The Scotland Bill brings the tax recommendations of the Smith Commission another step closer to being enacted. Although the Bill will not become law before the next general election, with all the main political parties committed to the principles set out in the Smith Commission’s report, the proposed changes are almost “set in stone”. 

The changes can be briefly summarised as follows:

  • The Scottish Parliament will have discretion to change the Income Tax bands and to vary independently the rates that apply to each band. (Note, however, that the liability of Scottish residents to the higher 28% rate of Capital Gains Tax, will still be determined by reference to the rest of the UK Income Tax bands.)
  • Once the current legal disputes surrounding Aggregates Levy are resolved, this tax will be devolved to the Scottish Parliament.
  • In relation to Value Added Tax, the Bill goes rather further than the Smith Commission report’s recommendations. As well as assigning to the Scottish Government’s budget the first 10% of revenues attributable to Scotland from the 20% standard rate of VAT, the first 2.5% of the 5% reduced rate attributable to Scotland will be similarly assigned.
  • The power to charge Air Passenger Duty in respect of passengers leaving Scottish airports will be devolved to the Scottish Parliament.

Together with the already enacted Land and Buildings Transaction Tax, Scottish Landfill Tax and Scottish general anti-avoidance rule, the proposals brought forward in the Bill will result in Scotland having a system of taxation distinctively different from the rest of the UK. Perhaps the change with the greatest potential impact, is the proposed income tax regime for Scottish residents. Bearing in mind the recent modification of the residential rates of Land and Buildings Transaction Tax, it will be interesting to see the extent to which the Scottish Parliament chooses to exercise its new fiscal powers.