Oral evidence: Proposals For Further Fiscal and Economic Devolution to Scotland, HC 760Tuesday 4 November 2014
Oral evidence, 4 November 2014.
Witnesses
Edward Troup, Second Permanent Secretary and Tax Assurance Commissioner, HM Revenue and Customs, and Sarah Walker, Deputy Director, Devolution, HM Revenue and Customs, gave evidence
Chair
Apologies to you, Sarah Walker. We are taking evidence from two people in this, not one. I am going to begin with a few questions to Mr Troup, who has the awkward task not just of thinking about this, but helping to work out how to do it administratively. I will come on to that in a moment. I just want to ask some very simple questions to get things straight. In principle, we were alluding to it near the end there with Dr Armstrong. Is it correct to say that it is just about always easier and more efficient to run a tax system as a single tax system in a unitary state and that any deviation from that is bound to cause some inefficiency?
Edward Troup
Taxes basically need to be effective in raising revenue. They need to minimise the burdens on taxpayers and businesses and hopefully minimise the costs to the tax administration. It is inevitable that in any single state with a single set of taxpayers doing that through a single administration and a single system is going to impose less cost—I would not comment on the economic efficiency—than having—
Chair
So the answer is yes to that?
Edward Troup
Yes.
Chair
Good. The second question is: although this takes you into the realm of what might be considered politics in the broadest sense, on the basis of your experience, which is a lifetime’s experience looking at the tax system from the private and the public sector in various places, would you agree with the proposition that the most important single issue with respect to any tax system is that it secures consent?
Edward Troup
I do not think I need to go back to the private sector, but it is certainly true from any perspective, but certainly from the perspective of the tax administration, that the consent and trust of the taxpaying public is essential to achieve a level of compliance that you need to run a major developed economy.
Chair
Right, and therefore there is, in a sense, a trade-off between those two, what might be conceptually ideal for maximal tax efficiency and what is most likely to secure consent politically?
Edward Troup
A global tax system for the whole world would probably reduce costs and maximise efficiency—
Chair
You are taking it to extremes. I am only going as far as the UK.
Edward Troup
—but I do not think it would attract consent.
Chair
You are not challenging the proposition I have just made?
Edward Troup
No, I am not challenging the proposition. I was reinforcing the proposition.
Chair
We are past those first two. It has taken a bit longer than I thought it might, but anyway, we are there. Is it preferable where taxes are being devolved—and you have mentioned the word “administrative” twice already—to retain a single administration system for collecting it, even where there is a high level of devolution? There are places in the world where this is occurring, for example, Quebec.
Edward Troup
The example of Canada is a good one, where having started off with separate national and provincial tax administrations, they have progressively moved towards having single tax administrations in each of the provinces, in some cases the national administration collecting national and provisional taxes, and in Quebec, having a provincial administration that collects both national and provincial taxes and divvies them up between the two taxing authorities.
Chair
Was that a yes to that one as well?
Edward Troup
Yes, it was.
Chair
I received three yeses in a row.
Edward Troup
You did.
Chair
That is what I wanted to hear, that your replies did not constitute qualification. Looking at the range of proposals that have been on the table for devolution, and there has been quite a large number: income tax, of course stamp and landfill are already going through—or at least a measure of devolution on income tax; between 2015 and 2017 they are coming in as a result of the Scotland Act—and then there are proposals for more income tax, VAT, corporation tax, oil, PRT, other taxes as well, a raft of others. Looking at all of those, are all of those administratively, even if more inefficient to do, in the realm of possible and reasonable?
Edward Troup
I do not want to get drawn into the question of the merit and demerits of devolution of particular taxes, because that—
Chair
Other colleagues may have a try later on.
Edward Troup
I am sure they will. That is a political decision that will be taken in the fullness of time, but I think HMRC has shown that it can deliver administratively a range of quite complex measures beyond the core simplicity or basic elements of tax. If you have a think about the high income child benefit charge, which delivers an objective effectively, but does so in a way that combines effectively elements of the benefit and tax system, we have effectively delivered that, as we have with a whole range of other initiatives. I can say I do not think there is anything in the proposals for devolution that we would not, if called upon to do so, be able to deliver, given of course appropriate levels of resource, because it—
Chair
I am sure there will be a spending bid.
Edward Troup
I am sure there would be.
Chair
But in a nutshell, HMRC can adapt to everything that is on the table, even at the radical end?
Edward Troup
Given sufficient resource and I would say time, because I think one of the lessons of the recent years is that given how important good IT systems and effective digital delivery are, these systems do, for better or worse, require time to get right, so there would be an element of time as well as resource.
Chair
Transition.
Edward Troup
Transition. Well, just implementation.
Chair
Transition and implementation are issues that need to be looked at, but in a nutshell, what you are saying is since HMRC could adapt to any of those that have been put forward, even at the radical end—and this maybe goes slightly beyond where you might want to comment—clearly that leaves space, if nothing has been ruled out on technicality or efficiency grounds, that must mean that the politicians need to sit down and do the hard grinding, not using various technical arguments, but just looking at what is most likely to deal with—the word that has been used today, “grievance”—the set of grievances that have arisen, which it has now held need to be assuaged.
Edward Troup
I would not want you to squeeze out the very practical issues of administration from the political debate, because taxes that themselves are administratively complex to deliver and impose burdens on taxpayers may themselves weaken the consent that goes with them, but I think—
Chair
But they are not the—
Edward Troup
Sorry, if your point from your opening question is that consent and political acceptability is the most important factor of a tax, then yes, I agree there needs to be political agreement and public acceptance overriding the questions of administrative convenience and administrative issues before they are squeezed out.
Chair
Or lobbying by those who pay these taxes.
Edward Troup
May I regard that as a comment rather than a question, please?
Jesse Norman
Can I ask you, Mr Troup, the Scotland Act 2012 sets out circumstances under which a taxpayer is to be considered a Scottish taxpayer and hence liable for the Scottish rate of income tax. There is a first question, which is it is true, isn’t it, it has been suggested to by ACAW and others that this affects all companies in England, because even English and Welsh companies will have to fill in a form to say they do not have Scottish employees?
Edward Troup
I think you are opening up two levels of questions, and I would explain that Sarah Walker, who is responsible for the devolution team in HMRC and is responsible for the administration of the Scotland Act and specifically the Scottish rate of income tax, is here with me, so can help out on any technical issues. But I was not sure whether you were asking the question about the definition of Scottish taxpayer and whether we—
Jesse Norman
I am going to come on to that, but the point of information is first of all that it is going to apply to everyone.
Edward Troup
The point of information is that any company, any employer in the United Kingdom, might be employing a Scottish resident taxpayer from next year, and PAYE systems will need to adapt to reflect that.
Jesse Norman
Right, so this is not merely a Scottish problem, it is a problem—
Edward Troup
It is not merely a Scottish problem—
Jesse Norman
Good.
Edward Troup
—although the majority of companies and certainly smaller companies in England do not employ Scottish resident taxpayers and so in practice, although there may be a line of code or two—and as I say, Sarah can expand on that—in their PAYE software, in practice they will not have to do anything with it.
Jesse Norman
Good. Now we come on to the question of what is a Scottish taxpayer, and the first question is are you confident that you have identified all Scottish taxpayers?
Edward Troup
No, because we have not started the exercise of identifying them.
Jesse Norman
Sorry, are you confident you will be able to by the time the process—
Edward Troup
We are confident, yes.
Jesse Norman
Okay. You are not concerned about some of the worries that have been raised about the definition of what a taxpayer is within the criteria you have set out?
Edward Troup
The criterion, as you know, cascade from the definition of a UK taxpayer and then go to the question of whether you have a place of residence in the UK, and if you do, whether it is in England and Scotland. That will be determinative for the majority of UK residents, because they only have one home. For those who have two homes, then you ask a question about principal residence. Again, in the vast majority of cases, that is likely to be determinatively straightforward. There will be a small number of cases where the question of principal residence is unclear or changes during the year. There are mechanical tests about day counting that can be applied, and I do not think anybody has raised any technical difficulties with that. Obviously, we will have to deal with the administration of that, but we deal with the administration of residents and non-residents all the time because people come and go from the UK.
Jesse Norman
Presumably, there will be bump up in the number of reconciliations you will have to do?
Edward Troup
In terms of end of year reconciliations?
Jesse Norman
End of year, yes.
Edward Troup
I am not sure there will. Sarah, what do you think on that?
Sarah Walker
I think there may be cases where people have changed their residence during the year. If we are not notified immediately, then there may be discrepancies at the end of the year, so there will be some.
Jesse Norman
How many people move back and forth between Scotland and England every year?
Edward Troup
About 40,000 a year is the current estimate.
Jesse Norman
How many people have dual residencies that might be caught or that may want to dodge the system by changing their residence?
Edward Troup
There are two questions. We do not know yet. I do not think we have any estimates of those with dual residence. That will come out of the exercise that we are starting in October 2015 to start identifying Scottish residents. How many people will try to dodge? Nobody will try to dodge it until there is a differential in rate that makes it worth doing. If the Scottish rate moves to 11 pence or 9 pence from the initial 10 pence whether it would have a significant incentive remains to be seen, but I would have thought it was fairly unlikely.
Jesse Norman
Your estimates of compliance and non-compliance are going to be driven not just by technical factors, but by your estimates of the incentives because of differentials?
Edward Troup
The incentives in the tax system to not pay tax exist because tax operates at the levels it operates. If those are adjusted by 1 pence or 2 pence in one or two directions, I do not think the incentive is going to be between Scotland and England, it is going to be the incentive to pay tax or not pay tax that exists there. Our compliance effort will go into finding people who are trying to conceal their income, convert it into forms of income or otherwise have made—
Jesse Norman
You heard the testimony in the last session. Has HMRC done any preparation for what it would be for it to become a tax collection agency for a Scottish government as opposed to that being the addition to an English or British tax collection?
Edward Troup
In a way, we are becoming one, because the Scottish rate of income tax we will be collecting as part of income tax for Scotland, and accounting to the Scottish Government for the Scottish rate of income tax share.
Jesse Norman
Has any reflection been done on the constitutional or financial or other implications of that arrangement changing in any way?
Edward Troup
The financial implications, absolutely, and I have been up to the Scottish Parliament on a number of occasions to give evidence to them about the costs of doing that, so the financial side has been addressed. On the accountability side, I am the additional accounting officer for Scotland within HMRC, and therefore, like any accounting officer, I am answerable to that Parliament—the Scottish Government—for the responsibilities to collect the Scottish rate of income tax that is imposed on HMRC by the Scotland Act 2012. To that extent, those considerations have been taken into account already.
Jesse Norman
You will be charging the Scottish Government the full appropriate cost of what HMRC is doing, including a share of its central costs?
Edward Troup
Let Sarah remind us of how we are calculating our costs for recovery.
Sarah Walker
We are charging the Scottish Government the additional cost of operating a Scottish rate within the PAYE system, so all the additional programming cost, all the additional cost of contacting the taxpayers, we will charge. We will not charge a sort of slice of the entire cost of the income tax system for Scottish taxpayers, because we would have been doing that anyway, but all the additional cost—
Jesse Norman
You mean that will already be included in some way?
Edward Troup
We are already doing that, because for a given Scottish income taxpayer, if they are basic rate taxpayers, they will be paying basic rate income tax and National Insurance contributions at the moment and we will be doing compliance on them. After 16 April, they will still be paying 10 pence of English or for the rest of the UK income tax, and they will be paying 10 pence of Scottish income tax, and they will still be paying their NICs, so in a sense we have still have a majority interest in their compliance. As a matter of cost, this is only going to cost us an additional £4.2 million a year, so it is a very small amount of our overall running costs.
Jesse Norman
Understood. A final question: you do not perceive any possible conflicts of interest between your roles as accounting officer for Scotland in this regard and your overall role as accounting officer within HMRC?
Edward Troup
Lin Homer is the accounting officer for HMRC as a whole, but even if we combine the accounting officer roles, I do not think that there would be. We already as a department perform responsibilities beyond the collection of tax for the Treasury. We administer the national minimum wage, we collect student loans, we do a number of things for DWP and to all of those bodies we have responsibilities that we discharge, and we are now discharging responsibilities to the Scottish Government and we have an accounting officer arrangement.
Steve Baker
Good morning. You have explained that most people who are Scottish taxpayers will be simply resident in Scotland, I think I heard you say, but some people will have multiple homes or perhaps be working overseas or whatever and they will need to count the days.
Edward Troup
Yes.
Steve Baker
How many do you expect will have to do that?
Edward Troup
I do not know that we have an estimate of that yet. Sarah?
Sarah Walker
We do not have an estimate of the numbers, but it will only in practice occur to people who do not have a main place of residence in the UK, so they will probably be people who are temporarily resident in the UK. We would expect anybody who is a UK resident normally to be able to identify a main place of residence.
Steve Baker
So you have no estimate. I feel sure you must have some ballpark guess at whether you are talking about 10 people or 200,000.
Edward Troup
I think if you look at the totality of taxpayers—sorry, I am just quickly checking—there are something like 2 million Scottish taxpayers. I think I would say with some confidence that we would be looking at tens of thousands or a couple of tens of thousands at the most. As I say, I have not done the work and I do not want to be dismissive, because that is a significant number of people, but within the context of the 45 million taxpayers and filers we have, it is a small issue for us to manage.
Steve Baker
Thank you. I am grateful to you for being pressed on that point. For those people who it would be tens of thousands—
Edward Troup
It could be. I am not saying it would be, but even if it were, that would be entirely manageable. It may be hundreds, it may be a few thousand.
Steve Baker
How would HMRC verify that their declaration of the number of days they had spent in Scotland was correct?
Edward Troup
Taxpayers make declarations to us in all sorts of circumstances in respect of their personal circumstances, in respect of the income, in respect of expenses. We do not, as you know, investigate every single claim that is made to us. We have moved progressively away from a system where we sought to check everybody to a risk-based system, where on a whole range of criteria—depending on the taxes, depending on the circumstances—we would identify those taxpayers and the characteristics of those returns that suggest particular patterns of risk, alongside some random enquiries, and on that basis we would investigate.
Steve Baker
Where does that leave you in terms of RIPA and surveillance powers? From what you have just said, it feels like where somebody might be considered at risk, you might extend the extent to which you use surveillance to verify where people are.
Edward Troup
The surveillance powers are, as you know, extremely proscribed in their application and we use them only in the most severe circumstances, almost always those cases involving criminality or suspected criminality. The idea that we would use those in routine compliance of factual declarations of income is extremely far-fetched. We just do not and would not.
Steve Baker
In saying that it is extremely far-fetched, are you ruling out an extension of surveillance under RIPA arising from these taxpayers?
Edward Troup
I think I would be, because although I am not completely familiar with the very limited circumstances in which we do use those powers because it is dealt with in a very tight part of the department, I can say with a very high degree of confidence that we would never use them in a normal compliance case where there was not some very serious anomaly and almost certainly a criminality suspected.
Steve Baker
Thank you. If Scotland acquired further powers over income taxation, do you expect that we would be looking at other ways to determine who was a Scottish taxpayer?
Edward Troup
I do not think so, because as I say, we have to determine who is a UK taxpayer anyway, and in a sense this is simply adding an additional territorial test. Yes, we would need appropriate compliance processes for that particular test and that particular liability, but it really is no different from whether somebody claims to be a Spanish resident or a UK resident or has dual residence and we have to determine which applies. There was nothing new here.
Steve Baker
We talked earlier about resources and HMRC’s ability to deliver if provided with proper resources, but I notice from the briefing that you have invoiced the Government of Scotland £1,018,713, I think it is, in relation to this project. That feels to me an oddly accurate number for one thing—that is another story—but it feels to me like that would be at the low side of my estimate to how much money it would cost to implement this degree of complexity.
Edward Troup
I am sorry you find it odd that we are accurate. We quite pride ourselves on being accurate. Sarah, who is responsible for drawing these up, can tell you exactly what that covered.
Sarah Walker
Yes, that is the cost in 2013/14, so that was last year’s cost. Because the income tax is not being introduced until 2016, we are still at a very early stage, so we are only doing the planning work. There will be substantial additional expenditure this year and next year. The estimate for the total cost of introducing the Scottish rate of income tax is between £35 million and £40 million.
Steve Baker
Over what period?
Sarah Walker
Between 2012/13 and probably about 2017/18 I think will be the last of the major spending.
Steve Baker
Thank you. The other issue on resources is what is HMRC doing to tell people living in the rest of the UK that they may be Scottish taxpayers, and those that may be Scottish taxpayers that they might have an obligation to count the days?
Sarah Walker
What we are planning to do is around about this time next year, so next autumn, we will identify from our own records and from any other databases we can use obviously people who we think are resident in Scotland and we will write to them directly, but we will also be doing general publicity in Scotland so that anybody who does not get a letter from us but is living in Scotland is encouraged to contact us and tell us their status.
Steve Baker
Thank you. I was not very clear: I meant the people in the rest of the UK who might end up, once they have counted the days, finding that they are a Scottish taxpayer. How will you ensure that people in the rest of the UK are aware that they might have an obligation to count the days?
Sarah Walker
The vast majority of those will not need to count days and they will not need to worry about that. If you live in England or Wales or Northern Ireland, it will not be an issue. The day counting may apply to people who come from abroad to spend a limited amount of time in the UK and then move between England and Scotland or other parts of the UK. In those cases, they will probably be getting advice anyway on their tax status and we would expect that to be coming through their advisers.
Steve Baker
If a person became a Scottish taxpayer through moving or acquiring a second home, or having a second home and spending more than half the year there and they became a Scottish taxpayer and it was a surprise to them because they had been previously clearly living in England for most of the year, how would you expect to treat such a person when what they pleaded ignorance, that they did not realise they had become a Scottish—
Edward Troup
I think you are raising wider questions of how do we comply generally, because you might acquire some small amount of income because you have a bank account that you did not previously have, and you are asking the compliance question, which is a very fair question, which is, “How do our rules apply when someone who has a source of income that they should declare and fails to declare?” In this case, that they are Scottish taxpayers and we subsequently find out about them. There is a whole penalty regime, there are interest provisions, so clearly if there was tax to pay, there would be interest if it was late paid. The penalty regime—and there is an awful lot on our website about this—shows that we take into account behaviour, co-operation and whatever it is and it is unlikely that unless there was a significant degree of culpable behaviour that there would be a significant penalty, but the law does provide for penalties in these circumstances.
John Thurso
Just on that last one, as the avowed policy of the current Scottish Government is to lower taxes, presumably your compliance problem will be to stop people claiming they are Scottish taxpayers when they are not.
Edward Troup
That would sort of logically follow, although as I say, there are lots of other incentives in the tax system and the differential would have to be quite significant.
John Thurso
It will be no different for somebody who, for example, is a resident of the Isle of Man or Jersey—
Edward Troup
Absolutely.
John Thurso
—so it is something you deal with all the time.
Edward Troup
Absolutely, yes.
John Thurso
Can I come, Mr Troup, to you first regarding HMRC’s business plan for 2014/16, which sees some quite significant changes and reductions in head count and fairly significant cost savings? To what extent has that business plan been cross-checked with the work that is envisaged with more devolved powers? Have they been able to make any estimate on that?
Edward Troup
It is always interesting doing business plans at this stage of a Parliament, because whatever happens under devolution, there will be a new government in the UK next year and history has shown that at the beginning of some parliaments, there is a degree of activity and HMRC gets asked to deliver a whole range of new things, so there is nothing new. Our business planning I will not say has a contingency for that, but there is an expectation within our business plan that we will have significant policy changes to deliver over the next few years, and Scotland is certainly registered on our list and devolution of those changes, but by definition neither the devolution proposals or what may happen in the next government can we specifically provide for, because we do not know what is going to happen, but we are prepared for a range of things. As I said in reply to the Chairman, obviously things do require resourcing and if we are asked to do something significantly more, we will have a discussion with the Treasury about our funding.
John Thurso
It is fairly logical that setting up the administration that will be required for Scotland will have a cost, whatever that may be. If at the same time there is a reduction programme and redundancies and all of the rest of it going on, is it not a reasonable assumption that some of the people who are not required if we were not doing what we were doing for Scotland, their roles may be taken up by the activities that are required for Scotland?
Edward Troup
First of all, we have made significant reductions in the size of the department since it was formed in 2005 through the merger, we almost halved it, and at the same time we have increased our performance, we have doubled our compliance yield. So we have demonstrated that we can reduce the department size while improving its performance and we have done that largely by shedding what I might call sort of low-level manual activities through an increasing amount of digitalisation. Now, whether that means, if this continues, which it will, the jobs that we shared and the resources that we free up could be applied to particular tasks in Scotland, obviously there is a geographical question, because you might not want someone in the South of England and they might not want to go and work in Scotland if that was what was required, but there is also a skills issue as to whether the resources freed up would be the appropriate resources to do whatever is needed for Scotland.
John Thurso
Given the number of offices that have been closed—this is my opportunity to mention this again, but never mind—and the relatively poor performance of HMRC’s telephone call centres, in a reasonable expectation of a rise in telephone enquiries, what steps should be taken to cope with that? Should it be a temporary thing or is there a need for a permanent increase?
Edward Troup
I think that is a very hypothetical question, but we do have a number of targets and one of them is call answering, as you know well, which we have worked hard to meet. It is hard work and we are doing it against the backdrop of reducing resources. We will have to continue to make the trade-offs as to where we put resources between compliance staff, transformation work to improve the digital service and help us reduce further and traditional call-handling and contact centre.
John Thurso
The sort of generally received view from most of our postbags and from the enquiries that we have undertaken and your own telephone surveys is you have a substandard call centre system. My worry is that if it is at that level now, if it is faced with a lot of enquiries relating to Scottish tax matters, it just kicks off with difficulties and whether or not you are planning—perhaps this is for Ms Walker—to have sufficient resource to deal with the initial one and then what extra resource will be required thereafter.
Edward Troup
I think there is a question for what we are doing at the moment and there is a hypothetical question about what we might do with a new set of devolution proposals. We do anticipate that once we start to identify Scottish taxpayers there will be some degree of additional call centre activity. I am not sure, and Sarah may or may not be able to tell me what we have done about this, and it is over a year away, of course, because we are not going to be doing any of this until the period before we implement the Scottish rate, but we will plan, as we do for any change, for any increase in call centre activity.
Sarah Walker
Yes, we have estimated that of the £35 million to £40 million for implementing the Scottish rate of income tax, £25 million of that is not IT change, it is not computer change, it is operational cost. The vast bulk of that will be dealing with enquiries around this mass mailing that we are doing this time next year to over 2.5 million people in Scotland, telling them that we think they are Scottish taxpayers and inevitably a proportion of those will call us, will reply to the letters. We will need to have the resources to be able to deal with that and we have factored that cost into the costs that are being met by the Scottish Government.
John Thurso
My fear that I am trying to ask you to talk about, and if I take a parallel that you will know about, which is the tax credits introduction, where they had the first debate in Westminster Hall on the subject of what was going wrong. The then Paymaster General told us there was absolutely nothing wrong with the computer and I was inventing it all and so on, and the rest, as they say, is history and the amount of money repaid and written off because of the computer problems, what are we doing to make sure there is enough resource so that these changes and the enquiries that come in are met properly and that we do not get into that kind of catch-up situation?
Sarah Walker
One thing we are doing, we are very conscious that the pressures on our contact centre are not constant through the year, we have particular peaks around the self-assessment deadline, for instance, and the tax credit renewal period, so we are deliberately scheduling this Scottish taxpayer mailshot at a time that is otherwise a trough, if you like, in our contact centre pressures. We do not have other big things going on at the time. We will have the capacity available, we expect, to be able to deal with and provide a good service to those enquiries.
John Thurso
Mr Troup, one last question for you, if I may, which is around the question of the possibility whether or not people will end up having to deal with two sets of tax authorities in the situation where say NI and saving taxation is not devolved, but other income tax is. Will people still have one point of contact with HMRC to resolve all the issues or will they be arguing with two separate sets of people to resolve whatever problems they may have?
Edward Troup
At the moment, the Scottish rate of income tax devolution proposals leave us, as you know, continuing to collect income and NICs from all Scottish taxpayers and then divvying it up behind the scenes with the Scottish Government. That leaves a single point of contact, because there is no Scottish income tax administration. Obviously if there were to be a devolution settlement that involved giving responsibilities, and remember, the Scottish Government are already taking on landfill tax, so if you are a Scottish business in the landfill activity—and there are very few of them, landfill operators—they will already have to deal with corporation tax with HMRC and landfill tax with Revenue Scotland as from next April. That is something that is happening anyway under the Scotland Act, but whether it happens under further devolution proposals is a political choice as to whether the administration of any part of the tax system, any more of the tax system, is given to the Scottish Government.
John Thurso
So a tax that is raised and varied in Scotland would be dealt with by Revenue Scotland?
Edward Troup
That is a political choice. You can have a tax that is—
John Thurso
Or one could say, “No, we will just have one. We will have the political choices can be made in Scotland, but the authority for collection and all of the rest of it can remain with HMRC”. There is a choice to be made.
Edward Troup
There is, and the experience in Canada, where they started off with separate but have ended up choosing to put them together is clearly an illustration of how this can play out.
John Thurso
For administrative purpose, as opposed to anything else, it would clearly be quite useful to keep this as simple as possible and have one authority or the other do it.
Chair
We have had a strong signal from you on that today, haven’t we?
Edward Troup
From the taxpayers’ perspective, that is certainly true.
Mr Ruffley
Mr Troup, good morning. What work has HMRC done to estimate the level of profit shifting and revenue loss should Northern Ireland get a lower corporation tax rate?
Edward Troup
I was not here to talk about Northern Ireland, and as you—
Mr Ruffley
No, but there is a link, as we will soon discover.
Edward Troup
No decision has been taken on Northern Ireland. The issues of how much profit-shifting might take place in the sense of just a parallel of issues that we have at the moment with the fact that our corporation tax is different from other corporation taxes around the world, I am not aware of any particular calculations of the estimate of any shifts of activities, but clearly it is something that might happen.
Mr Ruffley
Does that mean you have not done any calculations in HMRC?
Edward Troup
We would not within HMRC. This is a policy issue for Her Majesty’s Treasury, and in a sense I think you should ask them on the policy issue of what their analysis is.
Mr Ruffley
But one might expect there to be some profit-shifting and revenue loss and what do you think the impact on HMRC might be, the scale?
Edward Troup
I think that is rather similar to the questions on Scotland, that it is hypothetical until it happens.
Mr Ruffley
Of course.
Edward Troup
Our experience with dealing with corporation tax applying across jurisdictions is clearly extensive, because a very significant number of UK companies operate overseas and there are a whole variety of effects and behaviours of which a whole range of existing rules exist to manage and monitor. If the question is the administrative one, which is can we deal with it, yes, we can.
Mr Ruffley
Good, that is encouraging. What is your view if there is further income tax devolution, whether 100% or less than that? Will that lead to a rise in individual self-assessment of tax liability?
Edward Troup
I am not quite sure. Again, this is a hypothetical question. Just looking back to the UK to what happens at the moment, we have several million of self-assessors who are also within the PAYE regime for a variety of circumstances, something like 5 million in the UK at the moment. That figure changes from year to year. I imagine if there is devolution, then it will continue to fluctuate.
Mr Ruffley
Again, more compliance work leading to administrative cost to HMRC, do you think that is likely to be manageable?
Edward Troup
I think it comes back to the opening questions. I do not think that there is anything here that we cannot manage.
Mr Ruffley
Thank you. Finally, Chairman, to what extent do you think employers’ payroll management systems are equipped to potentially handle different rates and bands in relation to income tax?
Edward Troup
They do at the moment—
Mr Ruffley
Under the Scotland Act.
Edward Troup
—because while Scotland does change rates and bands and conceptually—
Mr Ruffley
But if there are further changes.
Edward Troup
Conceptually there is nothing different. Coming back to the opening point, that once you have identified your Scottish taxpayer, then the rates and the bands applicable to them will be operated within your PAYE payroll system.
Mr Ruffley
It would not be your expectation that there would be a significantly higher employer cost if there were further changes to allowances?
Edward Troup
All change involves cost, so clearly there will be costs, so in a sense, it is a quantification question and that itself is dependent on what the range of changes are.
Mr Ruffley
Of course, but worst-case scenario, with maximum change, you would not expect employers’ systems, from what you have seen thus far, to be unable to cope?
Edward Troup
Payroll software is updated literally every year, not least because the tax system is changed every year as well as the systems get better, and I would envisage that any changes within income tax to bands and rates would simply—not necessarily simply, but would be accommodated with the payroll software for employers and allow them, once they had identified the Scottish taxpayers—which is the opening and most expensive part of this operation—allow those changes to be administered within payroll software and hence for the tax to be accounted for correctly.
Mr Ruffley
Thank you. Ms Walker, is that your view?
Sarah Walker
Yes.
Mr Ruffley
You have not heard anything from employers’ organisations or there is no evidence you have seen that this would be unmanageable if there were to be complications or several challenges to allowances and rates?
Sarah Walker
No. Most employers should have had the ability to treat Scottish taxpayers differently since 1998, because the Scottish variable rate was introduced; obviously it was never used. We are building on that, so it is a familiar change. Once you have Scottish taxpayers separately identified by an indicator on their tax code then the employer can apply a different calculation. How complicated that calculation is, it is the separate identification that is the difficult thing in software. Applying a more complicated calculation within the payroll pay calculation is not significantly more difficult for employers. Different issues may arise if you change the base, so the income to which that calculation applies, but the calculation itself and the rates and bands should not be a big additional burden.
Mr Ruffley
Thank you.
Chair
Thank you very much for coming to give evidence this morning and thank you for being crisp and clear in all your replies. We are very grateful. Oral evidence: Proposals For Further Fiscal and Economic Devolution to Scotland, HC 760 20