Cost of Scottish tax system

The Department of Business, Innovation and Skills (BIS) has warned that setting up a new tax regime in an independent Scottish state could prove costly to develop and run, with estimates of up to £562m in start-up costs say Harris & Co chartered accountants Northampton.

In a report to Parliament, Scotland analysis: Business and microeconomic framework BIS analyses the impact of Scottish independence on a range of regulatory and legal requirements, which would need to be re-drawn should Scotland leave the UK.

It says that the annual cost of separate tax administration would largely depend on the system adopted by the government of an independent Scottish state. In 2011 HMRC’s tax collection running costs were £3.6bn or a per capita cost of £57. Scottish government calculations based on adopting a similar system suggest an annual cost of £302m.

However, BIS says analysis suggests that smaller advanced economies have higher costs and says the Scottish government has produced internal calculations, based on comparisons with New Zealand and the Republic of Ireland, which indicate the annual cost would be higher, between £575m and £625m.

The BIS report also says the initial setting up a new framework for administrating all Scottish taxes would be a complex and costly process, requiring the creation of new systems to deal with the millions of transactions undertaken by taxpayers and companies.

There would also be additional set-up costs in relation to recruiting and training new staff, since even if large numbers of HMRC staff based in Scotland transferred to ‘Revenue Scotland’, skills gaps would still be likely. BIS estimates that on a population-based share of HMRC staff, Scotland would need over 6,000 staff for tax administration.

The BIS report concedes that the overall cost of a new tax regime for Scotland ‘is difficult to calculate due to the complexity of the process and the lack of relevant international evidence’.

It points to Scottish Government analysis of the cost of introducing and administrating their replacements for UK Stamp Duty Land Tax (SDLT) and Landfill Tax, which suggests that initial set-up costs equate to around 90% of annual running costs. On that basis, BIS suggests the overall cost of setting up a new tax regime in an independent Scottish state could be up to £562m.

Elsewhere in its report, BIS warns that Scottish independence could produce a raft of taxation and compliance issues.

It says that Scottish Capital Gains Tax legislation may create the potential for double taxation, and that Scotland would have to renegotiate VAT exemptions with the EU on items such as food, children"s clothing, and new dwellings.

Further, a new heavy goods vehicle (HGV) charging rule would no longer be cost neutral, requiring Scottish HGV drivers to pay up to £10 a day to use UK roads, and bringing non-commercial vehicles into the UK for longer than six months would incur a registration fee and vehicle excise tax.

As regards alcohol, new administrative systems will have to be set up to pay and reclaim duty each time a product crosses the border or new warehouses either side of the border, and to ensure fiscal duty stamps are present.