Implementation of the Scotland Act 2016: third report

4. Chapter Four – VAT Assignment

The Scotland Act 2016 provided for the first 10 pence of the Standard Rate of Value Added Tax (VAT), and the first 2.5 pence of the Reduced Rate, to be assigned to the Scottish Government. The assignment of VAT will be based on a model that will estimate expenditure in Scotland on goods and services that are liable for VAT.

Key Developments

• The Scottish Fiscal Commission (SFC) has published its first forecasts of assigned VAT.
• Progress continues to be made on developing the model for assigned VAT.
• A draft model for assigned VAT was published on 22 November.

Costs

4.1.1 As agreed in the Fiscal Framework, the Scottish Government and HMRC are sharing equally all costs wholly and necessarily incurred as a result of the implementation and administration of VAT assignment. The 2018-19 costs to the Scottish Government associated with the development of VAT assignment, up to Quarter 3, totalled £0.1 million and forecast overall 2018-19 costs are £0.2m.

Implementation

4.1.2 In 2018-19, the Scottish and UK Governments have worked together to develop a draft VAT assignment methodology to deliver the best model with currently available data. At present, the survey data that underpins elements of the methodology is being boosted to help with volatility concerns. This will increase the reliability and stability of survey data which will determine a significant component of future Scottish Budgets.

4.1.3 The draft model for calculating Scottish VAT receipts was published^[6] on 22 November 2018 by HM Treasury, and on 28 March 2019 the Scottish and UK Governments held an event for interested stakeholders on the development of the draft model. Finalising the model will be discussed through the Joint Exchequer Committee in Spring 2019.

4.1.4 From 2020-21, provided both Governments are assured that the assignment methodology is working effectively, the Scottish Government's Budget will be determined by forecast and final estimated VAT receipts in Scotland and a corresponding block grant adjustment.

Scottish VAT Assignment Forecasts

4.1.5 The SFC has responsibility for producing forecasts of the VAT that will be assigned to Scotland. They produced their first forecast of VAT revenue assigned to Scotland in December 2018^[7]. This forecast has no impact on the Scottish Government's budget because 2019-20 will be a transitional year, where VAT assignment will be forecast and calculated, but with no impact on the Scottish Government's Budget.