“Implementing the Scotland Act 2012: an update”
Agenda item 3 is evidence on the AGS report “Implementing the Scotland Act 2012: an update”. From Audit Scotland, I welcome Caroline Gardner, Auditor General for Scotland; Mark Taylor, assistant director; and Gordon Smail, senior manager. I understand that the Auditor General has a brief opening statement.
Taken together, the powers in the Scotland Act 2012 and the Scotland Bill have significant implications for the Scottish Parliament’s financial responsibilities. In December 2014, I published my first report on the implementation of the financial powers in the 2012 act. The report that I am bringing to the committee today provides an update on progress since then.
Earlier this morning, we discussed HMRC’s preparations for the Scottish rate of income tax. My report on the Scotland Act 2012 notes that the Scottish Government and HMRC are working well together and, as you heard, it reflects the findings of the Comptroller and Auditor General about HMRC’s preparations for the Scottish rate of income tax. Therefore, I will focus my introductory remarks on the two other areas in my report: how effectively Revenue Scotland implemented the two new devolved taxes and how the Scottish Government is developing its financial management and reporting to accommodate the new powers.
First, on the devolved taxes, I am pleased to report that Revenue Scotland successfully implemented the two devolved taxes on time. Revenue Scotland effectively managed the risks that were highlighted in my report in December 2014 and ensured that the IT system and people needed to collect and manage the taxes were in place by the time that the taxes went live in April 2015.
It cost £5.5 million to implement the devolved taxes, which is £1.2 million more than was originally estimated in the financial memorandum to the Revenue Scotland and Tax Powers Bill in December 2013. The increase was due mainly to the need for additional staff to provide the skills and support that were required to deliver the project in the time available.
Revenue Scotland has established arrangements for making sure that taxpayers pay the right amount of tax, but it is too early to assess their effectiveness. Revenue Scotland is monitoring the amount of additional tax that it recovers through its compliance activities, and it will report that amount annually as part of its public performance reporting.
More generally, Revenue Scotland is refining its systems and processes, taking account of its experience in setting up and administering the two devolved taxes. It has identified lessons learned and is applying them in preparation for further devolved taxes.
Secondly, on financial management and reporting, the Scottish Government has made good progress in modifying its arrangements to accommodate the powers in the Scotland Act 2012. As we know, some arrangements are still being developed, and that seems reasonable, given that the new fiscal framework is yet to be agreed with the UK Government. Once it has been agreed, it is important that the Scottish Government moves quickly to fully develop its financial management and reporting arrangements to underpin it. I have made two recommendations in my report to that effect.
As always, my colleagues and I are happy to answer the committee’s questions.
I will ask the question that I asked earlier. On page 11 of the report, exhibit 3 shows that Revenue Scotland staffing costs have gone up by £1.36 million. On the following page, in paragraph 25, you say:
“The Scottish Government will need to reflect any additional costs in Revenue Scotland in its financial planning and budgets.”
We have a 20 per cent variance on the original estimate. Are further costs coming down the line? We are so accustomed to new IT projects coming in well over budget. Are there any particular risks here apart from what you have noted?
It is important for me to emphasise that the costs that we set out in exhibit 3 are the costs of the project to establish Revenue Scotland. That included getting its staffing and IT systems in place and making sure that it was in a position to collect the new taxes when they came into effect on 1 April last year. As you say, those costs came in at £1.2 million higher than the estimate that came with the original legislation.
Our conclusion is that most of that is exactly because of the evolving understanding of what was required, the shifts that were made as it became clearer what people were involved and what the costs of the IT were. Gordon Smail can give you more detail on that.
I appreciate that they were setting-up costs, but we are in new territory now. We are looking at the on-going running costs or the revenue costs. Given that setting up ran 20 per cent over budget, are the actual running costs—the costs of collecting the tax in Scotland—likely to be greater than estimated?
The reason for my caution is that we are clearly in an evolving field. We have the two new taxes up and running. We do not yet know how effective the compliance activities are, because we do not have a full year’s experience. There may be a need for more staffing in that or other areas. We also have the new Scotland Bill, which will provide, initially, two more devolved taxes that will also be collected by Revenue Scotland.
Gordon Smail will talk you through the way those two sets of costs are related, with the caveat that there is still a good deal of uncertainty about the longer-term costs.
It is important to differentiate between set-up costs and on-going running costs. That is why I think the question was raised.
On the set-up costs, which we highlight in exhibit 3, £1.2 million more was spent overall than was originally anticipated. It was one of those situations in which the legislation and the financial memorandum were brought forward, but it was only some time after that that the requirements based on staff and IT needs—the two major elements of the spend—became clearer. As we say in the report, the issue with the staff costs, which was the major element that was over the original estimate in the financial memorandum, was about getting an understanding of what additional staff were needed to ensure that the programme was brought in properly and on time. I think that that explains that element of our report.
While we are talking about the costs, it is as well pointing out that the IT costs were slightly less than were originally planned in the financial memorandum. That gives members a sense of the work that needed to be done to understand the implications. Of course, it was a new area for everybody.
Caroline Gardner was right to say that we need to be cautious about what the on-going costs might be in future with the additional devolved taxes and other responsibilities coming down the line and, indeed, as Revenue Scotland understands more about its operational role in respect of compliance, identifying tax gaps and all the things that go along with that in dealing with members of the public and the inquiries that come through. We already know about that from the land and buildings transaction tax.
In short, it is about understanding the business. Our report says that Revenue Scotland has done well to understand its business and staffing requirements and is progressing in that way. However, there is some uncertainty that we need to reflect, as we have done in the report.
I would not say that being 20 per cent over budget is doing too well.
That was, of course, in relation to the plans back at the time—
I appreciate that it was in relation to setting up.
Audit Scotland has previously spoken to committees about financial memoranda and how accurate they can be or not. The point is that this was new territory for everybody.
I appreciate that. Thank you very much.
We have been busy talking about the Scottish rate of income tax, but I want to look at paragraph 67 of the report and onwards. The report says:
“The Scottish Government is developing processes to manage its capital borrowing powers”.
That is little talked about but, in my humble opinion, the additional borrowing powers are fairly significant. We are talking about £2.2 billion. Can you give us an update on that?
New capital borrowing powers were included in the Scotland Act 2012 and took effect on 1 April last year. Forgive me, but I am not a member of the Finance Committee and so I am new to the issue. Is that £2.2 billion available for drawing down at this point in time? Has it been drawn down? Can you give me a bit of clarity and an update on where we are with those significant new borrowing powers in Scotland? Can you confirm that the amount is £2.2 billion every year? Is that an additional £2.2 billion? Mark Taylor is saying no. You can understand that I am looking for clarity.
I ask Mark Taylor to talk members through the details, because it is important that we get the matter clear in the committee. The questions that Mrs Scanlon is asking show why I made the recommendation that I made.
Sorry, but what recommendation?
The recommendation in the report about the importance of the Scottish Government’s setting out its strategy for capital borrowing and the way in which decisions will be made. There are significant new powers that have long-term consequences, and it is important that it is clear to the Parliament and people more widely how the powers are being used.
The powers have been in place for almost a year, so should there not have been more clarity on them? As an MSP, I should have known about them. Are you saying that there should have been clarity on the £2.2 billion on 1 April, when those new powers were implemented?
Since the borrowing powers came into place, the Scottish Government has included its plans for using them in the budget proposal. My recommendation is very much more about the framework under the updated fiscal framework and the way in which decisions are taken so that the Parliament is clear about the choices that are being made and the consequences.
Mark Taylor can give members more detail on that.
The £2.2 billion is an aggregate limit that applies to borrowing over a number of years. A separate annual limit is identified, which is a percentage of the capital departmental expenditure limit budget. In 2015-16, that equated broadly to £306 million. The figure is slightly above that in the current draft budget. It is around £300 million-plus each year, which aggregates over time to a total of £2.2 billion debt at any one time.
On whether there should be more clarity, as the Auditor General said, there is reference to the matter in the budget, and we think that that could be improved through time. We have reported on that separately in our work on developing financial reporting.
It is fundamentally important that we have clarity about the Scottish Government’s plans for using its borrowing powers over a longer period and over a strategic period, thinking ahead. We recognise that, while discussions about the fiscal framework are continuing, it is difficult to tie that down and for the Scottish Government to conclude that. However, we said in the report that, as soon as that framework is available, it is urgent that the Scottish Government can articulate what its strategy is and how it will use its current powers alongside what will be coming down the line.
So we could expect that in the forthcoming Scottish budget, which I think is due about mid-February.
As Mark Taylor has said, it depends on progress with the fiscal framework. The fiscal framework is required in order to be clear about the strategy for using the borrowing powers. However, it is now an urgent matter that it all comes together as a coherent package.
It is nice to be able to note that this has been such a success. The Auditor General comments that
“The Scottish Government established effective structures for managing the implementation of the devolved taxes”
and
“Revenue Scotland put effective arrangements in place to identify, respond to, and manage issues”.
It is good to see a project that has been well managed in that way.
Paragraph 66 of the Audit Scotland report talks about the Scottish Government having a limited cash reserve of £125 million. I just want to check—is that in terms of a windfall income coming from tax as opposed to what would happen if, for example, the Scottish Government decided to put up taxes? Presumably that would be a planned tax increase that would not fall under that limit.
Again, your question highlights the complexity of the new powers that are coming into being. That is partly why I am pushing hard for the financial reporting to be developed so that we can have a clear picture of that. I will ask Mark to talk you through how it works in practice.
On the ability to have a reserve, when more tax is collected than was originally forecast and budgeted for, the Scottish Government can decide to pay some of it into the reserve. In future years, if less tax is collected than forecast, the Government will be able to draw on the reserve to make up the difference.
However, the way in which the reserve currently operates is that there are strict rules around what can be paid into and drawn out from the reserve that are related to the variation between the devolved tax take that was forecast and what the actual tax take was.
Okay. We are talking about windfall tax here, not budgeted.
I would describe it more as a smoothing mechanism. As Mark Taylor said, if the Scottish rate of income tax raises more than was expected, the Scottish Government can choose to spend that in whatever way it wishes to. Equally, it can have a small cash reserve that it plans to carry forward to future years if it thinks that tax receipts in that year may have been higher than normal for a particular reason. It is a smoothing mechanism between years, reflecting the fact that the Scottish Government’s finances are still closely linked to the UK-wide finances.
So, in simple terms, £125 million is really optional.
The choice to use it is optional—absolutely. That is right.
Paragraph 26 says:
“the UK Government will transfer any costs saved by HMRC from not operating Stamp Duty Land Tax or the Landfill Tax in Scotland to the Scottish Government.”
It says that £0.3 million was transferred. Is that for a full year? It does not seem very much.
That is for the full year. It is not very much but it reflects the fact that, as the income tax system is a UK-wide system, the former system for collecting stamp duty was a UK-wide system and the savings from Scottish transactions that are no longer going through that system but are instead going through the new Revenue Scotland system are small savings. They are at the margin.
Still in the same paragraph, on the costs associated with the devolution of stamp duty land tax, HMRC
“estimates this will cost £1 million”.
That is not an on-going cost, though, is it? That is a one-off cost.
That is the estimated cost of switching off the system that was previously used to collect stamp duty UK-wide for the transactions relating to Scotland.
It will cost £1 million to switch it off.
The cost actually came in at £0.73 million, but yes.
11:15
Good morning, Auditor General. I return to a theme that I have pursued before. It is easy for us to talk about cash coming in and cash going out, which is mostly what you audit, but capital borrowing brings an opportunity for long-term capital investment, which we have discussed. In any business, one would worry about having a balance sheet showing the valuation of assets, depreciation and all the other things that financial accountants are familiar with. Are we any nearer to having a balance sheet for Scotland that will help us to understand how those things are changing over time?
I share your view that having a balance sheet for Scotland is important, given the new financial powers, and I have recommended that in reports over the past two or three years. The committee might recall that, when you took evidence from the permanent secretary on my section 22 report on the Scottish Government’s consolidated accounts, you asked the same question and the permanent secretary gave a commitment to bring forward proposals early in 2016. We have not yet seen those proposals, but I share your view that it is an important matter and I will keep pushing for such a balance sheet, as I have in this report.
Thank you. That is a very positive response in the sense that you believe that that is going to happen.
As I say, the permanent secretary gave a positive commitment to this committee in November or December 2015 to bring forward proposals early in 2016. We will work with the clerks to ensure that the committee follows that up in my future reporting on the matter. There is a lot going on in the area, within Government and more widely, but that is an important component of making the new powers work effectively for the long term.
I refer the Auditor General and Nigel Don to the evidence that was given to the Devolution (Further Powers) Committee, where the same issue came up.
There are no further questions from colleagues. As agreed, we now move into private session.
11:17 Meeting continued in private until 11:34.