMRC with regard to the Scottish Government’s position.
The e-mail trail that was started by Sandra Stewart, and of which the e-mail that you cite is part, goes on to demonstrate that the Scottish Government wished to pursue the £1.2 million option; we have published all the details. That is where the response comes from. We had taken a decision not to use the SVR during this session. We pursued the issue within the context of the discussions that took place by e-mail.
With respect, the e-mails do not address the matter. There is a lot of e-mail correspondence in which questions are asked, but I can find nothing stating that a ministerial decision had been taken. As you know, in February 2008 there were further questions from Sandra Stewart, who asked:
The e-mail trail of correspondence goes through all the detail of our pursuing the £1.2 million option. The whole subsequent e-mail trail is about our trying to explore what the £1.2 million was all about. I go back to an issue that Mr Brownlee raised. At the time, the question why, we were being asked for £1.2 million when we had already paid £12 million, was in my officials’ minds.
Cabinet secretary, I asked a very specific question, and I would appreciate a specific answer. Was a formal reply given to HMRC by Scottish ministers about the recommendation that you received in May 2007 on maintaining the state of readiness?
My answer to that is that my officials were pursuing my direction, which was to—
I know what the officials were doing, cabinet secretary. I am asking—
Yes—and I am answering the question. My officials were pursuing my direction to secure further detail on the £1.2 million as the preferred option that ministers wished to pursue out of the three that I was faced with when I came to office.
Cabinet secretary, was a formal reply given to HMRC on the view of ministers?
I have answered the question: the issue was taken forward on behalf of ministers by officials.
Where in the notes does it say that?
Officials habitually take forward many questions on behalf of ministers at all times.
I am asking in the tone that I am using because the communications were internal to the Government. I do not know whether you have the e-mails in front of you, but there is one dated 4 February 2008, addressed to “John/Fiona”. I think that “Fiona” is the private secretary in your office. It mentions
My point is that I gave direction as a minister and my officials took forward my priorities, which I had asked them to pursue.
Where in any of the minutes is your request for officials to do that?
That request would have been conveyed to the director of finance in response to the original briefing that I was given in May 2007.
If that was conveyed by you orally, I presume, to officials in May 2007 and there is no written record of the ministerial decision on the tax varying power, which is odd in itself—okay; you gave an oral request to explore it—why was the first reference to it after that in January 2008 from HMRC, asking what the Scottish Government’s position was?
That is explained by two factors. One is that the Scottish Government had decided that it was not going to utilise the Scottish variable rate for the four years of the session of Parliament, so there was no necessity for us to take a decision or to take particular steps as an immediate priority. The question that I was asked was whether I wanted to make an investment, or to pay a fee, by early June 2007, if I recall correctly. I obviously was not going to take that decision, so there was no necessity to communicate that to the Inland Revenue. The second factor is essentially about the priorities of my officials, who worked over that entire summer and into the next spring on the comprehensive spending review that the Government undertook when it came into office, and on the formulation of the budget bill and the pursuing of that bill, which of course concluded in February 2008.
I suggest that this has been taken as far as it can go, but if the minister has any further information that he wishes to add in writing—
I have nothing to add, convener.
As we know, the service level agreement lapsed in July. Did the Scottish Government or you ask for the work to begin on renewing the service level agreement?
That is what my request about the £1.2 million option was all about. I came in to office and was faced with three options, which I have rehearsed with the committee. What would we write a service level agreement about: the £1.2 million option, the £2.9 million option or the £3.4 million option? We could not write a service level agreement until we had some concept of what the service that would be delivered was going to be about. So, there was no service level agreement because it would inevitably follow the route that we decided to take as a consequence of the decisions that were arrived at. That is the subject of the file of correspondence that the committee has in front of it.
Let us move on to a separate issue. In some of the e-mails, I saw reference to officials’ requests before they met the Treasury to discuss local income tax in the context of the SVR. Why was the Scottish Government discussing with the Treasury local income tax in the context of the SVR?
The only reason for that would be to establish whether there were any systems and information technology foundations for the Scottish variable rate that could be utilised for collection of local income tax.
What was the Scottish Government’s conclusion?
Those were difficult discussions to undertake, as HMRC officials were—if I can put it this way—not enthusiastic about having a discussion on that question. I do not think that they were encouraged to have the discussion; in fact, I think that they were actively discouraged from having the discussion by ministers in the United Kingdom Government at the time.
That e-mail was dated 22 July 2008, but there was a separate e-mail on 17 February 2009 that had nothing to do with the UK Government—it was all about the Scottish Government. It related to part of a process whereby the finance officials wanted to get a response to use as to how they were to take forward their discussions with HMRC. As you know, Alyson Stafford wanted to write to HMRC, but you never gave authority for her to write to HMRC to clarify the situation. That e-mail from 17 February says:
The timescale is important, regarding the substance of what the Government was doing at that particular time—the draft proposal that starts off that e-mail trail. I do not have that immediately to hand, but I will get it if the committee will give me a second. The substance of that correspondence was, essentially, the Scottish variable rate. Mr Purvis is perhaps linking the fact that we were having discussions with HMRC about the implementation of the Scottish variable rate—which is addressed in the note to me of 13 November from the director of finance—to the fact that, quite separately, we were pursuing a dialogue with HMRC about local income tax. I suspect that I am being asked whether, as a consequence of our decision on local income tax, other steps could have been taken on the SVR to escalate consideration of the issues because at that time, and officials were becoming concerned that it was taking too long to come to a conclusion.
I have a further question relating to what you told the Finance Committee about how the budget papers are presented. You appeared before the Finance Committee on 23 November 2010, when Malcolm Chisholm asked:
I do not have in front of me the budget document for 2005-06, but my understanding of the convention between the Finance Committee and the Government is that the Government is required to confirm as part of the budget process whether it will use the tax-varying powers. That is precisely what I confirmed.
You gave the impression, however, that you used the same language as was used in the previous parliamentary session. It was clearly not the same language.
Perhaps I did not use exactly the same words, but I confirmed the same point, which is the one that I made in November. If that has created confusion in the minds of the committee, that was not my intention. I was simply confirming the point that a convention exists between the Finance Committee and the Government that requires the Government to confirm whether it will use the tax-varying powers.
Given Tom McCabe’s input to the earlier part of the proceedings, he has exempted himself from asking questions in this part of the meeting. It is useful to put that on the record, and I thank Tom McCabe.
In your statement to Parliament, cabinet secretary, you said that you did not inherit a functional IT system that was capable of delivering the tax power at 10 months’ notice. That is not true, is it?
It is true, Mr Whitton.
How do you justify saying that it is true when the documents show that if you had paid out the money, you could have had a system in place by April 2008, albeit that it would not be a full system?
That rather makes my point. The document said that I inherited a system that could not function without further capital investment.
No—that is not what the document says at all. What it says means that the system was functional, albeit that it was not operating at 100 per cent. The system was functional.
No, that is not the case. The advice that I got—
So, as far as you were concerned, the system did not work at all.
In 2008, the advice that I was given was that the system would require IT investment in order for it to go live. If it had been able to go live right away, surely it would not have needed that IT investment and, if it needed the IT investment, it could not have worked.
It did not need to go live right away; it needed to be able to go live within 10 months of the date that you would introduce it.
The advice that I got in May 2007 was:
No, not at all.
We have all found out to our cost that taking shortcuts and installing computer systems do not make good companions.
Fair enough. Was that what you meant when, later on in your statement to the Parliament on 24 November, you referred to the “woeful record” of your predecessors?
Yes.
You can correct me if I am wrong, but I think that you took part in the yes, yes campaign—yes for devolution and yes for tax-varying powers. For all I know, you voted yes, yes. As finance minister, were you not outraged to find out that the system did not exist?
For the record, in case anyone thinks that I am dodging the issue, I voted yes, yes; I participated in the campaign and I am delighted that I did so.
I am told that life is full of surprises for a minister.
There are many surprises, Mr Whitton, but I did not expect to get that particular piece of news. Was I outraged by it? I was not, because the Government was committed to not using the Scottish variable rate, so the fact that the system could not operate did not pose a threat or impediment to anything that the Government wanted to do. The actions that I took were designed to remedy and rectify that issue.
I am surprised that you are not telling us that as a new minister you found an envelope from the previous minister on your desk.
He never writes; he never phones.
Do not worry—we will make up for that.
In my estimate, we would have needed an IT system separate from that for the Scottish variable rate in order to implement local income tax.
So that would have been even more millions in the system.
There would have been a cost to that, yes.
Was that one of the reasons why you were not prepared to commit to spending on the SVR system?
No. The two issues were not in any way related.
Okey-doke.
You are stuck.
Not at all. I have hundreds of questions here. I could go on all day if I wanted to, but I dare say that the convener would not let me.
We are not that much at your mercy.
I do not have many more questions.
The first thing that I should say is that I clearly made a mistake in not communicating that to the Parliament. I have accepted that unreservedly. I cannot unravel that particular mistake. I should have communicated that information to the Parliament. I heard one of my predecessors—Mr Kerr, or perhaps Mr McCabe—helpfully suggest that I should have used an inspired PQ. They are right. That is one action that I got wrong.
Do you accept, then, that the person with the woeful record in this is your good self?
I made a mistake, Mr Whitton. I have put my hands up to that and I have accepted it in front of my colleagues in the Parliament, which is where I should do it.
I might take issue with that comment. Your mistake was not that you did not communicate your decision to the Parliament, but that you did not let the Parliament take the decision along with you. I do not think that the decision was yours to take as minister; it is a decision of the Scottish Parliament and a decision taken by the Scottish people in a referendum.
This is where we have to be careful about our terminology. The decision that I took was about restoring a system that I inherited and which could not work. That is the problem and the nub of the issue.
But it could work if you were prepared to put the investment in.
There is my point—
—and you have just said that you were not prepared to do so.
This is becoming a conversation. Please let the cabinet secretary finish his response, Mr Whitton.
The point that I am making, convener, is that when I came to office, I did not expect to get news that I would have to make significant capital investment to make the SVR system operable. I did not inherit a functioning IT system. My decision was not to stop the power, but to start it and ensure that it could be exercised in future. That is the issue of substance and why I took the decisions that I did.
On reflection, do you think that you overstated your criticism of your predecessors? In the earlier evidence session, which you might have seen, David Whitton read out a civil servant’s note indicating that no advice had been put to ministers and no reply sought on the £3.4 million option. Is it not a bit unfair to blame your predecessor ministers for what you inherited?
I inherited a system that could not function without further capital investment. What I have said on that matter is crystal clear. The thing for which I am being criticised, and which the secretary of state decided merited his intervention in the debate with such grace, is not having a system that could be operable 10 months after an election. That is precisely the position in which I found myself in 2007.
The committee will obviously have to come to a view on whether you should be criticised for that. Are you still levelling criticism at your predecessors for what you inherited or is it, as the evidence suggests, that it was a fairly recent intervention from HMRC that indicated that extra investment was required, that that was still being discussed between HMRC and officials, and that that had not been put by Scottish Government officials to the minister at the time?
My predecessors, who addressed the committee before me, said that they felt that they were taking actions to maintain the system’s operability. When I came to office, I did not inherit an operable system. I do not think that there is any doubt that that is at the heart of the issue and that that is crystal clear from the information that is now in the public domain. I did not inherit a system that was operable and the circumstances that gave rise to that situation happened when I was not a minister.
We will finish with two short questions from Jeremy Purvis and Linda Fabiani.
Coming right up to 2010, I was interested in an e-mail from Sandra Stewart on 3 August 2010 providing an update on the SVR and giving a brief background on the position. The second bullet point in the section headed “Brief background” says:
The point that I raised in my answer to Mr Brownlee was that in August 2009 Sandra Stewart questioned that point entirely.
I beg your pardon?
In Sandra Stewart’s e-mail of 7 August 2009, she questioned the point about what liability, if any, there should be to meet any of those costs.
So it is correct that a letter was proposed and your permission was sought to ask for more information from the Treasury, and that you did not give permission for that letter to be sent.
The letter that is referred to, if it is the letter that I think it is, is the draft letter that Alyson Stafford put to me. I do not actually see—
Can we get a reference?
It is in the papers.
It would be the letter to which I referred earlier in my evidence to Mr Purvis, which it was proposed to send to HMRC. I advised officials to continue the dialogue with HMRC to try to make some progress on the question.
Instead of sending a formal letter.
Yes.
The next bullet point relates to the deadline for committing. It states:
My recollection is that Alistair Brown discussed that with me on—I think, if I have my dates right—either 4 or 5 August.
What was your response to that?
My response was that we should find out some more information, because I was not committing to £7 million without more detail about how it had suddenly become £7 million.
But you were fully aware at the beginning of August that HMRC needed a reply by 20 August and that Scottish Government officials had known for a considerably longer period that HMRC had to have sufficient time for that before the elections in May 2011. You were fully aware of the consequence if that deadline was not met. Is that correct?
The first time the figure of £7 million was mentioned was, I think, on 28 July. The e-mail is from 3 August and Alistair Brown raised the matter with me on 5 August.
Did you not consider it to be an issue on which you may have wished to speak to other ministers in a UK department? Or were you perfectly content that it would be handled by officials?
A range of issues are handled by officials. Sometimes, ministers will delegate particular issues and, in other examples, ministers will be involved in all the discussions. It varies from issue to issue depending on the questions that are involved.
If the Parliament voted to utilise the tax-varying power, when is the earliest availability for it to be implemented?
The earliest availability will be in 2013-14.
And is there a time by which a decision would have to be made for it to be implemented at that stage?
The committee has had released to it the notes of teleconferences that took place on 2 and 9 December on taking forward some of those questions. I am sure that there will be further work to ensure the operability of the system. As part of that discussion, we have pressed for clarity at the earliest possible opportunity. The Parliament must obviously consider whether that work should be undertaken if it results in a cost, given the UK Government’s proposals to abolish the Scottish variable rate as part of the Scotland Bill.
But it would be impossible to get the power back to a 10-month state of readiness by May 2011.
That is my view, based on the information available to me.
And the last discussions relevant to the—
On that point, the position that I inherited and the advice that was given to me in May 2007 meant that the reliable date for the operability of the SVR system would have been 2009-10, which was two years after the Government was elected.
The briefing that you had in 2007 went into detail in two paragraphs about an April 2008 start. Mr Whitton was discussing that.
These are very specific questions. I suggest that, if the minister wants to add anything further in writing—
No, I have nothing to add.
I am asking because paragraph 15 of the note from the teleconference on 2 December says,
I am saying that, on the information available to me—
What information is that?
I have had a further response on many of these questions from the Exchequer Secretary to the Treasury, Mr David Gauke MP, and he essentially makes that point to me. I am happy to provide the committee with a copy of that letter.
Why have we not already been provided with that?
I am here today and I am happy to make it available to the committee.
That would be helpful.
Convener, I thought that the Scottish Government had said that all relevant material had been provided to the committee.
In relation to the circumstances of the issue about which I have been asked to inquire, that is the case.
How much more information and how many more papers exist that we do not know about?
All the information that the Scottish Government holds about the issue has been made available.
Up to when?
Up to 9 December. The letter from Mr Gauke is from 21 December.
Right. Thank you.
Linda Fabiani will finish off.
I will be quick, unlike Mr Purvis. Earlier we heard Mr Purvis’s questions about the successive budgets that were introduced by the previous Labour-Lib Dem Administration and the statement about the SVR that was contained therein. He finished by talking about the budget for 2006-07. The draft budget that the coalition prepared for 2007-08 had the statement about the 10-month state of readiness of the SVR in it. Cabinet secretary, in retrospect, do you think that that was misleading?
It certainly was not what I inherited.
Do you know about the mothballed call centre in East Kilbride? I can tell by your face that you do not.
I do not know anything about a call centre in East Kilbride.
Convener, could the committee write to HMRC to find out about the current state of play in relation to that, and ask for further confirmation about who paid the £2 million in that regard? Understandably, there is a bit of confusion because some of the papers are missing.
If it helps the committee to clarify the situation, I am happy to do that.
I have no additional comments to make.
Thank you, minister.