Public Audit Committee

Meeting date: Wednesday, January 29, 2014

Official Report 608KB pdf

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Scotland Act 2012

Agenda item 2 is on the Scotland Act 2012. At our last meeting, we heard from representatives of the National Audit Office and HM Revenue and Customs. This morning, we have with us Alistair Brown, deputy director of the Scottish Government finance directorate, and Jonathan Sewell, the directorate’s principal policy analyst. We also have Caroline Gardner, the Auditor General for Scotland; Russell Frith, the assistant auditor general; and Mark Taylor, the assistant director of Audit Scotland. Welcome.

Before committee members ask questions, I wish to ask the witnesses: do any of you have any comments on what you heard or read of what was said at our previous meeting?

I have no specific comments, but I am happy to answer questions from committee members.

The same applies to us, convener.

What are the views of either the Scottish Government or Audit Scotland on how adequate the draft amendment is? Does anything need to be done to strengthen it to ensure that all the relevant issues are addressed? We have already heard that reports or accounts would be laid in the Scottish Parliament, so the committee would have the opportunity to look at them. Does the amendment address sufficiently the concerns or worries that have been expressed?

I believe that the amendment addresses the key issues. The Auditor General will probably have a better view of the issues than I do, as they concern the matter of accountability and audit most closely. The proposed amendment, which the United Kingdom Government intends to include in the forthcoming finance bill 2014, appropriately fills out the role and responsibilities of the additional accounting officer. We have known about the role itself for some time, and the amendment seems to fill it out in a sensible way.

Our view is that the amendment, in so far as it relates to the responsibilities of the Comptroller and Auditor General in relation to the audit of HMRC’s performance in collecting the Scottish rate of income tax, does what is required. It covers the requirement to report on the way in which the amounts collected are reported, the cost of reporting that, and the discretion to examine value for money in relation to all of that, which are the three most important areas to us.

It was clear from the committee’s previous evidence session that some other areas will benefit from being fleshed out and agreed before the Scottish rate of income tax comes into effect in 2016, including the form of the report and the way in which Audit Scotland works with the National Audit Office to provide assurance to you about the coverage of Scottish interests and about how you can take evidence on that. That can all be dealt with subsequently, in places such as a memorandum of understanding, but in our view the proposed legislation provides a good basis for that.

We heard at our previous meeting that there are legal impediments to Audit Scotland accessing information on taxation and revenues. That is understandable, because HMRC and the National Audit Office operate within a clear legal framework. It is fair to say that we also heard, particularly from the National Audit Office, a willingness to co-operate with Audit Scotland. Nevertheless, would operating on the basis of good will or a memorandum of understanding for some of the work give Audit Scotland sufficient capability to delve into the accounts to ensure not just transparency but—more to the point—fairness and competence in identifying and collecting the Scottish element of income tax?

It is worth saying first that the way in which the Scottish rate of income tax is constructed—with a shared tax base that is administered through a UK-wide system—throws up challenges that we all need to work together to resolve in order to assure the committee and the Parliament about the amounts that are collected and the cost of that.

It is clear that HMRC is a UK-wide body and that, in line with all other UK-wide bodies, audit responsibility is with the National Audit Office. In HMRC, there are strong protections for taxpayer confidentiality, as we would all expect. That means that we would not have access to taxpayer records, whatever we were doing to work with the NAO on the audit work that it does.

We have been very much part of discussing the proposals that the committee heard about two weeks ago, which suggest that we in Audit Scotland would have a role in discussing with the National Audit Office its planned audit work and the findings of that work and in giving evidence to the committee through the lens of our audit of the Scottish Government. That would all help to give the committee the assurance that it is looking for.

The issues that the committee heard about, particularly in relation to compliance and collection, are difficult for a tax system that is designed to operate on a UK-wide basis. The most important aspects for the committee to pursue are how Scottish taxpayers are identified and how records are maintained, as that will be a key foundation for the new tax to work properly. The committee also has a proper interest in levels of service to Scottish taxpayers, particularly in the collection of the Scottish rate of income tax. Compliance and collection in the middle will be harder to unpick for the Scottish tax alone.

How soon will the agreement—the memorandum of understanding or whatever you intend to call it—be reached?

The memorandum of understanding between us and the NAO is under discussion, but it cannot be finalised until the arrangements for putting in place the tax are worked through. I guess that that will be at the beginning of 2015-16—about a year from now. A lot of what we do will follow from the agreements that are being developed and worked up between the Scottish Government and HMRC.

That is very late in the process, and a lot will happen between now and then. Will you be given the same level of access now, before any memorandum is signed, as you will have after a memorandum is signed?

No audit work in formal terms—if I can put it in that way—is going on. The NAO is staying close to the HMRC’s preparations and is discussing and seeking to influence the arrangements that will be in place, and we are doing the same with the Scottish Government. Russell Frith and Mark Taylor can tell you more about the detail of that, as can Alistair Brown from the Scottish Government’s point of view.

In the 2014-15 audit of the Scottish Government, we will report on the state of preparation. That is the place where we would report to the committee any concerns that we had about preparations. However, until the tax comes in, we are auditing the state of preparation.

I ask Mr Brown how engaged the Scottish Government is in ensuring that the systems that are being set up will accurately identify and return the appropriate levels of the Scottish rate of income tax.

I would describe our level of engagement as pretty thorough. There are arrangements in HMRC to manage and oversee its programme of work on the Scottish rate of income tax. The work is overseen by a programme board, which is chaired by a senior HMRC official. I sit on that programme board, so I get all the papers and I participate in discussions.

Jonathan Sewell is a member of the project board that is managing the specific Scottish rate project, so, again, we see all the papers. Key decision points are flagged up to us in advance and we in the Scottish Government have the opportunity to consider the pros and cons and, if necessary, discuss them with colleagues who have specific knowledge. HMRC has been constructive and helpful in giving us time to examine issues and understand their implications.

On the identification of Scottish taxpayers, we are in the middle of discussing the detail of the process with HMRC and responding to its proposals. The matter is important, for the reason that you and the Auditor General gave: the identification of Scottish taxpayers is central to the whole endeavour. Scottish taxpayers must be correctly identified in the first place; we must then keep the list up to date, which is obviously important. A lot of effort is going into that. We are scrutinising pretty closely what HMRC suggests, and we are coming back with our proposals on how things might be made more accurate or more specific.

From what we have heard at a previous meeting and today from the Auditor General, we know that the issue is complex and technical and requires a degree of knowledge about systems, procedures and how financial regulations work. I know that the civil service has a history of giving people a taste of or experience in different departments, so people might move from prisons to education, fisheries or whatever. Given the complexities of what we are talking about, can you assure us that the key people who are involved on the Scottish Government side have the relevant experience or are qualified accountants?

I do not have experience in taxation, nor am I a qualified accountant—I have colleagues who are. In particular, we have access to tax expertise through revenue Scotland, which was recently formed on an administrative basis and whose chief operating officer, Nicky Harrison, was recruited from HMRC last spring. Therefore, I have a source of Scotland-based tax knowledge and expertise to which I can go for help with particularly technical issues.

On your general point, the process by which one goes about identifying Scottish taxpayers has to do with where people live rather than the complexities of a tax system, and the issues that we are discussing with HMRC are general rather than technical. Of course, there are other issues, to do with how the United Kingdom HMRC pay-as-you-earn system and other elements of the income tax system operate, which are deeply technical, and when it comes to them we look for assurance from HMRC and descriptions of how its systems work. HMRC is responsible for the integrity and accuracy of the internal operation of its systems.

You explained about revenue Scotland, but are the key people around you in the finance directorate experienced in taxation or qualified accountants?

I certainly have colleagues who are qualified accountants—

I am talking about the key people who are involved in the project. Are they qualified accountants?

I am not a qualified accountant and neither is Jonathan Sewell. However, he is an economist and a financial analyst, and I would suggest that that is as relevant in this context as having specific accounting skills.

Okay. Thank you.

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As Alistair Brown said, it is clear that elements of the project require a good, in-depth working knowledge of HMRC’s tax systems, so we are reliant on HMRC in the first instance, although I have been on the project for a long time and I am developing those skills. What we add is scrutiny of what HMRC is doing. We have to take some of the work that it does on trust but, as both Alistair Brown and Caroline Gardner said, one of the most important elements of the project lies in being able to identify Scottish taxpayers. HMRC would say that, although that is linked to how its systems work, it is a new task for it, and there are areas of that project in which the Scottish Government has much more expertise and is adding value to the project. One of the important things is to be able to identify the number of people who move in and out of Scotland through the year and between years, and that is heavily reliant on our migration data and our analysis of that. That is an example of where, within the project, HMRC comes to the Scottish Government for our expertise. I hope that you will take some reassurance from that.

I think that what the committee heard from HMRC at our previous meeting was encouraging. There was a positive attitude and a willingness to co-operate. I do not think that we heard anything that would give us cause for concern. Ultimately, however, we have two parties involved in the process that have different sets of responsibilities and are accountable to different political masters. In that situation, where there is a tension in to whom people are accountable and on whose behalf they are operating, is it not a bit naive to operate, as you have suggested, on the basis of trust?

I am not suggesting that HMRC will try to do anything disreputable, but you have a responsibility to the Scottish Government and Scottish taxpayers, and if you are telling us that you will operate on the basis of trust, that would suggest that you will not have access to all the facts.

I would suggest that we operate on the basis of trust but verify, as President Reagan used to say quite a number of years ago. Clearly, part of that verification is through formal audit processes.

I will give an example of that. You asked earlier about the statutory amendment that the UK Government is bringing forward in the 2014 finance bill on the responsibilities of the Comptroller and Auditor General and the NAO. That amendment will place an obligation on the NAO to report on HMRC’s work on the Scottish rate starting from—if I have got this right—the financial year 2014-15. At the end of that financial year, in the summer or autumn of 2015, the NAO will audit the work that HMRC has done in preparing for the Scottish rate. HMRC will not yet be running it at that time, but it will have done the preparatory work. In particular, it will have done a lot of work on identifying Scottish taxpayers, and the NAO will be responsible for auditing that work and producing a report on it. That degree of verification will go on, and Audit Scotland has a role in co-operating with the NAO to ensure that we in Scotland think that its work is appropriate. That is one example of verification.

Okay. Thank you. I open up the discussion to members, starting with Colin Beattie, to be followed by Mary Scanlon.

Audit generally operates on the basis of certainty. Where there is less than certainty, the second best is to audit and test processes and procedures that result in the outcome that we see. When we had the NAO here, it was clear that it would look at the process for identifying Scottish taxpayers, which is critical, but it said that it would not give any certification or undertaking that the process had been done correctly, and it would not give any comfort on the process—it would look at the process, but that would be it. That seems to be a limitation, which is a concern. I think that there is a gap in relation to identifying Scottish taxpayers. Another gap relates to HMRC’s ability to disaggregate information either on compliance activity or on tax risk in respect of Scottish taxpayers who are employed by UK-wide employers. So there seem to be a lot of gaps, but it was not clear from what the NAO said that it is capable of or willing to plug those gaps in terms of audit. I am interested to hear any comments on that.

You are right that there is a tension there. That goes back to my opening comment that we are talking about a UK-wide tax and a shared tax base, part of the proceeds of which will come to the Scottish Government and Parliament. To try to put it simply, the nub of the challenge is that the estimated receipts from the tax are currently about £4.5 billion, against total income tax receipts of around £152 billion, I think. So the issue is material in Scottish terms, but it is not material in relation to the UK as a whole. Obviously, it is of huge interest and concern to the Scottish Parliament and the Scottish Government. The question of how we can work with the NAO to give you assurance about that sum of the income tax receipts, alongside the assurance that the NAO gives to the UK Parliament about the overall receipts, is at the heart of what we are trying to resolve.

My view is that the proposed amendment to the Scotland Act 1998 in the forthcoming finance bill focuses on the right issues. It focuses on the correctness of the amounts that are identified as being the proceeds of the Scottish rate of income tax, the costs of collecting them and the ability of the NAO to carry out value-for-money studies of the way in which the system operates. However, there is still that two-tier focus on what is material for the UK Government and what is material for the Scottish Parliament.

In giving evidence to the committee and in discussion with us, the NAO has been clear that it cannot give the usual form of audit opinion—the true and fair view—on the proceeds of the Scottish rate of income tax, because that is a relatively small part of HMRC’s overall operations, and those proceeds will be collected as part of the overall income tax system and the overall collection of personal taxes. We can compensate for that to a great extent by the mechanism that we have discussed, which is our working closely with the NAO, as we already do, to understand the work that it plans to carry out, the risks that it will address and the judgments that it will make. When the NAO has done that work, we will then discuss with it the results of the work and the conclusions that it has drawn, and we will supplement the NAO’s report to the Scottish Parliament with our own report, if the committee would find that useful.

All that is entirely appropriate in giving the Parliament the assurance that it wants and needs about the way in which its interests are being looked after by HMRC in the process. However, we do not have direct access to HMRC and there would be real challenges in that because of the taxpayer confidentiality issue. That is why the current stage is important—we need to discuss the way in which the process will work in practice and what the form of reporting might be, and ensure that the mechanisms are nailed down for the committee to explore with me and with the Comptroller and Auditor General at UK level and with HMRC what is happening, in the way that the committee discussed at its previous meeting.

I accept your point that, in UK terms, we are talking about small potatoes but, equally, as you said, the issue is significant to us. Certainly from an audit point of view, there is a responsibility to ensure that the process is right and is properly audited. I realise that you are still in discussions on the issue, but I think that it is a key matter. The Public Audit Committee has to be satisfied that someone has signed off the process and said that it is fair and right and has been done properly and, we hope, that as a consequence the results are correct. At present, I do not think that we are in that position.

I think that you are right that we are not fully there yet. I give you the assurance that, as you would expect, I take the responsibility to look after this committee’s and this Parliament’s interests very seriously and I am very comfortable with the extent to which colleagues in the National Audit Office and HMRC are open to working with us to put together a system that does what you require. It is right to note that we need to be aware of that tension in the way that this tax is constructed when we put those safeguards together.

Twelve months from now we will all be in a better position to identify exactly how the arrangements will work in practice, but we are trying to make something quite unusual work in ways that are both cost-effective and, most important, fulfil the democratic accountability to the Parliament that is necessary here.

Are you including in this discussion the question of the disaggregation?

Disaggregation of?

We are talking about when it is a UK-wide company.

That is an interesting question. We listened closely to HMRC’s evidence two weeks ago about the way in which compliance and collection work. We came away with a great deal of comfort not only that HMRC is not likely to apply a differential approach to Scottish taxpayers versus taxpayers in the rest of the UK, but that it would be quite difficult for it to do that because of the way that its compliance and collection works.

I think that our interest has moved upstream to the whole question of how a Scottish-rate taxpayer is identified in the first place and how to ensure that that information remains up to date. We will certainly discuss that very closely with colleagues in the NAO over the next 12 months as that identification process gets under way.

Clearly, as everybody round the table has identified, the key to the process is to identify Scottish taxpayers. The question of disaggregation is quite significant, because we do not know how that will impact overall on various statistics that we receive, on the compliance issues and on tax at risk. We will not be able to have full reliance on those calculations or a full understanding of the overall position if we do not have disaggregation.

Alistair Brown is probably in a better position to answer that question than we are at this stage.

I will do my best to provide some sort of an answer to Mr Beattie’s question. I think that the context in which you raise the issue of disaggregation is compliance. I check that that is what you have in mind and play back some of the evidence that HMRC and NAO officials gave the committee a fortnight ago. They said—we understand this to be the case—that approximately 99 per cent of income tax is collected automatically through computerised systems or through self-assessment returns, with self-assessment taxpayers paying their tax in that way. HMRC’s compliance activity therefore relates to the 1 per cent of income tax that we might say does not come in automatically.

Edward Troup explained that a lot of compliance activity is to do with checking the pay-as-you-earn—PAYE—systems operated by employers to see whether they have operated the arrangements correctly. He gave the example of including taxable allowances, for example, in the calculation that generates the monthly PAYE payover from an employers’ payroll system to HMRC. In practice, HMRC adopts a risk-based approach to auditing employers. It identifies groups of companies that it sees as potentially of higher risk and puts compliance resource into checking the PAYE computer systems and associated clerical systems that are operated by these employers. It looks for errors or misapplications of the rules that would result in an undercalculation and an underreturn of tax. All of that is happening within the 1 per cent.

The point that HMRC would make is that it goes at this from an employer point of view rather than from a taxpayer point of view. If an employer shows certain characteristics that indicate that there might be a heightened risk of error in tax calculations, HMRC will apply compliance resource to that employer.

10:00

If the employer is a local firm in England, it is unlikely to employ Scottish taxpayers; if it is a local firm in Scotland, it will employ Scottish taxpayers; and if it is a national organisation, it will employ Scottish and rest of UK taxpayers. HMRC’s point is that if, for example, it intervenes through compliance activity with a national employer and a cheque for, say, £100,000 is sent to make up for some error in the way that PAYE has operated for the previous year, it will find it very difficult to say how much of that £100,000 relates to Scottish and non-Scottish taxpayers employed by the company in question. It would be possible to arrive at a figure with a good deal of clerical work, or one might, for example, choose to divide the money up with reference to the proportion of Scottish taxpayers on the employer’s payroll, but the question then is how much further forward one would be as a result.

If the committee will indulge me, I would like to make an important point about the 1 per cent figure that HMRC has used—

I am sorry to interrupt, but I seem to remember that the figure for self-assessment was 10 per cent. Do the clerks have that figure?

The 99 per cent is the proportion of income tax that comes in automatically through PAYE and self-assessment without any further follow-up work by HMRC.

So the 1 per cent relates to interventions by HMRC.

Exactly.

That is slightly different. As I recall, Mr Troup said that 90 per cent of income tax came in through PAYE and 10 per cent through self-assessment, and there was a small fraction where HMRC intervened.

Or where HMRC carried out compliance work.

Yes.

That is how I understand it.

But as far as disaggregation is concerned it will be the 10 per cent overall that, theoretically, will cause the problems.

Overall, 99 per cent will absolutely be allocated to either Scottish or non-Scottish taxpayers. HMRC’s computer systems will be able to calculate very accurately—indeed, to the penny—how much of the payover made by an employer or self-assessment taxpayer is attributable to the Scottish rate, and the auditors will be able to check that that routine works as expected.

The issue of disaggregation will apply to the 1 per cent in which the money comes in as a result not of automatic income tax processes, including self-assessment taxpayers sending their cheques or making their credit transfers, but of compliance activity or intervention by HMRC. The difficulty for HMRC is that most of the money that comes in through compliance activity comes in from an employer without its being disaggregated among the employees, some of whom will be Scottish taxpayers and some of whom will not.

I ask the committee to bear with me a moment longer. In general, the 1 per cent of income tax receipts that come in following HMRC intervention are received more than a year after the end of the tax year to which they relate. That is, of course, understandable. If there is a dispute or disagreement or if HMRC mounts an inquiry and sends officers into an employer, the work involved in that will take a while to carry out. If HMRC concludes that tax has been underpaid and raises an assessment with an employer to pay the balance, it might take many months—indeed, years—for the matter to be settled and for the money to come in.

As set out in its command paper back in 2010, the UK Government’s proposal with regard to the overall financial operation of the Scottish rate of income tax is that the amount of SRIT received should be struck at a point of time one year after the end of the tax year in question. In other words, the end of the tax year 2016-17, which will be the first year in which SRIT is applied, is the beginning of April 2017, and HMRC will count all the Scottish rate receipts throughout that year and onwards until the beginning of April 2018.

At that point it will settle up. It will say what the Scottish rate receipts are and will prepare an estimate of the unpaid amount of tax—the amount of tax that is still in dispute. Its best estimate is that that will be 1 per cent. It will then add that estimated 1 per cent to the actual receipts of the Scottish rate of income tax and the treasury will use that amount to calculate our block grant.

That is pretty complex and I apologise for that, but it is important to lay hold of the point that if there was a complete failure to collect any of that 1 per cent—although I am not saying that that would happen—the Scottish budget would not suffer, because an estimate would have been made of the amount of the 1 per cent, which would have been added to the Scottish rate receipts that were received up until the one-year point.

There are a couple of audit issues that the committee should keep in front of it and come back to later, because, as the Auditor General says, it will take some time before the area that she is discussing will be properly clarified and resolved. We need to keep an eye on it, as there are gaps.

I am very pleased to hear that there has been and is positive and constructive engagement. That is what we heard from HMRC. Anyone in Scotland, including taxpayers and businesses, would expect no less. I find that very reassuring.

My question follows on from Colin Beattie’s. It is on performance information, on which there has been quite a bit of discussion. I appreciate that significant preparation and progress is being made on compliance and prosecution rates, error and fraud levels, tax gap and the debt roll rate, and taxes written off, and I appreciate that we are looking at what satisfies the Scottish Government and what satisfies Audit Scotland, in terms of good governance of the Scottish economy. Are Audit Scotland and the Scottish Government seeking any information that HMRC and the NAO say is far too difficult to provide? Is something essential to the good governance of the Scottish economy being refused or difficult to get? Perhaps both Alistair Brown and the Auditor General could answer.

I am not aware of any information that would fall into the category of information essential to the correct operation of the Scottish rate and to which we are not being given access. There is information that, as HMRC has explained to us and the committee, is quite difficult to obtain from automated systems. We have asked it about that information and it has given responses that are consistent with what it said to the committee, so it is not telling us anything different from what it would say in public.

I will give an example, as it is always helpful to offer an example, and go back to the answer that I attempted to give to Colin Beattie on compliance. HMRC puts effort into its compliance work, on which it is closely examined—the House of Commons Public Accounts Committee takes an interest in it. Its compliance work yield is a big issue, which HMRC is audited on. It has to justify its investment in compliance by reference to the yield that it gets from it.

HMRC is saying to us that its compliance work will be quite difficult to disaggregate on the Scottish rate, which is the point that Mr Beattie made earlier. HMRC has explained the reasons for that and it is fair to say that we can see the logic behind its reasoning. If it is dealing with a compliance situation, it generally does so from the point of view of the employer. Its tax recovery—if it gets extra tax back—is from the employer as a whole. It is not attributed to individual employees. Obviously, it is only at the individual employee level that one is able to see whether a taxpayer is Scottish or not. That is an example of information that, ideally, it would be good to have, but HMRC has explained why that information is not available, and its explanation has been cogent, from my point of view.

Are you quite satisfied with that explanation?

Yes, I am satisfied with it. If issues arose in future as to the compliance activity of HMRC and any suggestion that it was differentiated between Scottish firms and non-Scottish firms, that is something that we would clearly take up, but we have HMRC’s assurance that its compliance activity is risk based. As it has said in public, it would be applied in the same way, pound for pound, to employers and employees in Scotland as it would to those in any other part of the UK. Indeed, most of HMRC’s compliance activity is broadly sectoral, so it might identify a particular sector of businesses with which there may have been issues in the past about the accuracy of tax calculation, and it would look at that sector of business across the UK without concentrating on any region.

I agree entirely with Alistair Brown’s comments on collection and compliance. It is worth restating the importance of the identification and maintenance of Scottish-rate taxpayers, which will be critical, and it will be important to have good performance information for that. I also said in my response to the committee last year that, although it would be difficult to break down service performance information between Scottish taxpayers and others, because all of us in Scotland will be both under that regime, it would be helpful to have information on complaints specifically about the Scottish rate of income tax, because they could be a useful marker of the way in which the system is operating across the piece. That may require additional data collection by HMRC, but in my view it would be worth exploring the costs of collecting that, because it could be helpful both to Government and to Parliament in providing assurance that the system is working as intended.

I would like to go back to Alistair Brown and ask whether that is an issue that the Scottish Government has discussed with the NAO or HMRC.

Jonathan Sewell can answer that.

We had a workshop just before Christmas with HMRC, which is looking at how its current phone-based system can track those calls that are specifically to do with the Scottish rate, as opposed to those calls that are general calls from Scottish taxpayers about the UK tax system. It is quite a tricky issue to disaggregate the two, but HMRC is certainly looking at how to do it and it is something that we are keeping a close eye on.

I will continue on the theme of the level of assurance that we are getting. The discussion seems to be focusing on whether we can or cannot identify who all the Scottish taxpayers are, but what level of assurance will we ultimately get if we do not know who the Scottish taxpayers are? Auditor General, did you say in your response to my colleague Colin Beattie that it is not the usual level of assurance? Could you clarify that for me, please?

Certainly, and I shall ask Russell Frith to come in on this in a moment, as he is our professional lead person on audit matters.

The amendment to the Scotland Act 1998 that is proposed in the finance bill will require the Comptroller and Auditor General in the NAO to prepare a report on a number of matters that must be covered, and give him a discretionary power to look at value-for-money issues, which he may consider. That is not the same as the usual requirement that he and we have to audit a body and prepare an opinion on the financial statements, although it can give a great deal of assurance.

I shall ask Russell Frith to talk you through that distinction.

It will be an unusual audit for the NAO, in that it is auditing an extract from a set of accounts. The NAO audits the whole HMRC set of accounts. Within that set of accounts, there will be certain numbers that relate to the Scottish rate of income tax, but those numbers will be individual numbers and will not themselves form a separate, discrete set of accounts. That is one of the reasons why the amendment is as it is. It requires the NAO to report specifically on the adequacy of HMRC’s rules and procedures and the correctness of the sums brought to account. The first part, about the adequacy of HMRC’s rules and procedures and about compliance with those rules, is important in relation to the identification, and maintenance of the identification, of the Scottish taxpayers.

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When we discuss with the NAO the scope of its work and, later, its findings, I believe that we should concentrate our efforts on ensuring that it is doing enough work on the key risk areas—the identification of Scottish taxpayers is the main one—to provide a similar level of assurance on those as we would provide on any other part of the expenditure or income of the Scottish Administration. What we are looking to achieve is similar levels of comfort, but in professional terms we would have to use slightly different words from what we would use for a full set of accounts.

My overall expectation from what the NAO is required to do and what we will do in providing what I hope will be a constructive challenge and review of what the NAO does is that the committee will end up with the same level of comfort in relation to the SRIT figures as it would for anything else that it considers.

I think that I follow that. I would expect the same rigour to be applied to systems and processes, and so on. However, I come back to the point that we do not know who the Scottish taxpayers are. I am sure that any member of the public listening to or watching this evidence session would probably ask the same question that I will ask: how can you give an assurance about the correctness of the sums if we do not know the numbers of people involved?

We would expect both HMRC and the NAO to look at how we identify those taxpayers to a sufficient degree of accuracy. There are lots of other areas of audit where we are looking for things that might be there but are not being disclosed. That work in itself is not unique. With regard to the Scottish taxpayers who have identified themselves, provided that the Scottish rate of tax remains the same as the UK one, there is no particular incentive for people to declare themselves to be Scottish taxpayers or not, because they will pay the same amount.

The risk increases if the Scottish rate of income tax differs from what is applied in the rest of the UK. For example, if the Scottish rate is set higher, we might expect there to be a move of people who no longer consider themselves to be Scottish taxpayers. We would therefore expect both HMRC and the NAO to focus on the reasons for such movements and their acceptability. Similarly, in the opposite direction, if the Scottish rate is set lower, we might expect a lot of people who previously did not declare themselves to be Scottish taxpayers to begin to do so.

From an audit of risk point of view, it is about looking predominantly at the movements in Scottish rate taxpayers and the reasons for those movements. That would be done once we have got over the initial process of identifying the core Scottish taxpayers the first time round. For that, we will look to HMRC to develop its approach to looking at, for example, its address databases and, in particular, to determine how it will test the people who it has not identified through its initial trawl.

On that point, I refer to a submission from the HMRC team in June 2013 on the issue of the tax gap, which my colleague Colin Beattie raised—the difference between tax due and tax collected. The submission states quite clearly that HMRC

“would not have sufficient data to make meaningful estimates in respect of Scottish taxpayers alone.”

That statement raises questions about the quality of the whole assurance that can be given to the Scottish Parliament and the Scottish public. I do not know whether we will get any closer to that assurance or whether in effect we are just doing the best we can with this. However, it is almost as if we are being handed the responsibility but being asked to wear dark glasses—or in some cases a blindfold—which interferes with our ability to see what is going on. If we cannot get a complete picture, how can we give assurance? That is my final question on that issue.

I can offer the first part of an answer to Mr Coffey’s question. The Auditor General might wish to comment, too. As I recall, the route statement that Mr Coffey quotes from was explaining something of the mechanics or dynamics of how tax compliance operates, so again, we are talking about the 1 per cent of income tax receipts that require compliance intervention by HMRC.

HMRC is saying that it does not expect to have a detailed breakdown of the results of its intervention activity by reference to the status of the taxpayer. It will know what effort it puts into income tax compliance work and it will know what the yield is from that work, but it will not be able to say that 10 per cent of that yield is attributable to Scottish taxpayers, for example. It will not have that data.

HMRC would be able to say that, on average, taking a number of years together, the yield from income tax compliance is a certain percentage of the total income tax receipts. The estimate that it has used in discussion with the committee is 1 per cent so, looking back over previous years, HMRC would expect to raise something like 1 per cent of the total income tax receipts from compliance activity.

HMRC would also say that it has no information that suggests that Scottish taxpayers and people who employ Scottish taxpayers are more or less likely to be the subject of compliance activity than taxpayers and employers in the rest of the UK. Therefore, a reasonable extrapolation is that 1 per cent of Scottish rate income—that is, the income from the SRIT—can safely be estimated to come in through compliance activity. In other words, the Scottish rate is a representative sample of UK income tax as a whole.

That is what I understand the HMRC evidence to be conveying, but the Auditor General may want to comment on that.

Alistair Brown is right about the compliance element of the tax gap. My understanding is that it also includes estimates made by HMRC about the effects of tax avoidance schemes and of what it terms the hidden economy—cash transactions that are never declared. HMRC does not feel that it would be possible to disaggregate those figures to show the effect for Scottish taxpayers or the Scottish rate of income tax against the effect for the rest of the UK. That is not a surprise to us. Again, it is one of the features of collecting the SRIT on a shared tax base through a shared and common system.

On the broader question that Mr Coffey raised about the absolute importance of identifying who Scottish taxpayers are, we can only agree with that whole-heartedly. As Russell Frith said, the first exercise will be to make sure that there is a complete database of Scottish taxpayers who are eligible to pay the new SRIT when it is introduced in 2016. That information has not been needed in the past because there has never been a tax of that kind. That will be a major focus of interest for the NAO and for us under the proposed new clause in the finance bill.

Once that initial exercise is complete and we are satisfied with it, the focus will shift to how HMRC will ensure that it is kept up to date against the background of the potential risks that Russell Frith has identified, which may give individual taxpayers an incentive to opt into or out of registration as a Scottish taxpayer. Compliance activity will focus on that and minimise the possibility of it.

I have a final question on the role of Audit Scotland in this process. When we embarked on this, I think that members were keen to make sure that the role of Audit Scotland in the entire process would be positive and influential—that there would be a real role for Audit Scotland to play. In your response to the question that we put to you about that, you say:

“Audit Scotland could discuss with the National Audit Office their planned work in areas relating to the SRIT”.

I was hoping that you would have a more formal role. I do not want to suggest that there be duplication of effort—an issue that was mentioned in some of the responses. However, given your role in providing assurance to us, I was hoping that your organisation would have a more positive and proactive role in giving us an overview. I would be a wee bit concerned if we were to have meetings in future in which we had colleagues from the United Kingdom department in front of us but you did not have a role. I suggest that if reports from UK departments are laid before the Scottish Parliament, your agency should have some kind of oversight of them or ability to reflect on them and give us your opinion of their worth and accuracy. Otherwise, we would be losing the valuable input that Audit Scotland has given this committee over many years.

I understand that aspiration entirely. All our thinking has moved on since we gave our response last summer. We have reached a clear understanding with the NAO, HMRC and the Scottish Government that our role would be to discuss with the NAO the work that it needs to do to fulfil the new requirements under the finance bill and that we would have the chance to influence that work, respecting the Comptroller and Auditor General’s discretion, which reflects mine, to make his own decisions about the work that he will do.

Once the work is complete, there will be a second formal discussion in order to understand the findings and the reporting that is due to come from it. Alongside the report that would come to this committee from the NAO on HMRC’s extract of accounts, I would be very happy to provide my own report, either to reassure you that we were fully content with the work that the NAO had done or to raise with you any questions about its work’s coverage or findings of which I thought you should be aware. My powers already enable me to do that, but it would be useful to capture it in a memorandum of understanding once the new arrangements are in place from 2015 onwards.

I hope that that would give you a higher level of assurance than you are suggesting you have at the moment, without getting into the complexities of Audit Scotland’s statutory rights of access to HMRC as a UK body. I think that that would give you the reassurance that you need that Scotland’s interests are being fully taken into account in that audit work. I am reassured by the commitment that we have experienced so far from the NAO and HMRC to making that work in your interests as well as the UK Parliament’s interests.

Thank you.

I thank Mr Brown for his comments, which have helped my understanding of the new system, which is quite complex. We are here to look at the role of the auditing systems, but we have not introduced the finance systems in the first place. I hope that you do not mind clarifying a couple of issues for me. What is the role of revenue Scotland? You said that you can call on its expertise.

We do not expect revenue Scotland to have any formal role in the collection of the Scottish rate of income tax. The calculation of the amount due and the paying over are entirely HMRC’s responsibility. My earlier reference to revenue Scotland was simply to draw attention to the fact that I have a colleague there who is well versed in UK tax matters.

I just want to clarify this. Clearly, it is the issue of accountability that is vexing us. The Scottish Government, not HMRC, is the body that we hold accountable for raising the SRIT.

I remind the committee that HMRC has appointed an additional accounting officer—Edward Troup—who gave evidence here two weeks ago. There is therefore a direct line of accountability—it is a very special one that was set up only for the Scottish rate of income tax—from Edward Troup, on behalf of HMRC, to the Scottish Parliament and, largely, to this committee.

Do you think that Mr Troup is accountable to the Scottish Parliament? My understanding is that he is accountable to the Scottish Government and that it is the Scottish Government that is accountable to the Parliament for raising revenue through the SRIT.

10:30

I can certainly verify this for the committee, but my understanding of the position is that the arrangements that have been put in place by HMRC, which informally name Edward Troup as accounting officer, represent an expression of an accounting relationship to the Parliament. If I can lay my hands on anything that confirms as much before this evidence session ends, I will say so. If not, I will be happy to send the committee a note to confirm that.

Caroline Gardner looks as if she is keen to come in and clarify the point.

I was simply going to add to Alistair Brown’s comments by pointing out that I think that there are two important lines of accountability. It is clear that HMRC will collect this tax and that arrangements are being put in place to provide accountability to the Parliament but, equally, when I audit the Scottish Government I will look at its arrangements, the adequacy of the agreements between the Scottish Government and HMRC and the monitoring and oversight of what is going on in ways that can be reported very directly to the committee.

I want to make sure that I understand this. It is very helpful that HMRC has appointed Mr Troup as accounting officer and, indeed, Mr Morse was also very helpful in his evidence last week. They are clearly willing to come to the Parliament to talk about the reports that they have laid and so on. However, they and indeed HMRC have also made it very clear that they are not answerable or accountable to Parliament in that sense. We cannot, for example, demand that they come before us; they will come if we ask them to, but we cannot make them come, which, in my view, is quite a clear line of accountability.

On the other hand, the Scottish Government is answerable to Parliament. My understanding, therefore, is that, although we will get very helpful and informative administrative information from HMRC, strict legal accountability will lie with the Scottish Government. The Government will be responsible for raising the Scottish rate of income tax and will be accountable to this Parliament for the amounts that have been raised, the accuracy of that information and so on. Am I right or wrong in that?

Both are true. As Russell Frith has pointed out, this tax is unique in that it will be set by the Scottish Parliament but collected by a UK-wide body. As a result, the accountability arrangements, too, are unique. The Scottish Government clearly has an accountability that I will be monitoring through my audit work and on which I will report to the committee and the Parliament, and the new arrangements that have been put in place for HMRC via the NAO will provide you with an additional line of accountability.

Just for clarification, as far as audit responsibility is concerned, you will not only have a working relationship with the NAO but audit the Scottish Government’s role in collecting the SRIT.

Yes, and we are already looking at that through the lens of the Government’s preparations for the tax. Mark Taylor, who leads for me on the audit of the Scottish Government, might want to say a little more about the audit work that we are planning in that area for the audit year that is just starting.

First of all, I point out that, as part of our on-going audit work, we are continuing to engage in understanding the Scottish Government’s arrangements. As we get closer to the date on which the SRIT will be introduced, we will ramp up that engagement and understanding.

Our focus at the moment is very much on the Government’s oversight arrangements and its engagement with HMRC and how they are operating in practice to protect Scottish interests. We do not have any initial concerns about that but, as we have been discussing this morning, there is a lot of practical work still to be done and we will continue to keep all that under review. As the Auditor General has said, if concerns start to emerge about the Scottish Government’s performance of that role, we will have clear opportunities to bring them to the committee’s attention.

Can Mr Taylor or Mr Brown clarify whether the Scottish Government will have a separate and distinct line in its accounts for the specific amount that will be raised by the SRIT?

My expectation is that the amount that will be raised by the SRIT will not be separately identified in the accounts because the amount that will be due to the Scottish budget as a result of the Scottish rate will be included in the block grant, which is obviously a Treasury matter. As the Treasury advises us on what the block grant is, we also expect that it will advise us on how it has calculated it.

It is important to bear in mind the point that the amount that will be added to the block grant will be the amount that is raised from the Scottish rate, less the block grant adjustment that the UK Government will make in recognition of the fact that its Exchequer is no longer receiving that proportion of UK income tax. Our focus is on the net effect of the amount that will be raised through the Scottish rate minus the block grant adjustment, because that is what actually impinges on the Scottish budget. We are obviously very interested in the calculation of the block grant adjustment, which is a matter that the Parliament is interested in and which the Finance Committee has pursued and is pursuing with us.

We will be very interested in that. Am I right that there is an incentive built into the new system, in that if we increase the amount of tax take in Scotland, we can keep a proportion of it?

Yes. If the Scottish Parliament were to approve a resolution that set a Scottish rate at either more or less than 10p in the pound, the Scottish budget would see the financial consequences of that. In technical terms, those financial consequences would be calculated by the Office for Budget Responsibility, and we would take a close interest in its calculation. If a resolution were made before the beginning of the tax year to which it related—as it would have to be—the pay-over from the UK Government in the block grant would immediately reflect the calculated impact of a variation in the Scottish rate from 10p.

Why would you not report on that directly in the Scottish Government accounts, or to Parliament?

Audit Scotland colleagues will be able to keep me right here. As far as financial accounting is concerned, the income to the Scottish Government’s budget, which it then spends—our funding—is simply a single line of funding from the Treasury, at the moment. In the future, that will be made up from a calculation involving the Scottish rate. As far as our accounts are concerned, the source is the Treasury’s block grant. How the Treasury calculates that is upstream of our accounts. That is not at all to say that there will not be information available, but it might not be in our accounts.

Perhaps the Auditor General can answer this question. How will we be able to check that?

You certainty should be able to check it. The committee may recall that, in my submission on the issue last summer, my final point was on the importance of ensuring transparency about the proceeds from the Scottish rate of income tax, and about the consequent adjustment to the block grant.

Alistair Brown has accurately described the question of the accounting treatment, and there is also the wider question about how the Scottish Government reports that. That is part of the broader information that the Parliament needs, and that all of us as citizens and taxpayers need in order to understand the state of the Scottish public finances, and it will be the basis for decision making in the future. It is very important to have that transparency, and we will be keeping an eye on that in our audit work over the next couple of years.

I very much agree with what the Auditor General says about transparency. Accurate and full information is very important, and we all do everything that we can to provide it. Mr Swinney has recently written to the convener of the Finance Committee, setting out the information that he expects the Scottish Government to provide to Parliament in future draft budgets, including information about tax receipts.

The immediate context of Mr Swinney’s letter was devolved taxes—the land and buildings transaction tax and the Scottish landfill tax. In his letter, he said that he expects the same provision of information in relation to the Scottish rate once it starts a year later, in 2016. The Scottish Government is, essentially, saying that it will provide all the relevant information that it has about actual and forecast Scottish rate receipts at draft budget time, which is normally in September.

What is the mechanism or process by which we will see that calculation? Will it be provided by the Government through the budget papers? Will we have to approach the National Audit Office? I cannot work it out. Will it be the report that is laid before us by the NAO, or will a Scottish Government report be laid before us that provides the vehicle through which we can make our own judgment and do our own scrutiny of the calculation that has been made of the amount that has been raised through the SRIT?

The Parliament would have information in the draft budget, some six or seven months before the beginning of the financial year, about the details of the calculation that the Treasury had provided to us on the Scottish rate and the block grant adjustment.

As we develop this new world of greater financial autonomy for Scotland, there is a question about how the Scottish Government’s financial reporting will develop to reflect that. I published a report on the matter in June, on which the committee took evidence, and we identified that issue as being one that needs further thought. We are engaged with the Government on that.

My sense is that the cabinet secretary’s commitment to producing more information at budget stage is welcome, but there is further discussion to be had about broader financial reporting, how the proceeds of the Scottish rate of income tax are made transparent to Parliament and others who have an interest, the impact on reconciliation of the block grant, and the broader picture of the state of Scotland’s public finances. The provision of such information is good practice in any case, but it will become increasingly important as we have more financial autonomy, more decisions to make and more volatility risk to bear, in that context.

May I clarify one issue?

This should be your last question.

My question is about the 1 per cent of receipts that we were talking about. I have more than one question—I am sorry, convener, I can see your face sinking into despair. I think that Mr Brown clarified that the Treasury calculates that figure because, in effect, 1 per cent is what is raised every year through compliance activity. Is that where the 1 per cent comes from?

Yes.

I think that in evidence two weeks ago Sarah Walker told us that even a year after the end of the tax year, most of that 1 per cent will not have been collected—

That is correct, yes.

Therefore, the Treasury is still making an estimate, even at that stage. We heard that estimated receipts from the tax are about £4.5 billion, so 1 per cent of that would be £45 million. How do we check whether it is 1 per cent, 2 per cent or 0.5 per cent?

As we understand it, the proposition from HMRC, and from the Treasury, which is also involved in this, is that by looking through a number of years’ data from income tax collection files or records, HMRC will be able to provide an accurate estimate—in general, taking one year with another—of how much of its income tax receipts come in after the plus-one-year cut-off point. On the assumption that future years are fairly like previous years, HMRC believes that that is an accurate enough basis for estimating the proportion of tax that is still to come. It will then uprate the actual receipts by that 1 per cent—or whatever the amount is found to be when there is fully accurate sampling of previous years’ data—and add the figure to the actual receipts to give the estimated 100 per cent of Scottish rate receipts.

That is relatively reassuring. The point that Mr Frith pursued, which I raised at our meeting two weeks ago, is more disconcerting. What happens if we in Scotland change the rate or create different rates for collection? As I tried to say earlier, the intention is not just to change the rate but to grow the Scottish economy and to reap the benefits of a faster-growing economy.

I assume that we will identify a lot more than 99 per cent of residents who are liable to pay income tax in Scotland—I assume that the rate will be 99.99 per cent. Am I wrong?

The honest answer is that we do not yet know. There has never before been a need to identify Scottish taxpayers. The Government and HMRC are planning the exercise, which will be a fundamental building block of the new tax, and we and the National Audit Office will take a close interest in the matter, because getting the number right will be the foundation for the tax being fair and equitable as well as for it raising as much as it can for the Scottish Government and the Scottish Parliament’s programme for public services and economic development.

So, we still do not know. Do we have an estimate of how many Scottish taxpayers we will be able to identify? I think that Jonathan Sewell suggested that the Scottish Government will do most of the work to identify those people.

HMRC is leading on that work, but we have had a number of sessions with analysts from across the Scottish Government on the various data sets that we have, such as national health service data and migration data, which are contributing to the process.

The process is on-going. HMRC has done some work to clean up its database of addresses and I think that Mr Troup told you two weeks ago that he would be happy to come back and give you more reassurance on the matter.

10:45

I cannot at this point give you certainty about the final number, because we have not reached that point. We are driven by the incentive to know the total number of Scottish taxpayers as best we can. We will set the limits when we are further down the line. We have every incentive to ensure that the figure is as accurate as possible, so that we get as much money as possible. The system will have to prove that. As I said, the system will be transparent; the NAO and Audit Scotland will look at it, as will we.

Ken Macintosh made a point about the risk of Scotland’s having different rates from the rest of the UK. That is a big risk, and a line of work is being done with HMRC to consider how a compliance system might deal with that. As Sarah Walker said to the committee, we have from Scottish Government data a reasonable idea of migration between the rest of the UK and Scotland. If those data were to change in a way that was different from what we expected, that would be a clear signal to do more compliance work and would give a head start on where that should be based. A lot of work has been done, but because the issue is so important, more work is being done to improve the robustness of the approach.

It is difficult to audit if we do not know things. The question will be crucial. When the system is introduced and the rates are the same, the system will be robust and fair. However, as soon as the rates change, that will create an important difference, which is when fairness comes in. It could be quite easy for somebody with two homes, for example, to change their place of residence. If HMRC could not identify that, I cannot work out how the Auditor General could reassure us that HMRC’s calculations were right.

HMRC will have to do the work. That is the foundation on which the whole Scottish rate of income tax system is built. As Alistair Brown and Jonathan Sewell have said, a big part of the project plan for implementation in 2014-15 is identifying Scottish rate taxpayers, testing that, looking for people who might be missing from the database, looking at people who might be able to claim either status, and testing which status is right.

Getting that right will be a crucial initial exercise in which we and the NAO will have an interest. We can, at the appropriate point, provide the committee with some assurance about how well, or not, that has been done. For HMRC, the job will then shift to ensuring that changes are appropriate—especially if the Scottish rate changes, which might give people an incentive to misstate their place of residence.

Such work is not easy, but it is not unprecedented in taxation. It is the key focus of our interest at this stage in the implementation plan.

Mr Brown said that the main responsibility is with HMRC. Will you clarify what exactly is revenue Scotland’s function?

Revenue Scotland exists as an administrative entity at the moment. It will be given a statutory basis through the Revenue Scotland and Tax Powers Bill, which has been introduced in Parliament. Revenue Scotland’s function will be to collect devolved taxes, of which there are two at the moment.

So, revenue Scotland will have no input whatever into the Scottish rate of income tax.

That is right: revenue Scotland will have no role in collecting the SRIT.

When we scrutinise what goes on, an expert tax function will have been set up in the Scottish Government, called revenue Scotland, but it will make no comment on the significant issues in dealing with the Scottish rate of income tax. Will that be left to another Scottish Government department?

I will make it clear: revenue Scotland will have no function that is to do with collecting the Scottish rate of income tax. However, revenue Scotland officials are colleagues of ours, so it would be entirely appropriate for us to ask them for help, information or comment internally in the Scottish Government.

That would happen only if you chose to do so. Otherwise, a separate section in the Scottish Government will deal with the Scottish rate of income tax, and we will have an expert tax body called revenue Scotland that will have nothing at all to do with commenting on the Scottish rate of income tax, unless you decide to ask it to comment.

You are correct that revenue Scotland will have no formal role in collecting the Scottish rate.

I am not talking about the collection, because we understand that that will remain with HMRC. However, with regard to all the responsibility and functions that you will have as part of your engagement with the Scottish rate of income tax and ensuring that it is done properly and that you get your fair share, all that expertise will be in a separate section within the Scottish Government and will not be within revenue Scotland.

No. The expertise will be called on, as necessary, from the office of the chief economic adviser, for example. When it comes to forecasting and tax receipts at a UK level, that is done by the Office for Budget Responsibility. In Scotland, our expertise in forecasting lies with our economist colleagues in the office of the chief economic adviser, so we would go there for expertise on tax forecasting. There may well be issues for which we will also want to go to our colleagues in revenue Scotland.

But, formally, revenue Scotland will have nothing at all to do with any aspect of the Scottish rate of income tax.

Its formal functions do not include the Scottish rate.

Okay. Thank you.

Ken Macintosh talked about the tax take, but the response that we got was about the tax rate. Can you clarify the point that if, for any reason, a future Scottish Government raised the tax rate it would get to keep the money, but if the Scottish economy grew at a greater rate than that of the rest of the UK, we would get the tax back but there would then be a readjustment of the block grant that would probably nullify the growth?

You raise the issue of the interaction between Scottish rate receipts and the calculation of the block grant adjustment, around which there is a lot of complexity. Briefly, the Scottish rate receipts will be driven first of all by the tax rate that is set by resolution of the Scottish Parliament on a proposal from a Scottish minister, then by the tax base to which the rate is applied. In effect, the tax base is the non-savings, non-dividend income of Scottish taxpayers. As the Scottish economy grows and the income of Scottish taxpayers grows, the tax base is increased. That is all on the side of receipts from the tax.

Offsetting that there is the block grant adjustment. The agreement between the two Governments, which has been reached at ministerial level and discussed publicly, is that the block grant adjustment will be indexed to movements in the UK tax base. The effect of that is that if the Scottish economy grows by reference to the UK economy—that is, if both economies are growing but the Scottish economy grows faster—there would be benefit to the Scottish budget. If the Scottish economy grew more slowly in comparison with the UK economy, the block grant adjustment would, by a small margin, exceed the income from the Scottish rate.

To clarify, if the Scottish economy grows faster than that of the rest of the UK, would the tax benefits all come back to Scotland?

Yes, they would. The system is designed to deliver that.

Good. Earlier on, the Attorney General—sorry, I mean the Auditor General. I was going to say that you have been promoted, but I am not sure whether that would be a promotion.

The Auditor General talked about confidentiality. Is that a matter of concern? Will anyone in the Scottish Government have access to the confidential information that HMRC holds? If not, is that a matter of concern? Again, we return to the issue of recognising who Scottish taxpayers are. However, there is also the question whether we are getting a fair deal. Will confidentiality work as a block to either of those targets?

I will kick off from the audit perspective, but I am sure that Alistair Brown will want to add to that on the second part of your question.

As it stands, HMRC is jealous of taxpayer confidentiality, for good reason—as taxpayers, we would all expect that—and who has access to taxpayer information is clearly and tightly defined. At present, the National Audit Office has statutory rights of access to the information for the purposes of its audit work. Again, that is closely controlled to ensure that it is used only for those purposes and not more widely. We in Audit Scotland do not have such access. However, subject to the agreement of the new audit arrangements in the way that we have discussed, I do not think that we need that access. I think that we can provide you with the assurance that you need about the audit work that the National Audit Office has done without needing to look at individual taxpayer records.

Alistair Brown is better placed to answer the broader question of the extent to which the Scottish Government has or might need such access, but my answer is that the arrangements that we are talking about should give you assurance about Scotland’s fair treatment within the UK system. The question about the impact on tax management is for Alistair Brown.

We are interested in anything that would impact on the aggregate of tax receipts. I am not aware of any way in which the operation of taxpayer confidentiality would cut across our ability to satisfy ourselves or to look for systems or reporting arrangements that satisfied us about that. The short answer is that, at the moment, we do not see proper taxpayer confidentiality on HMRC’s part as something that would block us in doing the work that we feel that we need to do.

That takes me on to a different point. Do we have any mechanism in place to deal with the situation in which the NAO finds that there is a difference or that the sums that are attributable to the SRIT are not correct?

The amendment to the Scotland Act 1998 that is proposed in the draft finance bill places a duty on the NAO to report both on the amounts that are collected under the Scottish rate of income tax and on HMRC’s procedures and rules for collecting it. If the NAO found that there were material problems with that collection or that the amounts that HMRC had reported in the extract from its accounts were not correct, the NAO would report that to the Parliament and I would have the ability to report alongside it to you about the work that the NAO had done and my view of the implications for the Scottish Government’s finances.

Would there be a role for the Scottish Government to take that back to HMRC?

The memorandum of understanding that has been signed—the committee saw a draft of it at the end of 2012—puts in place dispute resolution arrangements whereby, if there were a disagreement about the administration or collection of the Scottish rate, the issue would first be escalated to senior officials and then, if necessary, to ministers in the Joint Exchequer Committee, which brings together Scottish and UK Government ministers.

So you are happy with the arrangements.

Yes.

My question picks up on the point about the function of the Auditor General’s office. The information will be given to you, and you are working through the audit process to bring it back in whatever shape or form. However, I am not totally clear about a couple of things. First, to what point in the information will you be able to audit? Obviously, there will be figures to which you do not have access, because they come from HMRC. Given that you will have to work with a top-line figure, how can we check back? We politicians sometimes have a punch-up or whatever on the odd occasion that we talk about money, particularly when there are different Administrations sitting 400 miles apart. How far back can you go to give the Public Audit Committee comfort in the knowledge that the information is absolutely correct, given the changes in the policy on gathering information?

I am pretty sure that you have had a bash at answering my second point, but how will you determine the value of the service that we get in terms of data gathering and reporting mechanisms?

11:00

The first assurance for the committee and the Parliament can be found in the requirements in the finance bill amendment to the Scotland Act 1998, which specifically requires my Whitehall counterpart to audit HMRC’s extract of accounts and to provide assurance on the procedures and rules that are being used to administer and collect the Scottish rate of income tax, the amounts that are being calculated as due to the Scottish Government from the tax and the amounts that are being billed to the Scottish Government for the marginal costs of running the system. Assuming that the legislation is passed, my counterpart will be able to do those things.

The other line of comfort for the committee is that every year my team will sit down with the National Audit Office team and talk through the audit work that it plans to carry out in order to fulfil those responsibilities. Given our existing working relationship, I expect that we will have the chance to drill down into all this, ask questions about the decisions that it has made and suggest areas of work that it should consider in order to carry out its responsibilities. Moreover, we would sit down with the team at the other end of the process to talk through what it had found, what it planned to report and any implications for the Scottish Government.

The third and final line of assurance is that when the Comptroller and Auditor General’s report is laid before this Parliament I will be willing and very able to lay a report that sets out any matters that have arisen in the process that I think should be drawn to your attention. The report might simply say that I am satisfied that the NAO’s work covers the requirements in the Scotland Act as amended and that there is nothing to draw to the committee’s attention. However, in the unlikely event that I thought there was a concern, my report would be able to say, for example, that the work that had been done to identify Scottish taxpayers might not be adequate to give you the assurance that you require. I am not at all suggesting that that is likely to be the outcome but, if it were, I would have a vehicle for reporting to the committee and the Parliament on the NAO’s work under the new legislation.

On the back of those comments about the assurances and reassurances that the committee can take from this, I should also point out that there will be a transition period at the beginning of the SRIT’s operation. The UK Government’s command paper, which was published in November 2010, says that the transition period will be two or three years. No decision has yet been taken on that matter; nevertheless, during the transition period, fluctuations in Scottish rate of income tax receipts will not affect the Scottish budget. The block grant adjustment will be set at exactly the same level as receipts from the Scottish rate. By definition, therefore, the net result will be zero and the Scottish budget will not be affected.

In any case, the point of the transition period is to give the systems an opportunity to settle in and demonstrate that they are working adequately. When it ends, the system will become real.

Thank you very much for contributing to what has been an unexpectedly long session on a very dry but nevertheless important issue. We still have some way to go on this matter and look forward to getting an update from the Scottish Government and Audit Scotland as matters develop.

I suspend the meeting for a few minutes to allow a changeover of witnesses and a comfort break.

11:03 Meeting suspended.

11:08 On resuming—