The recent publication of the Scotland Bill means the subject of taxation powers available to the Scottish Parliament is once again firmly under the spotlight.
These powers can equally be seen as an opportunity and a threat to businesses in the oil & gas sector. Should Scotland take up the option of setting a rate? Lowering it below current UK levels would enhance the appeal of a career in Aberdeen as opposed to London, while the reverse would be true in the case of an increase.
Here, however, we will look beyond the headline debate and instead focus on the powers themselves and how they might affect individuals and businesses in the oil & gas sector and, more broadly, this part of Scotland.
A brief history of Scottish taxation powers would be useful to set the scene. As part of the devolution referendum of 1997, the question was asked whether the Scottish Parliament should be given the right to set its own taxes. About 1.5million Scots said it should, and the Scottish Variable Rate came into existence – the so called Tartan Tax.
This allowed the Scottish Parliament to vary the basic rate of income tax up or down by 3%. This power has never been used by the Scottish Parliament, as the Tartan Tax was not seen by Holyrood as being accountable to the Scottish people.
To address this need, the Calman Commission was set up in 1998 to review the position. Its final report was published in June 2009, and has recently been incorporated into the new Scotland Bill to replace the existing powers.
The main proposals relate to income tax. As currently presented, the Scottish Parliament could set its own rate and, if it so desired, reduce all current rates of income tax by 10%, dropping rates of 20%, 40% and 50%, to 10%, 30% and 40%. The Scottish Parliament would then top this up to the rate it wished Scottish taxpayers to pay.
Therefore, the Scottish Parliament determines the incremental rates above these thresholds, hence the possibility of lower or higher rates as compared to the rest of the UK.
It should be noted that all rates must move in unison, so, for instance, a net 5% increase would mean rates of 25%, 45% and 55%. As currently drafted, the changes in tax rates will only apply to earned income, with bank interest and rents continuing to be taxed at the UK rate. Interestingly, this throws up a potential mismatch between those with substantial investment income and those earning.
WHAT IS A SCOTTISH TAXPAYER?
If the Scottish Tax comes into being, one of the key requirements will be identifying to whom it would apply. This may seem like something that is obvious, but actually identifying a Scottish taxpayer may be harder than envisaged and is indeed something that considerable thought is being put into.
To illustrate this point, consider the fact that the UK rules currently have about 80 pages of guidance on residence, and yet it is still a matter that frequently ends up being debated and decided in the courts.
The current legislation applies a definition based on the number of nights spent in Scotland. But, even with this seemingly simple definition difficulties may arise, the most notable being:
How should you treat an individual who works in Aberdeen or offshore, but actually lives outside Scotland, a matter of particular relevance to the north-east and the oil industry. These individuals may spend nights in Scotland but do not actually live here.
How will an employer determine who is Scottish? They may not have sufficient information to know which of their employees spends most of their nights in Scotland.
The current test is retrospective. In some cases it will not be known until the end of a year whether a person is a Scottish taxpayer or not. How will PAYE cope with this? Clearly this can give rise to the possibility of error and over or under payments. Who should bear responsibility for this?
Working offshore is not specifically dealt with but it is part of the UK under current income tax powers. There appears to be no current provision to define whether working offshore, off Scotland, should be deemed part of Scotland, as geographic logic would suggest for a large part of the oil & gas industry. Perhaps this will be clarified later.
These points illustrate the interesting and important technical matters that have to be resolved prior to introducing the tax, in order to make it workable for employers.
THE COLLECTION CONUNDRUM
The obvious way to collect the Scottish Tax is through the PAYE system that applies to the majority of taxpayers. Employers act as unofficial tax collectors in applying PAYE, therefore would the cost of implementing this change fall on them?
Clearly, some businesses with a small Scottish workforce may view this as an unnecessary cost and decide to relocate or shut down. This has the potential to impact on the international competitiveness of Aberdeen, and Scotland, as a business location.
As has been evident recently, the PAYE system does not always deliver the correct result at the end of the tax year. With an additional layer of complexity added with the need to identify Scottish taxpayers, the room for error is magnified. Should each Scottish taxpayer be required to submit a tax return? This ssdoes not seem likely as it goes against the grain of ease of collection and simplification that are at the core of current tax thinking.
THE POLITICS OF CHANGE
Given the magnitude of the decision to change the rate of tax in Scotland, there is a lot of political water to flow under the bridge before this becomes law. Furthermore, there are matters of details and principle that need to be ironed out too if the cost and complexities are not to act as a disincentive to employers to set up and employ people in Scotland.
More changes should therefore be expected. Reason suggests that, for all the nice technical and political motives behind giving this power to the Scottish Parliament, whether it is good news for the oil & gas industry will probably depend on the rate that is set.
Colin Pearson is a tax partner at Ernst & Young