Our second item of business is to take oral evidence as part of our stage 1 scrutiny of the Land and Buildings Transaction Tax (Scotland) Bill. I welcome to the meeting John Fanning, John Fraser and John King. I will not be calling anyone “John” this morning. You could change your names: one could be Sean and one could be Ian. We will have to call you by your surnames.
I am the senior responsible owner for the land and buildings transaction tax project in Registers of Scotland. We provided a written submission to the committee and we are delighted to be here to help with your evidence gathering, but we have no opening statement.
Fair enough. We will move straight to questions.
We have every confidence that it will be. The project that we have set up has a set of milestones and a set of key dates for key deliverables. We intend to have the LBTT system ready by autumn 2014. We appreciate that a degree of clarity is still required about the system’s functionality—what it has to do—and how our users will interact with it. That will become more apparent as the LBTT bill and the tax management bill progress.
That is reassuring, because concerns regarding the robustness, speed and ease of use of the automated registration of title to land were raised with us by, for example, Brodies LLP, whose written submission stated:
We acknowledge that there are issues with the ARTL system, particularly around robustness and speed of service. The system is still used. It is primarily a remortgage system and some 68,000 transactions have gone through it. We acknowledge that there are issues with it and perhaps my colleague, Mr Fraser, could explain what we are doing to alleviate some of them.
We will make sure that the new LBTT collection system is indeed robust and speedy. The ARTL system to which you referred, convener, has been running for five years; it was built five years ago. We now have access to better and faster equipment and better software, and we are confident that the LBTT collection system will be fit for purpose.
There are concerns about strategic planning agreement. Projects worth £6.7 million have been written off. There have been difficulties with information technology development over the years, have there not?
I emphasise that ROS is an IT-dependent organisation. Our core registers have all been IT-enabled for a number of decades, and that IT supports approximately 400,000 registrations each year. Similarly, the public’s access to registers is essentially achieved electronically. That has been the case since 1999, so we are used to working with IT.
Paragraphs 8 and 9 of your submission mention costs specifically. You state:
First, let me say good morning—I am the finance director of Registers of Scotland.
I am concerned about helpdesk advice, because people have said in formal and informal evidence to the committee that the current situation is a major concern. When the new tax is introduced, I would think that a lot of people will want to phone for clarification, perhaps before making submissions. If that advice—which one hopes will be of high quality—is to be provided along with everything else, an annual running cost of £325,000 seems to be a modest sum, given the volume of inquiries that I would expect you to have, at least initially.
The amount is difficult to estimate. We appreciate that the collection and administration role will be looked at in the context of the tax management bill. We based the figure on our experience of running the land register and of the land register being extended throughout Scotland, which gave us a feel for the likely volume of inquiries.
I was thinking about an initial surge of inquiries as opposed to a steady decline. Thank you for responding to my questions.
Paragraph 7 of your submission says:
A range of issues is being discussed. I say “issues”, but the appropriate word is perhaps “matters”—they are matters of relevance to the project. When it was announced that ROS would be nominated as a collection body, we established a project in ROS. On the basis of what we know is in the bill, we are developing high-level requirements and informing our understanding of the policy and the system impact of enabling that policy.
You have spoken about guidance for professionals. Later in the same paragraph of your submission, you state:
It is fairly early days. It is clear from our initial discussions with revenue Scotland that there is a lot more work to be done. We need to engage with revenue Scotland, as people will be using the system to ascertain what medium for distributing information will be appropriate for them and what type of information they will require.
That is obviously building on stuff that you have done previously. Were there any issues that you identified in the process that you are learning from this time around?
The one key message that we would take is that different solicitors firms have different preferred ways of receiving communications from ROS. If we wish to be successful in ensuring that people are aware of key messages, we will have to embrace a range of different methods for delivering those messages.
I stress the regular dialogue that we have with advisory firms, which is for all sorts of reasons other than to do with LBTT. We need to understand the needs and requirements of what is our primary customer base. It is not as if we are coming in as an entirely new organisation with which the entities concerned need to interact—they are already very familiar with what we do. We have numerous contact methods that we use with those firms. We know who they are and they know who we are. There is a continuing dialogue way over and above LBTT.
I want to go through some of the costings that have been set out in the financial memorandum, specifically the costings allocated to Registers of Scotland at page 53. The convener asked about information technology costs and referred to previous IT projects. If I understand the financial memorandum correctly, there is £10,000 under “Non staff costs” for helping solicitors to become familiar with the new system, but the total build cost for developing and implementing the new LBTT system is £75,000. Is that your understanding?
Not quite. The vast majority of the staff cost of £250,000 that you will see in the upper part of the table is the cost of our internal IT development staff, who will deliver the project. Had we done the project via outsourced purchasing of IT services from a third party, that would have fallen into the bottom half of the table—it would have been a non-staff cost as bought-in goods and services. However, because we took a strategic decision that we could develop a far more effective system in-house, we will be using our own staff costs.
Are you absolutely sure, subject to the caveats that you have laid out, that the £75,000 and the majority of the £250,000 will be enough to design and build the new system?
We certainly think that that is the case. John King mentioned the crofting register. Admittedly, its scope is narrower—it affects a finite group of individuals and customers, whereas LBTT affects the whole country—but the creation of that software, which was a more complicated technical project, cost £100,000, so we are quite confident that we can do the IT development for LBTT for the combined £250,000 plus £85,000.
We will take advantage of improvements that we are making in our infrastructure in any case. Since the departure of BT, we have had plans to revamp completely the hardware and networks. We will be spending that money anyway and will build and deliver the LBTT collection system on the same infrastructure.
Mr Fanning, when you used the word “generous”, did you mean that there is a bit of headroom in the provision? Have you built some risk into the figures?
Yes, I think so. Our IT history has not been unblemished—that is probably the polite way to put it—so we are wise to err on the side of caution.
I have a similar question on figures that are over the page in the financial memorandum, on annual running costs once the system is up and running. Perhaps you can tell me which staff costs would be included, but your non-staff IT costs appear to be only £20,000 a year. I am no expert, but that strikes me as quite low. Will you expand on that and tell me what the overall IT running costs are?
John Fraser can expand on this but, once we have up and running a system that has hardwired into it the capability to modify items such as thresholds and rates, the additional IT costs would relate only to developments to bring on board new legislative requirements.
I also want to re-examine a couple of points that have been raised by colleagues already.
Yes.
So is it your view that there would be no increase in the overall cost of compliance, and that the cost would simply shift from one organisation to another?
That is what I would expect to occur if there was a significant switch. Section 53 allows an agreement between ourselves and revenue Scotland. We have designed our costing assumptions around a relatively light-touch role for us in compliance and a commensurately heavier-touch role for revenue Scotland. If there were a shift in that balance, I would expect our partners in revenue Scotland to recognise that and transfer costs in the way that you describe.
You said to the convener that the LBTT helpdesk, for which you have made provision in the budget, would have four members of staff. We have heard complaints from a number of witnesses that the current set-up of the helpdesk is not as helpful as it ought to be. How will having four staff members across Scotland compare with what is currently in place? Is that a huge improvement? Do you have a sense of what the situation is like at the moment?
I do not think that we have a real sense of the situation at the moment. What we have is our experience of introducing other registration services in the way that John King described earlier. You could have an extremely generously staffed-up helpdesk, which could deal with every possible call on every possible matter, but that would be an expensive way of delivering the service. There is quite a tricky balancing act to be struck in getting the right number of advisers to provide a service and not veering over to the stage at which advisers—either deliberately or inadvertently—use us as a source of revenue to cover their own costs.
When Gavin Brown asked how having four members of staff would compare to the current situation, did you say that you are not clear on the position at the moment? Did I pick you up correctly?
The tax is administered by HMRC, and we have not had that dialogue so far.
That is interesting, because my main question is to ask about the relationship with HMRC at the moment, and how you see it developing. At the moment, you are, technically, agents for HMRC—you are collecting tax—and that relationship will be quite important over the transition period. Can you give us a summary of the relationship with HMRC?
If you do not mind, I will ask John King to cover that. He is much more familiar with that issue.
For a number of years, we have had a positive working relationship with HMRC. In relation to the launch of the stamp duty land tax component of ARTL, it provided us with advice in terms of the types of questions that our helpdesk might be asked, and in training.
I agree that the relationship is important. However, it does not encourage me to hear that HMRC does not know how many inquiries it has about SDLT and how many of them come from Scotland. That sends a warning signal for the future that things might not be all that smooth. I have to say that I am not a great fan of HMRC. The fact that the Government proposes to use Registers of Scotland and revenue Scotland rather than HMRC suggests that it is somewhat bureaucratic and expensive. Do you feel free to comment on that? Will the new system be more lean and mean?
It is worth making the point that our role vis-à-vis the collection of stamp duty land tax is confined to Scotland and is narrow; all we do is collect the tax. An adviser, or the taxpayer, identifies the tax that they think is due; we take a payment and remit it directly to HMRC. We have very little in the way of a compliance or advisory role at present. Under the new tax, things will be totally different. The concern that John Mason expresses is valid, but I do not think that the situations are directly comparable.
On the point about bureaucracy, without being in any way disparaging of HMRC—I emphasise that we have a good working relationship with it—the fact that ROS will act as a collection agent should reduce bureaucracy for the customer because we will, in effect, act as a one-stop shop. At present, for the overwhelming majority of transactions—all of them, apart from the ones that go through our online system—our customers have first to interact with HMRC before they can present their land transaction for registration. As we all know, that adds risk, administrative cost and delay to the process.
That is fair enough. I am not totally reassured, but there you go.
In principle, who pays which tax should be clear; we think that it should be very clear for residential transactions. There will be a clear cut-off date for when the new tax applies to a land transaction in Scotland. We hope that it will be clear, too, for non-residential transactions, and I imagine that our customers will hope that it is clear as well.
Okay. I take it that there are already examples of single sales that involve land or buildings on both sides of the border.
Yes.
Will the practice for that need to change much?
Our clear understanding is that any property in Scotland will be subject to LBTT and that any property south of the border will be subject to SDLT. You are right that there are transactions on property that straddle the border, although they are very rare. The same principle applies to land registration: title for property north of the border is registered with ROS and property south of the border must be registered with the Land Registry in England and Wales.
Does the value need to be split at the moment, or will that be a new provision for the future?
The value must be split for registration. I have to be honest and say that I do not know how that will apply for LBTT. I imagine that that is one of the details that will have to be explored.
Okay.
To which extra costs are you referring? Is it the transitional costs?
HMRC is talking about switch-off costs in that just to stop having SDLT will involve extra costs. I do not know whether you have been involved in that or have had discussions about it. It is just that—again—I am nervous that we will have costs landed on us as a result of HMRC saying that it needs a new computer system because Scotland is not involved any more, and so on.
We have not discussed that. I am not sure that we regard it as falling within our remit. I think that it is an issue for the Scottish Government and/or revenue Scotland.
Okay. I think that there is provision that HMRC or the UK Government will be able to get information from you and/or revenue Scotland on an on-going basis. I understand that that is because they need to do statistics and all that sort of stuff. Do you anticipate any extra costs in, for example, IT so that you can provide them with information, or will that all be covered by what we need to do anyway?
No; I think that we would build that requirement into the IT design. We have actually included a figure in the financial memorandum, to which Mr Brown referred. I think that the figure is £15,000 for the on-going requirement to remit information to HMRC.
Will HMRC refund us for that?
No, I do not think that it will. I think that that is a requirement on HMRC because, at least until November 2014, the majority of the tax affairs of taxpayers in Scotland will be managed by HMRC. In fact, that will be the case even beyond 2014 or beyond the introduction of LBTT, if Scotland remains a part of the UK. In that case, a large number of the tax affairs of taxpayers who are resident in Scotland will still be managed by HMRC, so it will still need that information both for the data purposes to which John King referred and for overall management of commercial entity or individual taxpayers’ affairs.
It appears, therefore, that we will pay for our own costs and for part of HMRC’s costs as well. You do not need to answer that. [Laughter.]
I will pass on that one.
Okay. Thank you.
There has been quite a lot of discussion about the timing of the payment in relation to registration. I am interested in how that works at present and how it will work under the new arrangements.
Your summation is spot on. My understanding is that, once the return has been submitted, people have 30 days from the effective date—which, in Scotland, is generally the date on which the transaction is settled; in other words, when the money and the keys pass over—to complete payment. Our understanding is that, with the exception of those transactions that go through our online system—with those transactions, the tax return and the payment happen simultaneously—people submit the return to HMRC, after which they have a set period in which to make payment. There is a range of ways in which payment can be made.
I will probably get this wrong now. Is the land transaction return made to you or to HMRC? How does that work?
At present, we collect a very small proportion of stamp duty land tax through our online system. With those transactions, people submit their land transaction return to us, along with any taxes that are due, at the same time as they submit their registration application. However, that is the case with only a very small proportion of the overall number of transactions.
That prefigures the new system.
For the other transactions, people would contact HMRC before contacting ROS.
I think that that has been the source of some confusion. You are saying that, at present, there are two ways of doing it. That explains some of the contradictions.
It is not so much the case that they will have to pay within that period; they will certainly have to submit their return to HMRC—
Is it not the case that payment has to happen at the same time?
Payment need not be made to HMRC. I understand that it has a set period, which I think is 30 days, so a person can submit their return on day 1 then submit payment at any point between day 1 and day 30.
I thought that ROS was going to receive the payment.
I guess that that comes back to the fact that there are two types of transaction.
I am talking about the arrangements in the new world.
I apologise. In the new world, payment will come to us.
I am sorry to jump in, but it might be worth mentioning that that is the methodology that we use at the moment for collecting fees in respect of our day-to-day activities; the vast majority of our business is transacted through such direct debit arrangements. We are quite familiar with that process and have managed it for quite a long time. In 95 per cent of situations, it works extremely effectively. It is also a very cheap way of managing payments. In a small number of situations it might not work perfectly, but we know how to deal with those situations.
The advance notice system that is being introduced under the Land Registration etc (Scotland) Act 2012 will, I am told, afford a 35-day period for registration. Will that change the situation significantly? Will it make things easier for people by giving them longer to register?
As far as land registration is concerned, that system will remove the period of risk that—as Malcolm Chisholm has suggested—currently arises with the letter of obligation because priority of registration will be preserved as long as advance notice is registered then followed up with registration within 35 days.
Most of the issues that you have raised in your written evidence have been dealt with. However, as you will know, we have had a lot of discussion about sub-sale relief, which you refer to in the last section of your submission. If the bill is not amended and sub-sale relief is not available, what mechanism would be put in place for registration and taxation in that regard?
I hope that I am answering this correctly, but I think that any relief will be built into the system. We are also aware that reliefs might change; after all, new ones might be introduced and existing ones removed and one of the basic requirements of any system would be flexibility to add or remove reliefs.
You have already answered a number of questions about the ARTL system. I would like to ask a final question about it, even though I will probably not understand the answer. What components of the system need to be improved? I realise that you have covered the financial aspects, but I note from your submission that the costs that you cite are estimates based on developments with regard to the SDLT component of ARTL. Are you confident that those cost estimates are reliable?
As I mentioned in response to earlier questions, we are quite confident that the time and resource allocation for our IT staff is adequate for delivery of the required solution. John King might have said as much earlier, but the ARTL system was not designed primarily as a tax-collection system; that capability was tagged on to it and is a subsidiary purpose. The system that John Fraser and his colleagues will design will explicitly address LBTT and its various reliefs, exemptions, complications and so on. We are confident that we will have much more fit-for-purpose software than was the case for ARTL.
That seems to have exhausted committee members’ questions, although I want to explore one or two more issues with you.
Although there is a degree of uncertainty about our roles in compliance and in advice and guidance—which is only to be expected, given the timing of the various pieces of legislation—we are clear that our core role will be collection, so we are focusing very much on that. We also recognise that over the course of the year our compliance role and our advice and guidance role will be clarified.
If you are not sure about your level of responsibility with regard to advice, guidance and compliance, how can you be so sure about the various costings in the financial memorandum?
We have made various assumptions and, as we have emphasised, if they need to be altered, the balance of funding between ROS and revenue Scotland might also have to alter. Our assumption that we will play a relative minor role in compliance has been factored into the costs and we have assumed that our advice and guidance role, for example, will relate more to administration of form filling than it will to providing guidance on detailed taxation matters.
Indeed—and you touch on that in paragraph 9(i) of your submission.
That is a very good question; that is one of the issues that we have identified as requiring further and considerable dialogue between us and revenue Scotland. As a result, I cannot answer your question except to say that we are aware that it is a key issue and that we will explore it over the course of this year and into the next with our key customer groups and with revenue Scotland and HMRC.
We have seen a budget and know what the staff complement will be, but we do not really know what questions are going to be answered or who is going to be asking them. Is the whole thing not a bit woolly at this stage?
Its being so is just a natural consequence of the fact that the collection and administration issues will be dealt with in the tax management bill that will follow this bill. That bill will provide more of a catalyst for identifying, focusing in on and resolving these matters.
I do not really want to speak on its behalf, but I note that revenue Scotland will have a £500,000 provision for on-going year-on-year compliance advice. If the balance between our respective roles were to change, there might, as John King said, be a reallocation of costs between us and revenue Scotland. It might be more comforting to think of the money as a pot of about £650,000 for various compliance activities that can be allocated between the two bodies depending on how their respective roles pan out over the next year to 18 months of discussions.
Indeed. People need to be confident that there is a one-stop shop and that they need to phone only one number, regardless of to whom, as you suggested, the call eventually goes.
I welcome to the meeting John Swinney, the Cabinet Secretary for Finance, Employment and Sustainable Growth; Eleanor Emberson from revenue Scotland; and Neil Ferguson and John St Clair from the Scottish Government bill team. I invite the cabinet secretary to make a brief opening statement.
Thank you for the opportunity to come and speak to the committee. As the committee knows, the Land and Buildings Transaction Tax (Scotland) Bill is the first of three bills dealing with the Parliament’s new financial powers over taxes on land and property and disposal to landfill. The bills are the first important step towards establishing the principle that taxes that are paid in Scotland are best set, managed and collected by those with Scotland’s best interests at heart.
Thank you. We move straight to questions. I will begin, and I will then open up the session to colleagues.
I say at the outset that one of my objectives in the bill is to ensure that Scotland’s reputation for competitiveness in this area of activity is protected. Equally, however, I also want to ensure that I fulfil the commitment that I gave to the Parliament that we will take forward in this legislation—and all the other tax legislation—a robust approach to tackling any tax avoidance. Those are essentially the principles with which we will wrestle. The Parliament has been clear with me that it expects there to be a heavy emphasis on minimising tax avoidance. Indeed, there is a strong emphasis on the need to minimise avoidance in the general commentary and wider debate on the whole issue of taxation. There is a balance to be struck here.
Some witnesses have suggested that the removal of sub-sale relief would have a detrimental impact on forward funding because sub-sales are used to unlock and develop key commercial sites. The bill team said:
What I was trying to say about separating off forward funding was designed to try to help us get to the nub of an issue that we have to be careful to avoid. I suppose that the best way to express that is to say that I am anxious to avoid anything happening under the legislation that makes it more difficult or challenging to develop sites where multiple uses may well emerge. That is where the distinction between sub-sale relief and forward funding is quite helpful. The forward funding model enables a more robust picture to be established.
Okay. Thank you. I know that committee colleagues will delve into that issue much more deeply, so I want to touch on other issues before I open out the discussion to them.
We are creating an entirely new framework. We do not have the framework for dealing with the abolition of stamp duty land tax, so we must put one in place to consider all the relevant questions. In the absence of that provision, we would not have sufficient legislative clarity on how we were going to deal with the question of any relief from LBTT for charities. Without the provisions, charities would be exposed to LBTT: we would not have created an exemption measure in the legislation because the whole regime was being abolished. In that respect, I would not describe that aspect of the bill as like taking a sledgehammer to crack a nut. Rather, I suppose that I would describe the requirement as a passport.
I do not think that OSCR agrees with that, to be honest. Brodies and ICAS suggested that relief should be available to those whose charitable status is granted by HMRC and not just OSCR. That would resolve the issue.
Obviously I will listen to what view the committee comes to on that question. We have already a mechanism in place for reduction or remission of non-domestic rates, and charitable relief accounts for a sizeable part of the relief regime that is in place for non-domestic rates. That is triggered, in essence, by registration with OSCR. I do not really see what the issue would be but if there are practical issues that need to be wrestled with, I will of course consider them.
I hope that the purpose of LBTT is also to achieve neutrality in revenue. Although the witnesses all agreed with that objective, many of them wanted as many exemptions and as much relief as possible, which would impact adversely on that target. At the same time, they want to keep the general level of taxation low. I have some sympathy with your trying to square that circle.
The bill takes the Parliament into new territory, because—with the exception of non-domestic rates, which is an issue that we chew over frequently—for the first time the Parliament is required to consider what type of revenue exemptions it wants to give people. Ultimately, a block grant adjustment will be made when stamp duty land tax comes to an end. A sum of money will leave the block grant, leaving a gap that will have to be filled by the same amount of money. If we fill it with less money, we will have to think about how we will fill the gap that is left by whatever decisions we take through legislation on tax relief. It will put Parliament through a different process that it has not been accustomed to, which will be a fascinating experience.
The committee is certainly aware of that. Many witnesses have said that certain measures, if enacted, would discourage wealth creation and ultimately have a deleterious effect on taxation. You obviously have to strike a balance.
As I said at the outset, I am forever mindful of the issues of Scotland’s competitiveness and the perception of Scotland’s competitiveness. However, we must also look at some of the questions of equity across comparable circumstances. If a particular type of shop is in an airport and that type of shop is also on the high street, the one on the high street will be paying stamp duty land tax on the lease. Issues of equity come out of that, because given the challenges faced by town centres, one might say that airports are more captive markets than town centres are. Those issues of equity have to be wrestled with.
Thank you. At the beginning of the bill process, we talked about the timing of and approach to stage 2 amendments and the option of the Scottish Government lodging all its stage 2 amendments at the outset of the stage 2 process. Where are we with that?
I aim to lodge as many as I can at the outset of the process. The nature of some of the territory that we have to cover is very complex and various questions will require further discussions with stakeholders. I certainly intend to have further discussion of some questions with the non-residential leases working group that I have established, and looking at material that might emerge from those discussions might mean that we are not quite ready to lodge certain stage 2 amendments at the outset. I, along with the bill team, will do my level best to lodge amendments as close to the outset of the process as possible.
Thank you for that clarification.
In looking at the evidence that the committee has taken on that point, I think that it would be fair to say that the consensus was that the tax rates and bands should be set out anywhere between a week before the start of the financial year and 18 months or two years before the start of the financial year. The committee has managed to create a helpful consensus in that respect.
I should say that anything from a week to 18 months is not our view. It is just that people from whom we have taken evidence have talked about the issue. We have still to deliberate on that.
I was being slightly impertinent.
I have a question on an issue about which we have not questioned any of the witnesses, although it has been mentioned in the evidence. In its report on the bill’s delegated powers, the Subordinate Legislation Committee sought clarification from the Scottish Government on the use of the negative resolution procedure. It said:
The nature of the responsibility is an integral part of how the bill is constructed, so it does not strike me that such exercise of the power would confer significantly greater powers or responsibility than are envisaged in the core of the bill. For that reason, the negative procedure is appropriate. Obviously, I will consider the Subordinate Legislation Committee’s views on why that is insufficient. It clearly provides for parliamentary decision making, but we can consider whether a change of direction is merited.
Paragraph 245 of the financial memorandum says that the costs in the financial memorandum do not
The reason why those costs are not included is that we do not have a definitive figure from HMRC. It has indicated to us that the costs will exceed £500,000, but we still do not have further definitive information from it.
Has HMRC given you any breakdown or any indication as to why it would be that fairly rounded figure?
To be fair to HMRC, it gave us an indicative figure.
Thank you for your evidence thus far, cabinet secretary, which has been very helpful.
I will need to take some guidance from my officials as to whether the reference to “Acquisitions by the Crown” involves bodies other than the Scottish Government and the United Kingdom Government.
The Scotland Act 2012 lists the bodies that are not to be covered by SDLT, which includes the Crown and a minister of the Crown, which includes the whole UK Parliament. I think that that is all that is included at the moment; it would not include the Welsh Assembly or the Northern Ireland Assembly.
The provision covers just the Scottish Government and the UK Government.
Yes, but I think that we will have to check on the situation in respect of the Welsh Assembly and the Northern Ireland Assembly and come back to you on that.
Presumably any other application of the provision is fairly theoretical, because I imagine that it is mainly the Scottish and UK Governments that acquire property in Scotland.
We have no powers to amend the Scotland Act 2012. If the 2012 act prescribes something, we have no legislative discretion to do anything other than follow that provision.
Is it that prescriptive?
It is wider than I suggested.
The Land and Buildings Transaction Tax (Scotland) Bill lists the following exemptions:
In other words, the exemptions in the bill are not the result of a policy decision.
No. The 2012 act specifically provided for certain statutory bodies not to be subject to the two devolved taxes. The list that I gave is in paragraph 2 of schedule 1 to the bill and reflects the requirements of the 2012 act.
I presume that that is reciprocated across the UK if the Scottish Government seeks to acquire property furth of Scotland.
Yes.
Clearly, the bill is about a new tax, but it might be useful to estimate what the value of such transactions might have been under SDLT in previous years.
We will endeavour to give that information to the committee.
It is helpful to know that the exemptions are a legal requirement rather than a policy decision.
I think that would be the case.
Our understanding is that anybody can register as a charity and we are particularly concerned about there being some way of checking on foreign charities. The point was raised earlier that that could be onerous, but the situation in which it would be onerous would be onerous for whoever was doing the supervising. It could be a matter of deciding, for instance, whether a charity with a large involvement by a particular family actually was a charity. Such matters will always take time to sort out.
Presumably, that is no more onerous than if a charity wanted to make use of the same provision now. Anyone who is suggesting that it is incompatible with the law for charities to represent themselves in that way is incorrect. It is helpful to have that clarified.
I will make an additional point that goes back to the character of the legislation. We are trying to create new legislation that, essentially, specifies the conditions for the whole ambit of land and buildings transaction tax. We have to envisage circumstances in which a variety of steps will be taken to undertake transactions and in which, once SDLT is abolished, we will have no legislative provisions in place to enable that to happen. We have to put a comprehensive approach in place.
I agree. In essence, the Scottish taxpayer will be agreeing to subsidise charitable work, which is sensible, but we want to know that the organisations are bona fide charities. If the provision exists, it cannot be hard to prevent it from becoming any more onerous than it is now.
I have no beef against HMRC, whose officials have been very co-operative and helpful, and my dialogue with the leadership of HMRC is very co-operative. We have signed a memorandum of understanding. I do not want to put in place any obstacles to good working with HMRC.
Thank you.
My general approach today is to listen to the committee’s suggestions as to how the bill can be strengthened at the outset of the proceedings, so I do not particularly want to close subjects down. I have looked carefully at the question of having some form of zero-carbon homes relief, but at this stage I am not persuaded by the arguments for including it in the bill.
Someone who wants to sell their home wants to make it as attractive as possible. What about the perspective that says that making it greener makes it a more attractive prospect for someone to buy and makes it easier to sell? I am not saying that that is my perspective; I am just positing it.
I think that a couple of big leaps would have to be made in that process. The individual selling the house would have to spend more money on the improvements than a buyer would save on an LBTT reduction. For a large number of properties, if we assume—obviously, I am not confirming the tax rates and tax bands today; I could feel my officials shaking a little bit when I started that sentence. The suggestions in the consultation paper envisage quite a lot of properties being out of the scope of LBTT, which puts a big part of the market off-limits to being encouraged and incentivised.
That is helpful. Thank you very much.
Jamie Hepburn has taken all my questions. That is what happens in this committee, I am afraid.
Sorry.
I was going to ask about charities and energy efficiency, but I will ask a general question about reliefs.
I do not have any. That would be conditional on our setting the tax rates and the tax bands.
If we assumed that the tax bands were the same as at present—which will not be the case—presumably you would make some savings?
We are moving to a fundamentally different basis of collecting the tax. We are going from a slab tax to a progressive tax. The committee and the Parliament will have the opportunity to scrutinise my decisions on tax rates and tax bands, which I will make in the light of the legislative decisions that we make on reliefs. I appreciate that those decision-making processes are not taking place at the same time but, ultimately, my decisions will be subject to scrutiny by the Parliament and the committee.
I accept that there are good reasons for reducing and simplifying reliefs, including in some cases to stop tax avoidance. It sounds as though you are trying to save money—or make some money—through changing the reliefs in order to have a more generous banding system to keep LBTT revenue neutral. That is what it sounds as though you are saying.
I do not think that that would be an unfair conclusion to arrive at. However, I stress that the approach that I am taking on reliefs is twofold, as Mr Chisholm said. It is about simplicity, but it is also about tackling avoidance. I am clear on that point and I want there to be no doubt that part of my policy intention is to tackle avoidance. We are dependent on HMRC information on avoidance, and it has been quite open with us about where it sees stamp duty land tax being avoided. I am using that information to ensure that we avoid some of those circumstances.
Am I right in saying that final decisions on the reliefs do not need to be made in the primary legislation? Is there a regulatory provision to change those? I think that ICAS criticised that, which I took to mean that the bill does have a regulatory provision to change the arrangements around reliefs. I cannot say that I have read the bill in sufficient detail to know that, except at second hand.
Yes, there is such a provision.
That would be a kind of safety valve if you wanted to change your mind further down the line.
Again, I am very happy to go into such a discussion. My officials will speak to OSCR and David Robb in light of his evidence to see whether there is a more effective way of doing that. The committee’s observations and deliberations will help us with that.
I have one more question on charities. The issue is intrinsically interesting, although I accept that it is not a massive issue in terms of the money that is involved.
In relation to any tax liability?
In relation to tax relief.
I think that we would accept that implicitly, because we would have one regime for charities. There would not be a regime for Scottish charities, UK charities and European charities.
Yes, but registration would be required.
That is a regulatory issue rather than a taxation issue and it means that we know who is a charity and who is not. We are now straying into the territory of charity regulation and I am probably on dangerous ground. We will have a land and buildings transaction tax that is without discrimination across charities. That means that we will treat all European charities in the same way. However, we must have a mechanism for designating who we consider to be a charity. I do not think that that puts us in any different position from HMRC when it defines who is a charity from its perspective.
We had better not spend too much more time on charities, but I think that David Robb suggested that OSCR could do that without the need for registration. However, perhaps you can pursue that point with OSCR.
There may well be some way in which some kind of imprimatur might be applied by OSCR through some kind of bilateral agreement with HMRC. OSCR might agree that it will accept as a charity any organisation that is registered as a charity with HMRC for tax purposes and headquartered in another part of the United Kingdom.
That is done at the moment to speed up the registration process.
I will not press you on that, interesting though it is.
My mind is open to particular issues, but my position in principle is that I am not particularly keen on creating lots and lots of reliefs.
However, you are keen on meeting your climate change objectives, which I now want to move on to.
I am completely supportive of fiscal incentives for behavioural change on carbon reduction issues but, to be blunt, I think that we would get more effect if we had more people taking part in a more comprehensive, more effective council tax discount scheme in more parts of the country. I do not think that the numbers are particularly compelling. The council tax discount scheme is already legislated for in the climate change legislation that was passed in the previous parliamentary session.
Well, I certainly do not object to that as a proposal.
That will be a material test, Mr Chisholm—I think that that is the best way to describe it. There are a number of points here that are fundamental to the issue. Mr Chisholm is absolutely correct in that, historically, there has been quite significant volatility. For example, in 2007-08, total Scottish receipts from SDLT were £565 million. These figures are not estimates; they are HMRC data on tax collected. I will give the series of numbers for the record: the tax collected was £565 million in 2007-08; it went down to £320 million in 2008-09 and £250 million in 2009-10; it went up to £330 million in 2010-11; and it went down to £275 million in 2011-12. The highest figure was £565 million and the lowest was £250 million, which shows a significant amount of volatility.
So there has been no agreement on that.
There is no agreement on it. I have made the point to the UK Government that I expect to receive the budget numbers for our 2015-16 budget sometime in the next six months and, because this matter will be material to our 2015-16 budget, I presume that those will be net of stamp duty land tax, so we have to reach an agreement about this in relatively short order.
Thank you.
I have to say that Malcolm Chisholm has done really well for someone who did not have any questions.
The five-year average must take into account the period before the commencement of the block grant adjustment in April 2015, so I would think that it will start five years back from April 2015.
That is fine. Is there any possibility of, as the Scottish Building Federation has suggested, transitional arrangements?
No. As the command paper states, there will be a one-off block grant adjustment. We obviously have certain borrowing capacity to manage some of the issues. I will check that with Neil Ferguson. Neil, does that apply only to the Scottish rate of income tax?
I beg your pardon?
Does any borrowing facility for short-term purposes apply only to the Scottish rate of income tax?
Yes.
Convener, we have no borrowing facility to make up for loss of income in that respect.
Will the Parliament be consulted on the issue through the Finance Committee?
On the block grant adjustment mechanism?
Yes.
That question raises a very good point. The agreement between the United Kingdom and Scottish Governments envisages that the issue will be resolved by the Joint Exchequer Committee, on which the Chief Secretary to the Treasury, the Exchequer Secretary to the Treasury, the Secretary of State for Scotland, the Deputy First Minister and I sit. In essence, a bilateral agreement must be reached. I am getting into the territory of what would happen if Parliament did not like the block grant adjustment mechanism that we negotiated. Obviously—to return to Malcolm Chisholm’s point—my aim is to protect the public finances of Scotland, so I assume that I would be operating in the interests of Parliament.
“Aye, right.” [Laughter.]
It would say, “This is a negotiation.” I cannot give the committee that commitment today. However, as I said, I would welcome the committee’s observations on the approach to the block grant adjustment mechanism.
We have taken that hint. The OBR is coming to the committee in April, incidentally.
Cabinet secretary, I am pleased that you appear to be excited about the bill and the collection of tax.
It is amazing how finance ministers can be persuaded of the attractiveness of generating tax.
I also make the observation that a number of our witnesses—certainly to my mind—welcomed the change. They recognised the imperfections of stamp duty land tax and the opportunity to change it, but they were hesitant about the changes that might be made. There was some anxiety about when the rate would be set; indeed, it was argued that business in Scotland would be put at a disadvantage with regard to commercial transactions. What is your opinion on that? This might not be relevant to the discussion, but I believe that, for about 50 or 60 years before the Scottish Parliament existed, Scotland paid much higher business rates than the rest of the land. Did that not have the same effect on Scotland?
Jean Urquhart has asked two separate questions. First, as we have already discussed, there is clearly a difference of opinion about whether the tax rates and tax bands should be set close to or way back from implementation. My view, which I made clear in my statement and in the arguments around the bill, is that—and I think that this is the wording that we have used—the rates would be specified as part of the budget process for the appropriate financial year, which I envisage would be in September when I set out the draft budget. Having looked at the evidence and the difference in views, I am thinking about whether I have got that right. Just to give the committee an indication of my thinking at the moment, I think that I am unlikely to set the tax rates and tax bands earlier than I envisaged and, indeed, might set them later.
Is there a disincentive to business if Scotland does not declare its rates far in advance, or is that point a kind of smokescreen? I know that you have already explained that to an extent.
We must be reasonable on the issue. I had thought that the position that I articulated earlier—of setting the rates in September, in advance of the beginning of the next financial year the following April—was pretty reasonable, but the evidence from the gentleman from the ESPC made me think that I might not have that right. However, I will have to consider the matter carefully before I make any change of direction on that.
The financial memorandum sets out two scenarios to do with rates and banding for residential property: scenario 1 and scenario 2. Which is your personal preference?
As I have said, I have not set rates. Obviously, I will reflect on those issues as we get closer to the time in considering the way in which to proceed in that respect.
You do not want to tell us which one you personally prefer.
I will come to a view when I set the tax rates.
Okay. I will return briefly to licences to occupy, which the convener asked about. You helpfully drew a distinction between short and long-term occupation. I think that you referred to a conference of a few days being short-term occupation. As the bill is drafted, would all licences to occupy be caught by the bill?
Yes.
I listened carefully and picked up that your personal view is that short-term occupation should not be part of the bill.
That is one of the issues that need to be addressed before the bill proceeds to its final stages.
Has the Government given much thought to how it will define “short-term” in law? Obviously, a lease for five years—
I think that I had better remove the definition of “short-term” from the discussion. We have identified a number of different categories in the area, and I would not want my consideration of licences to be characterised as consideration of just short-term things that might get a relief. I am pretty sure that there will be others, and I do not want to create the wrong impression for the committee that that is where our view is settled. There are a number of different categories of licence, and we are going through a process of exhausting the list of what I think might be the range of possibilities so that I can come to a view. What will determine our approach is not consideration of what is short term and what is long term but consideration of the nature of the activity and perhaps the business sector, which will be a product of that. Perhaps that is the best way to describe it.
That is helpful. Thank you.
No.
Is the Government minded to do that?
That raises an interesting point. I cannot tell the committee what avoidance has taken place because of sub-sale relief. I could not give the committee a number, and HMRC could not give us a number. HMRC has been perfectly helpful to us, and is trying to help us as much as possible on that question, but it cannot give us that information. Because of that, it would be impossible to construct the economic case that Mr Brown is asking about.
I accept the point that getting an accurate picture will not be easy, but I was comforted by your comments in relation to forward funding, to which you seemed to take a businesslike approach. However, I have a slight fear. In between the tax avoidance under sub-sale relief, which everyone may frown on—even professionals within the sphere—and forward funding, are there other elements of sub-sale relief that are currently being used that are genuinely valuable to the economy and which we might stamp out by abolishing the relief?
I think that that gets to the nub of the issue. The question about what one considers to be a good or an undesirable form of tax management activity is subjective. I might think that something is a wholly unacceptable activity that should be classed as avoidance, but someone else might think that it is a reasonable way of managing one’s affairs to generate economic impact. There is no absolute truth on the point. A judgment must be arrived at. My thinking on the matter is guided by a desire to tackle tax avoidance—I have been clear about that this morning—but not to stifle economic growth. In order to tackle tax avoidance, sub-sale relief will not be offered. In order to encourage economic activity, we will be more sympathetic to forward funding.
Are you proactively examining sub-sale relief in the way that you seem to be doing with licences to occupy, or are you literally waiting for the committee report to see our view? Are you doing your own work as well, at the moment?
We are in active dialogue with people on a variety of issues relating to the bill, including sub-sale relief.
Pages 50 to 52 of the financial memorandum outline the set-up and running costs of revenue Scotland. Do you feel that those figures are robust?
I do, yes.
Is there contingency room in there? Are the figures on the margins, or have you built in safe assumptions, so that the odds of going over the assumptions are low?
There is a line for contingency throughout the figures—in the non-staff costs, for example, and the other set-up and running costs. I think that the position is reasonable.
I want to clarify what we mean by avoidance, as I think that the term has perhaps changed its meaning over the years. My accountant colleagues used to argue that, because all avoidance was legal, it was all okay. I would perhaps take the line that there is good avoidance and bad avoidance.
I do not take the same view as Mr Mason about his claiming his personal allowance. That is an entirely legitimate element of the tax system. The UK Government says that people will pay no tax on a certain amount of income. As a state, we agree to that. That is the rule, and we are all perfectly entitled to have access to the allowance. That answer is in a similar category to my answer to Mr Chisholm’s question about the balance between the rules, the reliefs and the rates and bands, and what that throws up as a tax take.
I very much agree with what you say. It seems to me that there is a difference between the spirit of the law and the letter of the law, and you are trying to get society moved along to accept the spirit of the law. I feel that the UK generally—not just in tax law—has relied far too much on the letter of the law. I just wonder whether we can persuade the courts and the professionals to look at the spirit of the law more than the letter of the law.
I have seen some interesting and thoughtful material from tax specialists about how legislation should be designed with a view to capturing the spirit of what is expected in the area—I suppose that it is best to express it as Mr Mason did—rather than defining everything down to the nth degree, which just gets everybody concentrating on what they can do on the periphery by mucking about with their tax return. I am interested in that thinking, and we are chewing it over in relation to the tax management bill.
You said that you have older people in your tax consultation group who benefit from tax and that tax means that we can pay better pensions and all the other things that we want to do. On that basis, why do you want the bill to be revenue neutral? Some people might feel that, because we are tight for money, the bill could be an opportunity to raise some extra money.
It is necessary to consider the issues of competitiveness. When we promoted the consultation on the subject, there was quite a bit of media commentary that said that we were using the tax to demonstrate the Government’s interest in a progressive system of taxation, which was an interesting observation. The second observation that was made was that, through the way in which we were constructing the tax, we were using it to create opportunities to activate the housing market in Scotland and, in particular, to incentivise and motivate first-time buyers.
You mentioned competitiveness, which has come up a few times. I return to the issue of when the rates and bands for the new tax are announced. Although you have made the point that the UK Chancellor of the Exchequer can change the SDLT rates overnight, witnesses led us to understand that, if a transaction was decided today, today’s SDLT rate would apply even if the tax were not paid for three or four years.
I do not see how the situation would be different in Scotland. If a transaction happens on a given day, it is charged at the rate at that time. I cannot see how anything could be different in that scenario. The comparison between Scotland and England is irrelevant in that context. The circumstances will be judged according to the tax rates that are in place at the time of the transaction.
Both the SDLT and the LBTT regimes involve the concept of the effective date, which is the date on which the transaction is completed. That is when the tax is assessed and payable. It does not matter when the chancellor sets the rate; the tax that is payable is dependent on the effective date.
For the avoidance of doubt, I should say that I am not arguing for an approach whereby we announce the rates at 2.30 in a budget statement and effect them that evening. I reassure the wider world that that is not what I have in mind.
I might have misunderstood previous witnesses. They seemed to suggest that there is more certainty in England than it appears that there would be under the new regime in Scotland, but maybe we can clarify that elsewhere.
I do not think that that is the case.
That is fair enough.
One issue that arises is to do with some of the practical issues around gifts of property. Colleagues will be familiar with the circumstances in which parents give their property to a son or a daughter. There are quite clear rules on that. If it is done seven years before the death of the person who is making the gift, no inheritance tax or LBTT will be due. My view is that that is an appropriate provision to have in place because it enables families to manage the process. The issue is not exclusive to wealthy families but is quite broadly shared across society, so it is a reasonable provision to have in place.
Okay. Some witnesses have put to us a point on the relationship between LBTT and VAT. Some of them argued that LBTT should be imposed on the net amount without VAT. As I understand it, the proposal is that LBTT should be on top of VAT, which they claim is double taxation. I asked whether they would rather have 6 per cent on the net or 5 per cent on the gross. Their argument was that, because some land transactions have VAT and some do not, the amount of LBTT that would be charged would be uneven.
Our view has been informed by Lord Hope’s judgment in the Court of Session in—this is a blast from the past—Glenrothes Development Corporation v Inland Revenue Commissioners 1994. Lord Hope said:
We took evidence from Registers of Scotland representatives earlier. Registers of Scotland has had some IT problems in the past. Are you comfortable that it will be able to cope, especially with regard to IT?
Yes. Registers of Scotland has had IT problems in the past, which arose out of a contracting-out regime that was not well prepared for within Registers of Scotland. Essentially, control and operation of the IT was put outside the organisation in 2004. The organisation has now taken some pretty difficult steps to bring it back and to rebuild the critical capability in-house to undertake IT activity.
Thank you very much.
That brings the evidence session to an end. I thank the cabinet secretary and his officials for responding to our questions and deliberations.