Local Government and Communities Committee,

Meeting date: Wednesday, May 28, 2008

Official Report 286KB pdf

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Local Income Tax

Agenda item 3 is oral evidence on issues that relate to local income tax. I welcome Professor Christopher Himsworth, who is a professor of administrative law at the University of Edinburgh; Professor Richard Kerley, who is the vice-principal with responsibility for international strategy and commercialisation at Queen Margaret University; and Professor Alan Page, who is a professor of public law at the University of Dundee. Members have seen the submissions. Rather than invite brief introductions from each witness, it might be more useful to go directly to questions.

I welcome such eminent visitors to the committee. Given that the session is all about the legality—or not, as the case may be—of the proposed local income tax, will the witnesses comment on the Presiding Officer's statement of 11 November 2004 on the proposed Scottish service tax? He said:

"In my view, the provisions of the Council Tax Abolition and Service Tax Introduction (Scotland) Bill would be"

well

"within the legislative competence of the Scottish Parliament."

As the witnesses know, that tax would have been set nationally.

The obvious comment, which is highly relevant to the issue that is being discussed, is that although the Presiding Officer is required to express an opinion on whether any legislative provision would be within the Parliament's competence, that opinion is not definitive and does not even bar discussion of an issue by the Parliament. Such a statement is simply an expression of a view by the Presiding Officer.

So you do not necessarily think that the Parliament—I am sorry; I should allow the other gentlemen to speak.

Do the other witnesses broadly agree with Professor Page's view?

I do not have sufficient notice of the content of the Council Tax Abolition and Service Tax Introduction (Scotland) Bill or the reasoning behind the opinion. Otherwise, I share Alan Page's view about the status of that statement.

As I am not a lawyer, I would take a view based on the practice that I observe or read about elsewhere, which is that although Presiding Officers may be very impressively qualified people—all the Scottish Parliament's Presiding Officers have been such—they do not have the final word on whether what may ultimately become legislation is either within the competence of this Parliament or challengeable by others in a court. Were that the case, we would not see some of the discussion that is currently going on at the Westminster Parliament.

Do you agree that, given the importance of such legislation and of the proposal that we are discussing, the Presiding Officer would have recourse to expert legal opinion on the matter, which he could rely on to advise him whether it would be legally competent?

Absolutely.

If there was a nationally set local income tax—if you want to call it that—and local authorities could not exceed a rate of 3p in the pound but could vary the rate up to that level, what would be your view on the competence of such legislation?

That is an interesting question. There is no question but that the Scottish Parliament could legislate to replace the council tax with, for example, a local income tax of the kind that you describe. The objection that is taken at the moment is to the form of the tax and the fact that it would be set centrally in Edinburgh rather than by councils around Scotland. The implications of that are very interesting. Let us take your scenario, in which the legislation is framed in such a way that local authorities have discretion over how much they levy, and let us assume that that would be within the bounds of the legislation. Let us also assume that, as happens in other countries, all local authorities agree to levy up to the maximum rate, which in effect achieves the same result. Is that illegal?

That is what I am asking you. You are the experts.

It is a genuinely fascinating question.

I would tend to agree. I came to the matter with a cautious view on the powers of the Parliament to legislate in the terms proposed by the Cabinet Secretary for Finance and Sustainable Growth. Now that I have examined the issue more closely and thought about related legal matters and decisions, particularly the capping regime that could still exist, I have come round to the view that I think it would be possible for the Parliament to legislate to enable each of the 32 local authorities to set a rate of local income tax—that would result in 32 different rates. As happened with the decisions on council tax this year, the councils might all come to the same view, but I assume that they would have to reach it separately rather than have it determined by someone else. Whether such a patchwork of arrangements is desirable in a relatively small country is a separate matter.

Members are champing at the bit to get in, but I have a final question.

In the second bullet point under the heading "Some contextual comments", Professor Kerley's submission states:

"It is possible, for example, that a substantial proportion of pensioner households will incur costs under any proposed ‘LIT' scheme as great or greater than current CT costs and it is pensioner households that have been most vocal about the Council Tax."

Can you expand on that? How did you come to that conclusion?

My broad proposition is that you can model in aggregate. Indeed, the consultation paper makes it clear that the examples given reflect a general position, in which assumptions are made about the household in terms of level of income, number of people, other forms of income—there are many and various forms—and the age of the people, whether together or separately.

Age Concern Scotland is doing some work on that and I believe that it will submit evidence to the committee or observations in response to the consultation. Its work appears to suggest that there are a number of pensioner households, whether single or two person—there are unlikely to be more than two people in such households—for which the cost of a local income tax would be greater than what is paid currently in council tax. One can find everywhere idiosyncratic examples of people about whose circumstances we do not know.

Are there figures to which you can refer us?

The figures from Age Concern Scotland surprised me, because I read them as suggesting that 100,000 pensioners would pay more in local income tax. That struck me as a very high figure. I have not had time to ask Age Concern Scotland where the figures came from. It is extremely difficult to work out such figures, especially when one moves beyond salaried income and includes people who receive state pensions, superannuation through a defined benefits scheme and/or pension income through a money purchase scheme. It is entirely possible for people to have all three forms of income simultaneously, although they are treated differently for taxation purposes. To obtain a detailed answer, it is necessary to consider individual circumstances. Some of the letters from pensioners that I have seen in the newspapers and some of the interviews with pensioners on the radio suggest that the complexity of the issue is greater than even we can imagine. Some pensioners make claims that, prima facie, do not add up—in the broadest sense, rather than in a technical sense.

The issue has become especially polarised in political terms in Scotland. In my view, the Conservatives want to retain the present unfair tax system and to tinker with it to help pensioners and other well-off groups, but the system will still be unfair. In some ways, I am surprised that Labour members are happy to retain the current system when a change might help those who are not so well off. At least the SNP has seen that there is a fairer system that can be introduced—local income tax. Today we must address the legality of introducing such a system. The Government must acknowledge that it must abandon its plans for a nationally set local income tax and join the Liberal Democrats in supporting a local income tax that is set locally. That is both a legal and a much fairer way of introducing such a tax.

Professor Himsworth, in your submission you state that article 9 of the European Charter of Local Self-Government

"seeks to protect the access of local authorities to … financial resources".

You conclude that the Scottish Government's proposals for a local income tax would be in breach of that article. Why is that so? In your opinion, what would be the legal competence of a local income tax that varied in different local authorities? Would it be legally competent under the charter for any form of local income tax to have a fixed rate for an introductory period and, after a certain time, to change to a variable rate, with each local authority setting its own rate within a specified band?

Thank you for your question; I will deal with it in stages. To assist me, I will refer back to the previous question. The issue of competence relates to the Scotland Act 1998. Perhaps annoyingly, I share Alan Page's view that the question whether a nationally prescribed tax would be incompetent under the 1998 act is an interesting one. I have not come down definitively on either side of the argument. My only reaction to the specific question that was put is that, if a local income tax gives local authorities a measure of freedom to fix the rate, it is bound to be a move in the right direction. I stress the point about legality and competence that arises in that context, because one has to be careful about the status of the charter that I invoke for other purposes in the rest of my submission.

With regard to your question on article 9, it is worth bearing in mind that its principal requirement is that, irrespective of whether the money comes entirely from central Government grant or from other forms of locally raised income, local authorities must have adequate resources.

My submission does not address the question whether a local income tax would meet such a requirement. It might well do; however, there will always be differences of view over whether local authorities have adequate resources now or will have them under the new regime. I was alighting in particular on the requirement in article 9 for "Part at least"—which, I admit, is rather ambiguous—of local authorities' financial resources to derive from income that is locally fixable. If one reached a point at which local authorities in Scotland had no discretion whatever over the total funds that they raise each year, one would be bound to be in breach of both the spirit and the letter of article 9. That is why I am concerned about having a nationally fixed tax rate that appears to give no discretion.

That said, the argument on the other side is that other fees and charges are locally fixable enough to give local authorities a little bit of wiggle room, which means that an approach might not need to be sought through a local income tax. My submission refers to that, but I should say that I have not done the work on it. However, if you rely on that tax as the principal means of conferring a degree of local autonomy in fixing tax rates but do not give local authorities that chance, you will on the face of it be in breach of the charter to which the UK is party.

I mentioned the political polarisation that has occurred. There is a real danger that, if no agreement is reached on this matter, it will have to be settled in the courts. Would that be advantageous or disadvantageous to Scotland?

For the courts to resolve the lawfulness of the tax?

Yes.

I have no strong views either way. I suppose that any Parliament—indeed, any Government—that steers in a direction that might invite legal challenge has to bear in mind that such a problem is a possibility. The extent of that problem is part of the political calculation that must be made when one embarks on that track.

I readily understand—and share—the preference for such matters to be decided politically rather than judicially. However, because the Scottish Government and Parliament work within a framework of limited powers, this whole question arises. Given the devolution settlement, any change to the existing system will unavoidably and inevitably raise questions of legality and therefore lead to judicial involvement.

In pragmatic terms, it seems that not simply in Scotland but in the United Kingdom as a whole, we have an increasingly activist judiciary that reviews legislation, usually at the plea of people much affected by it, and it has taken different views even on the interpretation of single words in the legislation. As part of my evidence, I make the point that there are specific single words in the Scotland Act 1998 that I consider to be significant and meaningful, rather than just thrown in arbitrarily by the people who drafted the act.

As one of your number found out the other week, even the single word "provided" can be subject to interpretation by a court, albeit a very local court. I would always prefer that legislatures and decision-making bodies expressed their views crisply and competently so that they are not open to continued debate and discussion. Surely your earlier evidence-taking session turned on just that point about what legislation actually means.

I thank the gentlemen for those answers, with which I agree. It is my strong view that it would be preferable to find a solution to that issue and many others through the democratic process rather than by judicial means. I hope that political colleagues can be flexible enough to find such a solution.

We might want to explore that further.

Professor Page, you are aware that we operate within limited powers. The objective is to secure continuity and raise local government finance. If there were a big political division and questions about legality and implementation, how likely is it that this would end up in the courts? How would we deal with the situation in the interim, when I presume that we would have introduced and agreed the bill by one vote or whatever, however difficult that process had been? Would local government have no finance or means of raising it in the interim, while we transferred to the new system?

It is inevitable that the matter would end up in the courts; it is unavoidable and, indeed, it is desirable for the reasons that you have just given. The question of legality will cast a long shadow over the proposal until it is settled one way or another.

The nightmare scenario would be that we ended up in a poll tax situation, in which people would refuse to pay, saying that the Scottish Parliament has no power to impose a local income tax. The question of legality needs to be got out of the way. There are mechanisms by which that could be done before the practical matters of collecting the tax and the change from one regime to another arise.

Professor Himsworth, you mentioned in your submission a concern that a local tax for local services should not be set nationally if it is to comply with the Council of Europe's treaty, which is known as the European Charter of Local Self-Government. Is that a fair summary of your concern in that area?

Yes, all other things being equal. As I said in response to an earlier question, if there were other means whereby at least a part of local spending could be under the control of local authorities, any tax that was not a part of that part, so to speak, could be centrally devised without running into difficulties. However, there has to be an element somewhere or other in the totality of local authority spending that derives from locally fixed taxes or charges.

One looks to the proposed local income tax part of the system to provide that element, simply because the history of the emergence of the proposal leads us there. The systems of domestic rates, then the community charge, then the council tax and now the proposed local income tax, have been the principal device whereby local authorities have had a residual power to fix the level of revenue that they gather each year, albeit subject to lots of constraints.

So even though business rates are fixed nationally and pay for local services, you would exempt them from your criticism of the proposed new local income tax.

The criticism can be made only when one takes a view across the system. One does not criticise a reliance on grants from the Scottish Government for coming entirely at the determination of the Government, or possibly in negotiation with COSLA. Basically, the decision on how much to give to each local authority is for the Government and one does not criticise that element, because it does not give local authorities the possibility to regulate the amount that they get overall. Let us consider the situation hypothetically. If we are to rely on that element to provide the discretionary element for local authorities, but that is not forthcoming, that is the point at which one says that it is in defiance of the relevant requirement of the European Charter of Local Self-Government.

To be clear, when we speak about that requirement, it is a Council of Europe treaty, not European Union law.

Absolutely.

Does that charter form any part of Scots law that could be justiciable in a Scots court?

No. I do not spell that out in great detail in my submission, but I say that there is a distinction to be drawn between, for instance, the European convention on human rights, which has been justiciable for a long time, at least in Strasbourg—latterly, by virtue of the Human Rights Act 1998 and the Scotland Act 1998, it has been justiciable, in a sense, in the courts of Scotland—and the European Charter of Local Self-Government. The charter is different. It is an international obligation of the state, which is policed and monitored by other means. That does not mean that we cannot say that something happening in the UK is contrary to the charter, and it does not mean that criticisms may not be made by the Council of Europe—through its political mechanisms, its monitoring and its scrutiny—of the member state. In this case, the member state is the UK rather than Scotland, because the UK has undertaken the obligation. I am not saying, however, that a citizen or anybody else could simply go along to the Court of Session and challenge the legality of the proposed new law.

I have been quoted as using the word "illegal", but I do not think that I used it. The question at what point we can say that the proposal is incompetent and therefore testable in the courts of Scotland arises with reference to the Scotland Act 1998 and the legislative competence of the Parliament; it does not derive from the status of the charter.

Does Professor Kerley or Professor Page wish to say anything about any aspect of that question or answer?

There is nothing that I wish to add.

I wish to ask about two points concerning the interpretation of the Scotland Act 1998. The issue seems to be about whether the proposed tax comes under the heading of

"Local taxes to fund local authority expenditure".

Presumably, the first use of the adjective "local" has to have some meaning—it was not just thrown into the Scotland Bill capriciously. Would it be fair to say that the use of the phrase "Local taxes" does not refer simply to the purpose of the tax—that is, the funding of local authority expenditure—but must somehow relate to the nature, characteristics and structure of the tax? There must be some local elements present in it. Is that a fair interpretation of the legislation?

It is certainly one interpretation, and it is one with which I have some sympathy. However, I would urge against the adoption of too literal an approach. The distinction in the legislation is between local and national—national not in the Scottish sense, but in the UK sense. We are talking about local taxes as opposed to income tax, corporation tax or capital gains tax, all of which are reserved. Fiscal policy is reserved—the act mentions "taxes and excise duties", and "local" means in contrast to them.

Secondly, the legislation urges that, when determining whether a provision is within the powers of the Parliament, regard must be had to its purpose, taking into account its effect in all circumstances. In other words, it requires us to take a purposive approach to the question of competence. There is no question but that the Parliament has the power to replace the existing council tax with something. The issue is whether the setting of the local income tax rate in Edinburgh, by the Scottish Government, rather than by local authorities, deprives it of a local character.

Are you saying that a proposed tax that had no local characteristics—by which I mean no local government-style characteristics—and that was not defined with reference to a local government area, set by a council, collected locally or assessed locally for value could be still be regarded as a local tax?

It could nevertheless be a local tax.

In this context, does "local" mean Scotland?

I am not saying that that is the case, but it is arguable. I am wary of the argument that such a tax would be illegal or beyond the competence of the Parliament simply because, on the face of it, there would be no local connection, other than the purposes for which the money was to be used. Without question, the Parliament has the power to replace the existing arrangements. It could frame any new arrangements in a variety of ways. It could do so in such a way that the objection that has been made was addressed but, as I hinted earlier, in practice there was no variation whatever in Scotland, because all local authorities had agreed the rate at which they would levy the tax. Mr Gibson's question was about precisely that issue.

Would the other witnesses like to comment on whether it is possible to devise a replacement tax that has no local characteristics in the terms that I have described but is still competent?

I am getting lost in both the question and Alan Page's answer, but I can answer your initial question directly. My answer is yes.

There have been so many negatives and double negatives that I have forgotten what the question was. It will save a great deal of ambiguous interpretation in the future if you will indicate for the record what you are saying yes to.

The ambiguity may be caused by the fact that you are a lawyer and I am not. My view is that the double use of the word "local" in section A1 of part II of schedule 5 to the 1998 act is intentional and is not a drafting error. I interpret it as meaning that some variation should be available in whatever we define as local. I take the view that currently in Scotland only the boundaries between the 32 local authorities are recognisably local. There may be other interpretations on which I am not competent to comment—sheriff court boundaries might be regarded as local—but health service boundaries clearly mean nothing. Traditional county boundaries also mean nothing, except in ceremonial terms, so "local" must refer to the boundaries that are defined in the Local Government etc (Scotland) Act 1994. I think that that is what was intended in the 1998 act.

The question of what is meant by "local" is the test of whether the proposal is competent. Once again, I share Alan Page's position. It is perfectly possible to read schedule 5 to the 1998 act in the way in which Professor Kerley describes and to say that a disaggregated meaning must be placed on the first use of the word "local" in section A1, to distinguish it from "local authority expenditure". Another view—for which the Lord Advocate, on behalf of the Scottish Government, will no doubt argue, if the matter ever goes to court—is that no such disaggregated meaning should be given to the word "local", that the entire provision relates to local authority expenditure and that the fact that the proposed tax produces money for local authorities gives it its local character.

I am afraid that it would be for a judge to decide. A point that I did not stress in my submission is that, as you know, you ask a question that remains hypothetical until we have the text of a bill. One is bound to be cautious—it is one of the reasons for the caution that I express in my paper—until one sees the text. Only then would any lawyer begin to commit him or herself to an interpretation against the Scotland Act 1998. We are all engaging in a form of speculation about what we might do if the bill came out more or less as we suppose from the consultation document that it will.

That is a fair point. In that context, it might be worth noting that Mr Sheridan's Council Tax Abolition and Service Tax Introduction (Scotland) Bill, which was mentioned, placed the legal responsibility for collection of the Scottish service tax on local authorities, although Mr Sheridan envisaged that it might be subcontracted to the Inland Revenue. Would it be fair to say that Mr Sheridan's bill had a local characteristic because he placed the legal responsibility for collection on the local authorities? That would validate the Presiding Officer's judgment on its competency.

I am not sufficiently familiar with the text of that bill to comment. What I say in my observations on the local income tax proposal is that I would not expect the question whether a tax is local to be determined exclusively by its mode of collection. It does not seem to me to be wholly offensive for the means of collection to be not wholly local or not local at all. On the other hand, that does not rule out the possibility that its localness should be achieved through the mode of collection. As these things go, although I may be wrong, collection is much less important than the locus of decision making on the rate.

I will ask about the issue of the vires of any legislation and the possibility of a challenge in the courts, to which the convener referred in his question. Professor Himsworth's submission states:

"Only if it is manifestly clear that the power to impose the tax in the manner proposed has been conferred should a court rule in favour of the law's competence."

I would interpret your submission as meaning that the court should err on the side of any challenging taxpayer.

If a bill that abolished council tax and introduced a local income tax without any of the local characteristics that we have been discussing were ruled ultra vires by the court, would the court be ruling ultra vires only the local income tax that was introduced? In other words, would the court strike down only the sections of the bill that introduced the local income tax and not the sections that abolished the council tax?

That is a good question. Others might address the second question when they have had a moment to reflect.

Your first question was about my observations that it would have to be "manifestly clear" that the power had been conferred. Commentators have struggled since the beginning of devolution with the problem that no cases based on the reservation of powers under the Scotland Act 1998 have hit the courts. That is probably a good thing from many points of view, but it is a shame from the point of view of deriving any guidance as to how the courts will react to the act in particular circumstances. The situation is not a complete novelty, as legislative powers have been devolved to Northern Ireland for many years and the courts had a limited opportunity to say how the provisions of the Government of Ireland Act 1920 should be interpreted, but the courts in Scotland have not had such an opportunity. In my submission, I try to put together some thoughts, some of which have been referred to already, which derive from the Scotland Act 1998 and the guidance that it gives.

It is also known that in other contexts—not in the context of the Scottish Parliament because it has no track record on this—taxing powers will, on the whole, be construed strictly against the taxation authority. Normally, for example, courts will be inclined to construe against the use of delegated legislation by ministers to tax in ways that are not authorised under the authorising statute. My hunch is that a court might be induced to take a similar line on this aspect of interpretation and to construe strictly against the Government. On the other hand, the argument from the other side would be that we are talking about a Parliament with general devolved powers, not a mere minister. People could argue, "This is as near as we get in the UK to a constitutional statute, as opposed to merely a defined statutory power." Those considerations would then outweigh the considerations that would be invoked on the taxpayer's behalf, which would tend towards strictness.

I am afraid that I cannot be much more helpful than that. A balance would simply have to be struck in interpreting the 1998 act.

If we assume for the purpose of the question that a local income tax was construed as ultra vires, could we end up with the courts striking down only the sections of the bill that are ultra vires—that is, those sections relating to the local income tax—and the intra vires sections of the bill being kept on the statute book? Repealing the council tax clearly must be intra vires.

I think that the legislation caters for that possibility. However, the truth is that the proposal would be dead in the water if that happened. The status quo ante—the position as it was before an attempt was made to enact the legislation—would have to be reverted to.

In the meantime, would a lacuna not exist? Would there be no legislation and no valid taxing power? Some £2 billion of money would not be raised for councils.

I presume that the authority to collect council tax would not be repealed until the question of legality was definitively settled. I do not think that we would end up in a position in which no local tax of any form whatsoever was raised.

So the Government needs to include a just-in-case section in the bill that eventually emerges, just in case the local income tax is pronounced illegal. We had better not replace the other tax first.

That is why I said earlier that the question has to be gone into and authoritatively settled before anything is replaced.

Indeed.

There might be a solution within the interpretation of the effect of the annulment. Alternatively, it would take the Parliament a very short time to pass legislation to reinstate the council tax if that was necessary. Well, one would hope that it would want to do that.

I hesitate to be a good person found among three lawyers, but it seems to me that fascinating and complex matters are involved. I have been interested in the manner in which the proposed local income tax has been presented as if it were a hypothecated replacement for the council tax in respect of the value of moneys that might be raised by it. I do not see that that is the case. If the proposed local income tax does not raise the amount of money that represents the gap between council expenditure and aggregate financial support from central Government, central Government support will require to go up or councils will be required to reduce their expenditure. Councils must balance their budgets each year, even if in notional terms they say that they will receive more income and achieve greater efficiencies than most people believe that they will.

I agree whole-heartedly with my colleagues when they say that the actions of a Parliament must be treated with more respect by the courts than the actions of, say, a statutory non-departmental public body or another agency doing something that it is not entitled to do. One is democratically elected; the other is not. The only other instance that we have of democratic election is that of local authorities. There have been various instances over the years when local authorities, some years after the legislation in question has been passed, have been determined to be acting ultra vires. One example was the Borough of Hammersmith and Fulham and Allerdale Borough Council judgment on interest rate swapping; another is the Borough of Hillingdon judgment on the power of individual councillors. Local authorities were left with a vacuum and simply had to stop doing things that they had previously assumed they could do. Alternatively—and we are talking about UK-wide provisions in both the cases that I mentioned—several hundred local authorities could have continued to do the thing that had been determined to be ultra vires in the case of Hammersmith and Fulham and simply been slapped by the courts on each occasion.

I accept what members were saying in the earlier discussion about charging for food preparation—I assume that that is what you were talking about. Most authorities take the view that a test case that is definitively settled is sufficient for them to decide, "Whoa, we're not going to do that any more." They will have pretty good evidence that they can no longer do something. That leaves a gap, however. I am not so confident that reinstating the council tax, even if it could be achieved in 24 hours of legislating, would be a good way to enhance the respect of citizens for government at all levels.

Good morning, gentlemen. Thank you for coming today. Perhaps I can take us back down to earth, and away from the fantasy and speculation that Opposition politicians who want to defend the council tax wish to bring to the committee. Perhaps we can get back down to some facts.

Section A1 of part II of schedule 5 to the Scotland Act 1998, "Fiscal, economic and monetary policy", lists

"Fiscal, economic and monetary policy, including the issue and circulation of money, taxes and excise duties, government borrowing"

as being reserved. Built into that, however, is an exception, which we have spoken about today:

"Local taxes to fund local authority expenditure".

In speaking about that, we have heard a lot of wordplay about what we mean by "local taxes" and "local authority expenditure". That line of the act goes on to say

"(for example, council tax and non-domestic rates)."

It is only fair to focus on non-domestic rates, but we should bear in mind that it does not say "specifically, council tax and non-domestic rates"; other taxes could emerge. Would the witnesses agree with me that non-domestic rates are currently a national tax to fund local services? I ask that before continuing with my line of questioning.

I have put something about this in my written submission. I acknowledge that part of the trick of interpreting that bit of the 1998 act is to give meaning to that phrase. There is a reference to non-domestic rates, and I refer in my submission to the fact that, because non-domestic rates are currently centrally prescribed, they are not much of an example of local decision making as to tax levels. That is an argument on the side of suggesting that local taxes to fund local expenditure do not absolutely have to be locally determined.

I am sorry about this—I am trying to sit on the fence to a degree, and I am trying to provide the arguments that seem to be rather obviously against the competence of the tax. However, there are one or two other arguments that tend in the direction of supporting it. If I were paid to be in court on the side of supporting it, those would be the arguments that I would use. The issues would have to be canvassed. If the example of a local tax that is given is, at least for the time being, a centrally prescribed business rate, that indeed tends in the direction that you suggest. However, I do not think that it conclusively determines the meaning of "local taxes". There are other arguments besides that one.

I see the point in the question, and I have quite a lot of agreement with it, but there is a further element of the non-domestic rates arrangement that is pertinent. Whereas the rate is struck nationally—it is different in Scotland from in England—the assessment is carried out locally. The forms of taxation for non-domestic rates are based on a number of different forms of assessment. I forget what they are, but they are things like the contractor principle, the replacement principle, the membership flow of golf clubs and so on. Clearly, valuations vary dramatically. There is an instance of one university, where I had discussions recently, whose estate's entire capital value is so much that it is hesitating about what to do to balance its reporting standards for the capital value as opposed to the everyday level of activity. There is an element of localism there.

It is worth bearing in mind why non-domestic rates are set centrally. It is because, over the years, it was not simply citizens who were complaining about the levels of taxation that they observed through rates and so on; businesses were arguing that they were being used as an easy target by various local authorities. The then Conservative Government created a means of conducting consultation with businesses. When that did not seem to work, it moved to the aggregation of non-domestic rates. There are differences.

Thank you for providing the historical context and some of the technicalities that could be used for the administration of a nationally set tax to provide local services. The Scotland Act 1998 specifically mentions non-domestic rates. It does not add a caveat; it simply mentions them. If the interpretation is that non-domestic rates are set nationally, as I think we would all accept, but they fund local services, I put it to you that, if a local income tax is set nationally but delivers for local services, that would, by the same token, also be legal. That would seem to be quite clear, especially given the example that is specifically mentioned in the 1998 act.

I would like to ask you a further question. I am sure that you will agree with these figures. If a business has a rateable value equal to or under £29,000 a year, it must pay 45.8p in the pound in non-domestic rates, irrespective of which local authority the business is in. Would you accept that?

I am not familiar with the detail on that point.

I can assure you that that is correct. If the rateable value is above £29,000, the business would have to pay 46.2p in the pound, irrespective of which local authority the business is in. Those rates are nationally set, and they provide for local services.

I will mention one other thing that I would like you to reflect on and on which I would like to hear your comments. As you know, a small business bonus scheme was put in place. The proposal went through the Parliament, and there were no objections to it. That small business bonus scheme says that, if a business has a rateable value of "£8,000 or less", it will get 80 per cent relief; if its rateable value is

"More than £8,000 but not exceeding £10,000",

it will get 40 per cent relief; and if its rateable value is

"More than £10,000 but not exceeding £15,000",

it will get 20 per cent relief. That is from a Scottish statutory instrument of this Parliament. No one at the time said, "Whoa, haud yer horses, Government!" Nobody said that that was ultra vires or outwith the terms of the 1998 act. If it is legal for the Parliament to amend the provisions of one nationally set tax that is used for local services, surely local income tax follows precisely the same logic.

That is a big leap in logic, is it not?

At least we are dealing with logic rather than fantasy at the moment.

Bob, let the witness answer the question. You cannot object about the answer that you get.

Certainly not—I listen with interest.

I personally think that that is quite a big leap in logic. The example that you gave was an amendment of the terms of a local tax, albeit one that, as you rightly point out, is set nationally. I am sympathetic to the point, as I think we all are, but the other, crucial point is that none of us sitting round this table can authoritatively determine the question. Ultimately, it falls to be settled by the courts. As Professor Himsworth says, we are simply speculating about the arguments that might hold sway and prove conclusive.

Is anyone aware of—

Give the witnesses a chance to answer if they want to, Bob.

There is a difference between complete change and variation. I have no doubt that, given that there is a single-person discount of 25 per cent on the council tax, the Parliament could determine that that discount should be increased to 30 per cent or reduced to 20 per cent, which seems more analogous with the rates-relief system. One should bear in mind that the highest proportion of non-domestic rateable value out there in Scotland is attributable to very large organisations, not necessarily businesses. I do not think that your palace neighbour over there pays non-domestic rates; I am not sure, but it did not use to. I am not sure whether there are rateable charges on the Parliament building.

There are indeed.

Many organisations do not report a turnover in that sense. I am with Alan Page—the leap of logic is too far for me.

I am afraid that I agree with that. I appreciate that one has to give some meaning to the reference to non-domestic rates, but it is quite a leap from an adjustment to the manner in which that is levied to the devising of a new local tax. Other considerations would apply.

I appreciate that. The reason for asking was that if one tax is legal under the Scotland Act 1998, another would be too. That is my personal position. We might have heard some people say that the proposal to amend one nationally set tax for local services is illegal, but we have not heard anyone say that it is illegal to amend business rates in Scotland.

I think Professor Himsworth made the position clear. The word "illegal" has not been used; it is about testing the competence of the Scottish Parliament. Some of that language has been attributed to him, but it does not appear in any of the submissions that have been presented to us this morning or in other evidence.

That is correct. It is a question of whether the law as made would be law at all. I do not object altogether to the use of the epithet "illegal". However, the problem is still that you cannot move at great speed from the position of one legislative change a year ago, or whenever, to another, and simply reason by analogy. Certainly, you cannot reason from the argument that such a proposed change attracted no complaint. It is often the case with legislation that no complaint may be found for years and years and it might be only after a long period that someone thinks to make the complaint, perhaps in respect of another related proposal.

I preface my remarks by saying that a number of people had serious reservations about the small business bonus scheme, not least because it lacks evidence, outcomes or conditions. However, that is clearly a political matter rather than a technical one.

For information, would you expect the Scottish Government to take legal advice before putting out the consultation document so that the arguments would be balanced? I presume that the Government is obliged to undertake a risk assessment of any proposed legislation that it pursues. Would the presumption against the taxation agency, as opposed to against the taxpayer, have to be factored into any legal advice that was provided to ministers?

I assume that at the point of devising a bill, legal advice is bound to be taken in that a minister would have to sign off a declaration, statement or certificate to say that in his or her view, the bill was competent and within the powers of the Scottish Parliament. I assume that it would be almost inevitable that the Government would take legal advice before signing off such a certificate.

Whatever the legal process inside the Executive—or Government—would the obligation on the civil service be to ensure that it articulates the accompanying risk that you have identified? There would be no requirement on ministers to take the advice, but officials would need to lodge it somewhere in the system.

The question of legality will almost certainly be gone into in considerable detail.

The committee may, in the future, want to request sight of the evidence on that.

I am interested in the two separate arguments in Professor Himsworth's submission, one of which seriously questions the competency, under the current devolution settlement, of the Government's proposal. I think that you are saying that, if a country—no matter how its status is defined—is signed up to being part of the European Union, it would face legal challenge if it tried to define a local tax in the way that is proposed. I think that you are saying that such a challenge could be made regardless of the devolution settlement.

Yes, but with one important proviso: the two issues are set out separately because one does not necessarily lead to a judgment that a tax is unlawful whereas the other does. The issue of legislative competence arises uniquely, in terms of our purposes, in the Scotland Act 1998 settlement, which is why we are focusing on the act to interpret the powers of the Scottish Parliament in this context. If the UK Parliament were to legislate in this way for England, for instance, it would not face the same question of competency that the devolved Scottish Parliament would face. Of course, that is because the UK Parliament would be legislating directly for the state.

The sway of the European charter applies throughout the United Kingdom, but it is not European Union law. I made the point earlier that non-compliance with the charter does not lead to something that is likely to be actionable in the courts of Scotland.

Yes, but when we are trying to balance the powers at every level of government, is it not reasonable to say that the view across the European Union is that part of valuing local government is valuing its capacity to raise moneys? The issue is more one of good practice. In essence, we are talking not about legality but the language that we use in talking about the balance of powers across government.

I agree with that. Also, we are talking not only about the European Union but the 47 countries, virtually all of which have signed up to the charter. Again, virtually all have undertaken to respect the provision.

I understand that the Scotland Act 1998 allows for a 3p in the pound variation in income tax.

On the basic rate.

Yes.

Would the courts take the view that what is proposed in terms of a nationally set tax of 3p in the pound, which would be set across the whole country with no influence at the local level—local government has no capacity to shift it one way or another—is, in effect, the same thing? If it is the same thing, why does the Scotland Act 1998 distinguish between local taxes and the nationally set 3p in the pound variation in income tax?

With respect, it is not the same thing. The consultation paper does not go into the legal basis of the proposed tax—or, it does not do so in so many words. My understanding is that what is being invoked is the power to impose local taxes instead of using the power to vary the rate on the basic tax. The proposal would produce a different result. For its validity, one would look to schedule 5 to the 1998 act.

In the reasonable world where "local" means local—where common sense says that any such proposal should have a local element—the reasonableness test would be of whether the court sees a difference between 3p in the pound being set on someone's income at the Scottish level and a local income tax that is set at 3p in the pound on income. Is it not reasonable to draw the conclusion that the tax is not a local tax but equivalent to a proposal that would come under other powers in the act?

That is the argument that has been made; it is Mr McLetchie's point. Must separate meaning be given to the localness of the tax—I presume principally through its being locally determined, which would be what would give it its localness—or would it acquire sufficient local tax characteristics simply because it was devoted to local purposes down the line? I am afraid that there is room for both possibilities. In part of my paper, I share your starting position that local tax means a locally determined tax but, equally, one can see room for the argument that the alternative view is true.

You made the point that, if it was possible to establish that there were other local charges, those could be the local bit and, therefore, the tax would not be against the charter. If those charges were not ones that it would be reasonable to expect anyone in a local authority area to incur, would it mean that that test could not be applied? For example, if they were only charges for support for a child with disability or for an elderly person and they were variable, would that be sufficient to pass your test, or would it have to be a charge such as one for collecting the bins?

That is a good question and, to be honest, the answer is that I do not know. Because the European Charter of Local Self-Government is not justiciable in the courts of any part of the United Kingdom and not justiciable directly in other courts, we do not have such fine-tuning of the meaning of that part of it. My hunch would be that a charge that could be regarded as having a level of impact that could be described as de minimis—that is, a minute impact on a minute proportion of the population—would not satisfy the terms of the charter but that something towards the other end of the scale might begin to, perhaps along with other charges.

It could do. There is a warning in, I think, Professor Kerley's paper that, given that local authorities would be constrained from raising taxes but would have the power to levy fees and charges for other services that they provide, such charges and fees could increase. You suggest that, if that was all that we were left with, we could have the local income tax plus.

Absolutely. I will spare you a long history lesson, but local authorities have habitually been poor at considering charges for services, although across the piece they charge for in the region of 600 different activities. They have the right to do that and exercise it, but have tended to treat it as an afterthought: they consider the rate of inflation and, if it is 3 per cent, they increase prices by 3 per cent.

I anticipate that, if a major element of fundraising discretion were removed, local authorities would enthusiastically or reluctantly use their charge-varying powers to the maximum, test out the elasticity of demand and ask whether, if they have previously charged a flat rate for a service, they can push the charge up or vary it. They will consider introducing peak charging, shoulder charging and charges for activities for which they have not previously charged. Much of the charging regime in local authorities is historically based and has not been the subject of intensive or serious review. The rental charge for local authority housing and local authority properties and licences also benefit commercial operations. If I had a limited area of discretion, I would maximise my discretion in that area.

Did you say 600 activities?

In total, there are about 600 activities.

If the charter is not justiciable in Scottish law or UK law, what would happen if we went against our obligations in that connection? Are there any penalties?

There are no direct penalties. The Council of Europe, through the Congress of Local and Regional Authorities of Europe, carries out a process of monitoring and supervision in the background, with a more or less frequent programme of inspections of the member states. Alternatively, the congress can investigate complaints from a country on an issue. The congress then expresses whether the charter requirements are being met, and that works its way up through the political processes of the Council of Europe, which can lead to a political rebuke for the state on its lack of compliance with the charter. A similar rebuke can result from a breach of other treaties that the Council of Europe polices. However, the charter does not have the directly enforceable characteristic that, for instance, the European convention on human rights has.

A breach would be more of an embarrassment and a moral issue rather than anything else.

Yes—that sort of thing.

We have all tried to debate with you, with greater or lesser effect, the legality of the proposals. You rightly say that the devolution settlement has never really been tested in law in Scotland to find out what would happen with case law. What would the courts consider if they were to adjudicate on a bill that contained a proposal for a local income tax? For example, would they take into account any pronouncements by the Presiding Officer or the guarantees that I presume the Government would give on the legality of the proposals? If the Parliament were to debate the issue, which is by its nature controversial, the outcome of the parliamentary deliberation would likely be close and could even come down to one or two votes. Would the courts take that into account, too, or would they simply look at the text of the Scotland Act and adjudicate using that?

They would look almost entirely at the text of the bill, if the proposal was at that stage. That would happen in the Judicial Committee of the Privy Council or, if the process is delayed for a year or two, in the Supreme Court of the United Kingdom. If the legislation was tested after it had been completed and was on the statute book, the principal focus would be on its text. I am sure that people who were involved in a case would remind the court that the bill was signed off by the Presiding Officer, if it had been, and that it attracted the certificate from the minister. That would no doubt be mentioned as part of the case.

It is less likely that the court would consider the balance of the Parliament's vote, although it might take account of the seriousness with which a body of the status of the Scottish Parliament took the issue and of the fact that the issues were taken on board. The courts have gone to some trouble to consider human rights issues—the issues that have hit the courts in Scotland. Rightly or wrongly, in judging whether legislation meets the human rights standards, the courts have considered whether the Parliament balanced appropriately the human rights issues and the policy concerns in the legislation.

I think I am right in saying—Alan Page will correct me if I am wrong—that there has been a judicial response to the certificates that have been given by ministers in relation to the Human Rights Act 1998. However, that judicial response simply said that it is another factor to be taken into account; there is certainly no question of being bound by what a minister thought at the time about the validity of a bill, whether in the Scottish Parliament or in the UK Parliament.

That is an interesting point. The Westminster Parliament has been more successful than the Scottish Parliament in compelling the Government to disclose the reasoning behind its view that legislation is compatible with the Human Rights Act 1998. As far as I am aware, the Scottish Parliament has just accepted the certificate without any attempt being made to get at the reasons behind the Government's view although, as we all know, those reasons are crucial.

Any legislation that is passed by the Scottish Parliament still has to receive royal assent. Could consideration be given at that stage on the Government disclosing its reasoning?

There is a mechanism in the Scotland Act 1998 for pre-assent scrutiny by the Judicial Committee of the Privy Council. I imagine that such a case would go down that road.

That has to be done on the reference of a law officer. It is not expected that the Scottish Government's Lord Advocate would do that; nevertheless, it is conceivable in such a case, in which there is the will to have the questions tested, for example before a local income tax is formally launched. It might even fall to the Lord Advocate herself to make the reference to ensure that a judicial view is taken.

We appreciate the time that you have given us. We have a couple of brief questions to ask before we will close this evidence session.

My question for Professor Kerley follows what was said earlier. You pointed out Age Concern's comment that 100,000 pensioners could be worse off under a local income tax. Does that mean that the other 900,000 pensioners would be better off?

I do not know. As I said when I made that reference, I was surprised by that figure. I am also surprised that the data appear to be so hard to find. I have not yet had the chance to ask Age Concern how it arrived at that figure. I presume that, if 100,000 pensioners are worse off, the balance of 900,000 pensioners will be better off.

I think that we need more information on that.

I agree.

My second question is for the whole panel. Everyone accepts that the Government would be competent to impose an additional taxation of 3 per cent—the so-called tartan tax—if it so wished and if there was political support for that. It could, of course, disburse the moneys that it gained from that to local authorities throughout Scotland. Why, therefore, is it so difficult for it to do that and then remove the council tax element?

Do you mean to scrap the council tax and replace it with a local income tax?

Yes. That is basically what we have been talking about. The tax would be local to Scotland—not national, which, as Professor Page said, would mean UK-wide. Should it not be possible to introduce the tax in that way? I am thinking about the different ways in which the issue can be approached.

I need to check, but I think that the 3p could be levied only on the basic rate.

It would be 3p, not 3 per cent.

Sorry. Did I say 3 per cent? I meant to say 3p in the pound.

I assume that a 3p supplement on the basic rate—the Scottish variable rate—would not yield the gross moneys to replace the current gross moneys that are generated by the council tax. Therefore, if local authority expenditure were to remain the same, it would be necessary for the relevant ministers and then the Parliament to agree a further transfer of moneys—an increase in aggregate external finance—over and above the amount that is allocated to councils at the moment. That money would, necessarily, come from other budget heads that are within the control of the Scottish Government.

That would be the case even if Scotland did not get the £400 million back.

Even allowing for that, my calculations show that there would still be a gap.

Whether there will be a shortfall is another matter but, on competence, there is nothing under the Scotland Act that would prevent a move to a greater dependence of local authorities on central grant, which is what it would turn out to be. The way in which the Scottish Government would then get the additional moneys—whether or not they were sufficient—would not be material to that. It would not resolve the problems that I have raised in relation to the European Charter of Local Self-Government because it would leave local authorities with no obvious local source of revenue.

I do not know whether you were correct in saying that 900,000 pensioners would automatically be better off under the local income tax, given that many pensioners do not pay council tax in the first place, and that the amount that some people pay may stand still. We look forward to getting that information, whether it is by contacting Age Concern or through the consultation.

I responded to the question on that by saying that if that is your figure and it is correct, the balance will be better off.

I have a couple of questions about the role of the Lord Advocate. The Lord Advocate is a member of the Scottish Executive. As I understand it from the Scotland Act, when a bill is introduced a member of the Executive has to certify its competence. The Lord Advocate is also a gatekeeper at the end of the process and, after the bill is passed, has the power to refer an issue of competence to the Judicial Committee of the Privy Council. If the Lord Advocate has a gatekeeper role at the end of the process, should he or she take no collective responsibility for the initial certification, and play no part in determination of that competency? Should the Lord Advocate be involved in the certification of competency at the start of the process, when the bill is introduced?

Before you answer that, I remind members that BlackBerrys should not be in use in the committee.

My understanding is that the latter would be the case and that the certificate would not be given without the say-so of the Lord Advocate.

Your understanding is that when a bill is introduced, the Lord Advocate is consulted, and he or she effectively takes responsibility and has to sign it off.

Yes.

Notwithstanding that, the act gives the holder of the office of Lord Advocate collective responsibility at the end of the process.

Indeed.

Is that the view of the other panel members?

I defer to my colleagues.

That is probably correct. There might be a point about what is meant by "collective responsibility" in that context. There is presumably room within that process for the Lord Advocate's role to be the legal adviser to the Executive; therefore, were questions to be asked inviting political responsibility for what is being done, I imagine that it would not be the Lord Advocate who would answer them. I take the general point that he or she is a member of the Executive. I do not know whether you are making a point about a conflict of interest, but what happens is within the terms of the legislation.

This is an issue of practice, though. The issue is whether, as part of the processes of Government, the Lord Advocate effectively signs off the competency of a bill, which means saying to a colleague—for example a cabinet secretary—that a bill is competent and can be introduced.

That is my understanding of the practice.

Maybe we should ask the Lord Advocate.

Thank you, gentlemen, for your attendance this morning and for your patience and your answers. I hope that in the future we may be able to discuss this interesting issue again.

Meeting continued in private until 12:48.