Westminster’s prevarication on corporation tax

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by Vincent McDee

NNS readers already know about the intention of the SNP to have corporation tax devolved, in order to have powers to boost the Scottish economy.  In the words of a Scottish government spokesman:

“Devolution of corporation tax has been backed by successful Scottish business people, including Jim McColl and Sir Tom Hunter, and would give firms with a competitive edge and make Scotland a more attractive location for international investment.

“Ministers gave a commitment to call for the devolution of corporation tax so that we can cut the rate, and have a clear mandate to achieve it.”

“Full responsibility for corporation tax would give Scots a greater incentive to start their own business, provide Scottish firms with a competitive edge to help them grow, make Scotland an even more attractive location for international investment and help raise our standard of living, bringing jobs and wealth to communities across the country.”

But yesterday, in a letter to John Swinney, Treasury Minister and Conservative MP for South West Hertfordshire David Gauke (of whom more information can be found here: http://www.davidgauke.com/about) warned there were “risks”, and warned that costs of the policy were higher than forecast.

Mr Gauke said Scottish ministers must provide more detail on paying for the “significant costs” of cutting tax, as well as dealing with measures companies could take to reduce their tax bills though he forgot to mention these.

Mr Gauke believes that the administrative costs of a separate corporation tax system would be “significantly higher” than indicated by the SNP, requiring new IT systems and expertise to police the new tax border between Scotland and England.

The Treasury is already considering devolving control of corporation tax to Northern Ireland, given its unique position in sharing a land border with the Republic of Ireland.  In the Republic the levy is set at 12.5 %.

The Scottish government, which has published a discussion paper on its proposals, wants the same powers included in the Scotland Bill currently going through Westminster.

The amount of money generated by corporation tax in Scotland, excluding North Sea Oil, was £2.6bn pounds in 2009-10.

Were the North Sea Oil taxation be included a whopping £6.491bn was raised 09/10, but  the previous year saw £12.925bn because of the extra levy, a figure which would be probably repeated this year because of the Osborne Raid.

In his letter to Mr. Swinney, Mr Gauke said: “Scotland’s economy is significantly more integrated with the rest of the UK than Northern Ireland and separate corporation tax regimes could introduce significant distortions and frictional costs.

“Corporation tax is complex and reform will always involve tough choices.

“There is therefore a need for government to acknowledge the constraints it faces, among which is crucially the absolute requirement that it realistically costs and funds the reforms it proposes.”

Mr Gauke said the Scottish government plan went beyond the Northern Ireland proposals, saying more clarity was needed.

“I would welcome your views on the real tension between having a tax regime which varied in both rate and base,” the Treasury minister stated in his letter to Mr Swinney.

David Gauke can be remembered by the iXBRL format accounts requirement, which in opinion of every Chartered Accountant in both realms is imposing unacceptable burdens on business (see their letter here: http://www.icas.org.uk/site/cms/download/tax/ixbrl_accounts_20110201.pdf) and by the famous hullabaloo created by his demand of £7 m for the major upgrading required to the Scottish Variable Rate systems to render them fully operable again, in order for the Scottish Parliament be able to increase Income Tax. (See here Mr. Swinney letter to the Finance Committee: http://scottish-parliament.cc/s3/committees/finance/inquiries/svr/SVRResponse.pdf )

Earlier this year, HM Revenue and Customs warned that if the Scottish Government had control over corporation tax and reduced it to the Irish level, there would be an annual black hole in Scotland’s finances of £2.6 billion.

Of course, in order to dig that hole, the Scottish Treasury would have to reduce the tax by more than half, from the UK wide 26% at the moment (23% in 2014) to the Irish level of 12.5%.  Nowhere has Mr. Swinney expressed his intention to go that low.  Please remember Mr. Gauke is a Conservative with a capital C, which in some cases explains his assumptions.

Among other things, Mr Gauke’s letter included a few questions:

How would the Scottish Government cope with employed and self-employed people adopting “a corporate form to reduce the amount of tax they pay”, which would lower tax receipts in Scotland?

How the costs of setting up a separate corporation tax would be paid for, as it would “require new IT systems as well as expertise to police the new border with the rest of the UK”?

Was the SNP administration proposing a separate regime for taxing foreign profits, including setting up a network of treaties and double tax agreements with other countries?

To this I can only report the responses by the SNP: “predictable” and “depressing” said sources within the party.  SNP Treasury spokesman Stewart Hosie said: “As ever, the UK Government only ever sees things from the perspective of what suits the London Treasury and David Gauke’s prevaricating is another predictable Tory attempt to hold Scotland back.

“The failure of the UK Government even to understand how targeted investment allowances can help growth is yet another argument in favour of the devolution of corporation tax.”