Devolved taxes: a policy framework - consultation analysis

4. Policy and Legislative Cycle

The Devolved Taxes Policy Framework will set out a policy and legislative cycle through which changes to the devolved taxes will follow, with a view to providing enhanced certainty and transparency in the tax policy making process. The approach to engagement and consultation proposed in the consultation paper will be embedded within the phases of the cycle. The consultation paper set out an indicative policy and legislative cycle for comment.

4.1 Question 4: What are your views on the proposed policy and legislative cycle?

The majority of respondents were supportive of the proposed cycle, with the LSoS stating:

"We welcome the proposed cycle and consider that this will help to ensure clarity and predictability for individuals and businesses as to when tax changes will take effect."

CIOT and LITRG also recognised that the proposed cycle incorporates 'some of the 10 steps towards making tax policy better, as set out in 'Better Budgets - Making tax policy better'.^[8]

The tax and legal professionals and business representatives present at the events held alongside this consultation were also positive about the proposed cycle and the certainty it provided them with.

4.1.1 Timeline of cycle

The first and second phase in the proposed cycle covers the period from the initial policy development and annual tax forum to the announcement of new legislation. There was little comment on these phases of the cycle directly, as much was covered in the questions relating to the approach to engagement. Homes for Scotland however commented on the levels of planned engagement throughout these phases and CIOT and LITRG suggested that the timescales proposed are the "minimum period of time required for these parts of the cycle in normal circumstances".

In addition, ATT stated that:

"[T]his consultation timing would fall directly into the peak self-assessment season when it is very hard for our members to find the time to provide comments and feedback."

The third phase in the cycle includes the Parliamentary process and the legislation taking effect. The LSoS stated that it is important that the "policy consultation cycle fits with the legislative process". Some respondents made reference to the introduction of a Finance Bill, for example the Scottish Property Federation stated that "the introduction of a regular Finance Bill could aid the upkeep of current taxes and allow for changes in policy to be implemented more effectively". This consideration and further legislative options will be examined by the Devolved Taxes Legislation Working Group.

Finally, Revenue Scotland proposed that the implementation of legislation by the tax authority should be embedded within the cycle, taking place in sequence, rather in parallel to the delivery of legislation.

4.1.2 Post-implementation review

Many respondents were particularly positive about the inclusion of the fourth phase of the cycle, a post-implementation review. In terms of the purpose of such a review, ICAS stated that this phase is:

"[I]mportant to enable an analysis to take place of whether the policy as implemented is meeting its objectives, whether there are any drafting defects, and to provide the opportunity to amend or remove any measures that are not fully effective."

The LSoS also welcomed the inclusion of this phase "to ensure that legislation is operating in line with its policy aims", and stated that where issues arise "it will be important that steps are taken to resolve problems with the legislation or to amend or remove provisions which are not effective".

PricewaterhouseCoopers outlined some considerations for the operation of post-implementation reviews, stating that a review should be undertaken independently and that any outcomes and actions should be made public. Furthermore, ATT suggested that a DTC "would be a suitable place to discuss post-implementation reviews".

ATT also suggested that three years between the implementation of the legislation and carrying out a review may be too long, and that an interim review 18 months after implementation may be beneficial. Homes for Scotland also suggested that three years may be too long and that any "unintended consequences" must be picked up earlier. Revenue Scotland strongly supported post-implementation reviews and suggested that the timescale of such a review should take account of the time to implement legislation and be based on the nature of the change. For example, a review of a tax-relief may be possible after two years, whereas a review of a measure such as "three yearly reviews of leases the evaluation may take place much later, in, say, year 7".

4.1.3 Wider taxation landscape

The Royal Society of Edinburgh commented on the scope of the proposed policy and legislative cycle in relation to the wider tax landscape in Scotland. It suggested that the cycle could take account of all devolved taxation, including any future taxes and current local taxes, in order to provide a more coherent approach.

PricewaterhouseCoopers also stated:

"We note that the framework as proposed covers fully-devolved taxes (currently LBTT and SLfT) but does not cover other taxes within the remit of the Scottish Government (business rates, council tax and new taxes such as the workplace parking levy and the transient visitor tax). The same concerns that taxpayers have over future changes to devolved taxes would also apply to the taxes noted above and consideration should be given to how policy-making in these areas can also be improved through the use of the proposed framework."

4.2 Question 5: What are your views on how frequent the cycle should occur - annually or every two years?

Respondents to the consultation provided mixed responses on whether the policy and legislative cycle should occur annually or every two years.

4.2.1 Annual vs biennial cycle

One of the arguments from respondents for repeating the cycle annually is that it allows for changes to be made to taxes more efficiently. A number of respondents highlighted the need to make necessary 'technical' changes on an annual basis. For example, CIOT and LITRG highlighted that "when legislation is put into practice, it is often easier to then spot ways in which it does not quite operate as intended".

A number of respondents also highlighted that the need for changes to devolved taxation can arise for multiple other reasons, including policy changes at a UK level or in order to react to market conditions, and that an annual cycle can enable greater responsiveness for the Scottish system to keep up with the broader landscape.

Some respondents however suggested that an annual cycle may lead to unnecessary changes being made whilst there are only two devolved taxes. For example, PricewaterhouseCoopers stated that an annual cycle "may drive change for the sake of change without adding to the quality of policy debate and decision-making". Some responses reasoned that a biennial cycle may be sufficient for now, but others stated that an annual cycle would best cope with further devolved taxation.

In support of a biennial cycle, some respondents stated that it would allow for measures to be properly embedded and evaluated before any further changes are considered. Homes for Scotland argued that this ensures "long term consistency and stability going forward". However, a number argued that the use of a biennial cycle may give rise to the 'exceptions process' (Question 7) being used more frequently, meaning that change could occur out with the proposed cycle, to ensure urgent matters can be dealt with. ICAS stated that any 'exceptions process' that has to be used "relatively frequently would undermine the regular process".

Finally, some respondents suggested a flexible approach for some types of policy change. The LSoS suggested that some change may require more than 12 months to enact, requiring further periods of consultation, and Homes for Scotland suggested extensions to stakeholder engagement with industry or sectors, dependent on the scale of the proposed policy.

4.2.2 Regular and transparent cycle

Over and above the frequency of the cycle, a number of respondents highlighted that the most important factor is that there is a regular, predictable and transparent process for making changes to the devolved taxes. ICAS, CIOT and LITRG also suggested that the cycle is clear and visible to stakeholders and the public, to encourage meaningful engagement with the process.

4.3 Question 7: Do you agree with the Scottish Government's approach to the circumstances set out in this section?

The consultation paper reinforced that our aim is to make most changes to the devolved taxes through the policy and legislative cycle, and set out the approach that will be taken when this is not possible (the 'exceptions process'). Namely, where legislation is required at short notice to protect revenues or prevent distortions in markets or where there is a significant risk of forestalling. Measures will be assessed on a case-by-case basis and the need for transparency and certainty will be balanced against the risks present.

With the exception of one, every organisation answered this question and all accepted the need to use an 'exceptions process' and the need for flexibility when developing tax policy and legislation.

4.3.1 Use of the 'exceptions process'

Some respondents highlighted that the 'exceptions process' should only be used on limited occasions and where absolutely necessary.

One of the reasons given for this is that the proposed cycle offers certainty, and not following this process could lead to a lack of clarity for individuals, businesses and tax professionals. One individual also stated that using the 'exceptions process' too often would defeat the purpose of the proposed consultation process. Additionally, Scottish Land & Estates and Historic Houses stated that tax legislation should seek to be "proactive rather than reactive".

There were some mixed views on how prescriptive the 'exceptions process' should be, but the majority supported the approach outlined in the consultation. For example, CIOT and LITRG suggested that a checklist approach may be too restrictive and prevent the Scottish Government from adapting to change, however they do suggest that some may feel more comfortable with a commitment to "not making inappropriate use of such powers". PricewaterhouseCoopers however proposed that a detailed governance process over how decisions are made should be implemented, and the Caithness Chamber of Commerce recommended that the process should be as "carefully and narrowly defined as possible".

Where the 'exceptions process' is used, the LSoS suggested that where there is no full consultation the Scottish Government may be able to engage with "particular groups of stakeholders on specific matters, such as the detail of draft legislation".

4.3.2 Justification and review

Where the 'exceptions process' is used, some respondents suggested that the Scottish Government should be held to account and justify why this process was used and undertake appropriate review of any changes made. Audit Scotland stated that this is important in terms of the transparency of the process. SCVO suggested that:

"[T]here needs to be full transparency of data, papers and proposals in order for civil society to have trust that the decision have been taken in the best interests of people and communities."

An example of a suggestion for justification and review includes one from ICAS who stated that:

"Where the exceptions process is used, a part of this should be that a post-implementation review is conducted within a set, relatively short timescale on the change made under the exceptions process as such changes will not have been consulted on/challenged."

Additionally, Homes for Scotland stated that:

"[W]e would emphasise that any changes made should be closely monitored thereafter with frequent engagement with any industry or individuals that could be affected to ensure that changes are having their desired effect and further that this isn't having an adverse outcome on business."