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Lord Fraser of Carmyllie: Perhaps I may try out this point on the noble Lord to see whether I have understood the device. It is entirely within the power of the Scottish parliament to change local government. For example, it could revert to a two-tier system of local government. It would be possible for the Scottish

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parliament to introduce a local government Bill saying, "There shall be a single tier of local government for Scotland and the First Minister shall be the Mayor for Scotland". That is not altogether daft. The population of Scotland is 5.5 million--two-thirds of the population of London. By that device he could introduce a local income tax with all manner of bands and with all levels--perhaps up to 98 per cent. I believe that to be a ludicrous idea--of course, because I do not believe in high taxation. But, as a device, I would be interested to know where the flaw is in what I have put forward.

Lord Renton: Before the noble Lord answers that point, I wonder whether he would also bear in mind that it follows from what my noble and learned friend has said that the Scottish parliament could transfer to the Scottish local authorities responsibility for the upkeep of all roads and make local rate payers pay for that.

Lord Sewel: Some noble Lords have been concerned throughout the debates on the Bill to prevent the Scottish parliament acting in an absurd and ridiculous way. I have greater confidence in the Scottish parliament. I do not think there is any need for us to go over everything and try to block every potential absurdity and ridiculous act that the Scottish parliament might, if it had a brainstorm, seek to carry out. In a similar way, we are not troubled by the powers of this Parliament. This Parliament could do the most ludicrous things and there are precious few controls and limitations on it. There are many more controls, limitations and constraints falling on the Scottish parliament. However, within those constraints, let us have confidence that the parliamentarians will act reasonably and responsibly; and if they do not, the Scottish people will kick them out.

Lord Mackay of Ardbrecknish: That is not a satisfactory answer when it comes to drafting legislation. The legislation ought to be clear. It ought to be clear whether the parliament has the power to do it--and not whether the Scottish people will decide to allow the parliament to do it. What some of us are trying to do is to prevent situations in the future where there will be some difficult disagreements between Westminster and the Scottish parliament, or perhaps between the courts and the Scottish parliament, about what this legislation actually means. It is not a sovereign parliament. It is a devolved parliament. The powers it has are the powers given to it in this legislation. That is why it is right that we should probe the matter.

I think we have made some progress. At least I have discovered that we cannot have a local excise duty or a local sales tax and that we have the European Union directive to thank for that. Some of my noble friends will find that that is one of the first things they have had to thank European directives for. But there you are. They must be thankful for small mercies.

However, I am still suspicious about extra taxation in the form of new taxes and what new taxes the parliament may be able to bring to bear on the Scottish people. I understand perfectly clearly the point that my noble friend Lady Hogg and the noble Lord, Lord Desai,

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drew to our attention. The exemption from reservation could be local taxes to fund local government expenditure. Local government could use those powers that are not to be reserved to this House to make new taxes in order to pull in more money. While I am interested to hear that the Treasury may claw it all back, I suspect that the opinion polls in Scotland would begin to look very tartan indeed if the Treasury started to claw money back because local authorities had decided to use in one way or another the powers granted to them in this legislation, perhaps with the approval of their local electorates.

Therefore, that is all extremely dangerous. However, I shall not carry on with it any further at the moment other than to say that I take some comfort from the Minister's statement that the clause is drafted in such a way as to ensure that the Scottish Parliament can vary only the basic rate of income tax.

I noticed that the Minister said that my Amendment No. 281A could be defective because a higher rate taxpayer may well find that that portion of his tax bill which represents his basic rate would escape the extra 3p in the pound. He said that the amendment could do that. I have briefly taken some legal advice and that view is not shared universally by the people to whom I have spoken. It is very clear that the Bill says, "except the basic rate". It does not refer to the basic rate taxpayer. Therefore, I do not agree with the argument used by the Minister that somehow my amendment is ambiguous and open to the interpretation which he put on it. Before we reach that amendment, I shall have to reflect on what to do. However, I beg leave to withdraw Amendment No. 279B.

Amendment, by leave, withdrawn.

Lord Mackay of Ardbrecknish moved Amendment No. 279C:

Page 31, line 3, leave out subsection (3).

The noble Lord said: This amendment seeks to omit subsection (3) and is quite simply a probing amendment to ask the Minister what that subsection means. My amendment is grouped with Amendments Nos. 280 and 281. I am sure that my noble friends will explain the point behind their amendments. I believe that the main purpose of the amendments is to seek an assurance that all the allowances available to UK taxpayers will be available to Scottish taxpayers at the higher rate if the higher rate comes about.

I want to home in on the reference to the Income and Corporation Taxes Act 1988. Perhaps the Minister will explain to us what exactly is behind that. Does that mean that income from saving is to be exempt from Scottish tax? Perhaps I may explain my concerns about that.

Let us take three retired people. One has made provision for retirement through saving and investment. The second has put his money into a personal pension and has now bought an annuity to give him an annual income similar to the first person. The third person has been a member of a pension scheme which is exactly the situation which we have all wished to encourage. He

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is paid a pension which is the same size as the annuity paid to the second person and the income from saving and investments paid to the first. Currently, all three are taxed by the Revenue in much the same way. Am I right in thinking that the annuity pensioner will be asked to pay 3p in the pound extra; the pension fund pensioner will be asked to pay 3p in the pound extra; and yet the person whose pension income comes from saving and investment will not be asked to pay 3p in the pound extra?

I simply ask whether that is correct and if so, whether that is fair. Is the Scottish taxpayer whose pension comes from saving and investment to be exempt from the 3p while the person whose income comes from an annuity or a pension fund is not to be exempt? Is that fair? If I am correct, I suggest that it is not fair. The Government should do something about it. I beg to move.

Lord Lyell: Amendments Nos. 280 and 281 stand in my name and several of my noble friends. My noble friend on the Front Bench said that I may speak on this group of amendments, and the Minister and the Committee will be delighted to know that I shall be extremely brief. The noble Lord, Lord Mackay of Ardbrecknish, made the point about pensions and annuities beautifully. I am a trained accountant. I see that the noble and learned Lord, Lord Hope, is not here today. He was astounded that that was all I was. I am a fairly strong Angus lad.

The Committee will see that the Income and Corporation Taxes Act 1988 is a fair weight. I shall desist from starting at page one. However, I was looking at Section 875. According to the Institute of Chartered Accountants of Scotland, and others who were behind the tabling of this amendment, and Amendment No. 281, that section is amended and clarified by Section 257, which goes under the attractive name of "personal relief". Those two sections clarify much of the argument raised by my noble friend Lord Mackay. If the Minister will accept Amendment No. 281, that may clarify exactly what is in his mind and will put everything beyond any doubt.

4.15 p.m.

Lord Campbell of Croy: Perhaps I may put an inquiry to the noble Lord, Lord Sewel. Savings and distributions are mentioned at various points in this part of the Bill. I should like to deal not only with retired people, to whom my noble friend referred, but also with those who are earning, who are in employment and of working age. It seems that dividends are distributions and are not to be subject to the 3p variation. I seek the Minister's confirmation, so that somebody whose income brings him into the basic rate but has an earned income from wages or salary will have to pay the extra 3p, if the tax goes up by that amount, whereas the unearned dividend part of the income of other people will not be taxed or subject to the 3p.

Financial experts commented on this matter when it arose before the referendum. They were told to shut up by the campaigners--not the noble Lord, Lord Sewel, but other people in Scotland--and were told that they

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should stick to their banking and finance and not meddle in politics, even though the second proposition was entirely financial and about this very subject.

However, this is my opportunity to ask the noble Lord whether it is still the case that dividends will not be taxed in this way--the variation of 3p--whereas ordinary earnings will be so taxed. Does the noble Lord believe that he will be able to explain that to many of his followers in Scotland? Will he confirm what I am saying?

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