Agenda item 2 is discussion of the Scotland Act 2012, which the committee discussed some time ago, before I rejoined it. This morning, we welcome to the committee Amyas Morse, who is the Comptroller and Auditor General at the National Audit Office, and, from Her Majesty’s Revenue and Customs, we welcome Mr Edward Troup, who is the second permanent secretary, and Sarah Walker, who is deputy director and head of the devolution team. Would Mr Troup or Mr Morse like to make opening comments?
It is good to be here again. Thank you for introducing me and my colleagues. Quite a bit has happened since I appeared before the committee with Sarah Walker and Amyas Morse a year or so ago. We are happy to update the committee on the details.
At the higher level, our working relationship with the Scottish Government continues to be extremely good. After this meeting, I will spend time with colleagues in revenue Scotland. We feel that progress on implementing the Scottish rate of income tax is definitely on track. The office of Government commerce gave us an amber/green rating for project progress over the summer, so we feel that we are in good shape.
However, as the committee will know, this is new territory for the United Kingdom, and we are conscious of both the committee’s interest and the wider interests of the UK in getting it right. I am happy to be here to answer questions—especially the ones that I know the committee has about concerns about our performance. Through Amyas Morse’s and my appearing at the committee, we can reassure you about what we are doing.
Thank you.
At the previous committee meeting that we attended, I was kindly given the opportunity to make an opening statement, so I will not go over the ground again. However, I would like to reiterate that I have a good working relationship with Audit Scotland and that I am prepared to co-operate closely with it to ensure that the committee gets the form of assurance that it finds most useful. I do not see any difficulty in considering any of the options for that. The committee is aware of the fact that I have statutory access, which is not easy to change, although I see no difficulty in our establishing our working arrangements. To date, we have co-operated very well on a range of issues.
Thank you. Mr Troup said that things are going well and that you have been given a green light in terms of preparedness. The changes will kick in in just over two years. In terms of Government planning, two years is not long. I am not criticising you, but if you look at many of the major Government projects that have been planned and designed across a range of departments—whether it is HMRC or defence, or for all sorts of procurement—there has been disaster after disaster, in particular when it comes to information technology systems. We can come back to that later. I expect that officials learn as they go and that there is an attempt to ensure that mistakes are not repeated. However, how can we have confidence that in less than two years the most significant change—as far as Scotland is concerned; perhaps for the UK, too—to collection and disbursement of taxation will take place?
Although you say that preparedness is good and that you have a green light, we have a response from the Scottish Government dated 7 January that states that for many issues the detail remains under discussion and not all aspects have yet been defined and agreed—and yet we have only two years.
I think that there are two ways to respond to that. First, I make the point that collection of the Scottish rate of income tax is deeply embedded in, and is an integral part of, our wider collection of income tax—which members will know is principally under the pay-as-you-earn system, although about 10 per cent of receipts come in through self-assessment. Both are big systems, but they are existing systems. We have had challenges with them over the years but they are currently running extremely well and smoothly. We are therefore not piggybacking but are just using the existing structure of the PAYE and self-assessment systems. The principal requirement under the Scottish rate of income tax is simply to require from those systems the amount of the receipts from PAYE or self-assessment that should be allocated to Scottish taxpayers, from whom the Scottish rate is drawn.
I do not want to say that the process is simple—nothing in national-scale systems is ever simple—but in the context of the scale of the IT systems that we are already running successfully, this is a very manageable task. Amyas Morse may want to comment from the NAO’s perspective on our performance.
The second point is about our record and performance in IT delivery. I gave either this committee or the Finance Committee some figures on that when I appeared at a meeting last year. In 2012-13, 96 per cent of our IT projects were delivered on time; so far this year we are up to 93 per cent. The balance has not gone wrong; we have just delayed projects a bit to allow for further testing. So far this year, 100 per cent of the major IT projects that have been delivered have been delivered on time and without defects. We currently have a good performance record on our IT.
I do not ever want to give the committee the sense that I am relaxed and am not concerned about the matter—I am the additional accounting officer and I am concerned, but I do not see the IT challenges as being cause for concern or as a significant risk.
Has HMRC had difficulties in commissioning major IT projects in the past five to 10 years?
I do not have all the statistics in front of me. In the past year or so, we have rolled out real-time information, which has been one of the biggest changes to the PAYE system in a generation. Although that has not been 100 per cent implemented—the programme has not been completed—the performance to date has been well above our expectations and the change has been successfully delivered.
Amyas Morse may want to say something about that specifically or about IT more generally.
I do not deny it for a minute and it would be pointless to say that it is not true, because there have, over the past five years, definitely been hitches in the context of big technology changes. In fairness, HMRC persisted through those hitches—primarily under the leadership of Lesley Strathie, who did a great job in weathering a lot of those storms—and ultimately came out with a really modern and good PAYE system that works pretty well.
The most reassuring thing that I can say is that the core systems are in a stable state at the moment, as far as I can see. There is no massive change to anything that you should be worried about relying on. Mr Troup’s comment that a grandiose IT project is not involved is probably the most reassuring thing of all, whatever view you take. In fairness, the IT position in HMRC has reached a good, stable place. It has been through some tribulations over the past years, but it has come through them, largely speaking, and we have learned quite a lot. It would be unfair to say less than that. To be pragmatic, I would say that my main point is that a big IT development is not needed.
We always expected that the IT development for the Scottish rate of income tax would start in the next financial year, after April 2014. There is no point in doing that too early, because all the other changes in the PAYE system have to be intercepted. If things are done too soon, things will have to be changed again, because other things in the system will change. We are well on track to having an IT requirement in place by April this year. Although we say that some issues are still under discussion, they will not have a major effect on IT implementation.
How significant will the new IT system be in order for it to cope with the changes? I think that Mr Morse and Mr Troup have suggested that it will not be “grandiose” or huge.
The new system will be much smaller than the real-time information system and the PAYE rebuild that we did two or three years ago. Much of it had already been worked out to deal with the Scottish variable rate, which has been in legislation since 1998, although it has never been used, so we already had a pretty clear understanding of how the system would work in PAYE.
It is clear that there are some differences with regard to the Scottish rate, which we are dealing with now. The main difference involves our being able to attach an identifier to the tax codes of Scottish taxpayers, which will trigger employers to deduct tax at a different rate. We always expected to have to do that for the Scottish variable rate.
The other things that need to be done are to do with the accounting and ensuring that we can track money through into the money that is paid over to the Scottish Government. Again, we understand how that works; it is pretty well understood.
09:45
I appreciate that you are still discussing many issues with officials and that there are still many aspects to be defined and agreed. The last time you were here, we discussed compliance, prosecution rates, error and fraud levels, tax gaps and debt. Mr Troup talked about how much of the receipts will be allocated to Scotland. I appreciate that I cannot ask you about the discussions that you are having with officials, but how much information is it appropriate for us to have, as an audit committee? You will appreciate that this is new to us as well. Does Scotland need to know about compliance and prosecution rates, error and fraud levels, tax gaps, taxes that are written off and tax disputes or is just one sum necessary? I am not sure how much information is essential or appropriate, so I seek your guidance.
That is definitely an issue for continuing dialogue; I wrote to the convener about it before Christmas. To step back a little, the question is really about how much information you need to be distinguished from the general information about all of those things, which appears in our accounts, which we report our performance on, and which the NAO scrutinises.
I will put a bit of context around the question in relation to how income tax works. Ninety per cent of income tax comes in through PAYE. Broadly speaking, those moneys just come in. The other 10 per cent of income tax comes in through self-assessment. Of the total UK income tax receipts, 99 per cent comes in without any intervention from us because we are a compliant nation—or nations. Tax is paid because there is confidence in the integrity of the system and so on. In relation to that 99 per cent, your questions are probably simply about accounting. Are we ensuring that we give to Scotland the appropriate amount of the aggregate £200 billion or so that we get? That is an accounting process that we need to get absolutely right and which Amyas Morse and the NAO need to be happy is right.
The question about compliance, prosecutions and debts really relates only to that last 1 per cent, where we apply compliance activity in order to ensure that we get the tax in. We have improved our compliance processes nationwide. Our performance on reducing the tax gap, compliance yield and so on is published. Our performance has improved over the past few years and it is on an improving trend. As regards how much of that relates to the different categories of compliance, again you can look at the aggregate tax gap numbers, but when you look at that 1 per cent, there is a certain amount of compliance work through employers who have misapplied PAYE—they do not put expenses through, they put the wrong codes through or whatever. We have a successful yield from that employer compliance work.
However, it is extremely difficult for us to disaggregate that figure between Scottish and non-Scottish taxpayers. That is certainly the case when it comes to UK-wide employers. Although the committee is interested in it because it is about getting in additional money, which would add to the PAYE receipts, it is hard for us to disaggregate it. The bulk of your reliance must be on our general employer compliance work, on which there are data and information that we can disaggregate.
There is also direct compliance work with the self-assessment population—individuals who file returns and do not put things on the form, put in the wrong things, claim the wrong expenses or just do not file. In those cases, it is possible—with a bit of work and some changes to our systems—to get some information about Scottish taxpayers as opposed to UK taxpayers. In the course of discussions with the Scottish Government, we can look at providing some more information on that, albeit that there will be a marginal cost for that.
Mary Scanlon asked for guidance. The question for the committee is how much extra value the information would give you. It would give comfort about that 1 per cent of aggregate compliance, in addition to the 99 per cent, and you would get some extra information that would reassure you, over and above the core reassurance that we as a department and the Administration act even-handedly. We have no interest in applying compliance processes differently in England, Wales, Scotland and Northern Ireland. Indeed, under the new set-up, we will have at least as much skin in the game in receipts from Scottish taxpayers as you have, because you will have 10p and we will have a further 10p—or a further 35p—plus all the national insurance.
That is the question for the committee. We can do a bit on the self-assessment population, but we cannot do much on the PAYE population because of the nature of PAYE. However, at the highest level, the overall reassurance comes from the fact that it is the 99 per cent that really matters to you. I am sorry to have given such a long answer, but I hope that it has given you some thoughts to work with.
I appreciate that it would not be in line with the canons of taxation to spend so much money trying to understand that 1 per cent if it did not give us any additional understanding of the operation. However, the question was more about understanding whether our economy is different and whether people here behave differently from people elsewhere in the United Kingdom.
Given that discussions are on-going—I note that you are off to see revenue Scotland today—at what point in the next two years will you be able to give us more detailed information? When will everything be decided and agreed between HMRC and revenue Scotland in relation to that information and any other information that would be appropriate to the Parliament?
I will let Sarah Walker make detailed comments on timing but, in a sense, that will never be finally decided. We will go into implementation of the Scottish rate of income tax with a view of what information we will share with you from our existing systems, and what you want to pay for.
However, it will be an active relationship and engagement. I absolutely expect that we will change the information that we give as we see what is useful to you and what it is possible for us to provide. Our department is changing as we move into a more digital world. In three or four years, we might find that it is possible to give more information; we would certainly want to do that. The process will not be finally settled, although clearly we want to go into implementation of the Scottish rate with you having a clear sense of what information we will provide.
That was helpful. Thank you.
I ask Sarah Walker to answer on timing.
Under section 33 of the Scotland Act 2012, we are obliged to publish an annual report on implementation of that act. The next report will be published before 1 May. By then, we will have come to a pretty clear view about the design of the processes that we will operate to make the Scottish rate of income tax work. For instance, that will include how we will identify Scottish taxpayers, how we will contact them and how we will deal with address changes during the year. That will give us a basis on which to refine the cost estimates, which we know the committee is interested in, and which we are clearly interested in, too. At that point, once we have a clearer idea of the process, we will go into the next phase of our discussions on performance information. I do not think that we have a clear target date to have that agreed. Particularly where IT changes are not required—I do not think that many will be—there is no time pressure. Really, that is a matter for us to discuss with the Scottish Government.
I want to go back to the point that Mr Troup made about companies. Let us take Boots the Chemist, which operates on a UK-wide basis. I do not know where it runs its payroll and PAYE services but, for the sake of argument and given the nature of the company, I presume that it is south of the border, in Basingstoke or wherever. What is your observation to the committee? Are you saying that we—and for that matter you—will not be able to accurately assess how much of the Boots the Chemist PAYE allocates to Scotland? It will know how many employees it has in Scotland and, no doubt, we can ask it. How do we tie together the number of Boots employees in Scotland and the amount of money that revenue Scotland will gain from PAYE from Boots?
Can I not talk about any named taxpayer, even though I would not necessarily know anything about their individual affairs?
Of course.
A national retail employer will by definition have employees round the country. The employer compliance work will go into their core PAYE system and look at the way in which expenses are posted, the way codes are allocated and whether the update codes that they receive from us are properly allocated. Often a bit of employer compliance work will disclose that a particular form of benefit in kind, such as the cars, has been misposted; a particular category of expense may have been treated as non-taxable; the arrangement for dealing with a particular class of expenses is not in the agreement—there are a lot of agreements with individual taxpayers—or has not been properly applied; or amounts have just not been put through. That will take the aggregate information off their PAYE system and from that we will compute an adjustment to their liability. That will produce a compliance settlement that will result in both a payment to us, with an appropriate adjustment to our receipts, as well as, one would expect, an agreement from the business to change its practices in future.
As part of that compliance work we would not normally disaggregate the compliance yield between Scottish and non-Scottish taxpayers. It is possible to do so but, given the way in which payments to you are accounted for, the question is whether, for that last 1 per cent—and remember that that is settled up 12 months after the end of the period and often such compliance activities will take place later on, so in a sense you will already be accepting payment with a best estimate of an aggregate of what that 1 per cent comprises—it will be worthwhile for each of those national employer compliance settlements to put in what would be additional systems to report back how much of compliance intervention is allocated to Scottish and non-Scottish taxpayers.
It is not that that could not be done, because in a sense anything could be done. That is the trade-off, however, and I come back to my response to Mary Scanlon about the 1 per cent. What is the context for this?
I take that point and it is very fair. I presume that therefore the point to Mr Morse might be that, as the Scottish Parliament’s and Scottish Government’s check on HMRC’s ability to do its job properly, we might ask him to pick a couple of examples or use, for example, a couple of the UK companies in the North Sea oil sector that have more employees in Scotland than they do in London but still run their systems out of London. For the sake of argument, we might be interested in the compliance record of such organisations. Would it be reasonable to ask the NAO to look into that and report on that basis?
I will step back a little bit and say two things. My work on the financial audit of HMRC and looking at its systems and controls will be on an aggregate basis. It is a little bit difficult for me to say, “Well, I’ll tilt that around as part of my ordinary work.” I do not want to hold out that that is necessarily straightforward to do.
As I listened to the discussion it occurred to me that it was an interesting proposition for members of this Parliament to say, “What Mr Troup is saying is entirely correct and reasonable.” On the other hand, it is also taking quite a lot on trust to ask, “Wouldn’t you like to test some of this stuff somehow?” I realise that you might want to understand what it might cost for HMRC to be able to give you some additional information, what it could extract, and that it could spend a certain amount of money on testing whether that information was useful to you or not, rather than just say, “Oh, no. Thanks very much; we’re fine.” You might do either thing and neither of them is illogical. If you did ask for specific information, I would be happy to examine and audit it.
However, I have to do my examination based on the fact that I am auditing the whole of HMRC, so you would probably have to do something in addition to that for me to be able to cover that issue. If you chose to do that, we would look at any such additional information and give whatever assurance we were able to give, depending on the quality of that information.
10:00
I am trying to give an example of a UK company. When you look at HMRC’s record on its compliance work and at its ability to gain more revenue through that work, would you look at it, as you have just illustrated, on a UK-wide basis, or would you look at it in the context of Scotland’s interests?
We do not tend to go taxpayer by taxpayer, so if we found that there was a record of failure or weakness in controls, we would pick that up and examine it over a range, but we do not generally go top to toe in a particular taxpayer and check how HMRC is dealing with that particular one, because we are doing financial audit work. We might do a sample of companies if we were examining some aspect of HMRC from a value-for-money point of view, but we would be looking at the overall efficiency and effectiveness of the system. It is not unheard of, but it is unusual for us to examine a series of specific taxpayers. Because we are looking at the whole system, we do not typically tend to do that.
I am trying to think of ways to be helpful, but it is quite hard. It comes back to the question of what information you want. Would you like to know that PAYE is not complied with by Scottish taxpayers as well as it is by English taxpayers?
Or vice versa.
Or vice versa, remembering that the audit is about employers, rather than the individual taxpayers. Or do you want some reassurance that we are not differentially dealing with PAYE compliance? Almost by definition, we are not, because in the case of the company that you gave we would be looking at the company, not at its Scottish or English employees.
If you want comfort on the integrity of our compliance, that comes back to what the NAO can generally tell you about our overall activities. We publish performance information about what we get from employer compliance, and if you have a specific interest in employer compliance, I am happy to come up and talk to you, with information from my compliance colleagues, and to tell you how last year’s employer compliance activities have looked.
I will turn the question the other way, instead of asking about a UK-wide company, or about English companies versus Scottish companies or Welsh companies. Does your compliance work have any geographic consideration whatsoever, and do you think that it might in the future?
No, there is none at all. As you know, we have a risk-based approach, which is data driven in that we use some quite sophisticated data tools—and we hope to get even more sophisticated with them—to identify taxpayers who we think look more high risk. We literally generate lists of business names in a particular region, because there are some characteristics coming out of the system that tell us that they are more high risk, and we will want to ask them some questions. We also look at the higher-risk taxpayers in terms of size and type. As you probably know, our large businesses have a much more attentive regime from us than small businesses, which we deal with more on a risk-and-sample basis.
There is no deliberate geographical consequence of that but, hypothetically, if we were to say—and I do know how the risk ratings of different industries go—that there was a particular area of risk in the oil industry, for example, that might well have geographical consequences, and we might find ourselves looking at more companies for that particular category of risk that are based in Aberdeen than are based in Aberystwyth. Geographical consequences can flow from our risk-based approach.
Your approach is more sectoral, in that sense.
Absolutely. Risks take us to sectors and types of companies; they do not take us to regions. The only thing that we do regionally is regional campaigns. That is partly because we have finite resources. Having campaigns in different areas helps to raise levels of compliance. I know from colleagues that we had a campaign around the scrap metal industry in the north-east and north-west of England, where there were particular problems. That was quite effective. We have had campaigns against barristers in London. We have launched—but have not yet concluded—a campaign against the fishing industry, which has necessarily had quite a lot of Scottish impact.
I am kind of aware of that one.
If we are going to the fishing industry, we go for the appropriate location.
I have a question about Sarah Walker’s point about the systems in relation to the variable tax rate. I absolutely take your point, Ms Walker, that it has not been used up until now. The difference coming in involves a 10p rate, which the Scottish finance secretary of the day will have to set.
In the hypothetical circumstance—this is a couple of years away, and it is hypothetical—in which the finance secretary of the day decides to vary the rate, how will the system cope with that? It strikes me as pretty straightforward if taxation rates and so on are the same across the UK but, as soon as there are variances, that will create a greater challenge for you. How do we assess that you are doing your job adequately, so that we can see the revenue returns?
The mechanics of it are fairly straightforward. The rate should be set in the autumn of the year when the Scottish Government budget is published. I think that we have an agreement that that has got to be done by 1 December—or we would like it to be done by then. That allows us to incorporate it in the tax codes that are issued around Christmas each year to employers. We then give employers instructions about the rate at which they should deduct, and that then applies. As regards the 99 per cent that is automatic, that is within our normal coding system.
If the tax rates in Scotland are different from those in the rest of the UK, the risk basis for compliance work, which Edward Troup was talking about, will have to take into account the fact that there is now an incentive for people to want to be classified as being on one side or the other of the border. If there was a sudden flood of people reporting changes of address, that would be a risk, and we would need to look into that. There might be more people with two addresses who tell us that they are now spending more time or living in the other one, for instance.
There will be issues there, and one of the things that we need to develop in our compliance approach is how we would deal with that situation. We have all sorts of data sources for checking people’s addresses and that is one of the things that we are considering doing for the initial set-up of the system in 2015. Clearly, we will be discussing that approach with the Scottish Government, too.
Your data systems would start to ping up, as it were, when thousands of people, or a statistically significant number of people, changed their circumstances to take advantage of any changes.
Exactly. If thousands and thousands of people suddenly tell us that they have moved from one side of the border to the other, that would certainly alert us.
I will return to what we were discussing earlier. Mr Morse, you said that you audit all systems. That raises the question of what, if anything, you would be reporting to the Scottish Parliament.
Specifically for the Scottish Parliament, we would give our report, as required by the legislation, on the abstract and on how it has been abstracted from the whole system. How has the Scottish rate of income tax been separated? Are the calculations sound, as far as we can tell? For any other information that you ask for, how have the calculations been done? We will provide a report on that. That is what is required of us by the legislation and that is what we will do.
If the Parliament finds it helpful to have our opinion, we will express it in as clear a way as we possibly can, in addition to what is required of us by statute, so as to try and fit in with what the Parliament finds helpful, commensurate with what evidence we have. What decides the level of assurance that we can give you is how much Scotland-specific information is available to us. That will be the limiting factor.
The draft finance bill calls on us to report in a particular style, providing a narrative report to you that gives a view on the accuracy of the sums that are brought to account by HMRC. I will supplement that with further certification as far as I am able to do, based on the evidence that I have. I will try to have an open dialogue with you, so that if you want more specifics when we do the report we can provide them, by working with Audit Scotland or by ourselves, depending on what information you decide to require of HMRC.
But if you are certifying that the whole system is efficient—
We will be doing two things—I apologise; I am about to start speaking auditese. First, we certify that the accounts—in other words, the whole accounts of HMRC, of which Scottish income tax is a part, of course—are a true and fair view. We also certify regularity, which means that we express an opinion on whether the funds that the Parliament voted to allocate to the administration of the tax system have been applied as the Parliament intended.
In addition, we will be required to provide you with a narrative-type report on the Scottish rate of income tax.
Will that narrative include comment on whether the calculation and collection of the Scottish rate of income tax has been done accurately?
It will certainly include comment on how the tax has been calculated. I cannot say whether it will offer blanket certification that that has been done accurately, but it will certainly address that question.
I—
I am sorry. I want to ask a final question before I let you in. How will we know whether all the Scottish income tax that has been identified and assessed is being collected? Who will make that calculation or decision?
May I try to help here? Our accounts will contain a separate report on how much is due to you. I have been looking at the relevant clause in the finance bill that will shortly be introduced, which you have probably seen in draft. I do not want to put Amyas Morse on the spot too much, but the bill requires him to do things. It says that he must prepare a report on matters, one of which is
“the correctness of the sums brought to account by HMRC which relate to”
the Scottish rate of income tax. The report must also comment on
“the accuracy and fairness of the amounts which are reimbursed to HMRC”,
that is, the charges that we put to you. There will be clear obligations.
A subsequent subsection—it is subsection (4) of proposed new section 80HA of the Scotland Act 1998—says that Amyas Morse’s report
“may”—
so this is for him to decide—
“also include an assessment of the economy, efficiency and effectiveness with which HMRC has used its resources in carrying out relevant functions.”
I hope that the committee likes those words, and I hope that we will act with economy, efficiency and effectiveness. It is a matter of choice as to whether Amyas reports on that.
The “may” is important, because it means that it is at my discretion. I do not want to be churning out a report on the subject to you every year if there is nothing to add to what I have already said in my general report. In other words, if there is nothing more that l can look at, there is no point in doing what is, in effect, a value-for-money-type report every year. It would just not be worth your while to have such a report. On the other hand, if issues arise that need such a specific report—and we will have a dialogue about that—I will be happy to do it.
Okay. Mr Troup, in response to Tavish Scott you talked about how the Scottish element of tax will be collected. Are there additional costs with regard to the collection and identification of the Scottish element of tax that will pertain to large employers who are based in England but who have a significant Scottish workforce?
Costs for us or the employer?
Costs for the employer.
10:15
Employers should have a large part of that functionality in their payroll systems because they were required to be ready for the Scottish variable rate. All that they will need to do is to be able to recognise the fact that we have sent a tax code with an S on it—that identifies the employee as a Scottish taxpayer—and, if necessary, apply a different tax rate to that calculation.
Employers are not required to decide whether their employees are Scottish taxpayers; they are obliged simply to operate the code that will identify what we believe to be an employee’s status. Therefore, it should not be a big change for employers to apply the Scottish tax codes. As I say, a lot of them will have that function built into their systems, so we do not think that it will be a big deal for employers or a big extra cost.
I do not think that we can guarantee that there will be no additional costs. Most of the PAYE software packages update automatically every year, and the change will be built into the current PAYE software package. The coding notice will come out—everybody gets one—and the ones that we are talking about will have an S on them. In a sense, businesses will do nothing different for Scottish employees than they will for English employees, which is to take a code received from us, put it in their systems and apply the results. Therefore, there should not be any significant cost; rather, it will be marginal.
I have a question on collecting and aggregating the amount due to the Scottish Government from the Scottish rate of income tax. Will it simply be a proportion of the aggregate taxation that you collect in as assessed, or will it be the aggregate of all the individual taxpayers with the S code?
It will be the latter for the simple reason that, when we get a lump sum of PAYE from an employer, we need to know which employees that relates to so that, at the end of the year, we are able to reconcile whether any particular employee has overpaid, underpaid or accurately paid their tax liability for the year, which is something we do every year. Our PAYE system will be quite clear how much PAYE has been accounted for each individual.
For each individual.
For each individual Scottish taxpayer and to add that up in our systems.
Okay. Thank you.
I have three questions.
First, we have explored the issue that there is a certain lack of information about the disaggregation of information and so forth and that that creates some limitations. I understand that, at a UK level, the NAO would probably give overall reassurance across the UK without necessarily being specific with regard to the Scottish part.
What I am struggling with—I know that this issue has been touched on before—is how the Scottish Parliament and the Scottish Government will get a reassurance that the PAYE and self-assessment systems are operating even-handedly across the UK. Who will give that reassurance?
That comes back to my answer to the first question that the committee put, which is that 99 per cent of the changes will come in automatically. We are talking about an overall system, so in that sense, as long as the systems are working and we are putting the S codes against the right taxpayers, the question of even-handedness is not even applicable.
The issue of even-handedness, to the extent that it is applicable, takes us to our compliance activity and the assurance that we are not selectively adding to the 99 per cent preferentially by going off to the employers with principally English employees or by going principally against English self-assessors. We will not do that. As I said, you have the overarching reassurance that we have as much skin in the game for a Scottish individual as you do, if not more.
The matter comes back to the wider point of our responsibility as a tax administration. We have a responsibility to all the nations of the UK for whom we are collecting tax to do so in an even-handed way. The discussion so far has shown that it is quite difficult—because it involves proving a negative, in a sense—to demonstrate that we will not do that in a way that disadvantages the 1 per cent of Scottish taxpayers.
We review the controls on the system as a whole, so if the system made it easy for somebody at the centre to say, “You know what—we’ll reclassify money,” I would expect us to look at that. We would look not just at Scotland versus England but at the overall controls on PAYE and on the revenue. There are checks and balances in revenue that are intended to prevent what has been suggested from being done, if anyone were to try to do it.
Most of the audit work that we do is designed to test the control environment and ensure that it is strong enough. Nothing is impossible, but what has been described is unlikely to happen if there are good controls against it.
I understand what you say and where that comes from. Purely from an audit point of view, a bit of an act of faith is required in relation to the accuracy of the Scottish portion of the 99 per cent. I do not know whether we are stuck on getting a general reassurance because of limitations in the system but, from sitting round this table, I think that there is a weakness from an audit point of view.
I do not want to oversell anything, but I will look at the dynamics. There are two aspects—the examination of the overall system, and the calculation of the portion that is attributable to Scottish income tax. We at the NAO have an obligation not only to examine the overall system but to report on how accurately and reasonably the calculations have been made of the portion that relates to Scotland, which we have just heard about.
One aspect is assurance about the overall system, and Scotland’s risk that anybody can interfere with that system is no different from anybody else’s. The other bit is taking out the Scottish piece, which is very much in Scotland’s specific interest. The committee will need to look at our work and decide whether it is satisfied with that. I have indicated our willingness to collaborate with Audit Scotland. It cannot do the audit work, but it can collaborate with us on looking at how we have done the work and it can give you its extra reassurance that we have done the work reasonably.
I am more than happy with that approach, and I am absolutely open to anything of that sort. I said when I previously appeared before the committee, and I repeat, that I continue to be willing to do anything such as that work to give the Parliament additional assurance.
Another external check is that the Office for Budget Responsibility will forecast the receipts from the Scottish rate for any particular year. If we ended up diverging significantly from that, a question would be raised about why that had happened, and we and the committee would want to understand the answer. That might not tell members exactly what they want to know, but it would be a flag against us somehow doing something untoward.
That would place us on inquiry.
My next question is a spin-off from my first question. At the heart of the issue is the identification of Scottish taxpayers. That is the most important thing in the initial stages. Will any additional audit process cover that aspect in the first year or two? Once the system is bedded in and running, it will be fine, but Scottish taxpayers will have to be identified and everything will have to be put in place in the first year or two.
Your question is about what we are doing and whether what we do to identify Scottish taxpayers at the outset will be audited. I do not know whether Sarah Walker wants to say something or whether Amyas Morse wants to say whether the NAO will look at how we identified Scottish taxpayers.
We will certainly look at it to see whether it is reasonable, makes sense and appears to have been applied properly. That does not mean that we will go around checking every single bit of it—let me be plain: I am not offering that—but we will look at the approach and ask whether the way in which it has been done seems reasonable, careful and to the standard that we would expect for such a sensitive matter.
I would be happy to come back and explain to the committee, as we undertake the process in 2015-16, how it is going and what our experience has been. I will probably be able to supply the committee with some information about the numbers that we have identified, the number of cases where it has not been self-evident that people are Scottish residents and what processes we have applied in following up—in other words, the sort of things that Amyas Morse might ask if he were coming in to do a full audit.
I do not see why I should not be able to come back and give the committee that reassurance during the course of the identification process. All that we can do at the moment is to tell the committee what we are going to do. We are already doing some address matching at a data level, but we are obviously some way away from going out and engaging with the population.
What Mr Troup has proposed to do would be very useful, and it would be backed up by Mr Morse’s reassurances, for want of a better word. I think that that would give a lot of comfort.
Just to be clear, I do not think that Amyas Morse is committing to do an audit of what we are doing. I am just offering to come to talk to the committee about what we are doing.
I have taken it that Mr Morse is talking about an audit of the processes that allow for the identification of taxpayers.
Yes, but let me be clear: I carefully picked my words to say that we will look at the process to see whether it is reasonable. That does not mean that we will check every bit of it. I said that quite clearly at my previous committee appearance, so I am just repeating myself.
I know that the committee appreciates this, but it is worth spelling out that the process is not the only factor. There are two factors that might be a bit distorted in the first place. Mr Troup has mentioned them both at different points. One of them would be if there were some procedural shortfall in the way in which identification is done. The other one would be that people might try to get themselves on either side of the line, depending on where their tax advantage lies. They might not do that, but they might. It will take time for all that to be nailed down closely, because people might have a reasonable argument for their position.
There will therefore be a bit of dust, so to speak, being thrown up in the initial year. It is most unlikely that everything will be absolutely perfect, because there are various factors that will need to be sorted as quickly as possible. If I am managing the committee’s expectations sensibly, I have to say that, even with everybody’s best exertions, it is likely that the situation will be a little opaque in the first year but that it will become clearer as we go forward. I think that it is reasonable to say that.
My third question picks up on what Mr Morse has said previously in connection with producing and auditing the accounts. In the past, HMRC’s accounts have been qualified for various reasons over some years. Would it be conceivable that an audit of SRIT might be qualified? What would the implications of that be?
Whenever we do an audit, it is always conceivable that an opinion on anything could be qualified. Your question is a bit hypothetical, so I am not going to think up some reasons in advance of the fact about why I might qualify an SRIT audit. I think that that is a bridge too far.
What I can say is that the reasons for qualification have always been quite specific. They have not been to do with general lack of control or big audit issues; they have generally been regularity qualifications. That is to say that there has been qualification when there has not been absolute clarity on what tax release and analysis might be being claimed. It has generally been related to that sort of fraud and error area, in which the tolerance is much lower for the burden of proof for regularity opinion than it would be for a true and fair opinion that we would see for a company or any other body.
The fact that there has been a qualification is significant, of course, but it does not mean that the records were not in a good state of control. Sometimes imponderables simply come out of the system that mean that we cannot be certain that the funding that Parliament has voted has all been applied to the level of accuracy that we would have liked. That can happen.
10:30
If there was such a qualification, how would it be escalated in respect of the Scottish Parliament? Obviously, you would highlight it, but to whom would you highlight it in the Scottish Government? What would the process be?
First of all, if there was a qualification, we would express it formally on the record. It would then be a matter of public knowledge that we had qualified.
The question is hypothetical. Obviously, our effort goes into ensuring that the accounts are accurate and there are no such qualifications.
I am sorry: I am not the principal accounting officer, so I have not had to deal with the Public Accounts Committee face to face on what happens with qualifications on our accounts, but I think that that is ultimately where such a matter would go back to. Is that right?
Well, yes—
I will explain where I am coming from. I am trying to find out how the matter would come to this committee, because it must come to it ultimately. If a qualification were escalated, I presume that it would be escalated to the Scottish Government and Parliament and that it would eventually come to the committee, but what is the process?
May I just clarify something? For most purposes that we are talking about, I am committed to providing a narrative-style report, as I have said. I understand that that report would go to this committee in the first instance—I think that that is right. If I had serious concerns about the quality of the calculations on separation of the Scottish rate of income tax, I would come and personally report to the committee and tell it that. Is that clear?
That is clear.
That is rather more germane than saying, “Let me describe a process to you.” I will not describe a process; rather, I am telling you that, if I had serious concerns, I would come and tell the committee about them. I would address a report to you and, if it contained such concerns, I would expect to, and would, come and speak to you specifically and personally about them. Even though the question is hypothetical, I give the committee that assurance right now.
I have not thought this through, but it is almost certainly the case that issues would arise under the memorandum of understanding if matters that related to our accounting for the Scottish rate were qualified. I have discussed with the committee before the fact that many processes under the memorandum of understanding involve escalating matters up eventually to the Joint Exchequer Committee if, in dialogue with the Scottish Government, we cannot resolve whatever those issues are. That is the administrative process that would bring a matter back to ministers and the Government on your side.
I am not sure that that point has been clarified in the past. How the committee becomes involved when there is such a qualification is quite important.
I think that the report has to be laid before Parliament no later than 31 January of the financial year that follows the one to which the report relates. If the report is laid before Parliament, that gives the committee an opportunity.
I guess that we are all trying to get clarification. The report would come to us only when it had been laid annually.
That is correct.
Yes.
Okay. I think that that is clear in my mind.
In the very unlikely event of qualification, it is almost certain that, if something had got that far, it would have come up through the memorandum of understanding. Something would have caused concern between us and the Scottish Government about that before then. You need to ensure that you have formal oversight, but in practice I think that a lot of engagement would have happened before that hypothetical situation occurred.
I am sorry to keep coming back in, but I will do so one final time.
It is far more likely in practice that, if I was concerned that the committee needed to have something clarified and my view of it diverged from that of HMRC, I would want to come and talk to the committee about it. To be frank, that is not likely to be a qualification, but it might be some matter of clarity or emphasis that I am worried about and I am not quite comfortable that the committee has the full picture on.
I do not really think that that would happen deliberately but, if it did, I would feel that I was under a duty to come and tell you about it. I would also liaise with Audit Scotland about it just to be clear.
Thank you.
I will return to the issue of accountability, but first I will pursue the same line as every other member has pursued about identifying Scottish taxpayers, and particularly about the figures that you are using. You said that 90 per cent of income tax is generated through the PAYE system—is that 90 per cent of taxpayers who pay through PAYE, or does 90 per cent of the tax take come through PAYE?
The figures are slightly rounded. The 90 per cent refers to the tax take, but it is also broadly true for the number of taxpayers. Broadly there is 10 per cent under self-assessment, and that broadly relates to the number of taxpayers, too. I do not think that there is a material difference in the average amount of tax that is paid by a PAYE taxpayer and a self-assessment taxpayer.
The contribution that is made by high-net-worth individuals who pay tax is increasing. Although it is smaller in Scotland, I would have thought that it would still be disproportionate.
For that small number, yes. However, remember that self-assessment includes all those who are self-employed, who form the overwhelming numerical bulk of self-assessment taxpayers. Their incomes are quite dispersed and quite a lot of them have rather low incomes because there are some small businesses.
Indeed. You suggested that you would be able to identify 99 per cent—
I am sorry; I hope that I have not confused the committee. The 90:10 figure is about the mechanism through which we collect tax. There is then a numerical statement about whether for the entirety of that population that cash comes in as a result of us just sitting there, running some good systems and allowing people to file PAYE returns, or whether it requires us to go out and chase the money down. That is the 99 per cent to 1 per cent; 99 per cent of all the money comes in without us doing anything other than running some good systems and generating confidence in the integrity of the system.
I was a bit confused by the fact that you cannot necessarily disaggregate national insurance from income. You are saying that you will be able to accurately identify to within 1 per cent the amount of money that is raised in income tax in Scotland. It will not be an estimate.
The 99 per cent will come in by the time that we have to account to you for it, and we will know exactly what we have got in because that will just be actual receipts. We will have just sat there and the money will have come in. That will be a fact. The money will have come in and, as long as our systems are correctly identifying Scottish taxpayers, that number will simply drop out as a percentage of the effectively voluntary receipts—“voluntary” is not quite the right word—or those that have come in without our intervention or action, and we will be able to say, “This is what we have had.”
I want to give you two hypothetical situations to check how the system will operate.
If the Scottish tax rate were to change, there is a concern that it might generate tax flight of one sort or another. If there were to be a tax rate cut, it might generate tax flight to Scotland from the rest of the UK. Would you be able to identify the amount of tax flight in such a situation?
That is a separate question. At the end of the period to which that change related, we could certainly say how much had come in, and I do not think that the proportions would be materially different from the 99 per cent of the total that we would expect. The total figure might be more or less than it was in the previous year and we would take into account a number of factors such as changes in the economy, in the number of people who are employed and in the profitability of businesses. Buried within the figures would also be the question whether people have chosen to take jobs in England rather than in Scotland, or in Scotland rather than in England, in response to the tax rates.
We do quite a lot of work on trying to understand what is going on in the tax system. The only thing that I can say with confidence is that, even well after the event, we can never be sure how much of any particular change was due to a change in the tax rate or to other economic factors.
It will be very difficult to pin down what you call tax flight. Indeed, is it tax flight if somebody who is sitting in Northumberland and is given the choice of a job in Edinburgh or Manchester says that they would quite like the job in Manchester? If it so happens that the tax rate there is lower or higher, they will take that into account. He or she probably does not know whether that is tax flight and we certainly do not know.
People have choice of residence in some cases as well.
In another scenario, imagine that the Scottish Government wishes to pursue a much more rigorous anti-tax-avoidance strategy here in Scotland and wishes to gain the benefits of being tougher on tax. Would we be able to identify whether such a policy had been a success?
First, you can be tough on avoidance only in relation to those taxes that you have responsibility for—the land and buildings transaction tax and the landfill tax. You can certainly do that. Whether that tough policy is producing results is then a matter for revenue Scotland.
In relation to the taxes for which the UK tax administration is responsible in Scotland—the capital gains tax, inheritance tax and corporation tax—we will not adopt a different anti-avoidance strategy in Scotland from that in England. That will also be true of income tax, which will be comprised of the Scottish rate as well as the English rate. We will not take a different approach to avoidance in Scotland from that which we take in any other part of the UK. The Scottish Government might want us to do that but, under the current set-up, you cannot tell us to do it and it is not something that we would want to do. This is a national tax system, albeit that the Scottish rate is embedded in part of its operation.
Okay. In another hypothetical scenario, imagine that the Scottish Government did not rely on HMRC to pursue such a policy but used other techniques or other policies—I cannot imagine quite what they would be. Given that Scotland prides itself on having a more collectivist approach, we might decide to pursue a more moral economy and encourage greater individual and collective responsibility in Scotland. Would you be able to assess and measure that?
That is seriously hypothetical, but there are all sorts of behavioural techniques that can be applied to test the consequences of softer—what we tend to call upstream—actions. I am sure that there are techniques that could be applied to that seriously hypothetical question. Whether it would be appropriate for us to apply our resources to determining whether actions that you had taken had had some impact on our tax collection is an interesting point. We might well be interested, because we might think that it sounds like a good idea. If ministers go around persuading everybody to pay their taxes by giving tub-thumping speeches about how important it is and that appears to have an effect, we might be interested because we might want to encourage others to do the same. We might evaluate it or we might not. I would not be overoptimistic that we would be able to draw particularly firm conclusions, simply because this is an enormously difficult area in which to pin down consequences to actions.
There could be other actions such as insisting that everybody publishes their own tax details, for example, but I will move off that area of questioning.
Given that we are focusing on the 1 per cent of income tax that is not collected automatically, I will just add that the amount of that tax will be forecast by the OBR before the year starts. That will be the immediate effect on the Scottish block grant adjustment. It will take account of any behavioural assumptions that it might want to make about how the Scottish behaviour might affect the recoverability of that last 1 per cent.
A year after the end of the relevant year, we will make a final determination of the amount of revenue from the SRIT in our accounts. Most of that 1 per cent will not have been collected at that point. We will have to make an estimate of the amount of that that we would eventually collect. If there was a reason to think that that would be different from the generality of the UK, clearly we would take that into account. However, at the moment, the data that we have is all at the UK level and we would expect to use UK-level assumptions.
There are two issues. One is how you come to a fair assessment initially; the other is that we then have the ability to measure change should there be a policy difference. That is the key point that I was trying to establish.
Moving on to accountability, do you regard yourself, Mr Morse, as accountable to this Parliament and to this committee under the new system?
I shall certainly be addressing a report to you, so in that regard, yes. Obviously I am not under your broader direction, but I would be making a report addressed to you, and I have a statutory pathway to enable me to do that now.
10:45
The amendment that we are talking about clearly places a legal obligation on you to publish a report.
Yes, it does.
But there is no legal obligation on you to appear before this committee, for example.
That is true, but as a matter of fact, every time that you have invited me so far I have come, and I would do. I would not worry about the legal obligation. It would be difficult for me to do other than to appear, and I certainly give you my assurance that I and my successors would appear if you invited us.
On that point, I was interested in your earlier comment that you would wish to expand on any observations in a narrative report. Would you expect to appear annually before the committee to talk about the report that you publish?
That would be up to the committee, but if you asked me to come I would.
As I understand it, there is no legal relationship with the Auditor General for Scotland; certainly, none is mentioned in the amendment. Will your relationship be underpinned by a memorandum of understanding?
Absolutely. If that is appropriate, we would be happy to enter into it. In fact, it always would be appropriate, because in such circumstances you need to be very clear about everybody’s terms of reference. However well you co-operate, you cannot just rely on that; you need some clarity.
Absolutely. You need to know the limits.
So, you expect to enter into a formal memorandum of understanding. This may be a question for you or for Mr Troup, but would you expect the Auditor General for Scotland to have access to individual taxpayers’ accounts or to be able to identify individual accounts?
No.
No.
Specifically not?
No. There is no gateway by which to make those available to the Auditor General.
At the moment, am I right in thinking—
May I just take you back one step? If you decide that you would like some additional assurance from the Auditor General for Scotland on our work, I have already indicated that I would be happy to do it. I am not recommending it or the opposite; I am simply saying that if that is what you decide you would find helpful, in whatever terms you would find it helpful, we would want to be co-operative. Once we knew what that was and had worked out a practical way to make it work, we would probably want to record that in the memorandum. It is conditional on your wishing that in the first place.
I have a couple of issues, but the main one is about ensuring that the committee understands the legal limits. There is clearly good will on both sides, but—
Once we have entered into a memorandum, that would have an effect, and I would not expect that anybody would be able to depart from that. Whether or not it had statutory force, it would certainly have strong moral force, and it would be difficult for anybody not to comply with it.
No, indeed. However, as I say, the relationship is new and tricky to develop.
I understand that.
Neither HMRC nor the National Audit Office is directly accountable to this Parliament, yet you are responsible for a lot of the revenue that this committee will scrutinise, so the relationship is complex and we must ensure that we are clear about it. The role of the Auditor General is also an important one for us, because the Auditor General is accountable to this Parliament.
Mr Troup and Miss Walker are the embodiment of a separate operation. HMRC has established a clear area within its organisation that is responsible for devolved taxes. Would the NAO authorise or appoint a person with individual responsibility for Scotland, or a devolved operation such as that which HMRC has established?
Sarah Walker is responsible and I am responsible, but I would not like you to think that we are part of a unit of HMRC that is labelled “Scotland and nothing else.”
You have other responsibilities.
I have a lot of other responsibilities, and Sarah Walker has other responsibilities. That does not mean that we are not devoting the right amount of resources to the matter. However, we are not partitioning off part of the department and saying, “This is the Scottish bit of the department.”
That is reassuring. You are multitasking.
It is the efficient use of public resources.
The key point is that we know that HMRC—you, as individuals, and your offices—are directly responsible for Scotland. Would the NAO appoint such a person?
We would do so, and that person would change from time to time, as is the case with any other area that we look at—we look at a whole lot of things. Someone would be nominated to lead on the matter and report to me, and that person would be identified to Audit Scotland, who no doubt would also have nominated a person to lead on the matter, who would change from time to time. That is just how things are arranged in practice.
If Audit Scotland found that we were constantly changing the person and it could not get the assurance that it sought, I am sure that it would let you and the NAO know that things were unsatisfactory. However, in general, that is how we conduct our engagements. People develop expertise through continuing engagement, but it is also important to have some rotation in what people do. A balance must be struck between the two.
Indeed. However, HMRC has taken a route whereby there is a named officer in charge of the area. You have not reached that stage yet.
Please bear in mind that as far as I am concerned—I suspect that the Auditor General for Scotland feels similarly—this is a personal role, so the only person who is really accountable to you is me. Others assist me and do work under my instructions. That is the way to look at the matter, rather than to think that there is someone else who is the primary point of contact—although at a working level that is a different matter, of course.
If there were differences of opinion between the Scottish Government and the UK Government about the level of tax raised in Scotland, what would your role be in commenting on or resolving the differences? Would you have a role?
No, I do not think that I would have a role. Once those differences had worked themselves out, I presume that a rate would be applied, and then my job would be to comment on whether it had been applied accurately—and on all the other things that are required of me by legislation. My job is not to get involved in the policy discussion about what the rate should be. That is none of my business.
I presume that Mr Macintosh’s question was about differences of opinion about not just the rate but the amount, for example if we paid over an amount that the Scottish Government said should be different. Even so, Amyas Morse would say either that he agreed with us or that he agreed with you, which would not resolve the issue, because there might still be a difference between the Scottish Government and HMRC about the amount that was due.
Clearly, Amyas and the NAO’s view on what was the right amount might be pretty persuasive, but equally it might relate to a more subtle part of the dispute. In such a case I think that we would just go back to the memorandum of understanding, because something in that memorandum would not have been done in the way that one of the parties expected it to be done. We would go back to the mechanism for escalation of disputes, to which I referred; a dispute ultimately goes to the Joint Exchequer Committee and becomes a minister-to-minister matter between the two Governments. As I said to the committee last year, I do not know what happens in those circumstances—it is well above my pay grade. The dispute would have to be resolved minister to minister and Government to Government.
I want to be clear and remind members of the response that I gave to Mr Beattie. If I was concerned about a difference of understanding or a material issue that was germane to the Public Audit Committee, I would tell you about that when I came to report to you. We try to travel a pretty straight road. If there was something that we thought that you needed to know about—even if we were not able to resolve the matter but felt that information would help you to understand it better—we would be clear and explicit with you about it.
Mr Troup, does HMRC intend to appear annually before this committee?
I was asked this before. I think that I said that as long as you did not call me up every week I would be happy to come up with reasonable frequency and give an account of what we are doing, although I am not directly answerable to the Scottish Parliament.
According to the memorandum of understanding and the Scottish Government’s November 2013 implementation update, HMRC will send an extract of its accounts, covering all matters relating to the Scottish rate of income tax, to the Scottish Parliament. Separately, the National Audit Office annual audit report will be laid before Parliament. There is a difference, however, between sending something to the Parliament and laying it before the Parliament. What will be the force of the extract report from HMRC?
That is part of the operational matter that is covered by the memorandum of understanding between us and the Scottish Government, which says how we will administer the tax. If you have looked at the memorandum of understanding, you will have seen that it contains a whole lot of provisions. In a sense, it is like a commercial agreement: we have our obligations under the agreement; there are things that will happen if there are disputes; there are payments that you will make to us for things that we provide; and so on. We expect to comply with all those things, on which we already have good engagement with the Scottish Government. Ultimately, if there was a breakdown in agreement on what was happening in that respect, it would not be for me to be summoned by the Parliament; it would be a matter for escalation through the layers of governance.
So you will send an extract of your accounts to the Scottish Government, presumably with a copy to the Scottish Parliament. In procedural terms, if the National Audit Office report is laid before the Scottish Parliament, that gives the committee the opportunity to look at it, but we would not necessarily have the right to examine something that you simply sent to either the Scottish Government or the Scottish Parliament—that would require the Scottish Government to lay a report before the Parliament. Essentially, we would probably not be able to examine your reports unless something else was done—and it would only be an extract of your accounts. If we had concerns, we could certainly talk to Mr Morse about his views on how HMRC was operating, but if the committee had concerns about how you were implementing, collecting or disbursing, we would have no way of considering that formally.
I will let Sarah Walker speak about the details, but the important point is that we have an agreement with the Scottish Government and we are performing for the Scottish Government, which, in a sense, is managing the Scottish side of the agreement. We would not want to get into a situation—and the Scottish Government would not want to get into this situation—where you were managing the agreement, which is an agreement between us and the Scottish Government. That does not mean, however, that we are not prepared to come and talk to you—I am very much prepared to come and talk to you.
Forgive me, but I am clear in my own mind that there is a difference between managing an agreement and having political oversight of the way in which systems operate. As things stand, I cannot see a mechanism for this committee to comment on the effectiveness, efficiency or robustness of the processes. I cannot see a formal mechanism for the relevant material to be laid before Parliament and then before the committee.
If it would be helpful for us to say that we will lay before the Parliament the formal reports that come under the memorandum of understanding, we would be very happy to do that. I do not think that that would make any practical difference as, once we put those reports in, I am very happy to come and talk to you anyway. If it would reassure the committee, however, I am happy to say that we would lay—although I am not sure what is connoted by that word, other than giving you a bit more ability to ask us questions—
Forgive me if it appears that I am being pedantic, but we do not actually have the authority to go into subjects that are not laid before us in the Scottish Parliament by the Auditor General, on behalf of Audit Scotland, or laid by the Scottish Government. The fact that you have produced a report does not necessarily give us the authority to consider it. There needs to be a mechanism for triggering our consideration.
11:00
As I said, I am not quite sure what the word “lay” connects to in this context. If it means sending the committee a copy of the report, I am happy to do that. Ultimately, it is a matter for the committee to discuss with the Scottish Government in order for the committee to ensure that it has what it needs and that the Government is happy with that. However, I repeat that I am always happy to come to talk to the committee—although not weekly.
We can certainly explore that further. I think that there needs to be consistency between looking at what the National Audit Office is doing and looking at what HMRC is doing.
Can I just clarify a point that might appear trivial? You talked about the difference between the Scottish rate and the English rate. Are there going to be differences then in Northern Ireland and Wales?
There is a proposal to give to the Welsh Government the power to introduce a similar Welsh rate of income tax, but that is only a proposal and I think that it would first have to be adopted by the Welsh Government and then put to a referendum. There is no equivalent proposal in relation to Northern Ireland.
So until Wales makes a decision, it will be Scotland and the rest of the UK.
Yes.
Okay.
I echo what the convener has just said about the report. It sounds pedantic, but the committee has a pretty strict remit that, under our rules of engagement, allows us to scrutinise something or does not allow us to scrutinise it. Under the technical definition of laying, we are allowed to scrutinise in an appropriate manner that keeps us within our remit. The point seems pedantic, but it is quite important in taking the work of the committee forward.
Moving on, I hope that I am not going to damn the witnesses with faint praise, but I have written in my notes that I am “cautiously reassured”. At first look, it seems that, although the tax system can be complicated, if we get the systems, mechanisms and tax codes right, it becomes incredibly simple. If we have the processes right, it just happens. This is therefore about getting the processes and structures right. I hope that Mr Troup is doing that and that Mr Morse is part of the checks and balances in scrutinising that it is done effectively.
Members have mentioned Audit Scotland in relation to where the checks and balances might lie in scrutinising what will be a UK-wide report on how income tax is collected in the nations and regions of the UK. Obviously, the committee is incredibly familiar with Audit Scotland; it regularly lays quite detailed reports before us. Mr Morse, has the National Audit Office had detailed discussions with Audit Scotland about how you might conduct a joint exercise when assuring yourself that the Scottish rate of income tax has been collected robustly, routinely and efficiently as part of the wider UK system? I am sure that Audit Scotland would have something meaningful to say as part of that process. Have discussions taken place about where Audit Scotland might fit into the process?
Yes, they have, although they can always be more detailed, and if it is clear that that is what you would like to happen, they will probably take on yet another level of detail. It is quite important to emphasise how they might work. I will probably not put this as well as Audit Scotland would, but primarily we should do most of the auditing, with Audit Scotland looking over our shoulder, and would ask, “Does this seem reasonable? Are you comfortable with it?” The discussions would be along those lines. I think that that would provide the committee with very valuable reassurance and would be the most practical way for the discussions to work.
I may not have done them full justice, but that is what I think the discussions so far have led us toward. I am confident that that procedure would be manageable and would provide the committee with a degree of assurance from Audit Scotland as well as from us. My position remains as it was when I came to the committee in 2012, which is that I am more than happy to co-operate in arrangements of that kind. I have no reservations about doing that.
I suppose that what I am trying to tease out is whether Audit Scotland will audit the auditors or whether it will sit within a piece of partnership work with the National Audit Office and say—
Audit Scotland will not be able to do all the things that we do, because it does not have the statutory access that we have to HMRC’s records, but it will be able to look at how we do things. That is common among auditors. This is not some amazing new arrangement, as it is something that often happens. We have group audits in the private sector. Often, there is a group auditor and subsidiary auditors and they satisfy one another that they can all take assurances from one another’s work. I do not find the procedure a difficult or odd one to put into effect, and I think that we could do it in such a way that you would find it seamless.
That is helpful and I accept everything that you say, but what I am trying to tease out is this. The National Audit Office and Audit Scotland can sit down together and have discussions—I am sure that we will hear from Audit Scotland on this in due course—and the National Audit Office can say, “This is how we run these procedures. Here are our audits and our mechanisms, and this is how the Scottish rate of income tax fits in. What are your thoughts on that?” At that point, Audit Scotland could say, “Tickety-boo—that looks good and we’re happy with it”, or it might say that things should be tweaked in one way or another and ask whether the NAO would take that on board and then run its audit. That would not be Audit Scotland looking over your shoulder; it would be partnership working, or—
That sounds pretty much like what I expect us to do. It is not as if we will do the work, then tell Audit Scotland that we have done it and say, “Is it all right?” That is not my idea of collaboration. We will have a discussion with Audit Scotland—this is normal in the auditing profession—about what we propose to do, say what challenges and risks we see in it and take on board any suggestions Audit Scotland has that are germane. If we do not agree, we will have a discussion about that, see what concerns Audit Scotland has and what is practical and what is not, and then carry out the bits that only we can carry out according to what we have agreed. We will then explain what we have done and what we found and go forward in that way. That is the way in which we will do it, which is pretty much what you said.
I am still on my initial question. I think that you keep pre-empting where you think that I am going with it.
I do not think that you are going to get much further.
What I am trying to tease out is this. You said that what I described is kind of what you anticipate will happen. Audit Scotland will sit down with the NAO—I am sure that you already work closely together in partnership in many ways, so there is no turf war here; it is just a question of two respected organisations getting on with it—and you will say, “Here’s how we do the UK tax audit and scrutiny and here’s how we lay our reports. The Scottish rate of income tax is on the horizon, and here’s how it fits in.”
At that point, as I was saying, Audit Scotland might say, “Fantastic—that’s great,” or it might say, “Maybe you could do just a little bit more here.” Would it say that privately or publicly? Would it give a seal of approval ahead of that, or would it look over your shoulder—that was your expression; it would not have been mine—after you have done the work and, if you like, audit the auditors?
I think that for Audit Scotland to be “looking over our shoulder” means—
I will just say a little bit more and give an example before you answer, because this is important.
I will go off at a bit of a tangent. Audit Scotland did a detailed audit of waiting lists in Scotland. It went into the health boards and said, “Right—show us your waiting list data. Show us the computer systems, all the empirical evidence that you have and the pathways.” Audit Scotland looked at that information as auditors and had something meaningful to say about it. However, if we think about where Audit Scotland will fit into the auditing of the Scottish rate of income tax, we can see that it will not have access to data at the taxpayer level and will not be able to run through the National Audit Office’s internal systems. I have an issue with that. I am not sure whether Audit Scotland is looking to be able to do that—I am just thinking out loud—
It is not a question of whether Audit Scotland is looking to be able to do that. Statutorily, it cannot have that information.
Absolutely, but—
We have to find a way of working whereby Audit Scotland can be satisfied that everything that we do is sound. In other words, we will talk about it beforehand, as we are doing it and after we have done it.
Normally, when we do something like this, if somebody expresses concerns at an early stage, the chances of our overlooking those concerns or saying that we do not take them seriously are low. If someone asks us to do a bit more of something or says that we should do something differently, we would have a professional discussion about that and, most likely, we would find an agreed path. People do not disagree for fun; they disagree for some technical and professional reason. Therefore, I expect that we would resolve any issue together and come to a pathway that both could agree on. If Audit Scotland did not agree, it would tell you so.
The great thing about statute is that it can be changed—it just takes new legislation to do so. Just because something cannot be done now, that does not mean that it cannot be done in future, although I accept that you operate with the current statute.
I am sorry for continuing with this straightforward point, but let us look at the issue another way. On 31 January, the National Audit Office will lay—or give or provide—a report. After that, there will be no statutory duty for the National Audit Office to come to the Parliament. I am delighted that, as HMRC has done, the National Audit Office has said that it is more than willing to come along, so the argument about whether there should be a duty to appear might become an abstract one. You have said that you will do so, and I take that in the spirit in which it is intended. I am sure that Audit Scotland will do the same.
I am trying to understand the dynamic of our scrutiny role. Should we expect to have Audit Scotland and the National Audit Office sitting at an evidence session with the report before us and Audit Scotland saying that it signed off all the information before the National Audit Office went through its procedures and produced the report, so it is happy with it? Alternatively, will Audit Scotland say that it suggested this and that but could not quite persuade HMRC or the National Audit Office? I am trying to tease out the dynamic.
It is not for Mr Morse to tell us what Audit Scotland proposes to do. He is constrained to advising us on his role. Separately, we can expect the Auditor General for Scotland at some point to tell us how she believes that she and Audit Scotland will operate. We can consider the issue at that time.
Thank you, convener—that is absolutely right. The only thing that I would add is that I expect that we will both be as open as possible. There will not be a secret disagreement that the committee does not know about—I have no interest in that at all. I expect Audit Scotland, which has a direct relationship with you, to be forthright with you about what it thinks on every aspect. If you want us to talk to you directly, that is fine, or if you want to talk to Audit Scotland separately, to be assured that there is nothing that it would have liked to have said if we had not been there, that is fine, too. You could have whatever procedure you want to give you comfort.
I have no further questions. I appreciate your forbearance with that line of questioning.
Not at all.
I am just interested in the dynamic. Audit Scotland is to be involved at the coal face and will work with you in partnership on what the procedures will look like, but you also talked about Audit Scotland looking over your shoulder. I am interested in how it can do both those things. We can discuss that dynamic with Audit Scotland.
I think that what you take from the phrase “looking over our shoulder” is a little different from what I take from it. I do not regard your questions as requiring forbearance on my part at all. Such co-operation is familiar to people in the accounting profession, and there are strong conventions on how to carry it out. I do not find the idea that we will do that strange or difficult. However, whatever Audit Scotland and the Auditor General say that they want to do, I would say that the process will be conducted with the committee in the most open and explicit way. You will be aware of any degree of friction or disagreement or anything that is unresolved. There is no desire on anybody’s part to push anything on anyone. I do not think that that will occur.
That is helpful—thank you.
I want to clarify a few points with Mr Troup on compliance issues. I understand from what was said that it would be difficult to separate the Scottish rate of income tax from national insurance and capital gains tax.
Not capital gains tax, no. Capital gains tax is self-assessed, which means that, with some additional work on our systems, we can differentiate capital gains tax compliance.
So, which are we talking about? There is the Scottish rate of income tax and national insurance. Is there anything else?
11:15
The Scottish rate of income tax, the rest of income tax and national insurance will all be collected together through the PAYE system. It is for that reason, and because it is through employers, that it is difficult to disaggregate the impact of compliance activities on individual taxes.
How will you separate out the amount collected through the Scottish rate of income tax and national insurance?
For a compliant taxpayer, it will be very clear through PAYE; it will be separately identified in the way that I described, with the S code. In the case of self-assessment, part of the process will involve identifying the person as a Scottish rate taxpayer.
We are talking about the compliance activity with an employer after the end of the year where that has not worked. At the end of a compliance inquiry, we usually settle for a single amount and we do not necessarily disaggregate that between tax and national insurance.
In a self-assessment inquiry, we do not always separate out the different elements, which, in some circumstances, might include capital gains tax. It is probable that, after the one-year point, when we have struck that final figure for the revenue from the Scottish rate, we will still be doing compliance inquiries. Some of those will have a Scottish rate element. We will estimate that at the one-year point.
Do you believe that you will have access to clear and reliable data?
From employers or for Scottish taxpayers?
Both.
I think so, subject to Amyas Morse’s caveats in relation to the identification of taxpayers. We are dealing in aggregate with something like 40 million individuals throughout the UK, and probably 2.6 million in Scotland. There are always uncertainties at the margins because individual circumstances change—taxpayers die and businesses come into and go out of existence—but there is no reason to think that the data that we have for Scottish taxpayers will be any less clear and accurate than data for any other subsection of the population that we have to deal with.
Okay. You mentioned the timetable for the implementation of the Scottish rate of income tax, and Sarah Walker spoke about the IT systems. You will probably start the work in April this year and you believe that the systems will be in place in time. What are your other key milestones?
Sarah Walker may want to add to this. We have to get our own internal processes in place to cover some of the things that we have described. On the volume of people and activities, the biggest process is the identification of Scottish taxpayers. As we have previously discussed in the committee, we do not propose to do that until we are well into 2015.
There are discussions about the communications plan with the Scottish Government. Before we engage directly with individuals to confirm whether they are Scottish taxpayers, the biggest activity will be building up to that with some sort of communications plan, involving advertising and publicity.
I go back to something that was said at the beginning. Once we have done that, most of the other activities will be behind the veil so far as the public is concerned. It will be just a matter of us ensuring that the IT systems are in place so that the consequences of being a Scottish taxpayer are reflected in PAYE codes and picked up in receipts. That will be far and away the biggest activity. The start-up costs are quite significant because of the amount of effort required to identify the 2.6 million taxpayers.
You say that the start-up costs are significant. Have you identified what they will be?
We will give an update on that in April. We have not changed our estimate of £40 million to £45 million and I give the cautious reassurance that we do not expect the figure to be more than that. The committee can read into that a little optimism that the figure will be below that.
The Scottish rate of income tax will apply from the start of the tax year 2016-17—from 5 April 2016 or thereabouts. When will the Scottish Government need to decide whether to set a different tax rate for that to kick in at the start of that tax year?
The decision will absolutely have to be made before that tax year begins. The timetable envisages the decision being made by 30 November in the previous year. We discussed that last year—that might have been with the Finance Committee rather than this committee.
The decision would not have to be made by 30 November, but if it was not made by then, we could not issue coding notices on time, which would have consequences for employers. We can reissue coding notices—I am afraid that we do so from time to time when Governments change decisions or whatever—but that has cost implications. As such costs would be directly referable to a decision about the Scottish rate, they would come back to Scotland.
As long as we have a decision by 5 April, we can implement it. If we do not have it by 30 November, it will cost more and create more visible disruption, because people will get more than one coding notice.
Good practice would be to have the decision by November.
Best practice would mean 30 November.
Our budget timescale is different. The date has implications for how the Government determines its budget and for the Parliament.
Absolutely—we understand that. It is open to the Government not to make a decision until 1 March or whatever, but we would be clear about the cost and operational consequences of that.
I call Colin Keir—I am sorry for missing him earlier.
A lot of the issues have been covered, but I am still a bit shaky on the fact that the Scottish rate is a geographic tax that is not being set up in a geographic way, other than through tax codes. If a future settlement keeps things as they are politically and we have to proceed on that basis, what would be the dispute resolution mechanism if a dispute arose because a future Scottish Government in a devolved settlement complained that the figures were not right? How would that be manifested in reporting on the system by the NAO? Would Audit Scotland have a place in any reporting mechanism?
I do not want to cut the discussion short, but we have covered that fairly thoroughly in previous answers, albeit in a slightly fragmented way. Such disputes would be between us and the Scottish Government about the operation of the memorandum of understanding. As I said, they would ultimately be escalated to the Joint Exchequer Committee to become minister-to-minister issues between the two Governments.
As the discussion was fragmented, some of what was said might not have been taken in, but I appreciate the position. I just want to be clear. We will have a Scottish rate of income tax, but there does not appear to be an equivalent system, short of the coding. I know that you have mentioned that, but I am trying to understand the difficulties for reporting. I have not quite settled that in my mind, but that is my problem.
The arrangement is unusual and novel. Other countries might do something similar, but this is the first time that we have done such a thing in the United Kingdom. It is important that you as representatives understand the concept, because residents of Scotland will have to understand what is going on. That might relate to our publicity and communications campaign in 2015. Members will not want to alarm Scottish residents and voters into thinking that they are paying a new tax. There will be interesting communication challenges in getting over exactly what is happening, given that not much will be visible, unless or until the rate is changed. We will have to do quite a lot.
I was thinking of various ministers’ assessments when considering future budgets.
Without making this any more complicated, it is important to distinguish between any disagreement about the correctness of the amount that we report in our accounts, which is about our accounts and the NAO’s opinion, and, separately, a disagreement between ministers about the amount that gets passed on to the Scottish Government through the block grant mechanism. It is that decision that would get escalated through the—
I am trying to keep the discussion to auditing matters, rather than drift into the work of the Finance Committee, so thank you.
I thank Mr Morse, Mr Troup and Sarah Walker for attending the committee. Income tax is a very technical issue that can also be very dry. However, it is clearly one of huge significance for Scotland and the rest of the United Kingdom. I do not doubt that the committee and the Parliament will return to it. As Mr Troup explained, the territory is new—it has not been done here before. With that in mind, I realise that we are in an interim situation, but I thank the panel members for their contribution.
Thank you. It is right to leave with a message that is cautiously reassuring, which is rather better than being gung ho.
Judging by his language, Mr Doris is a frustrated civil servant.
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