Committee unconvinced by VAT assignment plans

Kenneth Gibson MSP (SNP) made the comments in a roundtable session featuring contributions from the Chartered Institute of Taxation (CIOT), Institute for Fiscal Studies (IFS), Fraser of Allander Institute, Audit Scotland (AS) and the Scottish Fiscal Commission (SFC).

VAT assignment was proposed as part of the Scotland Act 2016 that followed the Smith Commission report in the aftermath of the 2014 Scottish Independence referendum. The policy would see receipts from the first 10p of the standard VAT rate and first 2.5p of the reduced rate assigned directly to the Scottish budget.

Concerns with how these receipts would be calculated led to the policy being put on hold in 2019, but the recent Fiscal Framework Review agreed between the Scottish and UK governments commits both administrations to find a solution that will allow the policy to be implemented.

In opening remarks Charlotte Barbour, representing CIOT, noted that with assignment, the Scottish Government would have no direct control over VAT policy, such as the ability to set rates and exemptions. This would bring increased risks and complications for the Scottish Budget, which was not necessarily an attractive proposition.

Barbour added that VAT could be devolved, but that she had ‘grave reservations’ over how this would work in practice, given that Scotland is part of a highly integrated UK single market. She added that this could create extra costs for retailers and create opportunities for competition and avoidance.

For IFS, David Phillips, described VAT as a ‘poor candidate’ for devolution or assignment. He suggested that a review of how assignment has worked in other countries, as well as the consideration of better ways of capturing transaction data, could help policymakers better assess how VAT assignment would work in practice.

Philips also suggested that a sales tax could be a more appropriate tax to devolve, as it is charged at the final point of sale rather than being charged (and refunded) throughout the supply chain. Like Barbour, he also warned of the opportunities for avoidance and competition.

Professor Mairi Spowage, representing the Fraser of Allander Institute, was forthright in her views on the possibility of assignment being implemented. She told MSPs that, after a decade of work and ‘not insignificant’ sums of money being spent, it had not been possible to identify an assignment model precise enough to accurately measure Scottish VAT receipts. Noting that the unreliability of data would lead to receipts being revised ‘in perpetuity’, she said, “I just think overall – I just don’t think it’s (assignment) a good idea”.

Data concerns were also shared by John Ireland, chief executive of the Scottish Fiscal Commission, and Mark Taylor of Audit Scotland. Ireland said that he was ‘worried’ with the ‘very volatile’ data produced by HMRC and that this created a ‘severe number of practical issues’ for forecasters. Taylor said that assignment posed an auditing challenge because the data that would be provided would be based only on estimates. He said this also meant that the government would be unable to use its borrowing powers to iron out any shortfalls in receipts. Spowage noted that estimates were ‘not sufficient’ for budget setting.

An indication of the cross-party nature of concerns with VAT assignment became clear towards the end of the session.

Kenneth Gibson spoke of ‘considerable difficulties across the board’ in trying to implement assignment, asking ‘how long can you flog a dead horse?’. He was supported by Liz Smith (Con), who reflected that previous finance committees had come to a similar conclusion. Gibson also suggested that the proposals recommended by the Smith Commission were ‘not set in tablets of stone’ and should be kept under review.

Michael Marra (Lab) said assignment could create ‘absolutely huge’ compliance issues, adding later that he was ‘less than convinced’ in HMRC’s ability to find appropriate data upon which to determine Scottish VAT receipts.

And John Mason (SNP) concluded that, while he had previously supported the devolution of VAT, he was ‘very sceptical’ that the costs would outweigh the benefits.