6VAT
92.The Scotland Bill proposes to provide Scotland with the first 10 per cent of standard rate VAT revenue raised in Scotland (and the first 2.5 per cent of the reduced rate VAT). The UK Government does not set out in its Command Paper how this amount will be calculated. According to ICAS “considerable analytical and statistical work will be required if there is to be an amount that can be identified which truly reflects the VAT attributable to Scotland and will in future reflect any changes in the Scottish economy.”112 Professor Bell told us that he foresaw a number of difficulties in just getting a baseline for the tax.
93.When we put these concerns to the Deputy First Minister, he explained that, for the purposes of the fiscal framework, agreement had been reached that VAT would be assessed at the point of consumption and that further data sets would be created “to try to establish the levels of VAT that are appropriate to be allocated towards Scotland.”113
94.It has been questioned whether the assignment of VAT revenues actually delivers any benefit to Scotland. PWC have raised concerns that the Scottish Government would “bear the risk of any fluctuations or falls in [VAT] revenue, whilst having no direct influence on the setting or collection of the tax.”114 Dr James Cuthbert observed that:
Overall, it is difficult to see that Scotland gains anything from the proposal to hypothecate to Scotland a share of VAT revenues. Scotland gains absolutely no extra powers: but is exposed both to the short term fluctuations, and the long run indexation risk, which will be associated with this tax. And given the large element of uncertainty about the assignment of VAT receipts to Scotland, it is difficult to see that it adds much to the principle of fiscal responsibility.115
95.The Deputy First Minister told us that he welcomed the new powers and disagreed with those who questioned the merit of the Scottish Government being assigned a share of VAT revenues:
It is an incentive for us to improve the performance of the Scottish economy because if we do that then there will be the potential for it to be a benefit as a consequence of more successful economic activity.116
96.We agree with the Deputy First Minister that linking the Scottish Government’s budget to economic activity through the assignment of a share of VAT revenues provides incentives for growth. The fiscal framework should make it clear that if estimates of VAT revenues are exceeded then the Scottish Government retains the benefit of that improved economic performance and consequential improved VAT take.
97.We are concerned at the potential for inaccuracy in the data and forecasts on which VAT assignment and subsequent indexation will be based. Any method that is unreliable may lead to disagreement between governments and it will almost certainly lead to forecast errors. This latter risk must be factored in when the governments are negotiating what the Scottish Government’s enhanced current borrowing powers should look like.
112 Written evidence submitted by ICAS to the Finance Committee’s inquiry into the Fiscal Framework
113 Q146
114 Written evidence submitted by PWC to the House of Lords Economic Affairs Committee inquiry into the Devolution of the Public Finances
115 Written evidence submitted by Dr James Cuthbert to the House of Lords Economic Affairs Committee inquiry into the Devolution of the Public Finances
116 Q147
© Parliamentary copyright 2015
Prepared 9 February 2016