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Baroness Hogg: With respect, I thank the Minister for that explanation, but he has not answered my question. Is there a part of the system of taxation that may not be used by local government in Scotland to fulfill the devolved authority that may be given to it by the Scottish parliament? When you talk of reserved powers, such as VAT, is it the case that the Scottish parliament may not give local government the right to vary VAT in order to meet the local government finance arrears? Is it true of corporate taxes? Which taxes does it relate to?

There are two sets of local government finances. There is the expenditure which the noble Minister has described and there are also the taxes which are raised to finance it. Which ones are included and excluded for local government in Scotland under this Bill?

Lord Desai: Would it help the noble Baroness if I pointed out to her Schedule 5, page 66 where it says:

"Exception from reservation".

"Local taxes to fund local authority expenditure (for example, council tax and non-domestic rates)."

That is the one exception from reservation. That is it. There is nothing else.

Baroness Hogg: I am sorry if I am trying the patience of the Committee, but the description "local tax" does not define the taxation that is used. It does not say whether it is expenditure tax, income tax or corporate tax. They can all be used locally. That does not define the tax.

Lord Sewel: I hope it will be helpful to the noble Baroness if I say that it would be possible for the Scottish parliament to legislate in a way to change the basis of local government taxation. I accept that

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there is a theoretical possibility that it could legislate in a way to give local authorities the power to introduce something like a bed and breakfast tax.

Lord Mackie of Benshie: Can the Minister say whether the Scottish government could impose a tax on dogs and collect the money? Or has it no power to do that?

Lord Sewel: My off-the-cuff and highly risky observation is that the Scottish parliament could not introduce a tax on dogs; that is, to increase the tax revenue coming to the Scottish parliament.

Lord Campbell of Croy: The noble Lord, Lord Molyneaux, raised an interesting point. Members of the new parliament may feel bound to fulfil all kinds of promises they have given and I can visualise the situation where the new parliament has already expended its 3p. on the basic rate of tax and still calls for more money to be available in Scotland. Then the local government would be able to raise more and the parliament would allow it.

For example, non-trunk roads in Scotland have, for at least 50 years to my knowledge, been a local government financial responsibility and the Scottish Office was entirely devolved in those matters. That would continue. The noble Lord, Lord Sewel, has explained quite clearly that if the central government considers that too much money--not only the 3p. but a whole lot more for local government--would be charged by the new parliament, then the Treasury would put on a squeeze. That would be the worst situation one can foresee in Scotland. We know that there will be rows between Westminster and Edinburgh. To invite a situation where the Treasury has to put on a squeeze and stop money being available in that way is a situation we should try to avoid.

Baroness Strange: I do not want to confuse the situation further or to try the patience of the Minister. We have been talking about income tax. Will the Scottish parliament have any power to raise capital tax? If you have a bed and breakfast it is presumed that you have a spare room, which is capital, on which you will raise money by having people staying in it. Will there be a tax on people having spare rooms, such as there was on windows? Perhaps the Minister will explain that.

Lord Sewel: No capital tax, no spare bedroom tax, no window tax, no horse tax, no hot air tax. It may be to the advantage of the Committee if I can now return to the amendments before us.

Amendment No. 281C, to which the noble Lord referred, relates to retrospection. Retrospection is possible and desirable only in the very limited circumstances of Clause 70(4)--that is where the UK tax rate has been set so late that a Scottish resolution has to be made after the new tax year has started. That is the only circumstance, stated in Clause 70(4), which allows this very limited degree of retrospection. It is a necessary degree of retrospection where the UK tax rate

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has been set so late that the Scottish resolution can only be made after the new tax year has begun. That is the only possibility of retrospection.

As to Amendment No. 281D, I acknowledge that because of the way the tax provisions are structured and the dates on which the Scottish parliament will be elected it would not, in normal circumstances, be possible for the Scottish parliament to put in place a varied rate of tax before 2000-2001. There have been a great many theoretical and hypothetical exercises carried out to do with a new government, a general election and all sorts of weird and wonderful things before 2000, but there are extreme theoretical circumstances in which it could introduce the power before then were it not for Clause 70(6). I want to be absolutely clear that it will only be from 2000-2001.

We want to make that fact absolutely clear because many organisations have set great store by this provision in their planning and to remove it from the Bill now would undoubtedly cause confusion and would suggest to some, albeit erroneously--as the noble Lord, Lord Mackay of Ardbrecknish, recognises--that our intentions have somehow changed. It would be undesirable to introduce any such note of uncertainty at this stage when so much planning is already going on.

I have dealt with this particular group of amendments. The debate has gone into some interesting avenues and, indeed, some back-doubles which we have already travelled down at earlier stages. In view of the explanation I have given, I hope that the noble Lord will feel able to withdraw his amendments.

Lord Mackay of Ardbrecknish: I am grateful, at least in part, to the noble Lord the Minister. As to Amendment No. 281B, I am satisfied that the point about 2000-2001 is best on the face of the Bill. As to Amendment No. 281C, I accept the point that he has made quite firmly about retrospection. If ever there is any doubt, the words he has used to the Committee this afternoon will make clear the Government's intention.

As to Amendment No. 279B, I will leave that to one side and read what the Minister has said about it later. There is still a certain ambiguity about how the rest of income tax law will impinge on Scottish taxpayers if their basic rate is actually 3p. higher than the basic rate paid south of the Border. For the moment I am content to leave that.

Amendment No. 281A set a number of hares running. I suspect that the noble Lord the Minister has the noble Lord, Lord Steel of Aikwood, to thank for the hare beginning to run. That may be an unfair view of the "partnership" between the Labour Party and the Liberal Democrats. But it has been an interesting hare. I suspect that I have become more concerned as the hare has gone on running. We have the position where the Minister is doing his best to say, "There will be no other taxes. Don't worry", whereas his partner in devolution-- I nearly said "in crime"--is busy saying, "We would like more taxes". As a Scottish taxpayer, one is left wondering where, exactly, one stands.

My noble friends raised some interesting points about exactly where we stand and, as usual, the noble Lord, Lord Desai, came to our aid on economic matters and

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drew our attention to Schedule 5 to the Bill, which makes it clear, as he rightly pointed out, that taxes and excise duties are reserved matters. That suggests to me that the government of Scotland will not be able to change excise duties. The schedule refers to "taxes and excise duties", whatever that covers. I am not sure whether that covers corporation tax and other capital taxes, a point raised by my noble friend Lady Hogg. Perhaps the position will be made clearer later on in our discussions on the Bill.

If I am right, the Minister will agree and that will be fine. However, if the Scottish parliament decides that it wants to add 5 per cent. to excise duties in Scotland, my understanding, from what the Minister said and from what the Bill says, is that it cannot do that. But what would happen if it decided not to add 5 per cent. to excise duties but instead to have a sales tax on exactly the same goods and with exactly the same rules as with excise duties? I assume that "taxes and excise duties" means value added tax. As I understand it, the parliament cannot vary value added tax but it could introduce a sales tax, which would be the same as value added tax. It could add 5 per cent. It would come to an increase in value added tax but by a different name. Am I right about that? Is that what the parliament could do? If I am told that it could not do it, could local government do it? That is the point. Will the Minister help me? The Scottish parliament could not have a sales tax as that would be caught by the all-embracing reservation "taxes and excise duties". But local government could have a sales tax.

4 p.m.

Lord Sewel: The noble Lord is correct in that the parliament could not introduce a Scottish VAT variant. However, I think that he has chosen a dodgy example in terms of a local sales tax as I think we would run into trouble in Europe if we had a sales tax raised locally and at different levels in different local authority areas. But I will take the point in principle.

As I said to the noble Baroness, Lady Hogg, it would be possible for the Scottish parliament to legislate in a way that established a new system of financing local government in Scotland, just as we moved from the community charge to the council tax and previously had domestic rates. That kind of change is clearly open to the Scottish parliament to make because local government and local government finance are devolved. But if then, as a result, local authorities raised taxes at an excessive level, the Treasury, much to the chagrin of the noble Lord, Lord Campbell of Croy, could move in and claw back that excess expenditure.

I have just been handed a note which says that my memory, which needs a little refreshing on this point, was correct on the local VAT issue because it would be incompatible with the EC sixth VAT directive.

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