[Sir David Amess in the Chair]

Clause 12

Power of Scottish Parliament to set rates of income tax

6.40 pm

Sir Edward Leigh (Gainsborough) (Con): I beg to move amendment 124, page 14, line 14 , at end insert—

‘( ) The Scottish Parliament may determine the level of each threshold of income at which a Scottish taxpayer becomes liable for income tax at any of the rates set by the Scottish Parliament;”

This amendment allows the Scottish Parliament to decide at what threshold of income Scottish taxpayers should have to pay the basic rate or any of the other income tax rates to be set by the Scottish

Parliament

.

The Temporary Chair (Sir David Amess): With this it will be convenient to discuss the following:

Clauses 12 to 14 stand part.

New clause 32—Treasury Review of the implementation of Scottish rates of income tax

‘(1) The Treasury shall, no later than one year after the date on which this Act is passed, publish and lay before the House of Commons a review of the implementation of the Scottish basic rate and any other income tax rates for the purposes of section 11A of the Income Tax Act 2007.

(2) The Treasury review must include—

(a) a review of the revised fiscal framework;

(b) the tax year to which sections 12 and 13 of this Act will apply, and the day on which they are due to come into force;

(c) the number of staff assigned by the Scottish Government, Revenues Scotland and Her Majesty’s Revenue and Customs, to the project implementing the Scottish basic rate, and any other rates;

(d) a report on the identification of Scottish taxpayers who will be liable to pay the Scottish basic rate, and other rates;

(e) the rates and bands at which the Scottish basic rate, and any other rates, have been set by the Scottish Parliament; and

(f) a projection of the impact of the Scottish basic rate, and any other rates, on income tax revenues generated in Scotland and across the UK.’

This New Clause would provide for a review of the progress in implementing the new Scottish rate of income tax. This will include a review of the revised fiscal framework, a task that will hereafter be undertaken by the Scottish Office for Budget Responsibility.

New clause 54—Taxes on income

‘In Section A1 in Part 2 of Schedule 5 (fiscal, economic and monetary policy) to the 1998 Act, in the Exceptions, after the entry for local taxes insert “Taxes on income.”’

This new clause is intended to devolve income tax completely to Scotland.

Sir Edward Leigh: My simple amendment would allow the Scottish Parliament to set tax thresholds, as any good Parliament should be able to do, and is a genuine attempt to elicit from a Minister the reasons why the

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Scottish Parliament is not currently allowed to set the personal allowance. I am a lawyer, but I do not claim to be a tax expert or an economist.

[

Interruption

.]

Well, it’s just the truth. I am not an expert tax lawyer or economist. This is a probing amendment to help us investigate a complex issue, to which we can always return on Report.

The House of Commons Library has illustrated the complexity of the issue:

“The Bill as it stands would allow the Scottish Parliament to set the bands of income at which different Scottish rates of tax would apply. Clause 12(3) states that where there is to be more than one Scottish rate, the resolution which sets these rates ‘must also set limits or make other provision to enable it to be ascertained…which rates apply in relation to a Scottish taxpayer.’”

That is not immediately terribly clear, but it continues:

“So, if the Scottish Parliament wished to, it could set a zero rate of tax over a specific band of income, in effect increasing the personal tax allowance to all Scottish taxpayers.”

Importantly, in its briefing on the Smith commission, the Institute for Fiscal Studies asked why the power to set the allowance was to be reserved. That is the question I am asking. The IFS, a reputable body, has asked it, and I am simply using the amendment to ask it again. I think most people would agree that setting tax and then spending the money raised is a prerequisite of a responsible Parliament.

It is not necessary to go over all the arguments I used on Second Reading or in Committee two weeks ago—they are on record—but suffice it to say that power breeds responsibility. The Scottish Parliament must take responsibility for its own destiny in the firm conviction that it is ready and able to do so. So why are we devolving bands and rates, but not thresholds? Is not setting the threshold at which people start to pay tax—the personal allowance—vital to the decision-making process? Setting a band or rate but not a threshold is like being willing and able to leap the bar in high jump without having any control over where the height is calculated from. It does not make any sense. What we are giving the Scottish Parliament is only half a power. Are not thresholds much the most interesting part of the equation? We spent a lot of time last Parliament debating that point in relation to the UK economy.

George Kerevan (East Lothian) (SNP): Surely if the Westminster Parliament keeps the right to set the initial threshold, it can also vary it, thus taking away from the Scottish Parliament the ability to plan its entire budget, because the threshold could change overnight.

Sir Edward Leigh: That is a good point, and I agree entirely. It does not make sense. One Parliament might be trying to manage its own affairs by setting bands responsibly, but another Parliament could cut the ground from beneath its feet by changing the threshold. I do not know why the power has been reserved, but no doubt the Minister will tell us.

Nigel Mills (Amber Valley) (Con): Does it not go even further? Without the Scottish Parliament having control over the rules and the tax base, the UK Parliament could create a load of new reliefs that would cost it a fortune. If we are going to devolve income tax, we ought to devolve the whole thing, not just part of it.

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6.45 pm

Sir Edward Leigh: As I explained, my personal view is that we should devolve the whole thing. It makes logical sense. As I said, setting the thresholds is often much the most interesting part of tax policy in modern Parliaments. When our friends the Liberals were in power with us—we remember those happy times—was not their proudest boast that they, as members of the Government, had lifted hundreds of thousands of people out of tax altogether?

There is an interesting argument here. For the record, I am dubious about lifting the threshold. It is expensive, and surely more, not fewer, people should have a stake in the income tax system. But that is my personal view, and I accept that there are countervailing arguments. For instance, lifting the threshold reduces the pressure on tax credits. I recognise that it is an interesting political debate.

Setting rates and bands without being able to set thresholds makes no sense. Of course, raising thresholds and personal allowances is dramatic and expensive, which is presumably why the Scottish Parliament is being denied the power, but leaving aside the need for and desirability of full control, does not full fiscal autonomy lead to full fiscal responsibility? The more autonomy a Parliament is given, the more responsible it becomes. Countries such as Belgium and Spain—not without their own separatist problems—provide exceptionally broad autonomy to their constituent parts.

That is certainly the case in the United States, where the states have full fiscal autonomy, including the power to issue bonds and the like—the whole lot, as far as I know. This country is definitely not the United States, despite the best efforts of Mr Blair, but if there is one aspect of America we should like to emulate, it is its vigorous civic culture. Its states, counties and towns have real power and the capability to respond to people’s needs and democratic desires. Surely we all want Scotland to have that capacity, just as we want the whole UK to have it. The fact that fiddling with thresholds is so expensive makes Governments and Parliaments niggardly about raising them—each £100 is inordinately expensive—but why should the Scottish Parliament be less responsible than the UK Parliament? Can anybody tell me why a responsible Scottish Parliament should not also be niggardly about that power and use it in a very conservative—small c—way?

Of course, full fiscal autonomy requires a set of support mechanisms through a formula-based grant. That should be based on need, not obscure variations on English spending, which is why I am opposed to the Barnett formula and want to replace it with one based on need—but that is a debate for another time. If the UK Parliament issued a sensible grant formula based on the specific needs of the Scottish Parliament, and if that were followed by full freedom for the latter to set personal allowances, bands and rates, I believe the Scottish Parliament would use that power responsibly and carefully. I contend that the more power we give the Scottish Parliament, the less it will be a grievance Parliament and the more the forces of canny, prudent Scottish financial conservatism will be unleashed. Indeed, the best way to encourage the growth of the Conservative party in Scotland is to give the Scottish Parliament more power. At the moment, all the pressure on it is to spend more money and blame the UK Government when we indulge in any austerity programme.

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In the current situation, it is perfectly logical for the voters to choose whichever party complains the most and makes the biggest fuss. I do not blame the Scottish people for doing that. The current system leads to that sort of mindset, whereas the UK system leads to an alternative mindset—we want politicians in power who are careful about how they vary thresholds and bands. It is because Treasury Ministers have that power that people are careful about whom they elect, and Conservatives do not do too badly in that UK set-up.

With full home rule and full fiscal autonomy, the voter would be in charge and would choose representatives who would raise and spend money wisely rather than just go cap in hand to Westminster. That is surely what we want to achieve, so what is the objection? If it is said that the Barnett formula makes such natural freedom unobtainable, the solution is not the denial of power or freedom but the end of the formula. If the argument is that the Scottish tax system could undermine full UK fiscal responsibility, I find it unconvincing. For instance, the Scottish Parliament spends £37 billion and raises £30 billion—quite responsible, actually. The UK spends £732 billion and raises £648 billion. [Interruption.] I thought Scottish National party Members would respond in that way, but I could not resist helping them along.

The serious point that I am making is that the Scottish budget is very small compared with the UK budget. If we gave the Scottish Parliament full fiscal responsibility, it is extremely unlikely that it would upset our fiscal responsibility. The Secretary of State may, of course, be able to deal with that point. He has many more expert advisers than I do, and I will listen to the arguments that are made today and wait for his response. Perhaps he will indulge me, if not with a yes to my arguments then at least with a willingness to listen and, in time, to move. If he is not interested, we could return to the matter on Report.

I make my comments in the spirit of trying to be creative and helpful. We can return to these matters, but I hope that the Secretary of State will not just provide a throwaway line from the civil service brief but will try to respond to the arguments that are made. We are trying to create a responsible Parliament; let us give it full fiscal autonomy.

Stewart Hosie (Dundee East) (SNP): It is a pleasure to serve under your chairmanship in this Committee, Sir David, and to speak to our new clause 54. I enjoyed much of what the hon. Member for Gainsborough (Sir Edward Leigh) had to say, apart from his description of the “separatist problem”, which we tend to call “national aspiration”—I think I know what he meant. I am conscious of the time, so I shall try to cover the debate as briefly as I can.

Paragraphs 75 to 79 of the Smith agreement covered issues of income tax, and stated that income tax would remain a shared tax and that both the UK and the Scottish Parliaments would share control of it. The agreement said essentially that MPs representing constituencies across the whole of the UK would continue to decide the UK’s budget, including income tax. That certainly makes sense with the very partial devolution suggested by the Bill.

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Within that framework, the Scottish Parliament will have the power to set the rates of income tax and the thresholds at which they are paid for non-savings and non-dividend income only. As part of that, there will be no restrictions on the thresholds or rates that the Scottish Parliament can set. All other aspects of income tax will remain reserved, as the hon. Member for Gainsborough said, so that even such things as the definition of income could be changed by a UK Government, making subsequent and consequential serious change to the yield forecast by the Scottish Government. That is one reason why, with the partial devolution, we should all continue to vote on that component of income tax in the Westminster Parliament—and it is an even stronger reason, of course, for the devolution of all income tax.

The Scottish Parliament Information Centre analysis for the Scottish Parliament Devolution (Further Powers) Committee—for the rest of the evening, termed “the devolution committee”—found in its interim report on the draft Scotland Bill that draft clauses 10 to 12, now clauses 12 to 14,

“broadly seek to give effect to the extension of income tax powers recommended by the Smith Commission. These would give the Scottish Parliament the power to set rates and bands in relation to non-savings and non-dividend income…above the UK personal allowance.”

Clause 14 also deals with the interaction between income tax and capital gains tax. Currently, individuals who pay income tax at the higher rate also pay CGT at the higher rate. The clause sets out that the rate of CGT that applies to Scottish income tax payers will continue to be calculated using the UK income tax rate limits. That would create an imbalance should there be a change or proposed change for Scotland and people choose to do something in a different way.

There were, however, no draft clauses in relation to the corresponding adjustment in the block grant or the Scottish Government’s reimbursing the UK Government for costs arising from implementation or administration of the powers. Can the Secretary of State confirm that these recommendations do not require legislation?

The Scottish Parliament’s devolution committee interim report said in its conclusion about income tax powers that

“the essence of the Smith Commission’s recommendations has been translated appropriately by the previous UK Government into the draft legislative clauses”,

and that it had “no particular concerns” with “the drafting”. However, it highlighted the

“significant issues still to be resolved regarding the implementation of the new powers, such as an appropriate definition of residency…the details of the administration of the new regime (who collects the tax and how it will function…the need to avoid double taxation and the timing and phasing of the new powers on income tax relative to those already devolved under the Scotland Act 2012”.

Those are all matters that I am sure the Scottish Secretary will address. At paragraph 166, the devolution committee also recommended that

“details on the implementation of the new powers over income tax be produced before the Scottish Parliament is expected to give its legislative consent”.

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That is extremely important. It concluded, too, that

“any final detail of the fiscal framework and the other matters we have considered is provided to the Scottish Parliament before the question of legislative consent to any new bill is considered”.

That is a view endorsed by the Scottish Government, and I understand that discussions on these issues are ongoing with the UK Government, in parallel with the passage of the legislation.

It is normal practice for the Scottish Parliament to consider legislative consent before the final stage of a Bill in the Commons; with the Report stage likely in the autumn, usual practice would suggest September. However, the devolution committee suggested 2016 as a more likely date, so when does the Secretary of State believe the Bill will reach Report?

Because of the lack of information on the various technical aspects of the delivery of the tax powers, beyond the wording of the Bill, the committee said:

“As yet, we are not able to conclude that we are content with the fiscal framework and no detriment arrangements as these details are currently being discussed between the two governments.”

Will the Secretary of State confirm that discussions are under way and update us on progress, particularly in respect of the no detriment and no advantage clauses—principles agreed by Smith before the committee reported?

The devolution committee also said:

“both the process of these negotiations and the outcome requires proper parliamentary scrutiny. We recommend both Governments reach an urgent agreement on just how this will be achieved and for the Scottish Government to report to the Committee on what arrangements it proposes to put in place for parliamentary oversight.”

Will the Secretary of State describe what actions his Government are taking in respect of parliamentary oversight, particularly if we do not—as may well be the case—get through the debate on all the clauses and groups of amendments tabled for debate today?

In their response to the devolution committee’s interim report, the Scottish Government made it clear that they were

“broadly content with the clauses in the Scotland Bill relating to taxation”.

It added, however:

“as the Committee recognised, there will need to be extensive discussions between the Scottish and UK Governments over the plans for implementing these provisions.”

I note at this point that there were changes between the draft clauses and the Scotland Bill. In paragraph 165 of the interim report, the devolution committee highlighted one area that required specific clarification, so I ask the Secretary of State to confirm—I am sure he will—whether clause 12(5) of the published Bill now contains a change to specify that a zero rate of income tax is possible?

It is also worth saying a little about the nature of the taxation powers, which has been touched on. They are very limited. Even if we include the VAT assignation, the Scottish Parliament would raise the equivalent of around 50% of devolved expenditure. However, excluding the VAT assignation, the figure falls to barely a third. That is important because many of the submissions to the devolution committee called for more. In its written evidence, the Scottish Trades Union Congress called in its recommendation 2.1 for the

“devolution and assignment of taxation amounting to…two thirds of Scottish public spending (over 50% of all spending in Scotland)”.

The Bill clearly does not reach that standard.

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7 pm

The point is important also because it does not match what the UK Government said in their Command Paper “Scotland in the United Kingdom”, which claimed:

“As a result of the Smith Commission Agreement, the Scottish Parliament will control around 60 per cent of spending in Scotland and retain around 40 per cent of Scottish tax.”

Clearly, that claim works only by including the assigned VAT; the taxes that Scotland will actually control amount to less than 30%. The full devolution of all tax on income would help resolve that problem.

It is also worth noting the evidence to the devolution committee of Professor Andrew Hughes-Hallett, who warned of the risks associated with reliance on one single tax. He said a great deal about the possible compositions of the tax base, but in essence his point was that Scotland needs a diverse tax base. We believe that adding responsibility for savings and investment income along with every other aspect of income tax would at least offer a partial solution to that problem.

Furthermore, Professor Anton Muscatelli told the Committee:

“the cleanest solution would have been to have a package that would have involved not only complete income tax devolution, including the personal allowance”

but additional devolution of national insurance contributions, which would have

“allowed some flexibility around employers’ national insurance contributions to try to affect employment, since that issue seems to be of concern to Scotland.”

To try to resolve a number of the problems that we have identified, our new clause 54 seeks the full devolution of responsibility for all tax on income.

One of the other issues that new clause 54 seeks to address is that raised by the National Union of Students Scotland, which told the devolution Committee that it believed

“that by only devolving non-savings taxes, the Scottish Parliament is put in a precarious position for any future tax rises, and particularly the introduction of a higher rate of tax. As was seen in the year before the introduction of the 50p rate in 2010, and then in the year following the reduction to 45p, those who it affected were able to shift extremely large sums of money between years and between income and dividends, in order to either escape or benefit from the changes in rates. Without the ability to tax dividends, there is a great risk that Scotland will never be able to fully utilise or benefit from any future reform of income tax.”

Sir Edward Leigh rose—

Stewart Hosie: I shall give way once, yes.

Sir Edward Leigh: That is a very important point. We always moan about tax avoidance. I have been talking to people in Scotland, and it appears now that wealthy people will be putting more and more money into dividends precisely to avoid tax. I cannot understand the logic of encouraging people to avoid paying tax by putting their money in dividends.

Stewart Hosie: I agree entirely. None of us should be encouraging tax avoidance or evasion—not least a Tory Government, which is why I am sure the Secretary of State will want to support the full devolution of tax on earned and unearned income. It is a jolly good idea.

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However, whether the devolution of income tax is extended or not, issues of implementation must be fully resolved. I ask the Secretary of State to confirm that, as part of the fiscal framework discussions, the following issues are now being fully addressed: the timing of the implementation of the Smith provisions; the length of the transition period and how it relates to the transition period for the Scottish rate of income tax; how the costs of implementation will be met; whether there will be an agreement to revisit the memorandum of understanding between the Scottish Government and HMRC for the Scottish rate of income tax, to ensure that it remains fit for purpose; the enforcement and compliance regime under the Smith income tax proposals; how gift aid and pensions relief will be treated under Smith; how the block grant adjustment will work, although that is much broader than simply income tax; the forecasting of revenues, the interaction between the Office for Budget Responsibility and the Scottish Fiscal Commission and the detail of how we calculate the transfer of revenue; and the continued role of the National Audit Office in working in partnership with Audit Scotland.

The key issue is the forecasting that will drive the revenues that the Scottish Government will get and the block grant adjustment. There has to be a fair balance between the role and input of the OBR and the Scottish Fiscal Commission, particularly given that the OBR uses Treasury numbers to drive its calculations.

As I said at the outset, I am conscious of time; we have many groups of amendments to get through and others will want to speak. I hope that the Secretary of State can answer those important detailed questions on the proposed devolution. I commend amendment 54 to the Committee.

Ian Murray (Edinburgh South) (Lab): I was not able to make it to the House earlier, Sir David; I would like to express my sympathies to everyone involved in the tragic events in Tunisia. Our thoughts are with the families all across the United Kingdom, but especially the people in Scotland who have been caught up.

I want to speak to new clause 32. Part 2 of the Bill devolves significant new powers to Scotland over income tax and other taxes, and it is a real opportunity to provide the powerhouse Parliament promised by the Smith agreement. Clauses 12, 13 and 14 make provision for transfer to the Scottish Parliament of the power to set rates and bands of income tax, including, as the hon. Member for Gainsborough (Sir Edward Leigh) was pushing for, the ability to set a zero rate. The full impact of that and other tax measures should not be downplayed.

Lord Smith himself outlined that the measures proposed in the agreement would create one of the most powerful devolved Parliaments in the world. When taking taxation and spending clauses together, Scotland would be only slightly behind the Canadian provinces and Swiss cantons. Likewise, according to the OECD, in exercising power over setting both the rates and bases of income tax, Scotland would rank above sub-central legislatures in Sweden, Norway, Finland, the US and even Germany.

The economic evidence suggests that fiscal devolution can work. It is our responsibility, and that of the Scottish Government, to make sure that it does—that is the genesis of our new clause 32. However, these are hugely complicated processes; anyone who has tried to

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read the fiscal framework analysis in the Smith agreement will know that. I note that the Scottish National party and its new friend, the hon. Member for Gainsborough, have tabled new clauses that would seek to devolve income tax in its entirety.

I should say at the start that those are perfectly legitimate arguments that have been debated at great length at both the Calman and Smith commissions. Labour disagrees, because we believe fundamentally in the pooling and sharing of resources across the United Kingdom; that is not a criticism of the SNP position, but merely a disagreement on a fundamental broad principle. We have rightly and repeatedly criticised the Smith agreement and the Bill on a number of occasions, particularly on Second Reading and in last Monday’s debate, but I agree with the hon. Member for Dundee East (Stewart Hosie): in this instance at least, the Bill and the Smith agreement have got it right. That is probably why there are so few substantive amendments to the income tax clauses. The Chartered Institute of Taxation has echoed that by saying that the commission has made a

“pragmatic set of proposals which shows a lot of thought has been given to balancing the desire of Scots for greater tax powers against the practical obstacles to devolution”.

It is worth reflecting on the Scottish Parliament’s current position on income tax. Since 1999, Scotland has been able to vary the rate of income tax by 3p in the pound. Despite the current clamour for more powers, that power has never been used—incidentally, I believe that it has now lapsed, which shows the problems with the fiscal framework. Notwithstanding that, under the Scotland Act 2012, and as a result of the Calman commission, the Scottish Parliament has been afforded control over the first 10p of the basic rate of tax. Obviously, the Smith agreement and the Bill go much further.

The Scottish Parliament will have total control over income tax rates and thresholds and complete freedom over the levels at which those rates and thresholds are set. That is significant as the estimated devolved income tax liabilities on income tax in 2013-14 amounted to almost £11 billion. That is a considerable sum, the collection and deployment of which confers a substantial degree of responsibility on the Scottish Parliament. If they wish, the Scottish Government—of any colour—can increase or decrease that liability.

Sir Edward Leigh: I entirely accept where the hon. Gentleman is coming from in saying that he wants responsibility to be shared throughout the United Kingdom. However, can he explain why we should share responsibility over thresholds but not, apparently, over bands or rates? I cannot see the logic of that.

Ian Murray: The Scottish Parliament will have a significant ability to adjust the zero rate in particular. I hope that the Secretary of State responds to that point, because the House of Commons Library was quite clear on it. However, there has to be some pooling and sharing. Income tax is the biggest tax that everyone pays. Everyone who works pays a proportion of their income in income tax, above the basic allowance. It is important that everyone has a stake in that game. We could get to a situation in which people who did not

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have a stake in that game asked what the United Kingdom was for. I fundamentally believe in pooling and sharing, and the Smith agreement struck a reasonable balance.

We need a full analysis of how all the proposals will work. That is why we tabled new clause 32. Some adjustment of the powers might be needed in the future. We do not yet know what effect the implementation of the Scotland Act 2012 will have, because it does not come into force until 2016. The question that the hon. Member for Gainsborough raises relates to what we are trying to achieve with new clause 32, because the report would examine the consequences of this transfer of powers.

Andrew Gwynne (Denton and Reddish) (Lab): Is not one of the unintended consequences of the devolution of income tax to the Scottish Parliament that it will affect UK-wide facilities such as gift aid, which reimburses charities on the basis of the basic rate of income tax that is set at a UK level? If there were two different basic rates, might that not cause complexity for donors in tracking what they pay to HMRC and to Revenue Scotland? Does my hon. Friend think that that issue should be considered by the review that would be conducted under new clause 32?

Ian Murray: I am delighted by that intervention, because I was going to speak about that issue later. Given the time constraints, I will take that point out of my speech, because my hon. Friend has made it well. The Scottish Council for Voluntary Organisations has raised the relationship between income tax and gift aid. Although that matter is not mentioned in new clause 32, I hope that if there is a reporting mechanism, it will look not only at gift aid, but at pension relief. That is another matter that was not mentioned by the Smith agreement, but which has been raised by many of the organisations that have been in touch with us about the Bill. Gift aid is worth £1 billion a year to charities, so we must ensure that it is considered properly.

Stewart Hosie: The hon. Gentleman spoke about the principle of pooling and sharing, and I have heard that argument before. However, if it were a real principle, it would apply to the aggregates levy, landfill tax, air passenger duty and other small taxes that have been devolved. There is no principled reason why it is required to be applied to income tax. He rather gave the game away when he spoke about the ability to vary the rate by 3p either way, which was the original plan, and the ability to set the first 10p of income tax. Why does he think that so little is enough for a nation like Scotland? Why is he so afraid of giving our national Parliament all the powers it needs to tax income properly?

Ian Murray: What the hon. Gentleman is asking for is full fiscal autonomy. There are many amendments that will allow us to have a full debate about that later this evening, but I fundamentally disagree with that principle because the pooling and sharing of resources is important. The difference between income tax and the aggregates levy, landfill tax and all the other taxes he mentioned is that they are removable taxes, whereas income tax is not. We should be pooling and sharing resources, and we should therefore ensure that the significant sum of £11 billion is part of the overall matrix of the United Kingdom.

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As I said at the start of my speech, I do not disagree with everything that the hon. Gentleman said, but we disagree on the fundamental principle of pooling and sharing. His speech was completely reasonable in terms of what he is seeking to achieve, but Labour Members simply disagree with the broad principle of not pooling and sharing. There is no right or wrong on these issues in terms of what should be devolved; the issue is whether one believes in these broad principles or not.

I find it difficult in these debates to have 56 SNP MPs braying at me from behind, when I am actually agreeing with them. I have no idea what they will be like when I disagree with them. I am paying a compliment to the hon. Member for Dundee East, which I do not do often, and he is still unhappy with my contribution. Never mind; given that they have signed most of our amendments to the welfare clauses, perhaps we will be much more collegiate tomorrow.

I was explaining new clause 32. The Scottish Affairs Committee report on the fundamental principles of the Smith agreement, which was published in March, said:

“The Smith Agreement represents the best of both worlds. It presents Scotland with much greater powers over taxation, meaning for the first time the majority of the money the Scottish Government spends will be paid for by its own taxation. This will make it more fiscally accountable to the people of Scotland for how it spends their taxes.”

I am confident that the income tax provisions in the Bill strike the right balance between reserved and devolved taxation, although I agree with the hon. Member for Gainsborough that some movement might be required in the future.

I believe that these clauses are in the spirit and the letter of the Smith agreement and the vow. The vow is quite concise on these issues. It says very little or nothing at all about taxation. One thing that it does say, which goes back to the pooling and sharing of resources, is that the Barnett formula should be maintained. The Bill and the Smith agreement are utterly in accord with that stand.

7.15 pm

Mrs Anne Main (St Albans) (Con): Last week, I supported the SNP on full fiscal autonomy and scrapping the Barnett formula, although I know the hon. Gentleman did not. The SNP Members all trooped through the Lobby to vote for that, so does he share my surprise that they have come back today with amendments that do not include it?

Ian Murray: Nothing ever surprises me, although I was a little surprised last week that the 56 SNP MPs went through the Lobby with the Thatcherite arm of the Conservative party. That was because full fiscal autonomy would deliver something that would be fundamentally damaging to Scotland. The hon. Lady is absolutely correct. [Interruption.] I thank her for waking up all the SNP MPs with her intervention.

The Smith agreement said:

“Income Tax will remain a shared tax and both the UK and Scottish Parliaments will share control of Income Tax. MPs representing constituencies across the whole of the UK will continue to decide the UK’s Budget, including Income Tax…Within this framework, the Scottish Parliament will have the power to set the rates of Income Tax and the thresholds at which these are paid for the non-savings and non-dividend income of Scottish taxpayers”.

That is exactly what the Bill does, and it is important to highlight two aspects of that quotation.

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First, maintaining income tax as a UK-wide tax is critical to the continued pooling and sharing of resources. That facilitates UK-wide redistribution on the basis of need, which underlines the welfare state and the state pension system. The Church of Scotland expressed the same view when it argued for

“a degree of solidarity across the United Kingdom, where prosperity is shared and those with broadest shoulders can carry the extra weight of supporting those less fortunate.”

Secondly, the Smith agreement explicitly mentions the continuing right of Scottish MPs to vote on the Budget within the framework that it sets out. That is equally important, particularly given the Government’s proposals on English votes for English laws. Devolving income tax in its entirety, which the hon. Members for Dundee East and for Gainsborough are advocating, would place that right in doubt and create two classes of MP in this place. That risk was the subject of considerable debate in the Smith commission. As long as one believes in the pooling and sharing of resources, which we certainly do, Smith’s recommendation to retain income tax as a shared tax is critical. That is why we reject amendment 124 and new clause 54, which was tabled by the hon. Member for Dundee East.

New clause 32 concentrates on the implementation of the powers being transferred and, as I have said a number of times in this Committee, the use of those powers. What we are trying to achieve chimes with much of what the hon. Member for Dundee East said, when he laid out the concerns about how the proposals would be monitored, how the number of income tax payers would be determined, the “no detriment” policies across the United Kingdom and the complicated nature of the fiscal framework.

The report under new clause 32 would include

“a review of the revised fiscal framework”,

given its complicated nature. It would also include

“the tax year to which sections 12 and 13 of this Act will apply, and the day on which they are due to come into force”

so that businesses are able to plan. It would include details of the number of staff that both Governments would assign to the implementation of the new Scottish rate of income tax to ensure that adequate resources were deployed to make it happen. It would be useful if the Secretary of State responded to the particular concern that the staffing level to determine the Scottish rate of income tax might be deficient.

Tommy Sheppard (Edinburgh East) (SNP): I am just trying to understand the point that the hon. Gentleman is making. As I understand it, this is an opportunity to discuss whether the Scottish Parliament should have enhanced powers over income tax. His position seems to be that, rather than take that step, we should have a review of the situation. I can understand the logic of having a review of the powers, but why does he think that the review would be better in the hands of the Tory Chancellor, rather than the representatives of the people of Scotland in the Scottish Parliament? Surely the time has come to allow the Scottish people to determine these matters for themselves, rather than a Tory Government who have only one single representative in Scotland.

Ian Murray: I think that the hon. Gentleman is confusing two issues. We fundamentally agree with the clauses relating to the devolution of income tax, but these

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are hugely complex matters, as is demonstrated by the complicated nature of the devolution of the 10p income tax provision in the Scotland Act 2012. The new clause would not prevent the Bill from proceeding; it would merely allow the Secretary of State to bring to the House a report on the progress of implementation.

There is another difficulty. The hon. Gentleman is absolutely right—the Scottish Parliament could produce a report and submit it—but I cannot, in the House of Commons, command a different Parliament to do something, which is why I am asking the Secretary of State to produce the report.

It is right for these issues to be raised. I hope that the Scottish Parliament will also examine them in great detail, and will present a full report to both Houses. Our aim is to protect Scottish taxpayers rather than to create a political divide. It is disappointing that, although we agree on the broad principles of the devolution of income tax, Members are trying to bring about division between us. We are trying to be a responsible Opposition in calling for a report on the implementation of income tax rates.

New clause 32 calls for

“a report on the identification of Scottish taxpayers”.

The aim is to ensure that individuals are either Scottish or UK taxpayers but not both, to prevent the double taxation that was mentioned by the hon. Member for Dundee East, and to deal with cross-border mid-financial year movements, which is important in the context of where people may live or work.

The review must include the rates and bands at which the Scottish income tax will be set, and a projection of the impact of the tax on revenues generated in Scotland and across the United Kingdom. That is primarily designed to ensure that Scotland does not become worse off over time owing to the relative tax bases and demographic or behavioural changes in the United Kingdom overall. Such a review would allow us to assess the transitional process, and to ensure that the projected rates and bands accorded with the principle of no detriment for both Scotland and the rest of the United Kingdom. That would protect Scottish taxpayers, as well as taxpayers in the rest of the UK.

Critically—the Smith agreement restates this—any updated fiscal framework should secure the Barnett formula, with the Scottish budget bearing the full costs of policy decisions that reduce or increase revenues or expenditure. That is crucial to the fiscal framework.

My hon. Friend the Member for Denton and Reddish (Andrew Gwynne) mentioned gift aid, and I hope that the Minister will be able to respond to what he said.

I think it important for the people of Scotland to know what their Government are doing about these substantial income tax powers, whatever the colour of that Government. Those powers are worth £11 billion, and they are fundamental to the working lives of people in Scotland. As I have said all along, this is about transparency: transparency in regard to whether additional powers should be devolved, and transparency in regard to the use and impact of those that are devolved. That is what our new clauses 1, 21 and 32 seek to foster.

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All I ask is that the United Kingdom Government, and, indeed, the Scottish Government, approach the Bill in the same spirit of transparency and openness as us, and agree to new clause 32. We shall be pressing it to a vote later this evening.

Mr Alistair Carmichael (Orkney and Shetland) (LD): As others have said, the genesis of the clause lies in the report of the Smith commission. I have supported the commission since the day, indeed the hour, when it reported, but we cannot ignore the fact that the process was undertaken at great speed. Necessarily, given that five parties were engaged in the process, it involved a degree of compromise all round. It is for that reason that all of us undertook to ensure that there would be consultation following the publication of the report and, subsequently, the draft clauses.

In a debate in which consensus is not always easy to come by, I am pleased to note that there is consensus on the fact that the clause is a faithful replication of the agreement that was reached under the chairmanship of Lord Smith. However, the consultation that has been conducted since the publication of the draft clauses at the end of January has highlighted, and generated, a substantial number of important matters, some of which are technical and some of which go to the heart of the issue of taxation itself.

I suggest to the Secretary of State that further consideration may be necessary. He has the ability, through the good office that he holds, to bring all the parties together again to consider the representations that have been made during the consultation, and to consider whether, given the complexities and possible areas of conflict that could arise, it is actually worth implementing the tax power in the way that is currently envisaged. If the consultation is to be carried out in good faith—and, for my part, it always has been—there are sufficient matters about which we should be talking. That would still allow us—if it were necessary, and if it were possible to construct a consensus—to return to the issues on Report.

Nigel Mills: I rise as a reluctant supporter of the devolution of income tax to the different countries of the Union. I agree with the hon. Member for Edinburgh South (Ian Murray) that people throughout the United Kingdom should feel that they are paying the most important tax—the tax that puts the largest amount of money into the UK pot—and seeing it redistributed. We are where we are, however, and we are talking about devolving income tax to Scotland.

I fear that we have one foot in each camp, with part of the tax in this Parliament and part of it in the Scottish Parliament, and that we will end up in a real mess. I am not sure how it is possible to make a tax work when a Parliament can set the rate, the bands and the starting point, but not the actual rules. A particular policy issue in Scotland may mean that the Scottish Parliament rightly wants to incentivise certain employment and income activities. That may not be not a priority for the United Kingdom as a whole, perhaps for reasons of scale or owing to a different approach, but there will be no mechanism enabling income tax in Scotland to promote that certain activity. A new tax relief for people working in the offshore oil and gas industry, for instance, might not be a priority for the UK as a whole, but it might be a priority in Scotland.

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The record of our income tax code is cluttered with examples of the use of the tax code to promote certain types of behaviour. I am not sure that we can secure the full and effective use of a tax code if our Parliament is not setting the rate and looking after local activities.

The flipside will be that tax avoidance as a result of a loophole may become material for the Scottish Parliament in the case of a certain piece of exploitation, but will not become material to the budget of the whole UK. It may be extremely important in Scotland to get that loophole closed, but in the UK there may be several others that are ahead of it in the queue, because it does not represent a large loss to the Westminster Parliament. An action that ought to be taken on something that has a material impact in one part of the UK will not be taken because of the strange disparity that exists.

If we are going to start devolving taxes, we should step back and have a look at what a federal UK tax system would be like. We should work out which taxes are federal and which are devolved, and then try to bring about some consistency in Wales, Scotland and Northern Ireland so that similar taxes can be devolved in the same way, rather than adopting a piecemeal approach in regard to corporation tax in Northern Ireland, income tax in Scotland, and so forth. I do not think that anyone in the country will know to which Parliament they are paying what tax, and who has complete control of it. That means that we will not get all the advantages that we expect, such as the ownership and the accountability that my hon. Friend the Member for Gainsborough (Sir Edward Leigh) mentioned.

I do not think that we are achieving the sharing and the pooling that the hon. Member for Edinburgh South wanted, the coherent use of income tax that the SNP wants, or the full devolution that would make sense. We appear to have become involved in a strange halfway fudge which we may regret in a few years’ time. I think it would be better to step back and try to get this right from the start, rather than trying to find a way of clearing up the mess.

I accept that there are always good reasons why the line is drawn where it is. We must be very careful about tax avoidance through the use of residency, or pretend residency. If I am working full-time in Scotland, to get the Scottish rate—which may be higher or lower than the rate in the rest of the UK—I shall probably have to go and live in Scotland. I suspect that I cannot achieve that artificially. If I have large dividend flows, I can probably pretend that I am in Edinburgh when I am in London and vice versa in order to obtain the tax advantage. I can see why there is an attraction in having one UK-wide passive income tax, rather than an active tax.

Ian Murray: The hon. Gentleman is raising the issue of what are known in my constituency as “willies”—people who work in London, live in Edinburgh. Those are people who take the trip down to London every Monday and go back on a Thursday evening. According to the House of Commons Library, the UK’s reason for not devolving dividend income is to prevent people from pushing money into dividend income and taking advantage of a differential rate.

Nigel Mills: Yes, as I was saying, I accept there are always reasons for drawing the line where we do, and trying to stop tax avoidance within a territory is a powerful reason. However, that has left us here with a

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convoluted tax system where we seem to be devolving part of it, and that is not a sensible approach. It would be better to have a federal income tax which everyone in the UK paid at a lower rate than they pay now and which covered all passive income, and then have a devolved income tax like the one in the United States. It has a state income tax that can be credited against the federal one. That may be a better, more sustainable system than the one we have.

7.30 pm

I cannot therefore vote for the amendment of my hon. Friend the Member for Gainsborough (Sir Edward Leigh), because it is only half-fixing the problem. It is fixing the issue of the starting point, not the whole tax base. I sense it would be a bit of a rush to devolve the whole thing now in one amendment, so I am not sure I can vote for either of the two amendments, even though I think I agree with them, because we are starting from the wrong position. We need to look at what sort of federal tax system we could have.

Pete Wishart (Perth and North Perthshire) (SNP): The hon. Gentleman is making a thoughtful speech and he has the ears of those on the SNP Benches. He is right that we have got a halfway house and we have got to get this resolved. That is what the Scottish people thought they were voting for when they voted for us in such numbers. Is there anything the hon. Gentleman can do to persuade his right hon. Friend the Secretary of State to listen to what Scotland has said, and to have the proper solution and ensure we do this right and get what the Scottish people voted for just a few weeks ago?

Nigel Mills: I have tried to convince the Treasury Minister, my hon. Friend the Member for South West Hertfordshire (Mr Gauke), of various tax reforms over the last five years with, I would have to say, somewhat limited success, so I am not sure my words will help. If we are to achieve a lasting settlement of our constitution, having these tax rules in the right place with everyone understanding them and believing them to be fair will be extremely important. I do not think my constituents will understand how Scotland can set a different rate of income tax from what they pay if Scottish MPs are still able to vote on the English rate of income tax because it applies to passive income and dividend income. I suspect we will get into a constitutional nightmare, and I can foresee a situation in which Scotland chooses a lower rate of income tax than we have in England, and the English taxpayer will, rightly or wrongly, see a subsidy going from England to Scotland through the Barnett formula and then SNP MPs coming here and voting for a higher rate of income tax than their constituents are paying. That is the nightmare we would hate to see.

We need to have a clear devolution of taxes and responsibility, not what I fear we have here: a halfway fudge that we will have to try to fix in a few years’ time.

The Secretary of State for Scotland (David Mundell): May I start by agreeing with the hon. Member for Edinburgh South (Ian Murray) that we should put on record our thoughts for those people who have been caught up in the events in Tunisia, particularly those from Scotland who have perished? Although our debate has been curtailed today, it is right that that matter has been given such due consideration in this House.

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I say to the right hon. Member for Orkney and Shetland (Mr Carmichael) that I have considered the various issues raised in the House in the first part of our Committee stage, and I will continue that approach through the further days in Committee.

Tommy Sheppard rose—

David Mundell: I would like to make a little progress.

Since the Committee last met, I have had the opportunity to appear before the Devolution (Further Powers) Committee—to give it its full title—and to listen to its views and explain the Government’s stance. I can assure the hon. Member for Dundee East (Stewart Hosie) that that Committee will continue to play a full part in my consideration of the Bill as it progresses through the House, and I have assured the convener of that.

I had a very useful meeting with the Deputy First Minister to look at how we move forward, particularly in relation to the fiscal framework, and I am going to disappoint the hon. Gentleman, but in a good way, because the criticism that was forthcoming from the Committee to both me and the Deputy First Minister was that we both said the same thing to the Committee, which was that we are not going to give a running commentary on the negotiation of the fiscal framework. What I can say is that the list of issues that the hon. Gentleman referred to in his contribution will be part of the discussion of the fiscal framework. We will of course keep this House updated from a UK Government perspective, but it will be for the Scottish Government to keep the Scottish Parliament updated.

I am pleased to start with the clauses on income tax in today’s debate. These are often overlooked, meriting only a few lines in the comments received on the Bill from both Parliaments and from the Scottish Government, but that is because, as has been said, they command widespread support as delivering the central aspect of the Smith agreement in full.

The changes made by clauses 12, 13 and 14 will give unprecedented flexibilities to the Scottish Parliament on income tax and are a significant milestone in Scotland’s devolution journey within the UK. The Scottish Parliament will be able to set income tax rates and thresholds for earned income. This includes the ability to introduce new bands.

Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP): Is the right hon. Gentleman aware of the most recent analysis by the Fraser of Allander Institute, written by Dr Jim Cuthbert? This is not an issue about the individual devolution of income tax; it is about the interaction that will occur between the way in which income tax is proposed and the Barnett formula and the Government’s proposal with the Holtham index, and the conclusion of that analysis is that, when likely shifts in relative population and shifts in relative tax base are taken into account, this will create significant negative dynamic effects. In other words, it will be all over the place and lack consistency, and it will be a source of conflict down the years. Surely, that needs to be avoided by taking a stronger look at making sure the right income tax powers are devolved?

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The Temporary Chair (Mr David Crausby): Order. May I remind the Committee that interventions should be brief?

David Mundell: Obviously I am familiar with Cuthbert’s views on a range of issues, and many of the points the hon. Gentleman refers to will indeed be dealt with in the fiscal framework, which is why that is important for delivering a stable settlement.

The Scotland Parliament will retain the receipts from the income tax it is responsible for. This represents a significant devolution of powers, with Scotland retaining around £11 billion of income tax receipts. That accounts for over 90% of income tax receipts collected in Scotland. This gives Scotland greater fiscal autonomy, with incentives to increase employment and increase wage growth.

I emphasise to Members that there are no restrictions on this power. If the Scottish Parliament wants an income tax system with a dozen different rate bands, these powers allow it to do that. Similarly, if it wants to set a zero rate of income tax, it can.

As I said on Second Reading, the devolution of the rates and bands of income tax means we will correct a fundamental imbalance in the devolution settlement. Since 1999, the Scottish Parliament has debated how public money should be spent but not how it should be raised. The Scotland Act 2012 started to change that, giving the Scottish Parliament more tax-raising powers. The Bill goes much further.

As things stand, the Scottish Government still receive the vast bulk of their budget in a block grant from this Parliament and choose how to distribute that budget according to their priorities. When the UK Government have taken difficult decisions to bring our public finances back into order, the Scottish Government have often condemned us for inflicting cuts. Although I believe those spending reductions were necessary to secure our economy and are far preferable to increasing taxation on working families in Scotland, it is true that the Scottish Government took a different view. These clauses will allow them to do something about it.

With control of the rates and bands of income tax in Scotland, the Scottish Parliament will raise over half the money that it spends. If the Scottish Government want more money to spend on their priorities, such as higher welfare payments, they will be able to increase taxes to raise that money. However, they will have to justify that spending to the hard-working men and women in Scotland who will be paying for it out of their wages every month.

George Kerevan: Following on from what the Secretary of State is saying, how could the Scottish Government ever be sure of their tax yield if another House were setting the threshold?

David Mundell: The Scottish Government already have to manage their finances by building in estimates of revenue. That is part of the system in which we operate and part of the decision to have a United Kingdom-wide tax. I will come on to that point in a moment.

The Deputy First Minister has confirmed that the Scottish Government are already considering using the tax powers that they will shortly receive under the Scotland Act 2012 to put up income tax. The powers

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contained in these clauses will increase the scope for action considerably. With the SNP in government, Scots might pay the highest income tax in the UK. Perhaps the party will dust down its old “penny for Scotland” policy, although now, with inflation, it might need a little more.

Stewart Hosie: Will the Secretary of State please tell the House which person in the Scottish Government has suggested that income tax is going up in Scotland?

David Mundell: The Deputy First Minister, Mr John Swinney.

Ruth Davidson, however, has set out the Scottish Conservative position by saying that Scotland would never have higher rates of income tax than the rest of the UK. If people elect Scottish Conservative MSPs next May, that is what they will get. Scots voted decisively to remain within a United Kingdom. The UK is more than just a name and a flag; it is a social and fiscal union in which risks and rewards are pooled and shared. The Smith commission looked closely at a range of tax powers and agreed on a package of devolution that enhances Scotland’s place within the United Kingdom. It strikes the right balance, by empowering the Scottish Parliament, while maintaining the UK’s strength and coherence. There is a good reason for transferring every power that we are devolving in the Bill, and a good reason for keeping in reserve everything that we are not devolving.

Turning to amendment 124, devolution of income tax is a significant step, but it is important to remember that in the independence referendum only last September, the Scottish people decisively opted for the security of being part of the UK family of nations, and part of that is a single, cohesive income tax system. That is why HMRC will administer Scottish income tax for the Scottish Parliament as part of its UK-wide management of income tax, thus minimising the burdens on employers and individuals. It is also why the Smith commission—which it is important to remember all parties present in the Scottish Parliament signed up to—specifically decided after careful consideration not to devolve the personal allowance.

Tommy Sheppard: Colleagues here are finding it incredibly depressing that on this, the third day of our debates on this important Bill, the Secretary of State still seems to be resisting completely any amendment to his point of view. What parallel universe is he living in if he thinks that the will of his party, which has one representative in Scotland, should prevail over the wishes of the majority of the electorate in Scotland, who voted decisively for our party and for more powers?

David Mundell: The world in which I live is one in which I have had a very productive discussion with the Deputy First Minister of Scotland on how we should take forward these financial measures and reach agreement on a package that will provide stability and financing for the Scottish Parliament within the United Kingdom. That is what I am committed to doing. Of course I will listen to the views expressed in amendments tabled in this House, and that is what we are continuing to do today. It is for those who are tabling amendments to make a case for their being accepted.

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Sir Edward Leigh: We are dealing with my amendment, which relates to threshold points. Surely, if incomes in Scotland are generally lower, the Scottish Parliament would want to address the problem for people on lower incomes by lowering the thresholds. Would that not be the logical thing to do? I understand the Secretary of State’s point about the pooling and sharing of resources, but I have to ask the same question of him that I put to his opposite number: why is it okay to pool and share resources on thresholds but not on bands and rates?

7.45 pm

David Mundell: As my hon. Friend knows, we had lengthy discussions in the Smith commission on the balance between the respective responsibilities, and it was agreed that while income tax should remain part of the wider UK tax regime, these specific significant powers would be moved to the Scottish Parliament. I believe that that creates the balance we were seeking.

Pete Wishart: Will the Minister give way?

David Mundell: No, I will not at this stage—[Interruption.] The hon. Gentleman is one of the most frequent contributors to debates in the House, and he does get to have his say, although not as much as his former leader does. The right hon. Member for Gordon (Alex Salmond) is a very frequent contributor.

The SNP’s new clause 54 goes further than amendment 124, tabled by my hon. Friend the Member for Gainsborough (Sir Edward Leigh). However, to go further than the powers set out in the Bill would break the concept of shared tax and be complicated for individuals and employers with activity on both sides of the border, as they would have to understand and comply with two potentially entirely different tax systems. The Law Society of Scotland agreed with us, saying of the proposed change:

“The administrative burden would increase considerably. The complexities regarding the UK savings and investment market may also be particularly problematic”.

That would not be in keeping with a stronger Scotland within the United Kingdom. It is not what the people of Scotland voted for last September, and I cannot accept the new clause.

On new clause 32, tabled by Opposition Front Benchers, I hope that I can provide some reassurance to the House. The new clause is intended to provide the House with a report on the implementation of the Scottish rate of income tax and the further income tax powers in the Bill. That is a laudable aim, but I can reassure hon. Members that current legislation already provides for annual reports on the implementation of devolved tax powers to Scotland.

Section 33 of the Scotland Act 2012 requires the Secretary of State and Scottish Ministers to lay before both Houses of Parliament and the Scottish Parliament annual reports that broadly cover the areas suggested in the new clause. Three reports have already been produced, the most recent in March, and HMRC’s accounting officer for the Scottish rate and the Comptroller and Auditor General have both given evidence to the Scottish Parliament on the progress of tax devolution to Scotland. Of course, Westminster Committees have the opportunity to call for evidence, too. Alongside that existing requirement

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and to ensure that Parliament can have confidence in the implementation and operation of the Scottish rate, the Comptroller and Auditor General is required to report annually on HMRC’s administration of the Scottish rate.

I can also tell the hon. Member for Edinburgh South that I am satisfied that adequate resources are being brought forward to deal with the issues relating to the transfer of these powers to Scotland and to HMRC’s involvement in that process. I would further reassure Members that reporting requirements are a feature of the negotiations currently under way between the two Governments on the fiscal settlement that accompanies the Bill.

I have set out the rationale behind the Government’s drafting of the Bill, which, as has been widely acknowledged, fully implements the Smith commission’s recommendations on income tax. The fiscal framework will be an important part of the discussions, and we are giving this exercise the focus and priority that it deserves.

Sir Edward Leigh: I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clauses 12 to 14 ordered to stand part of the Bill.

Clause 15

Assignment of VAT

Question proposed, That the clause stand part of the Bill.

The Temporary Chair (Mr David Crausby): With this it will be convenient to discuss:

New clause 20—Review of operation of VAT refund schemes in Scotland

‘(1) The Treasury shall, within six months of the day on which this Act is passed, publish and lay before the House of Commons a review of the application of VAT refund schemes for businesses in Scotland.

(2) The review must include an analysis of the impact of the qualifying criteria for the VAT refund schemes—

(a) in Section 33 of the VAT Act 1994, and

(b) for Government Departments and the NHS,

on the level of VAT payable by Police Scotland and by the Scottish Fire and Rescue Service.”

Following the amalgamation of the (formerly regional) Scottish fire and rescue services and Scottish police forces into a single fire service (the Scottish Fire and Rescue Service) and a single police force (Police Scotland) respectively, they are no longer eligible for VAT exemptions under the VAT refund schemes mentioned. This amendment requires the Treasury to carry out and publish a review of the schemes in Scotland, and in particular in relation to the level of VAT payable by Police Scotland and the Scottish Fire and Rescue

Service

.

The Financial Secretary to the Treasury (Mr David Gauke): Clause 15 makes changes to ensure that a proportion of the VAT that is attributable to Scotland may be assigned to the Scottish Government’s budget. The Smith commission set the objective that more devolved spending in Scotland should come from tax raised in Scotland. Control over setting VAT rates is not being devolved to Scotland, because EU VAT law does not allow for differential VAT rates within a member state. The changes made by clause 15 will, however,

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ensure that a proportion of the VAT that is attributable to Scotland may be assigned to the Scottish Government’s budget. Clause 15 sets that proportion at the first 10 percentage points of the standard rate of VAT and the first 2.5 percentage points of the reduced rate of VAT. On the basis of current VAT rates, that would be exactly half, representing, very approximately, £4.5 billion.

Clause 15 will link Scotland’s share of VAT to economic activity, providing incentives for the Scottish Government to promote growth. The Scottish Parliament and Scottish Government have considerable levers to do this, for example on skills and education policy, and it is now for them to set out how they will do that. Assigning VAT to Scotland’s budget will strengthen the financial responsibility of the Scottish Parliament, and strengthen its ability to pursue its own visions, goals and objectives.

Let me say just a word or two about new clause 20, although I am sure the hon. Member for Caerphilly (Wayne David) will be saying more about it shortly. It requests a review of VAT refund schemes in Scotland, with a particular focus on how they affect Police Scotland and the Scottish Fire and Rescue Service. In 2012, Police Scotland and the Scottish Fire and Rescue Service restructured in order to streamline and modernise. As a result, eight local police and fire authorities became one. The restructuring stopped the duplication of support services, potentially saving £130 million, according to the Scottish Government. Like other people and organisations, fire and rescue services and the police pay VAT on the taxable goods and services they purchase, but because they are largely not engaged in business activities they cannot recover this VAT through the VAT system in the same way as businesses do. However, there are, in certain clearly defined circumstances, existing schemes that refund some or all VAT.

Section 33 of the Value Added Tax Act 1994 was introduced to ensure that VAT is not a cost borne by local taxation. There are two long-established criteria for inclusion in this scheme. First, that a body must undertake a local government function—we accept that the successor bodies of the former fire and rescue service authorities do this. Secondly, the body must have the power to draw funding directly from local taxation. The Scottish Fire and Rescue Service is funded by the Scottish Government rather than through any legal call on local taxes, and so does not fit under that criteria. In 2011, the Scottish Government were explicitly advised of this consequence of changing from regional police and fire services to a single authority. The expected benefits in the Scottish Government’s business case far outweigh the loss of any VAT refunds, and so the Scottish Government understandably continued restructuring with that in mind. The restructuring was the decision of the Scottish Government, made with the full knowledge of the VAT consequences of their decisions. This is a historical request and is not a matter that the draft clause regarding VAT assignment should address. Having set out the background, in anticipation of the arguments we may hear from the hon. Gentleman, I urge him not to press his new clause to a Division.

Wayne David (Caerphilly) (Lab): It is a pleasure to serve under your chairmanship, Mr Crausby.

The Smith commission’s report was very clear about VAT, particularly in paragraph 84. The Government have spelt out in the Bill how this arrangement will

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work in practice. The Opposition support the Government in implementing this part of the Smith agreement, but we have a real concern about the position of Police Scotland and the fire and rescue service in Scotland. A number of organisations have expressed concern about VAT relief schemes in Scotland, and I very much hope that the Government will accept our new clause 20 and that the review will be sufficiently broad based to cover a wide range of organisations, including charities.

I wish to focus my remarks on the situation, which has already been referred to in part, regarding Police Scotland and the Scottish Fire and Rescue Service. Surprisingly, none of the 43 police forces in England and Wales, or the Police Service of Northern Ireland, pays VAT—not even the National Crime Agency has to pay VAT—but both Police Scotland and the Scottish Fire and Rescue Service do. There is widespread indignation at this unfairness in Scotland. Sir Stephen House, Scotland’s chief constable, has said, in unambiguous terms:

“It simply isn’t correct. It is not right. It’s unfair and it shouldn’t be allowed to continue”.

The eight police forces and the eight fire and rescue services, before they were amalgamated, were exempt from VAT, but now Police Scotland has a huge annual bill—a bill that is unfair and unique in the whole of the UK. At a time when Police Scotland has no alternative but to make significant cuts, it is a liability that every year it has to put forward a forfeited bill of about £10 million—the figure for the Scottish Fire and Rescue Service is approximately £11 million.

Why has this situation arisen? The Government’s position was spelt out in some detail in a letter to Cathy Jamieson, the then Member for Kilmarnock and Loudoun and shadow Economic Secretary to the Treasury, on 9 March. The letter from the Financial Secretary explained that the fire and rescue service, and by implication Police Scotland, pays VAT on the taxable goods and services it purchases, but because these bodies cannot recover VAT through the system in the same way businesses do, there are special schemes in place. He then explained that there are two schemes relevant to fire and rescue services. The first, as set out in section 33 of the 1994 Act, made sure that VAT is not a cost borne by local taxation. There are two criteria for inclusion in this scheme. First, the body must undertake a local government function—and the Treasury did accept that was the case with the Scottish Fire and Rescue Service. Secondly, the Treasury claimed that the body must have the power to draw funding from local taxation. The Scottish Fire and Rescue Service is funded directly by the Scottish Government rather than through any legal call through local taxes. Hence, the Government have argued that a “key condition” of the section 33 VAT refund scheme does not apply.

That was the first refund scheme, but there is a second one, which is for Departments and the NHS. It is doubtful whether the Scottish Fire and Rescue Service would be in a position to claim refunds on outsource services, but the Treasury made it clear that the Scottish Fire and Rescue Service would not be eligible in principle because it is not a “central government” Department. To be honest, those reasons might be technically valid, but they are also morally suspect and unjustifiable. I am a great believer in the saying, “Where there’s a will, there’s a way.” Clearly, the situation in Scotland with regard to

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the Scottish Fire and Rescue Service and to Police Scotland is an anomaly, which applies to only one part of the United Kingdom.

I very much hope that the Treasury can muster the wherewithal to address that anomaly, and to do it through our proposed new clause 20.

8 pm

Dr Philippa Whitford (Central Ayrshire) (SNP): I note that Highways England and London Legacy, which was created after the Olympics, have both been granted VAT exemption. They also fall into the same group. Surely Highways England is in exactly the same boat, yet it is given VAT exemption. We are not talking about something that is chiselled in stone or set in concrete, so surely it can be changed.

Wayne David: Well, things can be changed through political will. As I have said, where there is a will to make that change, a change can be made. A way can be found, if there is the desire to do so. I very much hope that the Government listen carefully to what has been said this evening.

I must say that something else worries me, too. I refer again to the letter to Cathy Jamieson from the Financial Secretary. The penultimate paragraph says:

“In 2011 the Scottish Government were explicitly advised of this potential consequence of changing from regional police forces to a single authority as part of the proposed revised funding model for Police Scotland. At the time they took the decision to make these reforms they would have known they would no longer be eligible for the VAT refunds as a result.”

There we have it in black and white: the Scottish National party Government were warned that their plans to reorganise emergency services would, in effect, cost millions in VAT refunds. Yes, cost savings might have been made; but they knew the situation and they were prepared to see that loss occur. They still pressed ahead with their plans. This is in part a mess of the SNP’s own making, compounded by an indifferent and apathetic Tory-led Government here in Westminster. The sensible thing surely would have been for the Scottish Government and the UK Government to have come together and sort out this problem before Police Scotland and the Scottish Fire and Rescue Service were constituted on an all-Scotland basis. That is the common-sense thing that should have happened. But that is in the past.

Callum McCaig (Aberdeen South) (SNP): Will the hon. Gentleman enlighten this Chamber as to whether the situation we have here is what the Labour party has in mind when it talks about the pooling and sharing of resources?

Wayne David: The hon. Gentleman is really stretching things to try to make that point. What I am suggesting is that for devolution to be effective, there needs to be a consensus, a coming together or an agreement on the best way forward. I quoted an excellent example. Both services would have materially benefited if both the Government of the day and the SNP Government had had the wherewithal to come together and work things out sensibly.

Dr Whitford: The SNP Government had written extensively to the Government to try to deal with that issue. Is the hon. Gentleman suggesting that Police Scotland and the Scottish Fire and Rescue Service should have been left in eight divisions?

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Wayne David: No, of course not. What I am saying is that it would have been far better if the Government in Scotland and the Government in London had sat down maturely and worked things out for the benefit of services in Scotland rather than pursue a fixation with the idea that things had to be brought together on a centralised basis in Scotland, irrespective of the consequences. The Government were absolutely adamant on this. Presumably they could not find parliamentary time, or did not have the political inclination to bring forward an amendment to have a scheme that would have benefited everyone.

The sensible thing would have been to do precisely what I have said, but that is in the past. The important thing now is to move forward and resolve this situation. Our proposed new clause 20 calls for a review of the situation. It is a modest request, which I very much hope that the Government will accept. If they do accept it, it could provide an opportunity for everyone to get together and, hopefully, resolve the issue.

It has been suggested by the Scottish Council for Voluntary Organisations that VAT rebates should be devolved so that they better conform to devolved policy to support society and public services. A suggestion has been made that the UK Government could allocate a Barnett formula-based share of the VAT rebates to the Scottish block grant. That is one possibility, but, like all the other suggestions, it needs to be soberly and carefully discussed. It could be a part of the review that we propose. I hope that the Government will accept our amendment so that we can have that meaningful discussion and reach a decision for the benefit of Scotland.

Stewart Hosie: It is a pleasure to take part in this debate on clause 15 stand part and proposed new clause 20 in the name of the Labour party.

Let us turn to the way that the Smith commission has spoken about the assignation of a proportion of VAT. It said:

“The receipts raised in Scotland by the first 10 percentage points of the standard rate…will be assigned…All other aspects of VAT will remain reserved.”

The Scottish Parliament Information Centre analysis for the Scottish Parliament Devolution (Further Powers) Committee referred to it in its interim report on the draft Scotland Bill clauses. It said:

“Draft clause 13 [now 15] would give effect to the Smith Commission recommendation that the Scottish Government be assigned receipts from the first ten percentage points of VAT. With the agreement of both governments it also proposes to go slightly further by notionally assigning 2.5 percentage points of the reduced rate of VAT as well…The amount of VAT receipts attributable to Scotland is to be the subject of an agreement between the UK Government and the Scottish Government.”

It did point out that there are no draft clauses in relation to the corresponding adjustment to the block grant. Hopefully, the Minister will confirm that that does not require legislation. In effect, the Scotland Bill proposes the assignation of half of VAT receipts to the Scottish Parliament. However, that will provide no actual control of VAT.

The Devolution (Further Powers) Committee had no particular concerns with the draft clauses, but it did want details of the assignment of VAT revenues and the share of any benefits to be produced—the mechanics of

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the assignment—before the Scottish Parliament could be expected to give its legislative consent. The committee said:

“There is still significant uncertainty on how the assignment of a share of VAT revenues will be calculated and whether the Scottish Government will be able to reap the rewards of any economic stimulus that yields higher VAT revenues.”

It is also worth noting that the Devolution (Further Powers) Committee’s analysis paper, which set out the differences between the draft clauses and the published Bill, noted that:

“No further detail is provided on the assignment of VAT revenues, or the corresponding block grant adjustment.”

There are a number of technical issues for consideration notwithstanding the fact that there is no particular issue with the legislation as such.

The committee’s interim report considered the evidence on VAT assignment from a range of sources. It said that the bulk of the evidence received by the committee, while welcoming the principle, called for greater clarity in how the assignment of revenues would work. As the Institute of Chartered Accountants of Scotland told the committee:

“Clause 13 in the ‘Draft Scotland Clauses 2015’ regarding VAT delivers the mechanics of the assignment of VAT, but with the large caveat that it applies ‘where there is an agreement between the Treasury and Scottish Ministers’...The rules for agreeing this have not been provided and it may not be easy to identify ‘Scottish VAT’”.

I take on board what the Scottish Secretary said earlier about not giving a running commentary, but on that specific point—and I shall have more specific questions—at least I hope we can get clarity.

In oral evidence to the Scottish Parliament committee, Charlotte Barbour of ICAS elaborated:

“The assignment of VAT offers more opportunity for discussions on how that might be calculated. It slots in with the difficulties with the fiscal framework”—

we discussed those in the last debate—

“and some of the no-detriment issues”—[Scottish Parliament, Official Report, Devolution (Further Powers) Committee, 5 February 2015; c. 4.]

I mentioned those previously. The Scottish Trades Union Congress was broadly supportive of the assignment of VAT. Its deputy general secretary told the Committee that

“I am quite a fan of assigned revenue”,

but he took the point that

“it is not a power in the sense of being usable to promote particular behaviours”.

However, he said:

“A degree of assigned revenue clearly rewards the Scottish Government for economic growth and, in our view, the closer we get to an amount of revenue that is derived from positive actions undertaken by the Scottish Government, the better.”—[Scottish Parliament, Official Report, Devolution (Further Powers) Committee, 15 January 2015; c. 13.]

I do not think that any of us would disagree with that. We want responsibility, which rather prompts the question that given that there is no control over VAT, why assign only half of it? Why not assign it all? The Scottish Government could then quite rightly benefit, if there was a benefit, from the entire rise in VAT in Scotland rather than just half of it and could take responsibility if there was a shortfall, not just for half the shortfall.

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Speaking to the committee, John Swinney, the Cabinet Secretary for Finance, Constitution and Economy, highlighted two issues for discussion with the UK Government, which are both important:

“One is establishing the analytical base for how VAT should be apportioned and the other is the policy question of guaranteeing that if those estimates are exceeded, Scotland retains the benefit of that improved economic performance”.—[Scottish Parliament, Official Report,Devolution (Further Powers) Committee 12 March 2015; c. 26.]

The former Secretary of State for Scotland also commented on the issue of VAT in a letter to the Committee, in which he said that he could

“confirm that VAT assignment will link the Scottish Government’s budget with economic activity in Scotland, providing incentives for growth. The amount of VAT to be assigned…will be based on an estimated share of the total VAT generated in the UK...The UK and Scottish Governments will need to agree a methodology”.

Will the Minister provide further details, not on the specific discussions with the Scottish Government but on the themes? What are the options for how VAT will be assigned? Will it, for example, be a consumption-based approach? How can we improve the robustness of the measure and the timescales, for example by improving the survey data? What will be the costs of implementation and how will they be met? Does there need to be a proxy measure over a transition period until the methodology is robust? Has any thought been given to indexation and comparable measures of growth? What has been said about governance and accountability, for example developing a separate strand to the memorandum of understanding with the HMRC on VAT to expand the role of the project board?

The question of the robustness of the survey data is vital. At present, VAT is estimated by the Scottish Government in the Government Expenditure and Revenue Scotland report, based on a household survey of expenditure, therefore missing tourism spend entirely. That is corrected by a percentage share adjustment, meaning that the Scottish Government estimate what percentage of UK tourism happens in Scotland, but if the Scottish Government managed to increase tourism spend through other actions, such as reducing air passenger duty, that would not show up according to the current methodology. We therefore need to agree a new robust methodology and, perhaps, an interim measure until that methodology is in place.

As the Minister has said, VAT cannot be varied within a state and we understand and respect that. So let me repeat the question: why give only half rather than all, unless to camouflage the fact that the tax over which Scotland will have control will be such a small share of our tax base? Could the assignation of VAT revenue be designed simply to make that number seem a little bigger?

Let me turn to new clause 20, on the subject of VAT on Police Scotland and the fire service. We heard the hon. Member for Caerphilly (Wayne David) describe the amendment, which proposes a review of the application of the VAT refund scheme for business in Scotland. It has been tabled with the intention, it would appear, of addressing the anomaly of the inability of the Scottish Police Authority and the Scottish Fire and Rescue Service to reclaim VAT. Although we agree that that is an inequitable position for both services, we do not necessarily believe that a review is the way to address it. Instead, the UK Government—as the hon. Gentleman

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said, where there is a will, there is a way—should simply amend the VAT status of the single police service and fire and rescue service in Scotland.

8.15 pm

There are some technical issues with the new clause. VAT is UK-wide, so any review could not be confined solely to Scotland. Proposed subsection (1) requires a review of VAT refund schemes for “businesses” but there is no business VAT refund scheme as such. Subsection (2) would make the VAT refund scheme applicable to central Government bodies that sit outwith EU law but are the subject of an EU-wide consultation process. The reference to Police Scotland should instead be to the Scottish Police Authority, which is the legal entity and VAT-registered body; Police Scotland is the part of the SPA relating to police officers. However, notwithstanding all of that and the fact that the new clause simply proposes a review, it never does any harm to find out that what we thought we knew was correct—

Wayne David rose

Stewart Hosie: In a moment. We think that the better approach to fix the problem might be through a forthcoming Finance Bill after the Budget in July, but nevertheless we are happy to back the new clause today if Labour presses it to a vote.

Wayne David: I was going to ask the hon. Gentleman if he was going to support us, but he has pre-empted me. It is very good that he will, because, of course, the SNP did not table an amendment on this issue. I thank him.

Stewart Hosie: We did not table an amendment because there was not an amendment that we could table to fix the problem. As I have just said, that requires an amendment to a Finance Bill. One might have thought that an experienced old hand like the hon. Gentleman might have known that and advised his younger and less experienced colleague, the shadow Secretary of State, on how things work. Having said that, and that we are happy to support new clause 20, I will sit down and hopefully we can move on.

Mr Alistair Carmichael: I rise to say a few words in support of new clause 20, tabled by the hon. Members for Edinburgh South (Ian Murray) and for Caerphilly (Wayne David). When considering schemes such as those that lie at the heart of the new clause, it is worth starting with the principle that underpins them. Is it, as the Financial Secretary to the Treasury suggested, the principle that local government finance should not go straight into Treasury coffers? I can understand that principle and it holds water in so far as it relates to the scheme for police and fire services across the UK, as originally envisaged. The difficulty for the Minister, however, is that there are other schemes of a similar nature that go beyond the ambit of police, fire and other rescue services. The hon. Member for Caerphilly mentioned one related to the national health service.

The principle that underlines such schemes is fairly sensible—that for public services to pay money back into the Treasury is essentially an exercise in robbing Peter to pay Paul. It only creates work for accountants

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and achieves no public good. There is a more fundamental principle at stake, however, in the proposal before the Committee and in the new clause tabled by the Labour party. That is the principle that there should be equality of treatment across the board and across the United Kingdom. The hon. Member for Aberdeen South (Callum McCaig) hit the nail on the head when he referred to the pooling and sharing of risks. I think I have perhaps a greater commitment to that principle than he has, but I must say in all candour to those on the Treasury Bench that if they are sincere in their belief that risks and rewards should be pooled and shared across the UK, whatever the technicalities this situation should not be allowed to continue. Whether it is done through the review in the new clause or through action in the forthcoming Finance Bill, amendments for the sake of the continued constitutional integrity of the United Kingdom should be produced in early course.

Mr Gauke: Let me address the issues that have arisen during the debate, starting with new clause 20 and the refund situation. It is correct to say that there is a refund scheme for Government Departments and the NHS. This scheme refunds the VAT incurred on certain outsourced services. It was introduced to ensure that irrecoverable VAT does not dissuade Government Departments from contracting out services where this results in greater efficiencies of scale. There is also —this is relevant to the discussion—a refund scheme in respect of matters that can draw funding directly from local taxation. The Scottish Fire and Rescue Service is funded by the Scottish Government, rather than through any legal call on local taxes, so it does not meet this criterion.

That was not the case prior to the reforms brought in by the Scottish Government. I stress that this was a choice of the Scottish Government, with their eyes wide open to the fact that the VAT refund scheme would not be available in the event of that reform. They decided, as they were perfectly entitled to do, to proceed with those reforms, notwithstanding that loss.

Peter Grant (Glenrothes) (SNP): For 18 years, during which I was a member of both Fife regional council and Fife council, they were unitary authorities but we did not have a joint police board and we did not elect or appoint members from different authorities to a separate organisation in which the police were funded entirely by a budget decision of a single authority. In effect, they were operating financially as though they were the education service or the social work service. At that point they had the same VAT treatment as the police in Strathclyde or Lothian, which were managed by a joint board. Fife police did not have, in the Minister’s words, a legal call on the resources of the authority. They were funded because the authority thought it was the right thing to do, not because the police had the right to demand the funding from us. Will the Minister explain why the same position does not now apply to the Police Service of Scotland or the Scottish Fire and Rescue Service?

Mr Gauke: As I understand the situation that the hon. Gentleman set out, if services were funded through local taxation, the refund scheme was available. That is

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no longer the case, as the changes have been made. It therefore does not fall within section 33 as it currently stands. As the hon. Member for Caerphilly (Wayne David) acknowledged, it is technically valid that the refund scheme does not apply.

Many arguments are made in respect of the VAT refund schemes, and requests are made that they be broadened and applied to additional organisations. It is customary for the case to be made that charities, for example, should benefit from such refunds. That comes with significant fiscal cost. Now is not the time to run through the whole argument, but there may well be a case for reconsidering the position, but we should not look at it in isolation because of a particular decision that was made in one case. If there is a case to do that, the matter should be looked at in the round, not just on the basis of one case.

Dr Philippa Whitford: Is this not just a dry technical issue? This is the only police force and the only fire service in the whole of the United Kingdom that pays VAT and does not get it back. Members of the Front-Bench team agreed that it would be sensible to bring Police Scotland together and said that they would do the same. Surely now is the time to use some common sense and get rid of this anomaly—£33 million a year that could be going to front-line services.

Mr Gauke: But the reason for that is the decision that the Scottish Government took, with full information. This did not come as a surprise or as an unexpected consequence of a decision. It was a decision that the Scottish Government made, fully informed and understanding the situation. I am not criticising the decision because, according to the business case made by the Scottish Government, the benefits far outweighed the costs. But the costs were there and identified to the Scottish Government in advance.

Wayne David: I am sure the Minister would acknowledge that devolution is based on mutual respect. With the benefit of hindsight, does he agree that it would have been far better if the Government here in London and the Scottish Government had sat down and worked out a way forward?

Mr Gauke: A request was made of the UK Government and we provided information on what the position was. As I was saying a moment ago, there are many calls for an expansion of section 33 and the refund scheme. The cost of the scheme being widely expanded could be substantial. At a time when there are considerable constraints on the public finances, we have to be careful about responding to every request and claim, however reasonable it might be.

Ian Murray: I understand what the Treasury Minister says about the number of requests received for exemptions from section 33, but this is not a new exemption. There is a net gain of many millions of pounds a year to the Treasury from this change. Therefore the net effect of changing it back would be zero. We are not asking for exemption from section 33 to be opened up to charities. That is a separate debate. This is a case where the Treasury is a net beneficiary. How does Scotland get that money back?

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Mr Gauke: As I said, a decision was made by the Scottish Government, believing that the efficiency savings were more than sufficient to outweigh the costs incurred by losing the section 33 refund. That was the basis for the decision, and the position in respect of section 33 was clear.

Ian Blackford (Ross, Skye and Lochaber) (SNP): We keep hearing about respect. We all know why the Scottish Government introduced the change—it creates efficiency in the delivery of police and fire services in Scotland. A clear case has been made by many of my hon. Friends and by those on the Labour Benches as well. If there is a genuine feeling of mutual respect between the Government in Scotland and the Government in Westminster, all the Treasury has to do is make sure that we get the VAT back and we will invest it in front-line services to benefit the people of Scotland.

Mr Gauke: We respected the Scottish Government’s decision, because they were perfectly entitled to decide to reform the police and fire services in the way they did, but they knew what the consequences of the law of the land would be with regard to VAT. That decision was taken and it would be unreasonable for us to maintain the existing legislation, given that there are many demands on section 33.

Let me turn to clause 15. The hon. Member for Dundee East (Stewart Hosie) asked why we are simply assigning half of the VAT revenue, rather than all of it. That reflects the agreement reached by the five main political parties under the auspices of Lord Smith. It represents a balance between providing a sufficient incentive for Scotland to grow its economy, relative to the rest of the United Kingdom, in order to increase its revenue from VAT and exposing the Scottish Government’s budget to potential fluctuations in VAT receipts.

8.30 pm

Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP): For the benefit of the Committee, will the hon. Gentleman explain the difference between the agreement the UK Government have with the Isle of Man and what they are now proposing for Scotland?

Mr Gauke: The Isle of Man has different constitutional arrangements. What we are proposing is consistent with the conclusions reached by the Smith commission.

The hon. Member for Dundee East (Stewart Hosie) made a number of technical points about how that will work. I accept that a number of details will need to be worked out as part of the fiscal framework. There is a need to agree the methodology for estimating how much VAT is generated by Scotland and by the rest of the United Kingdom. The UK and Scottish Governments will also need to agree the operating principles, including mechanisms for verifying that the methodology has been applied correctly, how many adjustments might be carried out and arrangements for audit and transparency, including publication of results. It is worth pointing out that other countries operate similar systems and could provide a reasonable starting point from which to build.

Again, those considerations will be part of the fiscal framework, and I think that it is agreed on all sides that it would not be helpful to provide a running commentary on it. Of course, there have already been meetings with

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the Deputy First Minister and the Chief Secretary to the Treasury on some of those points. All I will say to the hon. Member for Dundee East is that the UK Government are determined to work constructively, as I am sure the Scottish Government are, to ensure that we reach an agreement that is fair and reflects the appropriate assessment that should be made.

Stewart Hosie: I thank the Minister for that answer; it is genuinely helpful, as he always is. However, will he confirm for the Committee that the agreement will be reached in good time for the Scottish Parliament to consider it fully before any legislative consent motion has to be passed?

Mr Gauke: It is kind of the hon. Gentleman to say that I am being helpful. In the spirit of continuing to be helpful, let me say that I certainly hope that that will be the case, but of course agreements will require both parties to act in a co-operative way, which I have no reason to doubt will be the case.

With those remarks, I hope that the Committee will support clause 15 and that I have said enough to persuade the Labour party not to press new clause 20.

Question put and agreed to.

Clause 15 accordingly ordered to stand part of the Bill.


Clause 16

Tax on carriage of passengers by air

Question proposed, That the clause stand part of the Bill.

The Temporary Chair (Mr David Crausby): With this it will be convenient to discuss the following:

Clause 17 stand part.

That schedule 1 be the First schedule to the Bill.

Clause 18 stand part.

Mr Gauke: Clauses 16, 17 and 18 implement the Smith commission’s recommendations by fully devolving two taxes: air passenger duty and the aggregates levy. Those taxes will be switched off in Scotland and the Scottish Parliament will then have full competence to maintain, redesign or scrap them. The changes made by clauses 16 and 18 will switch off APD in Scotland and give the Scottish Government the power to charge their own tax on passengers departing from Scottish airports. The Scottish Government will be free to make their own arrangements with regard to the design and collection of any replacement tax. Alongside that, funding for the Scottish Government will be reduced by an amount equivalent to the APD that would have been raised in Scotland.

Clauses 17 and 18 and schedule 1 make changes to ensure that the UK aggregates levy can be fully devolved to Scotland. The Smith commission agreement stated that there would be full devolution of the levy to Scotland following resolution of the legal challenges against the levy. The changes made by clause 17 will give the Scottish Parliament the power to charge a tax on the commercial exploitation of aggregate. The clause also introduces schedule 1, and together they enable the existing UK levy to be disapplied to Scotland. These provisions allow the Scottish Government freedom in the design and implementation of any tax on the commercial exploitation of aggregate in Scotland.

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Graham Stringer (Blackley and Broughton) (Lab): Amendment 36 would, in essence, have opposed clause 16 standing part of the Bill, because I want the Committee to explore the specific issues related to air passenger duty and the more general principles about tax competition between Scotland and the rest of the United Kingdom that may well evolve from a discussion on air passenger duty.

Some of us who voted to set up the Scottish Parliament in the first place now think that, although it seemed a very bold decision at the time, it was less bold than it might have been and that if we had the benefit of being able to go back in time—we do have the benefit of hindsight—the proposals that the Government are making might well have been those that should have been put before the House after the 1997 general election, with us now moving towards full fiscal autonomy for the Scottish Parliament. It was a fundamental mistake to set up a Scottish Parliament with mainly spending powers and no tax-raising powers, apart from the plus or minus 3p on income tax.

Mr MacNeil: The hon. Gentleman is absolutely right. One of the mistakes is that there is no incentive for the Scottish Government to grow the economy. A great example that we have in the Hebrides is that the Scottish Government have put a road-equivalent tariff on to the ferries. This has grown the economy in the west of Scotland, but the increase in tax revenue is not going to the Government that funds it but to Westminster, which gives no extra cash and further incentives to roll it out further across the west coast. It is similar with childcare and a number of other issues.

Graham Stringer: The hon. Gentleman makes a pretty fundamental point about devolution. When the House was making a decision to devolve powers, it would have been sensible to settle on a grant basis that was fair between Scotland, England and Wales, which the Barnett formula was not, and then allow the Scottish Parliament to raise taxes on that basis, so that if it wanted better-quality services, it could have had higher taxes and, if it was more efficient, it could have had better services or lower taxes, and so on. That is a very clear principle.

Mr MacNeil: The important point I am driving at is that, if the Scottish Government had proper control of their taxes, they could have grown the economy more and that growth would have delivered far more than the zero-sum game of who has got and has not got what in the UK. It is the ability to grow the economy that tax powers would give that is really fundamental.

Graham Stringer: If the hon. Gentleman is saying that Scotland, or any other devolved authority, should benefit from the initiatives it takes and from its own efficiencies, I agree completely. We are moving that way, but the Bill does not move far enough. No Minister or shadow Minister has been able to explain to me, in any of our debates, why we should have the unfair funding in the Barnett formula.

Those are the basic principles. I now want to explore how, if taxation is devolved to the Scottish Parliament, the United Kingdom Government will respond to competition. Air passenger duty is a very good example. As I understand it, the SNP intend to reduce air passenger

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duty by 50% and then reduce it to zero. That is quite a sensible policy for the SNP to follow. For that matter, it is a sensible policy for the United Kingdom Government to follow, because a number of consultants’ reports have shown that there is almost certainly likely to be a benefit for the whole United Kingdom if air passenger duty is taken away.

Every other country in the European Union has moved either to very low rates of APD or, as in the Netherlands, to zero. It is therefore a sensible policy, but the Government do not seem to have a clear position on what they will do about the very unfair competition between regional airports.

Mr MacNeil: Air passenger duty is a perfect illustration of what I said earlier. If the Scottish Government decided to lower APD and that upped the rate of economic activity in Scotland, they should benefit from the fruits of that activity. The benefits should not go to Westminster, because it would not compensate the Scottish Government for that initiative.

Graham Stringer: On 20 January, the Chancellor of the Exchequer told the Treasury Committee, in response to a question asked by my hon. Friend the Member for Wythenshawe and Sale East (Mike Kane) about that very point:

“I think the best approach to dealing with this concern, which I think is perfectly legitimate, is to cross the political boundaries of our two parties to try to find a solution that helps these regional airports that can be affected by an air passenger duty decision north of the border.

HMRC has done some work on this and I think it anticipated that Manchester airport would lose around 3% of its traffic and Newcastle could lose around 10% of its traffic. That was work carried out a couple of years ago… I think you and I—I made the same offer to Ed Balls—could work to help regional airports in the north of England if the Scottish Government were to go down the road of dramatically cutting its air passenger duty.”

Further to that, the Chancellor told the House of Commons on 27 January:

“We have a couple of years to work this out—it does not have be done tonight or tomorrow—and we can work out a plan that protects the brilliant Newcastle, Manchester and other regional airports.”—[Official Report, 27 January 2015; Vol. 591, c. 726.]

What progress has been made on that? This is about a loss of 3% and 10% of business, which are not trivial amounts.

This will result in not only an economic benefit for Scotland, but in real competition, which will come in two forms: there will be competition for passengers on short-haul flights, for which APD is £13 per passenger, and for those on longer-haul flights, for which it is £71 per passenger. Obviously, the same amount is paid for the return flight. A passenger from Newcastle therefore has an incentive—this applies to large families in particular—to travel to Edinburgh or Glasgow in order to save some money. Someone travelling long distance from north America or China has the same incentive.

Mr Kevan Jones (North Durham) (Lab): Does my hon. Friend agree that there is a knock-on effect on cargo? If the successful flight from Newcastle to Dubai were to be jeopardised in any way, the revenue earned from the airport through the transfer of cargo in that passenger aircraft would also be at risk.

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Graham Stringer: I agree with my hon. Friend. There is competition not only for passengers, but to get airlines and aircraft to land. Given that a lot of cargo is carried in an aeroplane’s belly, if Newcastle, Manchester or Leeds Bradford loses a flight to Scotland, it will lose not only the passengers and the benefit they bring but the cargo carried by the plane. The United Kingdom already has experience of that with Belfast airport. The Northern Ireland Assembly managed to get the power to vary APD because it was in competition with Dublin airport, which was taking passengers and aircraft to travel from south of the border. That is well known to people who are interested in transport, but it is less well known that the impact was not only on Belfast, but on English and Welsh airports, as people decided to fly across the Atlantic from Dublin to save the £71.

8.45 pm

I will conclude by talking about the economic impact on England. I have given the figures for the savings that passengers could make, and airlines can of course take advantage of those savings by choosing to split them between passengers and their own profit lines. If, however, for the sake of argument, one Ryanair flight and one easyJet flight were moved from Manchester airport to Glasgow, £2.9 million of revenue would be lost to the United Kingdom Treasury and 450 jobs would be lost in Manchester. That is not insignificant when one is trying to build an economy, and I do not blame Edinburgh or Glasgow for trying to build their economy in the way that Newcastle and Manchester are doing. Those figures represent nearly 250,000 passengers, and the economic impact in relation to long-haul flights is much more significant.

Drew Hendry (Inverness, Nairn, Badenoch and Strathspey) (SNP): The hon. Gentleman is making a point about cross-border competition. Does he agree that there is another point about the longer-term sustainability of airports outwith that area, such as Inverness and Dundee? They need additional support and would benefit from the reinvestment in Scotland of the revenue generated by additional passenger traffic.

Graham Stringer: I agree with that perfectly sensible point.

The Government may have a number of possible solutions, and I hope that the Financial Secretary will be able to respond in some way. Manchester airport has made the case strongly to the Government that there should be an air passenger duty holiday on new long-haul routes, and that would be helpful. The Government could devolve decision making to other parts of the United Kingdom as well as to Scotland, although it would be difficult to find a mechanism for doing so. The Government could also agree to compete with Scotland, because if there is no competition, there will be an unfair loss of jobs through lowering the rate of air passenger duty.

Such solutions seem sensible to me, given the experience in the rest of Europe and, indeed, in the rest of the world. The tax was brought in not for environmental reasons, as is sometimes said, but entirely to deal with the hole in the budget after the 1992 general election. It is an inefficient tax: consultants have estimated that it costs the economy more than it brings into the Treasury in cash. Even if the Financial Secretary cannot give an

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absolutely definitive answer today, I hope he will assure us that he is willing to look at some of the sensible responses to this new competition in tax regimes.

Mr MacNeil: The hon. Gentleman has been very kind in giving way. The tax is about more than just a hole in the budget; it is actually a demand-management tool for Heathrow and perhaps for Gatwick as well. If airports are full, APD is a demand-management tool that might work. It is certainly not helping in Edinburgh, Glasgow or Manchester. The solution is not to worry about each other, but for us to be rid of it, and for the Government to keep the demand-management tool in airports that are already saturated.

Graham Stringer: I do not agree with the point the hon. Gentleman makes in his fourth intervention. Demand management is not the solution for our regional airports, which have huge extra capacity, but if I went down that line, I expect you would rule me out of order, Mr Crausby. I look forward to the Financial Secretary’s response.


Stewart Hosie: I will come on to the comments made by the hon. Member for Blackley and Broughton (Graham Stringer) in a moment.

The provisions relating to the devolution of air passenger duty—I will concentrate on the duty, rather than the aggregates levy or the further provisions in clause 18—were set out clearly in the Smith agreement:

“86. The power to charge tax on air passengers leaving Scottish airports will be devolved…The Scottish Government will be free to make its own arrangements with regard to the design and collection of any replacement tax, including consideration of the environmental impact.

“87. In line with the approach taken in relation to the Scotland Act 2012, if such a tax is introduced by the Scottish Parliament to replace Air Passenger Duty (APD), the Scottish Government will reimburse the UK Government for any costs incurred in ‘switching off’ APD in Scotland.”

Given that they simply would not collect it, I do not imagine those costs would be very high. The provisions also require:

“88. A fair and equitable share of associated administrative costs will be transferred to the Scottish Government. The…block grant will be adjusted”.

A wide range of organisations that gave evidence to the Scottish Parliament Devolution (Further Powers) Committee backed the devolution of APD, including the Institute of Directors Scotland, Glasgow chamber of commerce, the Scottish Chambers of Commerce and the Scottish Council for Development and Industry. As the report says:

“This was coupled with support for either a reduction or scrapping of this duty after devolution had taken place.”

The Scottish Parliament Information Centre analysis for the Committee, referred to in the report, found that:

“Draft clause 14”—

now clause 16—

“would make this a devolved tax, as recommended by the Smith Commission. It would give HMRC the ability to ‘switch off’ these UK taxes in Scotland from a date to be set by secondary legislation.”

As with many of the clauses we have discussed, there is no recommendation as to how the transfer would work or how the block grant would be adjusted, but, as I understand from other clauses, there is no requirement for legislation to achieve that. Essentially, the legislation

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delivers on the Smith agreement in the way anticipated. We have no concerns with the drafting of the clause, which did not change between the Command Paper version and the Bill.

In terms of the policy approach on air passenger duty, on which much of this clause stand part debate is centred, the Scottish National party supports the devolution of air passenger duty to the Scottish Parliament. We are pleased that the Scotland Bill will deliver this recommendation. We have previously set out our proposals to halve APD when control over the tax is devolved, and we fully intend to abolish it when public finances allow. We believe that taking that action will encourage greater tourism and investment in Scotland, boosting our economy and creating new jobs.

There are a substantial number of benefits for consumers from the reduction of air passenger duty, not least because the UK levies are some of the highest aviation taxes in the world—indeed, APD is relatively rare in other countries. APD is currently £71 for an economy class long-haul flight, which is extraordinary—that is over 2,000 miles. Abolishing APD would mean that a family of four, with children over 12-years-old, would save something under £300 per long-haul flight—a substantial saving by any measure. Reducing APD would therefore save consumers money, and, in certain circumstances, significantly reduce the cost of family holidays.

There are broader economic benefits from a reduction in air passenger duty. A report commissioned by Edinburgh airport in March 2015 found that a reduction in APD would bring considerable economic benefits to Scotland. The report argued that the Scottish Government’s policy of halving APD in the first instance would create new jobs, and that a failure to take action would cost Scotland tourists and tourism revenue. Its key findings included the fact that a 50% reduction would provide benefits to Scotland worth £200 million a year, meaning a £1 billion economic boost over the lifetime of a Parliament; and that a 50% reduction would bring considerable benefits to local communities, creating something in the order of 3,800 new jobs by 2020. On the other hand, it was estimated that we could lose out on about 1 million passenger journeys a year if APD was not reduced. Again, by 2020, that would cost the Scottish economy up to £68 million in lost tourism expenditure every year. It is clear, therefore, that devolving and reducing APD would have a considerable economic impact on Scotland and that failure to act would mean Scotland missing out on significant tourism and hospitality revenues.

We have heard what happened in the Republic of Ireland and Northern Ireland. Although the 2014 study by Ulster University was a little more ambivalent and suggested only a limited number of scenarios in which Northern Ireland might benefit, supporters of a reduction pointed to the success of this approach in the Republic of Ireland. As the BBC reported:

“Tourism NI chairman Howard Hastings said: ‘If you compare with our nearest neighbour in the Republic of Ireland, in the two years since they abolished air passenger duty, they've seen arrivals grow by 1.1 million passengers.’”

It is self-evidently a success, and if we can replicate that, we can deliver the benefits I have described. If we do not, we will face the cost of failure.

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The hon. Member for Blackley and Broughton and others tabled amendments that are not being debated—although the debate has been very similar to the one I would have heard had we been debating them—and expressed concern that the devolution of APD to Scotland would disadvantage airports in the north of England, as travellers journey across the border to Scottish airports in order to travel to holiday destinations abroad. The SNP makes no apologies for championing Scotland, and we believe that the reduction and eventual abolition of APD would benefit Scotland’s economy and tourism sector in particular. Its devolution is also a cross-party commitment agreed through the Smith commission.

Attracting more tourists to Scottish airports by reducing APD could also benefit the north of England by rebalancing the economy away from London’s pull and bringing more visitors to the northern parts of these islands as a whole. If one considers Edinburgh to be a hub airport, I am sure that businesses in the north of England would rather spend an hour on the train from Newcastle to Edinburgh than four, five or six hours on the cross-London journey to Heathrow, let alone travelling to a hub airport such as Schiphol or Charles de Gaulle. Edinburgh is the ideal solution for people from Durham, for example.

A stronger Scottish economy will also bring significant economic benefits to the north of England, as new trade and investment opportunities arise. However, we are concerned about some of the UK Government’s threats in relation to APD—this relates to what the hon. Member for Blackley and Broughton said about competition. During the election, the Prime Minister astonishingly expressed concerns that a reduction in APD would “distort competition”. He said:

“The SNP government in Scotland is committed to using its new powers to cut and eventually abolish air passenger duty for flights from Scottish airports. That could distort competition and see business drawn north of the border with a huge impact on airports in the rest of our country so we’re reviewing the way air passenger duty works to make sure other cities don’t lose out”.

Devolving and amending APD is not a distortion of competition; it is competition.

The Prime Minister’s comments chimed with his so-called Carlisle principle. It was reported that the Prime Minister had

“outlined plans for an annual review of the impact of Scottish Devolution on the rest of the UK. He announced what he’s calling the ‘Carlisle principle’”.

He did that during a speech in Crewe—one would think he would go to Carlisle to do it, but Crewe it was. He said that the aim was to make sure that policies devolving more power to Scotland did not have a negative impact on other parts of the UK—in areas such as air passenger duty, tax rates, university tuition fees or energy policy. If only we had thought of that, we would not have abolished the subsidies for onshore wind.

The Prime Minister said:

“I want to set out a new principle—you could call it the Carlisle Principle—that we will make sure that there are no unforeseen detrimental consequences to the rest of the country from Scottish devolution, for either England, Wales or Northern Ireland.”

Will the Minister explain what the Carlisle principle—whatever it actually is—will mean in practice for the devolution of APD? I hope that when he gets up, he will say precisely nothing.