Independence means chance for reform


  By George Kerevan
I’ve heard of many reasons for a No vote in the independence referendum, but my favourite of the moment is the notion that Scotland would face a meltdown of its taxation system.
Or at least that is one interpretation of yesterday’s paper from the Institute of Chartered Accountants of Scotland (Icas) on how tax matters will be handled post-independence.

Actually, I have a high opinion of Icas. Think for a moment and you’ll notice that Icas is… er, separate from the English accountancy profession.

Indeed, Scottish accountants are fiercely jealous of their professional autonomy and Scots identity.

Suggest to Icas that it is wasting money remaining independent and that it should subsume itself inside the ICA in England, and you’ll be met either with blank incomprehension or downright hostility. Funny that.

Once you get beyond the inevitable media spin, what Icas is saying is that (1) insufficient planning has been done regarding a separate Scottish inland revenue; (2) consequently we don’t know the inevitable transition costs.

Icas goes further and suggests (correctly) that it is unlikely a fully working Scottish tax system could be created by the proposed date for running up the Saltire – 24 March, 2016.

Icas also points out that creating a Scottish inland revenue is complicated by the fact that the UK HM Revenue & Customs (HMRC) does not operate in convenient, self-contained regional blocks.

Instead, like the old Soviet bureaucracy, different taxes are handled by separate offices, and these are scattered across the UK. It’s called divide and rule.

Thus National Insurance is dealt with in Newcastle while oil revenues are handled in London (surprise!). Scotland would have to create whole tax departments from scratch, which would be time-consuming and possibly expensive. So far, Icas is perfectly correct.

However, I draw very different conclusions. First up, the current manner in which the UK HMRC operates is simply not fit for purpose.

This bureaucratic monster is inefficient, lumbering, bad at collecting revenue, operates contrary to the needs of business, and penalises ordinary citizens unfairly.

On top of this, the UK tax code is insanely complicated, and riddled with disincentives to work or invest. Frankly, we need to scrap the whole thing and start again in Scotland.

This is not just my opinion. Here is the respected Institute of Fiscal Studies: “Scottish independence would provide an opportunity to make sensible changes to the tax system in Scotland that successive UK governments have failed to make… the creation of a new state is surely the best opportunity that is ever likely to present itself for radical and rational tax reform, starting from first principles, which has the potential to unlock really significant economic benefits.”

Let’s examine only some of the unnecessary costs we’ve had to shoulder as a result of the current, highly inefficient UK tax system. Back in 2010, HMRC discovered its new PAYE computer system was a total shambles.

Embarrassed, it kept shtum for two years, even though officials knew that seven million people had been wrongly assessed.

In another blunder, HMRC wrote off £650 million in tax because it failed to notice that the 2008 Budget had reduced the time for collecting unpaid debts.

That’s a good one because £650m is in the circa-£750m ballpark Icas thinks Scotland might need to find to run its own tax system.

My point: HMRC is already wasting sums like this on a routine basis… and you are paying the bill. Might it not be a good idea for Scotland to create a tax collection system that actually works, and save money in the long term? If you think HMRC has now gotten things right – think again. A report published this month shows that almost half of the fines handed out for the late filing of VAT returns are incorrect.

Figures showed 49 per cent of the 17,200 automatic penalties issued by HMRC for the late filing of VAT returns in 2013 were overturned when firms requested a review.

Ever asked yourself who runs HMRC? A key external adviser on the departmental board is Volker Beckers, recent boss of RWE Npower, one of the big six energy companies.

At Npower, Beckers was party to an elaborate (but legal) tax avoidance scheme whereby the German parent company “loaned” investment cash to the UK subsidiary via a Malta-based front. Npower earnings thus ended up in low-tax Malta. In 2009, 2010 and 2011, Npower paid no UK corporation tax whatsoever.

Back to the Icas paper. This argues that, in the haste to set up a new Scottish tax system, chaos might ensue. Revenue might be lost just as transition costs are ramping up. Remember the HMRC has kept control over oil safely in London. We’d have to replace that expertise.

However, such a bleak scenario only arises if co-operation between Edinburgh and London breaks down.

I think it unlikely the Scottish authorities could create a complete tax system in the 18 months between September 2014 and March 2016, and should concentrate on the basics. But there would be no “meltdown” if the UK HMRC agreed to a phased transfer of responsibilities beyond 2016.

Why should HMRC be so obliging? For one thing, it is in HMRC’s interest to maintain a close working relationship with the Scottish authorities, as inevitable tax revenues will flow between the two nations.

Secondly, the Edinburgh Agreement between Westminster and Holyrood enshrines such co-operation in international law. And finally, because we have a strong precedent for such tax co-operation.

In 1922, Ireland became independent from the UK after a bloody conflict. Nevertheless, both sides immediately settled down to working together for mutual benefit. Some 20 UK tax inspectors were sent “on loan” from Britain to help the new Irish state organise its tax machinery and train local staff. A permanent Conjoint Office was also set up in London, staffed by Irish and UK Revenue officials, to manage ongoing problems.

If that could be done in 1922, after a lot of bloodshed, why would we think it could not happen now?

Courtesy of George Kerevan and the Scotsman