Good morning and welcome to the Finance Committee’s 10th meeting in 2014. I remind everyone present to turn off mobile phones and other electronic devices. We have received apologies from Michael McMahon. I had understood that Iain Gray would attend as his substitute, but he is not here, unfortunately.
Agenda item 1 is continuation of our stage 1 consideration of the Revenue Scotland and Tax Powers Bill. I welcome Dr Heidi Poon, who is a First-tier Tribunal (Tax) member and a tax law lecturer at the University of Edinburgh, and Justine Riccomini, who is an independent human resources and employment taxes consultant.
I understand that the witnesses have no statements. As is normal, I will open up with a few questions, and then other committee members will ask questions. My first questions are to Dr Poon and are on the general anti-avoidance rule, but Ms Riccomini can comment, too—when I ask a question of one person, the other person should feel free to come in, as appropriate.
Paragraph 7 of Dr Poon’s submission says:
“It is not immediately obvious how a narrowly focused GAAR will necessarily confer greater certainty ... ‘What is clear is that, once a GAAR is introduced, the players (government and taxpayers alike) are still at the mercy of the courts.’”
Your thinking on that is different from that of other witnesses, and our tax adviser said that he found your views on the issue refreshing, so I would like to hear a wee bit more about your thinking on the GAAR.
I did not read other submissions before I produced mine.
That is fine.
I do not know, therefore, what other tax advisers said. The summary of consultation responses is that people’s view is that a more widely drawn GAAR would create more uncertainty. My experience from sitting on the tax tribunal—in particular from a long case that I have been involved in concerning a tax avoidance scheme—is that however widely or narrowly drawn a GAAR is, the process of constructing what the law is trying to say and applying it to the facts of the case must still be gone through.
A higher or lower degree of certainty is not conferred by whether the GAAR is widely or narrowly drawn—certainty is not created at that level. A more principles-based approach would give more certainty than drawing a GAAR widely or narrowly. Is that clear?
That is pretty clear. Ms Riccomini is nodding.
I am nodding because I think that what Heidi Poon has said is sensible. More focus needs to be placed on what happens when a problem arises rather than on drafting GAARs. The main problem is the practicalities when it comes to attending tribunals and so on.
Dr Poon pointed out that
“a more widely drawn GAAR may result in a reduction in the number of Targeted Anti-Avoidance Rules”,
of which the United Kingdom has 300. She said that the tax code
“has grown considerably in complexity and volume in the period of the recent Labour Government ... There is a correlation between the growth in complexity and the increased number of TAARs.”
How would a more widely drawn GAAR prevent the need to produce all those targeted anti-avoidance rules?
Current United Kingdom legislation is based on rules, so we try to legislate according to a set of rules or conditions that, if fulfilled, mean that one can apply for an extension or relief. Legislation that is based on rules allows people to find loopholes so that they can tick all the boxes, although they might be going against the spirit of the legislation. Because they are ticking all the boxes, they can get away legally with avoiding tax, which means TAARs are needed.
Inheritance tax is an example. The current legislation was brought in in 1984 and very soon after than we had what is called the gift with reservation, which resulted in a kind of TAAR. People were making gifts during their lifetimes but were retaining the benefits of the assets that they were legally giving away. The gift with reservation suites of legislation came in, so people started doing other things, which led to the pre-owned asset tax charge, which is an income tax charge that was superimposed on inheritance tax. That is how the legislation has grown in complexity from the original Inheritance Tax Act 1984.
If legislative design is based more on principles, it will allow the court wider powers to interpret the legislation and to bring things within the scope of what is chargeable, rather than having to circumnavigate schemes that get around the rules and defeat the spirit of the law. It is about architecture or design. If you start with rules, you end up with more rules in order to close the loopholes, but a more principles-based approach allows more scope for a GAAR to interpret the legislation on the basis of the principles that are its starting point. That will impinge on how other areas of tax are going to be legislated on.
I think that I read in the Chartered Institute of Taxation submission that this is an opportunity to consider the basis on which Scotland might find a new way of drafting tax legislation, instead of cutting and pasting from the UK’s tax legislation.
Yes. I will avoid some of the high-profile cases that I understand you were involved in recently. What you have said is quite important and, in some ways, quite different from what other people have said. It gives the committee food for thought.
Ms Riccomini—do you have anything to add to that?
I completely agree with what Heidi Poon has just said. If you have the opportunity to create a new set of legislation in Scotland, it should be fit for purpose for Scotland and not just copied and pasted from UK legislation, because there are so many instances of its not working. It is just not practical, in reality.
As a tax practitioner and having attended tax tribunals and so on, I know that in many cases there are many hurdles to get over. I have been practising tax for 25 years, and I started off with three or four books that were quite thick, and now I find myself, as a specialist employment taxation practitioner, with books that are at least three times bigger. It has gone beyond a joke. If you can keep things simple and principled, that will be a more intelligent approach.
That also makes the system much easier for the public to understand.
Yes.
Yes.
We sometimes wonder how decisions are arrived at. The law might strictly say one thing, but the clear meaning behind it might be something else.
Dr Poon, you state in your submission that an
“omission noted is s212 FA2013 regarding ‘Relationship between the [UK] GAAR and priority rules’”,
and you go on to discuss that specific point. What do you consider the importance of that omission to be?
I compared the Scottish and UK GAARs, and I noticed that the Scottish GAAR in the bill follows the UK GAAR very closely in its format; the section headings just follow it, albeit that the Scottish GAAR substitutes the term “abuse” with “avoidance”.
If Scotland is going to follow the same format, there is an obvious question with regard to priority rules. The UK GAAR includes priority rules, which means that the GAAR will take precedence over other provisions in the corpus of legislation. Every year the Chartered Institute of Taxation produces an annotated copy of the Finance Act 2009 for its members and associates, which provides an interpretation of the priority rules. That is a fairly new piece of legislation, so it is a good guide to what we can rely on.
In applying the law, one has to decide, when two provisions come into conflict, which one will take priority. In this case, the bill specifically says that the UK GAAR will take precedence over other priority rules in other areas of legislation. For example, if a scheme has managed to deploy a priority rule in income tax but the GAAR has judged it to be abusive, the GAAR can override the priority rule that has allowed the scope of the scheme to be legal. If the Scottish GAAR does not have that priority rule, and a similar situation arises, how will you resolve it? That is the question behind the omission that I highlight in my submission; I query why there is not a priority rule in the Scottish GAAR.
On another level, with regard to double tax agreements, one can get into an agreement with a contracting state, and domestic law then has to adopt the agreement to ensure that there is harmony. If there is conflict, it must be resolved. The GAAR includes the treaties, and if there is conflict on the international front—if someone has managed, through a double taxation agreement, to do something that is abusive under the GAAR’s interpretation—the GAAR can overrule it. In that context, why is there no priority rule in the Scottish GAAR?
We will raise that point with the bill team.
I will switch to Ms Riccomini’s submission. You say at paragraph 3 that you
“have concerns about the proportionate ability to pay in terms of the penalty levies and the timescale for payment of penalties.”
Other people have raised the same issue. Can you share some more of your thoughts on that?
Did you say paragraph 3?
I am sorry: I was referring to Ms Riccomini’s paper.
It is to do with the timescale for payment.
Yes.
My main concern is that current experience in the recession shows that people are having difficulty paying, so 30 days is quite a short timeframe in which to arrange the administrative side and to sort out what the assets and liabilities are if someone needs to pay a penalty. A person’s being in a penalty situation sometimes indicates that there are wider problems in the business, so they may not be able to afford to pay the penalties, especially within that timeframe, if there is no cash flow in the business. Businesses have gone from expecting immediate payment to arranging for people to pay over 90 or 120 days because no one has good cash flow.
09:45I would not want revenue Scotland to be entrenched in the huge administrative burden of pursuing debts after 30 days when there would be very few people on the ground to put such a penalty regime into effect. Dealing with penalties requires human input as well as automated handling. One can issue automated penalties like billy-oh, but when people start to appeal against them or to submit reasons why they cannot pay, a human being is needed at the other end to decide whether the reason that has been given is valid or justifiable.
A company in my constituency was, because of difficulties that were created under a previous administration, given 48 hours to pay a huge tax bill. I was able to speak to someone and negotiate a timescale of six months. The company, which employs almost 100 people, would otherwise have gone into liquidation, but it has managed to survive and is thriving, so I sympathise with your point.
Are you saying that there should not be a 30-day penalty? Should the timescale be flexible according to individual circumstances? What would the parameters be?
The time period should be extended to 60 or 90 days. We are talking about the payment of a penalty rather than payment of the tax itself. Let us assume that revenue Scotland wants to pursue the actual tax that is due. What do penalties mean with regard to the actual tax take? Is the penalty just a frippery? Are we talking about pursuing people in a particular way?
I will compare the situation with collection of the BBC licence fee. A person who does not pay their licence fee is awarded a criminal record, which is a case of using a sledgehammer to crack a nut. You might want to think about a penalty regime that would encourage people to pay on a timely basis, but would not end up dragging the entire revenue Scotland organisation through the mud and making the task of administration like wading through treacle. Perhaps the timescale should be delayed, or the penalties should be structured slightly differently.
You said in your submission—as you have just repeated—that revenue Scotland may become
“entrenched in a quagmire of bureaucracy as a result of issuing penalty notices which remain unpaid”.
Yes.
That assumes that there will be a high level of non-payment. Is there anything to suggest that there will be?
My point assumes that there is a high level of non-payment, because we have to think about what would happen with a high level. We are not talking about income tax, capital gains tax or anything like that, and whether there will be a high level of non-payment remains to be seen.
From my tribunal experience, I am aware that quite a number of the cases listed since the new penalty regime came in under the Finance Act 2009 have related to penalties.
When there is an appeal about penalties, it takes up a lot of administration time. In a way, the whole collection process is stalled when there is a dispute. Quite often, penalties are listed and that takes up tribunal time as well. Such cases are also likely to be withdrawn close to the time they are to be heard. I agree with Justine Riccomini that the administrative cost of penalties can be disproportionate to the amount that might end up being collected, when we consider the time and human effort that would be needed.
There is scope for thought around whether it can be made more possible for people to meet the penalty payment. It will also have to be made very clear how the penalties are being applied because, for a business person, the escalation if the payment is not made by a specified time puts great pressure on them in terms of cash flow.
You want the tax to be collected and the penalties are there to encourage compliance. I think someone said that penalties are not another avenue for collecting more money, but they are quite often seen that way just because the escalation can be quite aggressive—very quickly, a businesses can find itself paying 100 per cent of the tax that is due. I have heard cases in which the business has said that if that is required of it, it will go out of business. Such arguments do not have much weight in law, in respect of applying penalties, so they do not really help businesses in bringing cases to tribunal.
There are issues to go through on the policy-setting level, so that the penalty is commensurate with the cost of collection and so that penalties are seen as a means to encourage compliance rather than as another means to get more tax out of people.
So, to extend the time period to 60 or 90 days would mean a smaller burden on revenue Scotland and on the taxpayers.
Yes. There is also an issue about communication; some cases have been brought to tribunal in which the taxpayers were in penalty but they had not heard about it for four months and so they said, “This is not fair—you didn’t tell me.” The administration must be in place to get notice out to the taxpayer in good time in order to make a fair assessment.
Thank you very much. I open up the questioning to colleagues around the table.
Ms Riccomini, in your submission you say that you agree with the establishment of revenue Scotland as
“a non-ministerial department and with its proposed membership”.
A few folk have come to the committee and said that the chief executive and other executives should sit on the board, but you do not seem to think that that is a big issue. Is that right?
If I have not commented on it, then no, I do not think it is a big issue.
Okay. That is helpful. You also say in relation to the charter that the bill mentions that revenue Scotland should “adhere” to the charter, not simply “aspire” to it. Again, a number of people have commented on the seeming discrepancy between what is required of the tax authority as opposed to what is required of the taxpayer. I am not sure whether you are aware of this but the bill team has, I think, accepted that that wording is not particularly suitable and will look at it again. I presume that you welcome that.
I definitely welcome that. I do not think that there should be any discretion as to how it works.
Presumably the charter should place both parties on some form of equivalence?
Yes.
You mentioned earlier that this is a chance to get legislation that is fit for purpose and that we should not just copy the UK legislation. You say in your submission:
“I do not believe that any part of Revenue Scotland’s activities should be exempted from the Freedom of Information Act as currently applies to some of HMRC’s activity.”
I confess that I am not particularly aware of what that relates to. Could you set out for the record what HMRC activities are exempt from FOI?
Let us suppose that an adviser is looking for something in the revenue manuals—perhaps to answer a question from a taxpayer. They want to give the taxpayer some advice, and they search through everything from HM Revenue and Customs that is available online. I am aware that that is currently being changed, as it is being moved over to gov.uk. I am part of the team that is helping out with that.
Lots of bits of information have been redacted, because of the Freedom of Information Act 2000. It is quite frustrating when we are reading something and we suddenly come across a big bit of it that has been taken out—we are not allowed to see it. Even when I worked for HMRC, I could never really understand why that was the case. We were talking about tax, not Government Communications Headquarters. Why does anybody see fit to redact anything at all? There should be complete openness and freedom of information in all aspects of revenue Scotland’s work, and HMRC’s work, for that matter. I cannot see that there is anything that presents some sort of national security issue. If we are asking people to comply, they need every bit of information at their fingertips.
It might be said that some material has been redacted because people could use it to find a way to create loopholes or tax avoidance schemes, but I honestly cannot see that that is the case. They have all been thought of already.
I am inclined to agree with you. Clearly, I cannot ask you what the redacted bits say—they are redacted, after all—but do you know what areas they relate to?
Many areas have redacted bits—not just one area in particular. If you look at HMRC’s website and consult the manuals, you will see that quite a lot has been redacted. The site says, “This information is not available because of the Freedom of Information Act,” or whatever. We might wonder why. It is rather condescending and irritating, frankly.
I admit that I am also wondering why, although we have not explored the matter as far as we can.
I am sure that somebody out there with a much bigger brain than I have knows the answer to that question, but I am afraid that I do not understand it.
In your submission, you talk about
“the power granted to take samples of material from premises if they are reasonably required to verify a person’s”—
Jamie, remember that the other witness sometimes wishes to come in.
I beg your pardon—I apologise.
First, on the point about information and website manuals, one possible reason why there are constant changes and things are blocked out is the constant change of practice and legislation. With every finance act, part of the existing corpus of legislation is repealed. We are in constant flux and the manuals cannot keep up in good time. When I do not see something appearing, that is my first thought.
Secondly, we should be careful about the status in law of HMRC guidance or manuals. Taxpayers who have relied on the guidance often come to court having found themselves in trouble. They might argue that they had grounds for legitimately expecting that they could rely on the accuracy of the manual. It is a matter of how the authority and the taxpayers use the manual, and of its accuracy. At the time when it is used, does it reflect the legislation in force? It is quite a tricky area to get right. When it comes to an argument in court about legitimate expectations, that takes the case to a different level that is not about the tax that is being disputed but about whether the taxpayer has the right to rely on the manuals for the interpretation of their situation.
10:00I know that revenue Scotland is developing a website to feed information in. The background to what will be created in terms of the relationship between the taxpayer and the authority must be very clear and must be managed. I often think that the less that is said in the manuals, the better. If you are still developing and changing, you do not want reliance to be placed on manuals to the extent that you will create trouble for yourself in the future.
So the less said, the better—but if you are saying it, do not redact it, because we want to see what you are saying.
I am talking about having something more permanent, rather than something that is so detailed that you have to keep updating it in order to get it right. Do you see what I mean?
You mean a default position.
Yes. It goes back to what we were saying earlier. If you have a more principles-based approach in your design for tax law, you can end up having something that is much simpler to communicate to the public and it means that what you put in the manual does not have the kind of transience that we are experiencing.
Okay. Thank you.
My next question is on a reference in Ms Riccomini’s submission to
“the power to take samples of material from ... premises if”
that
“is reasonably required ... to verify a person’s tax position.”
You suggest that a short list of examples of the samples that might be anticipated should be included in the bill. I am not clear whether you mean a list of circumstances for which such samples might be required or whether you mean the material itself. Which do you mean?
I mean the material. As an ex-inspector of taxes, I am very aware of people in HMRC abusing their powers in certain circumstances and having their own interpretation of what can and cannot be removed from business premises and what they have a right to see. Generally speaking, HMRC people who visit premises have sometimes taken things that, strictly speaking, they are not allowed to take, which is not in the spirit of the legislation.
My suggestion is that the bill could prescribe what kind of records could be taken by revenue officers so that they would be aware of the limit of what they could take. For example, they would know whether they could take only records that had something to do with the issue at hand or whether they could take anything. Like it or not, that has happened in the past.
Is there not a danger that the short list of examples that you propose could be interpreted as an exhaustive list? That would mean that if something was not on the list, it could not be taken.
It was a thought and a suggestion. I do not really know whether I have any particular solutions to that suggestion at the moment, although I might think of some.
But you take my point that what you propose could be a problem, because people could assume that anything that was not on the list could not be taken.
Yes, but the suggestion has the same context as what I said about the taxpayers charter, in that we do not want people abusing their power. I wanted to highlight by my suggestion that we do not want revenue officers abusing their power; we need them to stick to the guidelines so that taxpayers and their advisers know where they stand.
Thank you.
My first question is for Justine Riccomini. At paragraph 9 of your submission, you say that all ministerial guidance “should be fully publicised.” Your comment refers to section 8 of the bill; there is an exemption under section 8(4). Can you expand on your thoughts in that regard?
What is the title of it? Which paragraph did you mention? I do not have numbered paragraphs on my sheet.
It is paragraph 9 in our copy—it refers to section 8 of the bill, which is on ministerial guidance.
Is it the paragraph entitled, “The independence of Revenue Scotland”?
That is the paragraph title, but in the text you make the point with regard to section 8(3) that
“all interactions with Ministers ... should be fully publicised in the spirit of open government.
Yes. That relates to my belief that we need to facilitate a culture in which people should not need tax advisers, although I may well be doing myself out of a job. People should be able to understand and be completely clear about all aspects of what they do. To my mind, technically speaking, the idea behind employing a tax adviser is that the taxpayer does not have time to deal with their tax situation rather than that they do not understand it. That should apply to all aspects of taxation.
The point that I make at paragraph 9—which runs throughout my comments—is that we need a spirit of completely open government. All interactions with ministers on the running of revenue Scotland should be there for everybody to see. There is nothing wrong with that, and it is the way that revenue Scotland should go in terms of how it functions.
Dr Poon, you commented earlier that, if the GAAR in the bill makes future TAARs unnecessary, that would be a positive thing. There is probably a degree of consensus on that.
Would anything need to change in the GAAR as it is drafted to ensure that that end—namely, having fewer TAARs—actually happens? Do any amendments need to be made in that respect?
I welcome that question, and I would like to take some time to consider it. My first thought is that the GAAR is, in itself, a piece of legislation that interacts with other tax law. It does not exist on its own; it is there only to apply to other areas of tax law.
Instead of thinking about how you draft the GAAR to reduce the number of TAARs in future, you could think about how you draft the next piece of legislation to allow the GAAR to be more effective in addressing schemes or arrangements that end up not fulfilling the spirit of the law in the new legislation. The GAAR can come in at that point, if you see what I mean. The GAAR is there to apply to other pieces of tax law and, in order to make it more effective at doing what it is supposed to do, you need to look at the design of your other legislation. That will make the difference.
That is helpful, thank you. As you will appreciate, the committee has to produce a report at the end of our evidence taking, so we would welcome any obvious examples, but your answer explains your position quite well.
Thank you. I can perhaps think of some good examples—I am doing some research that involves comparing GAARs in different jurisdictions, and when that piece of work is done I can pass it on to the committee as further information.
Thank you. I want to explore briefly—again with regard to Dr Poon’s submission—the disclosure of tax avoidance schemes. You suggested that you would welcome the introduction of such a provision to the bill either at stage 2 or thereafter. For the record, can you outline your position on the matter?
I have just produced a case note for an academic journal on a tax case that was brought to the tribunal as a result of the penalties that were imposed on a taxpayer who was using a DOTAS mechanism. The tribunal decided in that case that the penalties were correctly applied because the taxpayer, even in relying on a DOTAS, did not discharge their obligation to make an accurate return. They claimed capital losses when there was no transaction to create that loss in the first place. The use of a DOTAS did not exonerate the taxpayer from a degree of culpability, but it helped in terms of openness. The relevant legislation is schedule 24 to the Finance Act 2007.
That case involved considering the three degrees of culpability. One category of culpability covers a taxpayer being careless and not taking reasonable care; the second includes deliberate error that is not concealed; and the third concerns error that is deliberate and concealed. By concealment we are talking about creating evidence to mislead the tax authority.
Given the three degrees of culpability, a taxpayer would, without using a DOTAS, easily end up being culpable of the most severe offence. However, if taxpayers make use of a DOTAS, it will allow the dispute to rest at the level of carelessness, which would help to mitigate the penalty imposed.
The use of a DOTAS will also allow the authority to know at an early stage what is around. If they know that something is there, they can take a look at it. If they do that sooner, less time is spent on it, and it is better for the authority because, if the scheme is discovered years later, time bars may apply.
For multiple reasons, the GAAR and DOTA schemes should go hand-in-hand.
That is helpful, thank you.
I will go back over some of the points that were raised, particularly in the interaction between the convener and the witnesses. On the issue of principles and legislation, you both suggested that you quite like the idea that legislation should be principles based rather than containing incredibly detailed rules.
Some witnesses have suggested that UK legislation is moving in that direction. Do you feel that that is the case? I believe that countries such as the Netherlands take a more principles-based approach.
There is a piece of legislation—I cannot remember which it is—that started going in that direction but ended up going down the rules-based route again. It is to do with employment schemes or something similar to disguise remuneration; I am not exactly sure.
That is okay; I do not need the exact case. However, you are hinting that you are not convinced that the UK has moved very far.
10:15
Correct. I think that an attempt was made, but it was not carried through. There is a problem when something that involves more of a principles-based approach is being grafted on to the bigger corpus of legislation that is not designed in that way. How can you allow that grafting to be successful? That is what leads to failure.
During his time as chairman of the International Accounting Standards Board, David Tweedie encouraged an approach that would allow international financial reporting standards to be more principles based. That was a decade’s work. The merit of that approach is that it allows the international financial reporting standards to be more manageable in size, because people do not have to try to work in the US way, which involves thinking of all possibilities, scenarios and contingencies and making a complete set of rules. It also allows more of an element of comparability. That is important for the global economy because, if an accountant or an investor is trying to make a decision about two companies in different jurisdictions that do not have comparable standards in their accounting reporting, how are they to know whether one company is doing better in one area than the other? The principles-based approach, when it has the adherence of more countries, will allow people to compare two sets of accounts. Given that each country has its own set of rules, taking a rules-based approach makes life incredibly difficult.
I take that point. The argument around principles applies to countries as well as companies. How does the bill that we are discussing fit into that? Is it more principles based? It is claimed to be.
I think that the bill is quite similar to what we are getting in UK tax legislation.
I think that it is a reasonable place to start. However, as we have said, it might need to look at things in a slightly different way—almost in a philosophical way. As Heidi Poon has said, if you try to think of every scenario in which someone could possibly avoid paying tax, you will be on a losing streak, because you cannot think of everything that everybody will ever do. People will always find a way around things. That is what tax advisers are employed to do, generally.
If the regulations were more principles based rather than trying to be more prescriptive, that would be a much better place to start. It would probably be a good idea for the Scottish Parliament to consult people such as the gentleman whom Heidi Poon mentioned, and the Office of Tax Simplification in England. I have a lot of dealings with a guy called John Whiting who works there. I am on a committee of national employment tax experts that works with the Office of Tax Simplification to change employment taxation completely so that it is easier to administer. At the moment, with all the share schemes, the expats and everything else, it is exceptionally complicated. Such an approach would also introduce some consistency of reporting with companies and individuals. Making things simpler would make it easier for everyone.
To add to the point that you made at the beginning, I am not sure that the simplification of the tax regime in the UK is necessarily working. In trying to simplify everything, we seem to be making the system more complicated—it is growing arms and legs. We need to be chopping off its arms and legs and trying to contain it. I think that that is happening because we are still trying to tax everything that moves instead of looking at things from a more philosophical point of view.
I have a huge amount of sympathy with what both of you are saying, although other witnesses have said that they like the slight move that is being made towards principles but that they do not want what we do to be too different from what the UK is doing, because some taxpayers operate in both systems and they might get confused if the two systems were too different. Is that a danger?
It is about having a system that is simple enough to understand. Quite a radical rethink is necessary. I will give an example of what I am talking about.
I might not be right, as I left Hong Kong many years ago, but I think that the tax system there, in what is a small country in land miles, is based on territorial ties. When it comes to international tax law, either a country gets the nexus to tax a source of income because it happens to be in that jurisdiction—it arises in that country—or it taxes according to the residency of the person. Most jurisdictions have a mixture of both, which means that they end up having double taxation relief, because a source of income can be taxed in one country when it is owned by a person who is resident in another country.
As a small place, Hong Kong operates a territorial, source-based tax. The approach there does not involve thinking about where someone is resident. That takes away a suite of legislation for determining where a person is resident. Just the source of the income that arises in the territory—whether it arises from employment, a corporation or consumption—is taxed. That is a simpler system to administer, because it involves dealing with just one nexus and it avoids the complication of another nexus coming in and a decision having to be made about source and residency and who has the right to tax. When there is a competing interest, it is necessary to have another set of rules in order to decide how to give relief and which country to give the primary right to.
That could be a highly effective model for a smaller jurisdiction such as Scotland. It would eliminate all the questions about how to tax a person who is resident in Scotland as well as England, which opens the floodgates on determinations. Would we have the resources to deal with what is an extremely common occurrence? People could just change their residency to suit their tax bill.
You raise some big issues, which should probably have been raised before the bill was written.
I think that we are at the second stage. I have talked about the GAAR and so on. The issue is how we apply it to other tax legislation.
The committee is thinking about the new law that will bring in a new tax regime for Scotland. That is the time to think about how to use the principles-based approach.
I do not want to go on for too long, but Ms Riccomini mentioned the idea of openness. You said that there should be more openness and that you are not happy with the present system. We have heard about other countries where everyone’s tax return is published. I believe that some countries even give their top 10 taxpayers a prize at the end of the year. Would you want to go down that route of having complete openness? There is an argument that says that every taxpayer pays money to the state, so every taxpayer should have all their tax returns published.
I am not sure about the human rights or privacy side of that. That would need to be thought about before we went to that level of openness.
If Scotland had the opportunity to raise its own taxes, have its own tax jurisdiction and make its own legislation, it could do something revolutionary rather than just following what everybody else is doing. You have the ability to draft legislation differently because it has not been done yet. You are only at the tip of the iceberg. That gives Scotland’s Government the opportunity to present itself as exceptionally open, honest and absolutely transparent, which is very important these days. That is what people want. It is half the reason that people do not turn out to vote and that companies think twice about whether they want to invest in a country or employ people there. They need to understand what a country is all about and how it functions. If the people who live in Scotland’s jurisdiction can see that, it could attract new business to Scotland, attract a different level of compliance from its people and create a new culture that does not exist in the UK because everybody is so disenfranchised.
That is helpful and interesting. Thank you very much.
Paragraph 16 of Dr Poon’s submission says:
“There is little in the Bill to suggest what the criteria for selecting a mediator are.”
I ask her to give us some suggestions for what those criteria could be.
Competence in the technical aspects will be one important criterion. The mediator must understand the tax that is in dispute and be able to understand both sides of the argument. I am thinking about something that is a little lower than the tribunal but which has the same kind of robustness in technical judgment. The mediator needs to be conversant with the tax law, which gives credibility to the decision.
The mediator must also be independent. They should not be appointed by revenue Scotland. They should also have experience in adjudicating.
Are there any further points that the witnesses want to bring to the committee’s attention?
I have a point on the simplification of tax law. When John Whiting came to speak to the tribunal judges conference, he mentioned that 100 pages of tax legislation had been removed in two years but, in those two years, Parliament added back 1,000 pages.
Your submission includes details about the size of the orange and yellow handbooks. You say:
“The publisher Lexis Nexis states the 2012/13 Tolley’s Orange and Yellow Handbooks at 18,634 pages”.
You go on to say how many pages there are excluding the non-statutory and other material. Going through that is complex enough in itself. It is quite mind-numbing. Clearly, it is almost impossible for anyone to have a full grasp of that—if, indeed, it is possible at all, which I doubt. Simplification is an issue that the committee has grasped.
That takes us back to the question of how successful tax simplification has been. It is hard to work with and simplify something that has grown to that size because it is not possible to work on the foundation. In Scotland, we have a chance to work on the foundation and create a different structure that will not grow in that shape.
Thank you very much for that. On that note, we end the evidence-taking session.
I will allow a brief suspension for a change of witnesses and to give members a natural break.
10:31 Meeting suspended.Previous
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