September 18th will see Scottish electors cast their votes in the independence referendum. A ‘No’ outcome will bring about a devolution of tax powers in Holyrood, and a ‘Yes’ outcome would bring the need for a new tax system to be created for an independent Scotland.
So what will happen if Scotland votes ‘No’ to independence?
A plan for greater fiscal devolution within the Union has already been decided by the Land and Buildings Transactions Tax and Scottish Landfill Tax, which will be introduced by Revenue Scotland.
If this dual approach is extended to devolve further tax powers, it could neatly balance the benefits of greater devolved powers with the economies of pre-existing UK-wide tax administration. It would also help Scotland’s capabilities to develop in an orderly fashion over time, while relying on the existing strengths and expertise of HMRC.
What will happen if Scotland votes ‘Yes’ for independence?
If Scotland does vote for independence, it will mean that Scotland requires a comprehensive new tax regime. There is the expectation that Scotland will achieve fiscal independence at an early date, but it is possible that this may not happen.
It has been suggested that a ‘yes’ vote would result in a replica UK tax system to exist in the transitional period which is gradually reformed to form a tax system that was neutral, stable and flexible.
Whilst this might initially seem like a sturdy plan, anyone who has dealt with HMRC will be aware of the intricacies and administrative shortcomings.
In theory, a newly formed Scotland should be in an excellent position to introduce a simpler tax regime that could be administered by a smaller but efficient tax authority. However, the proposed replication of the UK system is likely to cause huge pressure to Revenue Scotland and require manpower that is disproportionate to the work completed.
Some might suggest that those working for HMRC in the north of the UK might convert to Revenue Scotland, however it is, unfortunately, not so simple. HMRC operates specialist teams across the UK, for example, all the national insurance specialists are based in Newcastle.
It has been agreed that HMRC will administer the Scottish rate of income tax which will be set by Holyrood. The Scottish government will pay £40 million for the IT systems and about £4.5 million for annual running costs. Yet, such plans to share responsibilities might not be feasible following a ‘yes’ vote.
Furthermore, HMRC are unlikely to want to undertake a sub-contract of this type, particularly as it would cause reduced manpower and personnel may suffer from low morale.
To conclude, it is very clear that Scotland finds itself at tipping point, from which it cannot return. Whether Scotland gains independence or not, it is clear that tax administration systems need to be robust and cost-effective and Revenue Scotland and the Scottish Parliament are under considerable pressure to achieve this.