Informing the decision – the tax implications of Scottish independence or further devolution

Led by: Professor Jane Frecknall-Hughes (The Open University Business School)

Background

The Scotland Act 1998 established devolution. It reserved taxation to the UK Parliament under Schedule 5 with the exception of local taxes to fund local authorities. However, it provided in Section 73 the power to the Scottish Parliament to vary the basic rate of income tax by 3%.

The Scotland Act 2012 further devolved tax powers to the Scottish Parliament, giving it the power to set the rate of income tax in Scotland, also the taxes on land transactions and waste disposal to landfill. Currently most taxes in Scotland are collected and administered by HMRC, with the exception of local taxes which are collected by the local authorities.

The current project will consider the implications of further devolution or independence for Scotland in terms of taxation.

Aims and objectives

The project will produce a research report outlining the current context; addressing the following research questions and making recommendations in relation to the public interest, public policy and further research requirements.

1. What practical issues arise in developing and administering a new or supplementary tax system, what capacities are key, and how might capacity requirements be met?
2. What are the determining factors for a ‘new’ country designing a tax system? For example, should there be a legacy approach, a new start, with a simpler approach or an approach to fulfil other political or economic objectives?
3. What trade-offs or compromises arise and on what basis?
4. How long would it take to implement a new tax system and what would happen in any transitional period?
5. What are the most significant implementation issues? and
6. What are the key risks and what can be done to mitigate those risks?
7. What are the insights, processes and learning points from other ‘new’ countries or regions which have gone through similar developments?
8. What are the insights, processes and learning points from federal systems, for example the US or Switzerland?
9. What are the educational (professional and public) needs to support a new system?
10. What would a new system of incentives or penalties to support compliance look like?
11. Is the current tax system fit for purpose for modern Scotland?

Methods

The core of the project is a desk-based literature review. Tax changes have many economic, political and even, sometimes, social implications so a comprehensive approach to the wide range of issues involved is necessary for success (see for example, James and Edwards, 2008). An indication of the enormous amount of literature in these areas is that for tax compliance alone there are four substantial surveys/bibliographies of the literature: Ahmed et al. (2003), Jackson and Milliron (1986), James and Edwards (2010) and Richardson and Sawyer (2001).

In the literature review, we will address the issues as raised in the research questions. However, in addition to applying existing knowledge, we will also conduct approximately 12 semi-structured qualitative interviews with key experts on the topic. These interviews will add value to the research through bringing to bear the expertise of those with knowledge of the current UK and other tax systems, the constitutional set up in the UK and the current discussions around further devolution or independence.

Research team

• Professor Jane Frecknall-Hughes (The Open University Business School)
• Professor Simon James (Department of Organisation Studies,University of Exeter Business School)
• Ms Rosemarie McIlwhan (The Open University Business School)

Research centre: Responsibility and Regulation (R&R)