The Scotland Bill - Scottish Affairs Committee Contents

Examination of Witnesses (Questions 238-313)



Q238   Chair: Welcome to the meeting of the Scottish Affairs Committee looking at the Scotland Bill, Calman and related matters. It may be helpful if you could introduce yourselves for the record.

Sarah Walker: Good afternoon. My name is Sarah Walker. I am the Director of Pay As You Earn, Self Assessment and National Insurance in Her Majesty's Revenue and Customs. My colleague is Pamela Mulholland, the Head of Devolved Taxation in HMRC.

Q239   Chair: The general issue relating to the Scotland Bill inasmuch as it affects yourselves is, is it doable and, if so, can you do it? That is what the questions boil down to, is it not? I suspect that a simple yes or no might not be sufficient, but you can maybe give us some background and then we will ask specific questions.

Sarah Walker: That is fine. I think the short answer is yes, it is doable, and, yes, we can do it. The basic design of the income tax[1] is based on the Scottish variable rate which has been in place since the relevant legislation was passed in 1998. That is built into our systems and built into employers' systems. The differences are clearly that the new Scottish tax will apply to all the rates of income tax rather than just the basic rate and that a portion of the revenue from each of those rates will be attributed to Scotland, but that does not affect the mechanics of how it will work for employers. The other thing to say is that the expected date for implementation is 2016, which gives us five years from now to get all the arrangements in place, which is giving us plenty of time to do it. We are not going to be rushed. We are confident that we will be able to deliver.

Q240   Chair: You are the people who administer tax credits, are you not?

Sarah Walker: Yes.

Q241   Chair: Now, I, and almost every other MP, have hosts of people coming to us in a distraught state about tax credits. How can we have any confidence that the people who gave us tax credits can run this properly?

Sarah Walker: I think this is a different proposition. Clearly, in the early years of tax credits, the Department had difficulty in operating it. I think now it is better than it was. The Scottish rate will be implemented through employers. It will be something that the employers know how to do. We will be responsible for identifying the Scottish taxpayers and telling the employers who to operate the new rates on. It is a well-known process and we are confident that we can do it.

Q242   Chair: I was at a seminar held by accountants and other people the other day and a whole group of anoraks were discussing in enormous detail the complexities of all of this. They seemed to be getting very excited about how difficult it was. Are you satisfied that you can cope with all possible problems that might be flung up?

Sarah Walker: I would be mad if I said that we could cope with every single problem, but clearly we have time to get it right. The sorts of things that are being raised at the moment around the definition of Scottish taxpayers are things that we can very easily address together with the representative bodies. Through good guidance and good consultation between now and the introduction of the scheme, we are confident that we can make that work.

Q243   Lindsay Roy: What are the estimated costs of introducing this new system and over what time scale?

Sarah Walker: The time scale proposed will start in April 2016. The costs—

Q244   Lindsay Roy: Time scale, sorry.

Sarah Walker: I am sorry. I am talking about income tax. Yes.

Q245   Lindsay Roy: In terms of preparation for this.

Sarah Walker: We will start as soon as the Bill is passed and we will have the thing up and running in time for starting in April 2016.

Q246   Lindsay Roy: Do you have a budgetary profile from 2011 through to 2016 as to what the on-costs would be?

Sarah Walker: There are some costs published in the regulatory impact assessment, but the full costs will depend on the detailed design of the system, which is not all in place yet.

Q247   Lindsay Roy: Is there a rough estimate?

Sarah Walker: We are saying that it is something like £40 million to £45 million over the period between now and 2016.[2] Out of that, roughly £10 million is IT costs, computer costs, and the remainder is the administration of setting the thing up.

Q248   Lindsay Roy: Is the responsibility for that revenue with the UK Government or the Scottish Government?

Sarah Walker: Under the terms of the agreement, I think the Treasury rule is that the Scottish Government would meet those costs.

Q249   Fiona O'Donnell: In terms of how easy the system is going to be to operate, both for you and as someone who has been responsible for payroll in a previous life and had the lovely disks from HMRC that made it all easy, is it going to be easy for you to operate and easy for people working in HR to operate as well.

Sarah Walker: Perhaps I can just explain a little bit about how it is going to work. The way PAYE works—I am sure you know from having operated it—is that you have tax tables and tax codes. The tax tables set out the different rates and allow you to calculate the rates of tax. The codes identify what is different about each employee and tells you what allowances and deductions they are allowed. Before the introduction of the Scottish tax, we will identify from our records all the people we think are Scottish taxpayers. We will write to all of them in order to tell them we think they are a Scottish taxpayer, allow them to dispute it or complain and sort out, as far as we can, those questions. Once we have a list of who is a Scottish taxpayer, we will issue to all employers a different type of tax code with a prefix, an "S" on it, so that it identifies somebody as a Scottish taxpayer.

Q250   Fiona O'Donnell: Given that the definition of a Scottish taxpayer has not been tested in the courts yet, at what stage do you think you will be writing out to say that to people so that we know we have time for court cases?

Pamela Mulholland: The current plan is the year before, but again that depends on the final design of the system. Early indications are that we would probably do that round about the summer of the year before so there is plenty of time.

Q251   Fiona O'Donnell: Is that allowing for time for lengthy legal disputes, going to Europe and all that kind of thing?

Sarah Walker: We are not expecting a lot of difficult cases.

Fiona O'Donnell: There are some thrawn Scots out there.

Sarah Walker: I am sure there will be some people who will want to dispute and clearly that is why if we write out in the summer, it gives us nine months or so to the start of the year. Obviously, if there are still disputes going on, during the year or after the year, we can still put the thing right. The intention is that if we do it that way, the vast majority of people will have a very clear idea by the beginning of the tax year whether they are a Scottish taxpayer.

Q252   Fiona O'Donnell: Did you want to add anything, Pamela?

Pamela Mulholland: I was just going to say that for the vast majority of people it is fairly straightforward. Most people know where they live and there will be some complex—

Fiona O'Donnell: I want to come to the subject of MPs and the rest, but I will wait until we get to that question. Thank you.

Q253   Chair: There is no way under any of the rules that you devise that Sean Connery would be classed as a Scottish taxpayer, is there, because he has managed to get himself—

Sarah Walker: I do not think he is a UK resident.

Chair: That is right and, even under the new system, I do not think his commitment to Scotland is such as will result in him wanting to pay tax here. Cathy, you wanted to come in.

Q254   Cathy Jamieson: Could I just explore some of the difficult areas? The Institute of Chartered Accountants of Scotland suggested in its evidence to the Scottish Parliament's Bill Committee that there were a number of anomalies. What I want to try and get at is this. Are they raising serious concerns about a large number of cases or are they just trying to make clever points and show how difficult it all is? For example, they suggest this for some itinerant workers or people who do not have a fixed address: somebody who lives in England but works in Scotland on a day shift would be an English taxpayer, but somebody who lives in England and works a night shift in Scotland would be a Scottish taxpayer. The issue is that if there are those kinds of anomalies, does that undermine the public's confidence that it is a fair system? Are they really just "at it" in terms of highlighting these anomalies or are there serious questions like those to be addressed?

Sarah Walker: In that particular example, if they live in England, then they will not be a Scottish taxpayer because it is about where you live. Whether you work in Scotland on a day shift or a night shift, it will not make a difference. I am not saying that there are not any specific issues that the Institute have raised that clearly need further discussion, but I do not think that is one that is going to cause us any particular problem. The whole basis is where you live. It is being able to determine where somebody lives and that is where their main residence is.

Q255   Cathy Jamieson: Can I follow up with another example that they have suggested? They talk about an itinerant worker who might have spent 101 days in Scotland, 99 days in England and 165 days working overseas but, in such a case, would be a UK resident and deemed to be a Scottish taxpayer despite the fact that he has spent the majority of his time outside Scotland.

Sarah Walker: The first test is whether they are UK-resident. If they are UK-resident, then the choice is where their home is within the UK. In that case, if they have a clear home either in Scotland or in England, again it will follow that that will be where they are taxed. If they do not have an obvious home in the UK, then you have to start counting the days and that is where that day count comes in. If they have a home and it is clear where they live, then that is where they will be taxed.

Q256   Cathy Jamieson: Can I add a final point? I am going to choose my words very carefully. Not everyone will be as keen to co-operate and make this as simple as possible and be up front in wanting to pay their fair share. Do you think that there are loopholes which need to be addressed around this particular issue?

Sarah Walker: I do not think there are loopholes. It will obviously be important that we do the right sort of compliance, that we check up where people live and it is not just the address they want to give us. We will need to have systems where we can, where necessary, investigate and use whatever evidence we can to check where people really live.

Q257   Chair: Following that up, we do remember the poll tax where there was an incentive to disappear. I appreciate that much of this will be PAYE, will it not, and therefore you have a link with employers, but there are, certainly in areas like mine, quite a substantial number who are not declaring income. There is the black economy and all the rest of it. Will you be able to tackle those sorts of areas adequately?

Sarah Walker: We do a lot of compliance activity in relation to the black economy and people who do not work. The Government have just promised us a lot of extra money to do more of that sort of work. We are quite successful in our compliance. Clearly, the more we do, the more we will collect, but it is not a new problem in terms of identifying people who are not declaring their income.

Q258   Chair: But there is nothing in relation to the Scotland Bill that makes the issues relating to compliance any more or less difficult.

Sarah Walker: Clearly, the new thing is where people live. The Scottish rate will not always be higher than the English or lower than the English, so clearly it will not always be obvious to people where it is in their interests to live. If suddenly there are a lot of people who decide that they will live somewhere else after a different tax rate has been declared, that would ring alarm bells for us. There are things that we can follow up. We think that we will be able to determine, in the huge majority of cases very easily, where people live and, where we cannot, we will develop the compliance activities that will try and track those people down.

Q259   Fiona O'Donnell: This is a very narrow question and I promise that it is not motivated by self-interest. As Cathy was saying, it is not just a question of definitions. It is about fairness and people being able to see that the system is fair. One of the definitions where the Scottish rate would apply would be for individuals if they represent a Scottish constituency in Westminster, Edinburgh or the European Parliament for any part of that year. I am thinking about a Member of Parliament whose main home is in London and whose family is resident there. They are accessing all the services such as the health service and they have children at school. Can it be seen to be fair that they are paying part of their income tax in Scotland but the services that they are predominantly consuming are in England?

Sarah Walker: That is obviously a decision that Ministers have taken, but they have obviously taken it on the grounds that if somebody represents a Scottish constituency, then they have that very close connection, or ought to have a very close connection, to Scotland. Therefore, it makes sense for them to pay the Scottish tax, but, as I say, that is a decision that Ministers have taken.

Fiona O'Donnell: Yes, I am not defending it. I just think that it will be the kind of thing, given the scrutiny, quite rightly, that there is of MPs, that people will pick up on.

Q260   Dr Whiteford: First of all, I would like to follow up the point about the Institute of Chartered Accountants of Scotland evidence given to the Scottish Parliament, to which Cathy has already alluded. One of the things they said in evidence was that they believed the implementation costs could be substantially higher than the £45 million estimate. My concern about that would be, given that it will be the Scottish Parliament which meets the costs of that, what guarantees are there in place to ensure that costs do not spiral, because sometimes in Government Departments costs of implementation of new systems do tend to spiral?

Sarah Walker: I have seen the figure that the Institute quoted; I think it was a figure of £150 million. We simply do not recognise that and do not see any obvious way in which that could happen. The IT component of this is relatively small. As I say, it is £10 million, so obviously it is big, but in relation to the cost of our big tax systems that is a relatively small proportion of the costs. I cannot give any guarantees that that will be precisely right. It is an estimate at the moment and, clearly, as I say, it does depend upon the precise specification of the rules. I would like to say that it is unlikely it will go up hugely unless the system becomes much more complicated.

Equally, the cost of implementation is things like mailing out to all the Scottish taxpayers, telling them that we think they are a Scottish taxpayer and dealing with the replies and any inquiries. That is something that we are used to doing so it is relatively easy for us to estimate what that cost would be and the number of people we would need to do that. Obviously, there will be some disputes that will stretch out and cost us money, but we are expecting those to be relatively small. We have reasonable confidence that that is a good estimate of the cost, but it will depend. It is five years' time so clearly other things could happen.

Q261   Dr Whiteford: In the evidence session immediately before this, we were hearing that in countries like Canada, which have a very devolved and decentralised fiscal system, they have very effective ways of collecting taxes across different tax rates. I just wondered to what extent you had looked at not just Canada but the other countries in Europe that have quite complex tax arrangements in different parts of the state—Spain, Italy, Germany and there are others. Is that something that you have looked at in terms of building a system that is going to work in the UK?

Sarah Walker: The system we have is the system that was recommended by Calman. Calman recommended that it was based on our national PAYE system. Other countries do have different ways of collecting regional taxes based on their basic income tax system. We have not looked at doing it in a way that is not through PAYE because clearly that was the Calman recommendation, which has been accepted by the Government.

Q262   Dr Whiteford: How responsive do you think the IT system is going to be to changes and fluctuations in the tax rate, if taxes go up or down in Scotland? Are you confident that the technical specifications of that are going to happen?

Sarah Walker: Changing a tax rate in our system is pretty easy. It is not a big rewrite. We put them in every year when the budget changes. We have said, I think, that we would expect the Scottish Parliament to decide on the rate it wants to apply in the autumn before the start of the tax year, and that would allow us to incorporate that in tax tables and tax codes which will be issued around this time of year—January and February—for implementation from the following April.

Q263   Dr Whiteford: This is the last question from me. The Public Accounts Committee report that came out on 1 February highlighted some administrative issues in HMRC. Do you expect that those problems will have some impact on HMRC's ability to implement and administer the Scottish rate of income tax?

Sarah Walker: I cannot say too much about the PAC report because we have not made a formal response to the Committee, but clearly it was around the implementation of our NPS system, the current PAYE system, and we made some comments on the way that project was run. Clearly, we will have lessons to learn from that, and Lesley Strathie, our Permanent Secretary, has made it very clear that we have some lessons to learn.

  The changes that we need to put in to implement the Scottish tax are of a much smaller magnitude than the wholesale reform of PAYE which we did under that programme. We think they are much more within our control. We think we have plenty of time to plan. We will clearly learn the lessons from what went wrong before and, yes, we think we can do it.

Q264   Chair: I wonder if I could follow up with a couple of points. I cannot remember whether or not we have had a statement from you indicating just how expensive you think it will be both in capital and revenue terms—your estimates at the moment. If not, I wonder if we could have one, just for the record, indicating how much you think it will all be.

I think we still have this anxiety. I used to be on the Public Accounts Committee and there was a constant litany of grief about IT projects. To be fair, it was not just yourselves, but you were not exempt. There is this anxiety that you will end up not being able to cope with either the time scale or the costs because, in a sense, why should you be different from any other Government IT project which traditionally runs over time and over budget? What assurances can you give us? Is this project particularly simple? Everybody says they have learnt lessons, but it turns out that they have not learnt any lessons. What assurances can you give us that it is not going to blow up in our faces?

Sarah Walker: In terms of the costs, there are figures for the costs in the regulatory impact assessment and that is all we can give you at the moment.

Q265   Chair: And these still apply?

Sarah Walker: They still apply, yes. They accompany the Bill. The only thing I can add in terms of assurances is that we did give the Scottish Government an indication that we would be able to run the Scottish variable rate with effect from 2013 if they wanted to operate it. That gives us two years' notice. That is the vast majority of the IT change that we would need in order to operate the Scottish income tax, which we are aiming another three years beyond that to do. On that basis, if we could do most of it in two years' time but we actually have five years to do it, it seems to me a reasonable expectation that we will be able to deliver it.

Q266   Chair: It certainly sounds reasonable, but then again all the other IT projects sounded reasonable when we were agreeing to them as well.

Can I turn to the question of deadlines? Again, this was a point that I had not thought of until you mentioned it. You seemed to be saying that you would expect the Scottish Parliament to set the rate in the autumn to be implemented from the April. Are we likely to have a cut-off date by which you cannot implement it unless they set a budget by such-and-such a date? You can see in those circumstances how there would be an incentive, depending on what the make-up of the Parliament is, for people to be delaying it beyond in order to block a decision and so on, or is it going to be a slightly movable feast?

Sarah Walker: I think there will be a deadline if they want the new rate to apply from 6 April. I might let Pam explain a bit more.

Pamela Mulholland: This is a matter for the Treasury and the Scottish Government to discuss. We would expect the rate to be signalled in the autumn budgets. What the Bill provides for is that the resolution must be passed before the start of a tax year, so by 5 April. Now, that would be very late in terms of systems, and certainly what we are saying is that if we do not have the rate by December, things start to get very difficult for businesses to implement that rate and for HMRC to communicate to make those changes. The further past December it goes, the more difficult it becomes, but there are processes in place to deal with that should it happen. It is just that the burdens become more once you go past December.

Q267   Chair: Can you just clarify for me what these difficulties for businesses are? I am not an accountant. I have never operated a payroll. I just presume that somebody presses a button and one set of figures gets changed for another set of figures and a wee man in a computer changes it all.

Sarah Walker: We issue tax codes to people, which, in a lot of cases, do depend on the tax rates. We do that annually in the period between January and March. We are sending out now PAYE tax codes to people. If we do not know what the tax rates are going to be, some of those will be wrong. Clearly in the past, there have been UK budgets in March which have changed tax rates. What happens then is that you start the year with out of date tax codes—the old tax codes. We then have to reissue tax tables and tax codes to employers after the start of the tax year. That means they have to change everything in their payrolls. They have extra work to do because they have to do the work twice. It is not impossible. We have tried to avoid that in recent years by the Government setting rates and allowances before Christmas rather than in the March Budget. That saves work for employers because they only have to do it once.

Q268   Chair: I just wanted to be clear, though, that we will not find ourselves in a position where the Scottish Government complain that they are unable to change the rate of tax because the Treasury is unable to do the mechanics. Even if they go beyond whatever would be the best date, the desirable date, you could end up issuing sets of tax codes and people's code numbers and then have to change it during the year, if necessary. That is messy and difficult, with additional time and effort and so on, but it still can be done.

Sarah Walker: Yes. As Pamela says, the legislation allows for that resolution to be passed right up until 5 April and, if it is, then we will implement it.

Q269   Chair: There are no circumstances, unless I am mistaken—I want to be absolutely clear about this—where the Scottish Government could turn round and say, "We would like to have made this change, but HM Treasury is saying no, we are too late."

Sarah Walker: Only if it is after 5 April.

Q270   Chair: Why can you not change it after 5 April, because surely the same thing would happen if you did it on 4 April? You still have the inconvenience of sending out the additional tables, it is messy and all the rest of it. What difference does that particular date make?

Sarah Walker: Clearly it is in the legislation. You have to draw a line at some point. Changing the tax rate in-year is confusing and difficult for all sorts of reasons.

Q271   Chair: Of course it is. I understand that. People who are looking for an argument might very well seek to blame something that they did not want to do on HM Treasury. I just want to be clear that, in fact, it is doable even though it is chaotic and more difficult. It would be the responsibility of the Scottish Parliament for the date on which they set it, but you would still be able to do it even though it is difficult, messy and more expensive.

Sarah Walker: The other problem is that once you pass the start of the tax year and you then change the tax rate, you are having a retrospective effect on actions and decisions that people have made after 6 April. You might choose to employ somebody or take a job on the assumption that your income tax rate was going to be one thing and then retrospectively it would be put into something else.

Q272   Chair: I am not arguing that it should be done. I am just seeking to clarify whether or not you could do it and you would never have a circumstance where you would say, "This actually cannot be done." It might be undesirable, they might have got themselves into a mess, but you would always be able to do it at the date that they decided. Even if they decided nine months through the year and it would mean all sorts of chaos going backwards, you mechanically would still be able to do it.

Sarah Walker: I think theoretically we could, although there would be lots of other legal reasons why it would be—

Q273   Chair: Absolutely, but that, in a sense, would be the Scottish Parliament's problem. You, as the deliverer, as it were, of this service to them would not be a block on them changing the tax rate at any stage.

Sarah Walker: I do not think so.

Q274   Chair: Fine. Sorry, Ms Mulholland?

Pamela Mulholland: We would not have the legal cover to do it after 6 April, though, because, as Sarah has said, the Bill does say that the resolution has to be passed by 5 April.

Sarah Walker: If the Bill is passed as it is, clearly that is when the cut-off date is.

Q275   Chair: In those circumstances that is a decision of Parliament, but there are no circumstances in which you, as HM Treasury, would be the people who were saying, "This cannot be done because mechanically we cannot do it."

Sarah Walker: I do not think so, no.

Chair: Fine. You can understand why we want to be clear about this. We want to have somebody else to blame rather than you. I am sure we will have enough to blame you for in due course.

Q276   Lindsay Roy: In this phased preparation, are there likely to be new jobs created and, if so, any in Scotland? You have given us a £45 million estimate. Does that include labour costs or additional labour costs?

Sarah Walker: There will certainly be requirements for people to do the work. Whether they are net new jobs is difficult to say. We have a planned reduction in overall staff over the next four years of the spending review period and the costs of any additional staff would clearly have to be taken into account in that.

Q277   Lindsay Roy: So the phased reduction does not take into account this initiative.

Sarah Walker: The staff, I think, would be additional. They would be paid for by the Scottish Government. Am I right?

Pamela Mulholland: Yes.

Q278   Chair: Can I just clarify where they will be?

Sarah Walker: We have not decided yet. It is too soon to say. Clearly, we have quite substantial offices in Scotland. We have call centres in Scotland. It might well make sense for those jobs to be in Scotland, but I cannot say.

Q279   Chair: I think that would be a jolly good idea, don't you? I can see a certain difficulty about creating jobs somewhere else to administer the tax system in Scotland.

Sarah Walker: I understand that.

Q280   Chair: I am sure you understand that point.

Sarah Walker: Very much so.

Q281   Jim McGovern: There are a couple of HMRC offices in Dundee in my constituency.

Sarah Walker: I will make a note. Thank you.

Q282   Jim McGovern: Can I offer them some assurance from you that their jobs are safe?

Sarah Walker: I am sorry, I do not think I can answer that question.

Jim McGovern: So I cannot offer any assurances.

Chair: Good try, Jim.

Jim McGovern: You have to try.

Q283   Lindsay Roy: What kind of consultation will there be in terms of the Scottish rate applying to charities, gift aid and pension contributions?

Sarah Walker: I think Pamela can explain what we are doing.

Pamela Mulholland: We have set up three technical groups: one for income tax in general, one for the pension sector and one for the charitable sector. We have met with the pension and charitable groups twice now to look at the very specific issues affecting those sectors. The charity group, for example, have been looking very closely at the issues surrounding gift aid, in particular, to minimise any burdens there. We are working with them to try and identify the best way to minimise any of the burdens on charities and donors.

Q284   Lindsay Roy: What are the main issues coming up? Are there real problems presenting themselves at the present time?

Pamela Mulholland: With the charitable sector, the charities that receive donations do not know whether somebody would fall within the definition of a Scottish taxpayer or not. What was proposed for the Scottish variable rate therefore was that the charitable relief—the gift aid relief—would be given at the UK rate to remove those burdens from the charitable sector. We are looking at all of those issues with the sector and, in time, we will put forward the case to Ministers for them to consider.

Q285   Lindsay Roy: But nothing definitive has been agreed so far.

Pamela Mulholland: Absolutely not, no. The charities have issued a paper to various organisations to seek their views and we are waiting for their input and response to that.

Q286   Lindsay Roy: To what extent have you been giving guidance on this?

Pamela Mulholland: Giving guidance? We have been working with them and we are waiting to hear their views. We are very much looking for their insight on the issues that this will raise for them.

Q287   Chair: Can I clarify a little bit on that? If charities apply under gift aid and it is on the UK rate, that is perfectly straightforward. What would be the additional complexities for the charity themselves if somebody was a Scottish taxpayer? What additional work would that mean for them?

Pamela Mulholland: If the relief was given at a UK rate, it would put no extra burden on them at all. If the relief is given at the marginal rate, they would need to know who was a Scottish taxpayer and who was not, and currently their systems would not provide for that. When somebody makes a gift aid declaration, obviously they are not asked whether they are a

Scottish taxpayer or not.

Q288   Chair: Would your systems not tell you that automatically?

Pamela Mulholland: No, the systems do not work in that way. The claims to relief are made to us and they do not identify individual addresses. They certainly do not identify at the moment whether somebody is a Scottish taxpayer or not. We will have to look at the issues for the sector but also how HMRC will be able to deal with those.

Q289   Chair: Right, but this is subject to consultation?

Pamela Mulholland: Yes.

Q290   Fiona O'Donnell: We have talked about the set-up costs, but in terms of the year-on-year running costs, have you any idea how many people move from Scotland to other parts of the UK in any given year, or move into Scotland from other parts of the UK?

Pamela Mulholland: We believe the numbers are relatively low, but we are going to be doing some research on that so that we can see the scale of the problem and the proportionate response.

Q291   Mr Reid: The system is dependent on you being able to calculate accurately tax revenues from Scotland, but is that going to be a difficult calculation for you?

Sarah Walker: No. If we have the indication on the individual record that we have designated them as a Scottish taxpayer or not, then our systems, through our accounting rules, will automatically add those up. The way the system is expected to work is that the Office for Budget Responsibility will make a forecast at the beginning of the year so that it can give the Scottish Government an idea of how much money they are going to get. There will be a payment on account and then there will be a reconciliation once all our tax has been collected. We think that within a year of the end of the relevant tax year, we have collected over 99% of the tax that we are going to collect. Therefore, that will be corrected at that point.

Q292   Mr Reid: You said that the OBR would make the forecast at the start of the year. Was that January or April?

Sarah Walker: I am not sure if that is decided yet.

Q293   Mr Reid: The reason I am asking is that you have already said that the Scottish Government would ideally have to set its rate in the autumn. Is the Scottish Government going to know the forecast for the following financial year at that point?

Sarah Walker: That is a matter between the Scottish Government and the Treasury, but I am assuming that that would be the case. The OBR would give them a forecast at the point when they were making that decision.

Q294   Mr Reid: Under the present system, every year in the Budget statement, the Chancellor makes an announcement of approximately how much would be raised if a Scottish variable rate was to be implemented. Have you done any studies to find out how accurate these forecasts have been?

Sarah Walker: I am not aware of that, no, but I am sure it could be done. As I say, it is a Treasury and not an HMRC forecast.

Q295   Mr Reid: But are all the figures available so that somebody could go and work that out?

Sarah Walker: If you were asking us to do it now, we do not have a completely up-to- date identification of Scottish taxpayers; we are not doing that on a day-to-day basis now because the SVR is not in operation, but we would be able to do a pretty good estimate, I think.

Q296   Mr Reid: But the Chancellor, in his Budget statement last March, made an estimate. If you do not have those records, how was that estimate made?

Sarah Walker: I am assuming it is based on relative population and the statistics that the Treasury have, but as I say, it is a Treasury forecast rather than an HMRC forecast.

Q297   Mr Reid: Is it the OBR or the Treasury that we should be asking these questions of rather than yourself?

Sarah Walker: Yes, really.

Q298   Jim McGovern: How will HMRC work with the OBR in making the projections that you and Alan have referred to?

Sarah Walker: We already make available to the OBR data on tax receipts for them to use in making their forecast. Clearly we would do that again for this. We would make available data on Scottish taxpayers, what their income was and what tax was paid. The OBR are independent forecasters. They would use that to reach a forecast.

Q299   Jim McGovern: I imagine there would be a subsequent reduction in the block grant for Scotland. What mechanism would calculate that?

Sarah Walker: You would have to ask the Treasury. That is not a matter for HMRC.

Q300   Jim McGovern: Is it not?

Sarah Walker: No.

Q301   Chair: With regard to these figures that you are producing that are going to be fed into the mechanism, I always remember when I was at school that you had to show your workings. One of the issues about all of this is the question of transparency because, believe it or not, there are people of mischievous bent who will want to argue that the wrong figures are being used, that they are being robbed blind and all the rest of it. Is there any reason why your workings should not be shown for these sorts of figures, given that it is all aggregated?

Sarah Walker: As I say, the workings will not be ours. The workings will be the OBR and the model that they use to do forecasts.

Q302   Chair: Or whatever it is that you are providing them with.

Sarah Walker: We already publish data on tax paid by Scottish residents. That is public and that will still be available.

Q303   Chair: I must confess it is not something that I read regularly. This is just a general point. Is there any reason why anything related to any of this should not be transparent and publicly available? I am obviously not asking for things relating to individual taxpayers, but as I said before, over Barnett, for example, we frequently have disputes about the fairness thereof and all the rest of it. If possible, we want to avoid that here by making sure that everything is open so that economists and accountants can have hours of fun disputing whether or not the figures are accurate. Is there any reason—legal or anything else—why aggregated figures should not be available?

Sarah Walker: As I say, the data that would be used by the OBR is already data that we publish. I would not expect any problem in that being available. Clearly, you would need to talk to the Treasury and the OBR about what other data or information they might use to make a forecast.

Q304   Chair: We will speak to them about their bits, but from your bits—

Sarah Walker: Yes.

Chair: Fine. There are no difficulties there. I think those are just about all the points that we have for you. Sorry, Eilidh?

Q305   Dr Whiteford: I was going to come in on this point about forecasts and the tendency for forecasts, from the Treasury certainly, to overestimate. I am concerned, I suppose, because of the knock-on impact of that on the workings of the Scottish Parliament. If there is a constant overestimate every year, and every year the Scottish Government or Executive or Parliament is having to pay money back because the forecasting has been inaccurate, that is going to cause real cash flow problems and real issues for a subsequent Government over the cycle. What is your own assessment of the accuracy of Treasury reports in your experience and are there steps that can be taken to ameliorate that?

Sarah Walker: I do not think I am really qualified to comment on that. You really should talk to the Treasury.

Q306   Chair: That had the merit of clarity. "It wasnae me. A bad boy did it." To draw matters to a conclusion, we can be assured then, can we, that you can work all this, and there is nothing that we should be worried about. You can resolve all these difficult disputes that have been identified by accountants and the like, and we should go on to bigger things.

Sarah Walker: Yes, I think we are confident that we can do this. We have plenty of time to sort it out. I am not saying that we have all the answers at the moment because we have five years between now and the thing starting, so we clearly have work to do. We clearly have consultations with all these bodies to talk through their issues and to find answers, but nothing that has come up so far looks like something that will prevent us from operating this successfully.

Q307   Fiona O'Donnell: Maybe I could pick up on the recent debate about the variable rate that exists just now in Scotland and the capacity of HMRC to introduce that. Is that system ready to be operated just now should the Scottish Government decide to use its existing powers?

Sarah Walker: Because of what has happened over the last few months, we have said that now it would take us two years to get into a position to do that. It would be April 2013 if the Scottish Government decided that they wanted to put themselves, or their successors, into a position to implement it. If we were told now, it could be done in 2013.

Q308   Fiona O'Donnell: My understanding is that those costs arose for the Scottish Government because of changes that were being made to the IT system.

Sarah Walker: Yes.

Q309   Fiona O'Donnell: Is it your understanding that if in the future, HMRC changes its systems so that any costs or any changes were needed so that the Scottish system would be able to work, those costs would again be passed on to the Scottish Government?

Sarah Walker: Yes.

Q310   Chair: Just covering that point again, if a new Scottish Government is elected in May and comes in in June, they would not be able to use the power that Parliament gave them to alter the income tax rate immediately. They would have to wait two years. Is that right?

Sarah Walker: That is right.

Q311   Mr Reid: If a new Scottish Government coming in after the election in May decided to ask for the powers, would it be ready for April 2013?

Sarah Walker: Yes.

Q312   Chair: Can I just clarify a final point? If we want to come back to this in five years' time to see if it is working, what are the chances of you still being there? My experience in Public Accounts was that, usually, the people that we were interviewing by the time anything had gone wrong said, "It was nothing to do with me. It was somebody else." Are you likely to be in these jobs at that time or do you get moved around every couple of weeks?

Sarah Walker: It is not quite every couple of weeks, but I cannot give you any guarantees that I will still be in the same job in five years' time.

Q313   Chair: And Pamela?

Pamela Mulholland: A similar answer.

Chair: Fine. On that happy note, thank you very much.

1   Scottish Rate of Income Tax Back

2   For the period up to and including 2016-17 Back

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