One area that will remain unchanged is corporation tax, a move which was welcomed by John Cridland, director general of the Confederation of British Industry (CBI).
“Businesses will be pleased that common sense has prevailed and corporation tax is reserved at a UK level, as an integral pillar of the UK’s seamless internal market,” said Cridland.
Income tax will be devolved from April 2016, but businesses with employees on both sides of the England-Scotland border will want clarity on how issues like PAYE and pensions tax relief will work.
Administrative challenges
Administrative challenges, chiefly relating to implementation of new systems and processes, mean there will be higher costs for Scotland as well as more tax revenue.
“The problem is that the Scottish government will not only have to put in place new tax administration processes which they will have to fund themselves, but they will also now receive a bill from the Treasury to cover the costs of introducing the Scottish tax and devolved benefits,” said Frank Nash, senior tax partner at Blick Rothenberg.
“This is all going to affect their bottom line and lead to high uncertainty both from a personal and business tax perspective,” he added.
Indirect tax
On the VAT front, the main change will be to the share of revenues Scotland receives.
“Despite reports, there are no significant changes (as devolved powers are not allowed under EU legislation) other than the ability of the Scottish parliament to retain some of the VAT revenues raised in Scotland,” said Alan Pearce, VAT partner at Blick Rothenberg.
Pearce said that while many reports are claiming that 50% of VAT raised in Scotland will be retained, the reality is not quite that simple.
“The report confirms that Scotland can retain the first 10 percentage points of the standard rate – which currently does not equate to 50%) but if Westminster decides to raise the rate above 20%, under the current proposals, none of the extra revenue raised would go to Scotland. There is no mention of the reduced rate so it appears that any VAT raised at 5% will be fully retained by the UK government.”
Pearce also raised a logistical concern relating to VAT-registered entities with businesses on both sides of the Scottish border. He questions how the amount of VAT raised in Scotland would be identified if such an entity remits VAT receipts under a single registration.
“This could result in additional administration for businesses that have operations in Scotland and elsewhere in the UK,” said Pearce.
Mixed reactions
Lord Smith of Kelvin, who was commissioned by David Cameron, the UK prime minister, after the defeat of the Scottish independence referendum in September to oversee the cross-party talks that led to the devolution package report, said the recommendations set out in the agreement “will result in the biggest transfer of power to the Scottish parliament since its establishment”.
However, Nicola Sturgeon, Scottish First Minister, described the package as “disappointing” and “an opening offer”, suggesting that further negotiation will be needed.
Though the package would deliver much greater autonomy to the Scottish parliament, the Institute of Economic Affairs (IEA) also said the package does not go far enough, and that the result is a “dangerous halfway house”.
“Scotland should be given full responsibility for all forms of welfare spending and all significant aspects of tax policy,” said Philip Booth, editorial and programme director at the IEA. “That way, there will be clear accountability and the Scottish government will have the genuine freedom to experiment with welfare reform appropriate to the particular problems and opportunities it faces.”
“This is an asymmetric set of measures – likely to lead to more government spending, regulation and higher taxes,” added Booth.
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