The 1998 Scotland Act gave Scotland significant powers to determine its own destiny in many areas of legal and public life. Over the past decade Scotland has used those powers in some innovative and creative ways, but its ability to generate capital and revenue is limited.

The Commission on Scottish Devolution, led by Sir Kenneth Calman, was tasked with considering how well devolution was working so far, and with identifying ways in which further devolved powers could be applied.

The Scotland Bill is the outcome of the Commission's findings and provides for the transfer of significant tax and borrowing powers, although not to the extent of giving financial independence to Scotland. Currently, the Scottish Parliament raises around 15% of its own budget, and with the new arrangements this is expected to increase to about 35%. There is a substantial amount of detail to the proposals that will only be determined after future consultation. Further legislation and regulations are expected.

The main financial proposals

  • A Scottish income tax will replace part of the UK income tax;
  • Stamp Duty Land Tax and Landfill Tax will cease to apply, and the Scottish Parliament will set levels of tax for land transactions and disposals to landfill for Scotland;
  • Other taxes may be created, or transferred to the Scottish Parliament; and
  • Significant new borrowing powers will be available.

The new taxation powers in the Bill are general enabling provisions. The precise detail and arrangements for implementation will be set out in future secondary legislation.

This note sets out the proposals as at February 2011, and based on the Bill as introduced to Parliament in November 2010. Changes of substance may be made during the parliamentary process.

Income tax

The Scottish variable rate of income tax, set out in the 1998 Scotland Act, will be replaced with the power to set a Scottish rate of income tax on an annual basis. From April 2016, UK rates of income tax will be reduced by 10 pence in the pound for Scottish taxpayers (i.e. the current rates of 20, 40 and 50% are reduced to 10, 30 and 40%). Scottish rates of income tax will be set by the Scottish Parliament and these will apply in conjunction with the reduced UK rates. The rate changes and new Scottish rates will not apply to income from savings. Scotland will continue to receive a block grant from the UK Government but the amount of this will be reduced to reflect Scotland's increased tax-raising abilities.

HMRC will continue to collect the Scottish income tax, which will allow PAYE and self-assessment systems to continue to operate. The structure and operation of the new income tax system will be the subject of detailed regulations to be devised in the future. However the Scottish system will continue to be embedded within the UK tax structure, and new intergovernmental mechanisms are proposed, which will include the setting up of a UK-Scotland tax committee.

The income tax proposals are likely to have an impact on the administrative burden borne by businesses, although until the full details are published, the effect on costs and compliance cannot be fully assessed. It is expected that guidance will be produced by Government and/or HMRC, in advance of implementation of these proposals, to assist in managing their impact.

Stamp Duty Land Tax and Landfill Tax

Both Stamp Duty Land Tax and Landfill Tax will cease to apply to Scotland. The Scottish Parliament will then have powers to create a new tax on transactions involving land interests, and a new tax on disposals to landfill specific to Scotland's requirements. These powers will be available from April 2015, although additional regulations will be required, and decisions will have to be made by the Scottish Parliament on the scope and application of the new taxes.

There is an opportunity for land and landfill taxes to be devised that better meet the requirements of Scotland and the Scottish taxpayer. There are not yet any proposals from the Scottish Parliament about what these new taxes might look like, although it is probable that they will be broadly similar to the current UK taxes, but adapted so that they are more compatible with the underlying system of property law in Scotland. HMRC can continue to collect these taxes on behalf of the Scottish Parliament.

Other taxes

The Bill contains general provisions for other taxes to be devolved to Scotland in the future. Original proposals in the Calman Report to devolve aggregates duty and air passenger duty to Scotland have been shelved. Aggregates duty is the subject of a legal challenge in the European Courts, and proposals for changing air passenger duty are currently being considered by the UK Government as part of a wider review of aviation duty. Decisions on devolution of these taxes will be considered at a later date.

New taxes

The Scottish Parliament will be given powers to introduce new taxes, with the agreement of the UK Parliament. Such new taxes will be subject to rigorous scrutiny before they can be introduced, to ensure that they will not have any negative effect on the economy of the UK, and that they are compatible with EU rules and legislation.

Borrowing powers

The Scotland Act 1998 currently gives Scotland borrowing powers of up to £500 million for short term spending. The Bill proposes to replace this power with the ability, from 2013, to borrow to finance capital expenditure for specific purposes, and from 2015 for any purpose, without the need for the consent of the Treasury, although subject to limits and controls which allow the UK Government to retain overall control.

Other aspects of the Scotland Bill

Fiscal changes are the main, but not the only, proposals in the Scotland Bill. As well as making a number of changes to the electoral and administrative structures of the Scottish Parliament, a number of other areas will be affected, allowing for greater devolution in some cases and a return to UK legislative responsibility in others. For example, the Scottish Government will be given legislative powers to regulate air weapons, set drink-driving limits and national speed limits, and to issue licences under the Misuse of Drugs legislation. The Bill returns certain corporate insolvency responsibilities and the regulation of all health professionals in Scotland to the UK Parliament.

The Calman Commission made a number of recommendations that are not included in the Scotland Bill, but which may be the subject of future consideration. These include social security and welfare reform, animal health policy, management of the marine environment and the law relating to charities.