Tax policy and the budget: consultation

4 – Sequencing: the policy cycle and engagement

This chapter explores the timing and structure for tax policy development in the context of the policy and budget cycles respectively, identifying sequencing throughout the financial year.

Context

During every fiscal and budget cycle Scottish Ministers and the Scottish Parliament consider tax policy. This necessitates engagement, policy development, appraisal, decision making and delivery, although not always to the same extent depending on the particular tax, timing and nature of any proposed changes.

The operation of the Fiscal Framework, the timing of the UK Budget and UK tax and macro-economic policies can all present challenges for the Scottish Government, particularly when we are required to legislate at short notice to protect revenues or prevent market distortions. For significant policy changes, we would normally follow policy development comprising the key stages of the policy cycle set out below.

The work of the Devolved Taxes Legislative Working Group seeks to develop a more structured approach to the planning, management and implementation of legislative changes to the arrangements for the fully devolved taxes. We intend to reconvene the working group this year, to ensure that it can continue to inform our approach. This will build on the group’s interim report, published last year, and separately the Scottish Government’s consultation on the policy framework for the devolved taxes in 2019.

The tax policy cycle

The development of tax policy comprises five stages:

1. Engagement & Analysis: initial analysis of calls for policy changes, including their proposed objectives, rationale and evidence base. Ongoing evaluation, feedback from stakeholders and pre-budget consultation. In line with our commitment to an open and honest approach to taxation.

2. Policy design: data analysed, proposals developed, appraisal in line with strategic objectives, decision making matrix and any specific commitments. For significant changes this part of the cycle will usually be more extensive.

3. Decision making: identification of lead option/s, provision of advice and timely decisions taken.

4. Implementation: delivering the necessary legislative changes and working with Revenue Scotland, local government or HMRC to ensure changes are implemented and clearly understood, with efficient administration and collection.

5. Evaluation: monitoring and assessing existing policy and recent changes against intended aims and performance expectations.

Figure 5: The tax policy cycle

1. Evaluation

2. Engagement

3. Policy Design

4. Decision Making

5. Implementation, restart from evaluation

Revenue Scotland and HMRC

Revenue Scotland is responsible for the administration and collection of the fully devolved taxes in Scotland and HMRC for the devolved aspect of Scottish income tax. Tax authorities play a critical role in delivery, principally in relation to collection and administration, as well as providing a rich source of knowledge and expertise to inform policy development. They also play a crucial role as data holders of all taxpayer related information. As experts in the feasibility and efficiency of tax collection and the potential impacts on taxpayers, they are a vital component of a people-centred approach to tax policy making. Working closely at the earliest possible stage (Stage 1: Engagement & Analysis) is essential for good tax policy making, as set out in the joint Scottish Government and Revenue Scotland statement on working together on tax.

The Scottish Budget Cycle

There are key times throughout the budget cycle where Ministers are required to consider tax changes, subject to the timing of the annual UK Budget (e.g. Autumn or Spring). Timing will align with the policy cycle, as much as possible.

Autumn UK Budget: UK tax changes announced as part of an Autumn UK Budget gives the Scottish Government notice of UK tax, macro-economic and spending decisions in advance of the Scottish Budget. Timing can present challenges for the Scottish Government if significant changes are announced with little time before the Scottish Budget is published. This can impact the decisions Scottish Ministers will take and may require rapid policy development.

Scottish Budget: Decisions are typically made around rates and bands (Type A, see Table 2, below) and how these can support spending and outcomes. However the budget is also a good opportunity to announce consultations on other changes such as changes to existing reliefs or new taxes (Types B to D).

Budget Negotiations: Due to the design and composition of the Scottish Parliament’s electoral system, it is rare that a Government will command a majority in the chamber. As such, it is often necessary for the Government to negotiate to garner Parliamentary support for the Budget Bill, which may include tax changes (this could include all decision types).

Spring UK Budget: a Spring UK Budget means that Scottish Ministers’ decisions on devolved tax policy are made without prior knowledge of UK tax, macro-economic and spending decisions. This creates a risk for devolved tax policy and impacts policy development. It may also mean that subsequent changes to devolved tax policy are required as a result of UK policies.

Types of tax policy change

The following table outlines the main categories of tax policy change:

Table 2: Decisions for tax policy changes

Policy change: A. Changes to tax rates and bands or reliefs: usually via secondary legislation

Approach: Typically announced in the Scottish Budget

Typical purpose:

• Changes reflecting inflation
• Raise revenue or provide stimulus.
• Incentivise/discourage particular economic or other behaviours e.g. forestalling.
• Address impacts arising from UK Government announcements on tax.

Policy change: B. Care and Maintenance: usually via secondary legislation, but some changes may require primary legislation

May require an urgent change or be addressed as part of a Budget or consolidation package

Typical purpose:

• Clarify devolved tax policy and legislation.
• Address unforeseen consequences.
• Protect revenue and/or strengthen delivery.
• Tackle avoidance.
• Ensure, where appropriate, a consistent approach across the UK.

Policy change: C. Significant policy changes, including structural changes to a tax: likely to require primary legislation

Approach: Policy development, underpinned by the Framework for Tax and Programme of work

Typical purpose:

• Policy outcomes in relation to revenue, distribution and/or behaviours.
• Address impacts, including those arising from UK Government announcements on tax.
• Prevent any market distortion in Scotland or ensure a common UK approach, where appropriate.

Policy change: D. Introducing a new tax: likely to require UK secondary and Scottish primary and secondary legislation

Approach: Policy development, underpinned by the Framework for Tax and Programme of work

Typical purpose:

• Create new sources of revenue.
• Promote behavioural change.
• Address particular challenges, e.g. shifting or eroding tax base, or to support emerging SG objectives.
• Implement devolution, for example a new devolved tax.

Sequencing

We will normally approach our annual planning cycle as follows, although timing and policy development can be affected by the timing of the UK Budget and fiscal events, as set out above.

Figure 6: Tax policy sequencing

Sep - Nov

UK Budget?

UK Tax changes may be announced as part of an Autumn UK Budget

December

Scottish Budget

The budget is an opportunity to announce tax changes, tax related constultations or other changes such as new taxes

January

Budget Negotiations

Typically required to secure support for the Budget Bill, and may include tax policy commitments

Spring

UK Budget?

UK tax changes may be announced as part of a Spring UK Budget. This may impact devolved tax policy

Changes to devolved taxation will follow different cycles depending on the nature of the change. Type A and B decisions for change, i.e. changes to existing rates and bands or operational maintenance of existing devolved taxes are likely to take place either on an ad hoc basis, or most likely as part of the annual Scottish Budget.

Type C and D changes, i.e. major structural reforms to existing devolved taxes, or the introduction of new local or national devolved taxes are likely to be announced at the Scottish Budget and may span several budget cycles, given the requirement for evidence gathering, consultation, design and primary legislation that underpins good tax policy making. This is in addition to negotiation and securing agreement of the UK and Scottish Parliament to devolve the powers for a new national tax in Scotland, which introduces further uncertainty over precise timelines for new national taxes.