Scotland Act 2012 financial provisions implementation: fifth annual report

Chapter 1 - Fully Devolved Taxes and Assigned Revenues

Scotland Act 2012

Legislation

1. Over the year, the Scottish Government has laid a number of proposals for changes to devolved tax legislation before the Scottish Parliament.

Land and Buildings Transaction Tax - supplement on additional homes

2. The Land and Buildings Transaction Tax (Amendment) (Scotland) Act 2016 which introduced an LBTT supplement on purchases of additional residential properties - the Additional Dwellings Supplement, commenced on 1 April 2016.

Scottish Landfill Tax ( SLfT) - Qualifying Materials Order

3. Scottish Ministers committed to introduce a statutory loss on ignition testing regime for fine material following the first year of operation of SLfT. Following a consultation in November and December 2015, Scottish Ministers laid a replacement Qualifying Material Order before the Scottish Parliament on 11 February 2016 which received parliamentary approval on 9 March 2016. This introduced a statutory testing regime with effect from 1 October 2016.

Tax Tribunals

4. Work is ongoing regarding the integration of the Scottish Tax Tribunals into the new Scottish Tribunal system under the Tribunal (Scotland) Act 2014. The necessary subordinate legislation has completed the parliamentary process and will be in effect from 24 April 2017.

Devolved tax rates and bands

5. Proposed rates and bands for LBTT and SLfT were published in Scotland's Budget: Draft Budget 2017-18 on 15 December 2016. ^[1] On the same day, the Scottish Government published the Draft Budget 2017-18 Devolved Taxes Methodology Report which described the methodology underlying the five-year tax revenue forecasts for the period 2017-18 to 2021-22. ^[2] The forecasts and forecast methodologies were scrutinised and challenged over the course of 2016 and endorsed as reasonable by the Scottish Fiscal Commission in their Report on the Draft Budget 2017-18. ^[3]

6. A new rate-setting Order for SLfT was laid before the Scottish Parliament on 21 February 2017 and approved by the Scottish Parliament's Finance Committee on 11 March 2017. LBTT rates and bands set by Order in 2015 will remain in force for 2017-18.

Revenue Scotland Operations

7. The following paragraphs summarise the progress and performance of Revenue Scotland in its first year of collecting devolved taxes; comments on projected revenue outturn against forecasts; and notes the tax legislation changes made by the Scottish Parliament during the year.

8. Revenue Scotland completed its first full operational year in April 2016, collecting a total of £572m - £425m of Land and Building Transaction Tax and £147m of Scottish Landfill Tax. The organisation operated efficiently and effectively, with running costs in the first year of less than 1% of the total tax collected.

9. At the end of the 2015-16 financial year, 99.8% of all tax returns submitted had been paid either within the financial year or within five days of the year end.

10. During the period of the report, Revenue Scotland successfully implemented the LBTT Additional Dwelling Supplement, ensuring the systems and processes required from 1 April 2016 for purchases of second homes and buy-to-let properties in Scotland were in place.

11. The organisation used digital innovation to establish the Scottish Electronic Tax System ( SETS), enabling 98.1% of returns to be submitted electronically in the first year of operation. This exceeded an initial target of 90% set through comparisons with the online payment levels for Stamp Duty Land Tax at UK level.

12. In terms of customer service, average call waiting times to Revenue Scotland's support desk in the first 12 months was 10 seconds. Of the written communication initiated by taxpayers and agents, 96% were responded to within 10 working days.

13. The organisation places a strong emphasis on effective stakeholder engagement and consultation. In its first operational year, the Devolved Tax Collaborative provided a forum for engagement on a range of tax issues. LBTT and SLfT forums enabled stakeholders to exchange information and views on technical, tax-specific issues.

14. Collaboration has also been a key part of Revenue Scotland's work to prepare for the introduction of Air Departure Tax. Although the bill to establish the tax in Scotland is subject to consideration by the Scottish Parliament, Revenue Scotland has been involved in regular engagement with key airline industry stakeholders to support work to develop systems and processes for the tax being introduced from 1 April 2018.

Scotland Act 2016

VAT Assignment

15. The Scotland Act 2016 allows for receipts from the first 10p of the standard rate of VAT and the first 2.5p of the reduced rate of VAT in Scotland to be assigned to the Scottish Government. As long as the standard and reduced rates of VAT remain 20% and 5% respectively, half of VAT receipts from Scotland will be assigned to the Scottish Government.

16. The power to set VAT rates will remain reserved to the UK Government. As such, the Scottish and UK Governments have agreed that requiring businesses to report their VAT separately for Scotland and the UK would impose an unwanted administrative burden, and have agreed that VAT raised in Scotland will instead be estimated.

17. Assignment of VAT to Scotland will begin in 2019-20. As per the Fiscal Framework agreement ^[4] there will be a transitional period during which VAT assignment will be forecast and calculated each year, but with no impact for the Scottish Government. The effectiveness of the methodology will be reviewed in the final year of the transition period.

18. The Scottish Government is working with HMRC and HM Treasury to produce a model of VAT liabilities in Scotland. This consists of producing a regional version of HMRC's VAT Theoretical Tax Liability ( VTTL) model.

19. As part of the fiscal framework agreement, the Scottish and UK Governments agreed to share equally all costs incurred as a result of the implementation and administration of VAT assignment. The Scottish Government and HMRC agreed the governance arrangements for the allocation and payment of these costs in February 2017. Costs related to this work in 2016-17, up to Q3, totalled £0.13m, and were split equally between the organisations.

20. The VAT assignment working group expects to produce its first estimate of VAT receipts in Scotland by September 2017. It is intended that it will include an estimate of VAT associated with both international and domestic tourism. The estimate will relate to outturn VAT. The Joint Exchequer Committee ( JEC) will agree arrangements for the production of VAT revenue forecasts at a future date.

Air Departure Tax

21. In March 2016 the Scottish Government published a consultation ^[5] seeking views on how a tax to replace Air Passenger Duty ( APD) in Scotland should be structured and operated. Following the devolution of powers over APD to the Scottish Parliament under the Scotland Act 2016, and as confirmed in the 2016-17 Programme for Government ^[6] published on 6 September 2016, the Scottish Government introduced the Air Departure Tax (Scotland) Bill ^[7] to the Scottish Parliament on 19 December 2016.

22. Assuming the Bill successfully completes its Parliamentary passage, and under terms agreed between the Scottish and UK Governments in the fiscal framework ^[8] , Air Departure Tax will replace APD in Scotland from 1 April 2018.