§ 3.20 p.m.
§ The Parliamentary Under-Secretary of State, Scottish Office (Lord Sewel)
My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
§ Moved, That the House do now again resolve itself into Committee.—(Lord Sewel.)
§ On Question, Motion agreed to.
§ House in Committee accordingly.
§ [The CHAIRMAN OF COMMITTEES in the Chair.]
§ Clause 69 [Power to fix basic rate for Scottish taxpayers]:
§ Lord Mackay of Ardbrecknish moved Amendment No. 279B:
Page 30, line 42, leave out subsection (2) and insert—
("(2) Where this section applies to any year of assessment, the Income Tax Acts shall apply in relation to the total income of Scottish taxpayers liable to basic rate tax, subject to subsection (3),
as if there were substituted for any rate determined by Parliament to be the basic rate for that year a rate increased or reduced in accordance with the resolution of the Parliament.").
§ The noble Lord said: I beg to move Amendment No. 279B and I shall speak also to Amendments Nos. 281A, 281C and 281D. It feels as though we have not been away, but perhaps in the intervening two months the Government have given some thought to the points raised in this important Bill and there will be some government amendments taking them on board.
§ The amendments in this group all deal with additional tax to be raised in Scotland if the Scottish parliament so desires. The first amendment looks at Clause 69, which starts the tax bearing powers in subsection 2, and replaces the words used by the Government with a variation which spells out exactly what is intended. I hope that the Minister can respond to one of the difficult issues this afternoon. If the Scottish parliament decide to add 3p in the pound to the basic rate for those who live in Scotland—and we will come to who does and who does not live in Scotland later—will that new rate be the basic rate? Will all tax law look to the Scottish rate as the basic rate, or will it be the basic UK rate plus an additional impost of 3p in the pound from Scotland so that where the Inland Revenue rules refer to the basic rate, it will be 23p and not 26p?
§ This is a very important issue that will affect a number of organisations; for example, charities and the pension industry which is greatly concerned that it may have to keep very complicated records of all the people who are paying into pension funds. Some people may be receiving tax allowances at 23p in the pound and others at 26p in the pound. Some may feel that it would be unfair to give the Scottish taxpayer the advantage of an extra 3p discount over their fellows in the rest of the United Kingdom. Can the Minister give the Government's interpretation of subsection 2 and state why it is necessary?
Amendments Nos. 281A and 281C are very much clearer. They include what must be magic words in legislation:
For the avoidance of doubt, and notwithstanding any other provisions of this Act, the Parliament shall not vary any tax except the basic rate of income tax.
Those words are repeated in Amendment No. 281C, which states that the parliament shall have no power to retrospectively vary taxes, and that again is stated to be for the avoidance of doubt.
§ The amendments would make it absolutely clear that it is only the basic rate that can be varied and that there can be no retrospective tax increases in Scotland. I believe that that honours the second question which was posed to the Scottish people in the referendum. It ensures that any shortfall in the amount of money raised by the 3p can only be obtained by manipulation of the basic rate of income tax. At the time of the referendum the Government stated that 3p in the pound would raise £450 million. They now tell us that 3p in the pound would raise only £420 million, so £30 million has disappeared in the few months since the referendum.
§ If the £420 million cannot be raised by the 3p because something has been changed in UK income tax regulation, for example a narrowing of the band, the 263 Government have said that somehow, magically, a way will be found to make up the difference. I use the word "magically" because we have never received an explanation of how that would be done.
§ We have been told on a number of occasions that promises made in the Scottish parliament, the White Paper and the referendum are not to be questioned and that we must not make any changes that will go back on those promises, even if we find that the detail will lead the Government into a daft position. The promise was quite clear, that it would only be the basic rate of income tax that would be changed. I am now giving the Minister the opportunity to clarify the position during this Committee day. I gave him the opportunity on the last day to solve part of this problem by getting rid of the 3p concept altogether and by saying that the £420 million was the base line. However, the Government would not listen and they have got themselves into a real problem. They could get themselves out of the hole by stopping digging, but they will not.
§ I want an assurance from the Minister today, the best assurance being to accept Amendments Nos. 281A and 281C, that the Bill cannot be used to increase or decrease any tax other than the basic rate of income tax. That was the promise in the White Paper, that was the promise in the referendum and that is the promise I want to see reflected in the Bill.
§ Lord Steel of Aikwood
Can the noble Lord clarify what he means by Amendment No. 281A? Does he exclude the possibility that the Scottish parliament could raise new taxes entirely of their own devising?
§ Lord Mackay of Ardbrecknish
Yes, I do, because that was the promise made to the Scottish people and that is what is in the White Paper: it is only the basic rate of income tax that can be varied. The noble Lord, Lord Steel of Aikwood, probably knows more about this than Ministers do, and he indicates that I am wrong about that and that the Scottish parliament may be asked to raise more new taxes. If that is so, please may I hear about them; please may we all hear about them, and then some of us can decide whether we want to stay in a country that would rapidly become the most overtaxed part of Europe? If the ticket is a free one, I may take it!
The intervention by the noble Lord, Lord Steel, is even more worrying. He is part and parcel of this constitutional convention which is the other part of the Holy Grail, in addition to the referendum and the White Paper, that I omitted to mention. He has increased my concerns. Is it true that the Bill would allow the Scottish parliament to raise other taxes? If that is right, then I want to know about it and we will return to it at Report stage with a vengeance.
However, if, as I believe, it is only the basic rate of income tax that will be varied by the Scottish parliament, as the Minister and his colleagues have said, then why is it not on the face of the Bill? The Minister, whom we trust, will then have his position clear on the face of the Bill; and the noble Lord, Lord Steel of Aikwood—whose position perhaps we do not trust, having heard it—or his colleagues will not be able in 264 the future to impose taxes other than on the basic rate of income tax on the people of Scotland. I think that we should know.
As regards Amendment No. 281D, I wonder why we need subsection (6) of Clause 70. It states:A tax-varying resolution shall not be passed so as to have effect in relation to any year of assessment before the year 2000–01".Clause 70(2) already states that any tax-varying resolution,must be expressed so as to relate to no more than a single year of assessment beginning after, hut no more than 12 months after, the passing of the resolution".Under the powers of Clause 70 there does not seem any possibility for the parliament to do what it seems to be forbidden to do in subsection (6). However, that is a minor matter. The major matter into which we slightly stumbled is whether or not the parliament will be able to increase taxes other than the basic rate of income tax.
§ 3.30 p.m.
It seems to me that Clause 69 is one of the most important provisions in the Bill. Whenever we are legislating we should try to avoid uncertainty, especially when legislating on tax matters. I go further. When we are delegating the powers of the United Kingdom Parliament to a devolved parliament, again it is vital that we should avoid uncertainty; and vital that we should avoid uncertainty on tax matters.
The amendments moved and spoken to by my noble friend have the great advantage of removing uncertainty. If the Government do not agree to those amendments, or something like them, they will be inviting us to fail in our parliamentary duty.
§ Lord Steel of Aikwood
I hesitate to intervene again on this matter. However, it seems to me that the official Opposition, the Conservative Opposition—I remind them that they do not exist in Scotland but, unhappily, exist here, so we have to listen to this plea—seek to curtail the powers of the Scottish parliament. When the Government refer to the taxation matter being limited to the basic rate of income tax, they are referring to those taxation powers that are reserved. Income tax is a reserved matter. The only exception to that will be a variation of up to three pence. Value added tax is also a reserved matter. All that is clear in the legislation.
However, on those matters devolved to the Scottish parliament, the Scottish parliament itself must be left to decide what, for example, is the system of local government taxation, and other charges that they may from time to time decide in their wisdom. If they were a Conservative Government, they might introduce all sorts of new taxes. That is a matter for the Scottish parliament. I hope that in this House we shall resist any attempt to write into the Bill words that could be construed as curtailing the powers of the Scottish parliament when it comes into being.
§ Lord Molyneaux of Killead
I was originally opposed to the idea of tax-raising powers for any of the 265 new devolved administrations. But I am inclined now to give some favourable consideration to the words of the noble Lord, Lord Steel.
The members of the assembly in Northern Ireland have already been elected. I have noted that in the few months since they were elected they have come under pressure and have sometimes yielded to the pressure and individually are making promises to keep all hospitals open, with no more rationalisation of the health service, and considering new roads where new roads have never been considered before. They will find it difficult, I think, to deliver on all those undertakings if they are dependent on and restricted solely to the block grant.
Although the Conservative Front Bench may think that I am somersaulting on this issue, it is again a question of experience. I fear that the representatives, the elected members of the Scottish parliament, will find themselves in the same trap: being expected to deliver that which cannot be delivered by Scottish members of parliament.
§ Lord Sewel
The Committee is indeed back, and in terms of the arguments we are addressing we have not been away. The point that the noble Lord, Lord Mackay of Ardbrecknish, sought to make today is one that he sought to make at the referendum debate, on Second Reading of the Bill, and on earlier amendments as the Committee considered the Bill before the Recess. I shall deal with his point yet again, but it may sound repetitious at least to some members of the Committee.
I return specifically in detail to the amendments. Amendment No. 279B would replace Clause 69(2) with a subsection with somewhat different wording but, as I think the noble Lord accepts, with substantially the same effect. Notwithstanding what the noble Lord said, I am not persuaded that the wording in the amendment offers any improvement over the clause as drafted. Indeed, there is a weakness in the way in which the amendment is worded because potentially it introduces a degree of ambiguity about whether Scottish taxpayers who pay tax at the higher rate would be liable for the Scottish variable rate. Therefore, rather than adding greater clarity, the amendment introduces a dangerous degree of ambiguity.
The purpose of Clause 69(2) is simple. It provides that where Clause 69 applies, the basic rate of income tax determined by the UK Parliament for any tax year, as it applies to the income of Scottish taxpayers, shall be varied by the amount specified in any tax resolution passed by the Scottish parliament. This is an important, yet essentially technical provision. The words currently in the Bill achieve precisely the intended effect and should not be replaced by a provision that is certainly no better and which is possibly flawed.
Amendments Nos. 281A and 281C are also unnecessary. The provisions of Clauses 69 and 70 are already drafted in such a way—I believe that these are the words the noble Lord, Lord Mackay of Ardbrecknish, is waiting to hear—as to ensure that the Scottish parliament can only vary the basic rate of income tax. I repeat: it can only vary the basic rate of 266 income tax. I have made that point several times during debates on the referendum, the White Paper, Second Reading of the Bill, and earlier in Committee. Therefore I think that we can now draw a veil across this issue. I hope that it is clear.
§ Lord Fraser of Carmyllie
Before the noble Lord finally draws a veil over the matter, perhaps I may say that I disagree with my noble friend Lord Mackay and agree with the noble Lord, Lord Steel. I understood his position to be correct at the time of the campaign. It was then our understanding that a Scottish parliament would be able—I am not saying that it would do so—to impose, for example, a tourist tax. It could, for example, impose a bed and breakfast tax. It could, for example, completely unstitch the basis of local taxation and introduce a wide range of changes, including a local income tax which did not have a single rate but a range of bands, much the same as we experience in the United Kingdom for income tax.
I am sure that the noble Lord, Lord Sewel, intended to be as reassuring as possible, therefore I shall repeat for the last time that the Scottish parliament can vary only the basic rate of income tax. Of course, we take him at his word on that. The emphasis is on the restriction to the basic rate of income tax, but we want to understand the range of potential taxation for the Scottish parliament.
Clearly, I am not one who would favour an increase in taxation in Scotland, for the reasons put forward by my noble friend Lord Mackay. But if we are to have a grown-up debate on the issue, it would seem desirable to be able to understand the range of taxation that might be introduced by the Scottish parliament. As all political parties in Scotland are beginning to gear up for the election campaign, we want to understand what is at issue so that we can address our respective arguments. For example, we would never wish to see the introduction of a bed and breakfast tax, a tourist tax, and so forth.
It will not do for the noble Lord simply to say that he gives an absolute categoric assurance that the only income tax on a UK basis which can be varied by the Scottish parliament will be the basic rate. There is a far wider and potentially far more damaging issue. In spite of the referendum Bill and the fact that we are a long way into the Committee stage of this Bill, I am not sure that we have had a clear and comprehensive answer to what is the potential range of taxation.
§ Lord Sewel
I am happy to clarify the position and again I refer to points I made earlier in our consideration of the Bill. There is a fair distinction between the tax-raising powers of the parliament in terms of the taxes it can raise by its own hand. That refers specifically and is limited to the power to vary the basic rate of income tax upwards or downwards.
It is possible for the Scottish parliament to change the structure and nature of local government finance. We have been clear and explicit about that and I referred to it in earlier debates. It would be possible to change the system of local government finance, were it so ill advised, to what we called with great affection "the poll 267 tax" or to introduce a totally different system of local government taxation. But that would not be in terms of the tax-raising powers of the parliament. Parliament would legislate to change the structure of local taxation for local authorities, giving local authorities a power to introduce, say, a tourist tax or something similar. But it is not the tax-raising power of the parliament at its own hand. That is limited.
§ Lord Fraser of Carmyllie
That really will not do as an argument. In respect of the block grant which the Scottish parliament will receive from Westminster, it would be open to the Scottish executive to save not only the £4.8 billion contributed towards the National Health Service in Scotland but to say that it shall be £6 billion or £8 billion. That could be achieved only by cutting back severely on local government expenditure. While it might be some luckless local authority which would impose the taxation, it would follow as a direct consequence of the actions of the Scottish parliament that such taxes were imposed.
§ Lord Sewel
No, and we dealt with the issue at an earlier stage. In those circumstances, if the UK Government, specifically the Treasury, took the view that public expenditure in Scotland was rising at a level which endangered the overall public expenditure figures or was having an impact on macro-economic policy, it would then be available to the Treasury to reduce the grant to the Scottish parliament accordingly. That check and balance is built into the system to deal with a potential abuse of the powers of the parliament. That situation is foreseen in the Bill and the Bill makes provision for it. I hope that the noble and learned Lord is reassured.
§ 3.45 p.m.
§ Baroness Hogg
Without testing the Minister's patience even further, I wish to be clear about what he is saying. When saying that the Scottish parliament can alter only the basic rate of income tax he could be saying one of two things. He could be saying that in dealing with a system of income tax the only element that the parliament may vary is the basic rate. Alternatively, he could be saying that in dealing with our entire structure of taxation the only element that the Scottish parliament may vary is the basic rate of income tax.
I understand him now to say that in dealing with our entire system of taxation the only element that the Scottish parliament may vary is the basic rate of income tax, except that it may then give to Scottish local authorities the right to vary any element of our taxation system in order to raise finance for local government. Am I right in that belief?
§ Lord Sewel
I welcome the noble Baroness to our debates on the Bill and I thank her for her contribution. Perhaps I may build up the case. First, the whole Bill rests on the idea of reserved and devolved matters. As the noble Lord, Lord Steel of Aikwood, said as regards taxation, one can start making correspondence between elements of taxation and the reserved and devolved matters. As the noble Lord indicated, corporation tax 268 and VAT clearly fall under the reserved category and the parliament is in no position to change them one way or the other. Income tax is broadly reserved, but there is a specific power to the parliament to make a variation upwards or downwards equivalent to 3p on the basic rate.
However, local government and local government finance are devolved issues. Clearly, it would then be appropriate for the Scottish parliament to legislate so as to change the system and structure of local government finance in Scotland. One would not need to change the system in order for local authorities to increase their expenditure levels. They could do so within the present structure and system of local government finance. However, if local authorities increase their expenditure levels fundamentally to distort the overall level of public expenditure in the United Kingdom and to upset that balance, or to act in a way which impacted upon macro-economic policy, or if basically they abuse their power, it is open to the UK Government to counter that by reducing the block grant which goes to the Scottish parliament. I hope that that offers some clarification to the noble Baroness.
§ Baroness Hogg
With respect, I thank the Minister for that explanation, but he has not answered my question. Is there a part of the system of taxation that may not be used by local government in Scotland to fulfill the devolved authority that may be given to it by the Scottish parliament? When you talk of reserved powers, such as VAT, is it the case that the Scottish parliament may not give local government the right to vary VAT in order to meet the local government finance arrears? Is it true of corporate taxes? Which taxes does it relate to?
There are two sets of local government finances. There is the expenditure which the noble Minister has described and there are also the taxes which are raised to finance it. Which ones are included and excluded for local government in Scotland under this Bill?
§ Lord Desai
Would it help the noble Baroness if I pointed out to her Schedule 5, page 66 where it says:"Exception from reservation".Local taxes to fund local authority expenditure (for example, council tax and non-domestic rates).That is the one exception from reservation. That is it. There is nothing else.
§ Baroness Hogg
I am sorry if I am trying the patience of the Committee, but the description "local tax" does not define the taxation that is used. It does not say whether it is expenditure tax, income tax or corporate tax. They can all be used locally. That does not define the tax.
§ Lord Sewel
I hope it will be helpful to the noble Baroness if I say that it would be possible for the Scottish parliament to legislate in a way to change the basis of local government taxation. I accept that 269 there is a theoretical possibility that it could legislate in a way to give local authorities the power to introduce something like a bed and breakfast tax.
§ Lord Mackie of Benshie
Can the Minister say whether the Scottish government could impose a tax on dogs and collect the money? Or has it no power to do that?
§ Lord Sewel
My off-the-cuff and highly risky observation is that the Scottish parliament could not introduce a tax on dogs; that is, to increase the tax revenue coming to the Scottish parliament.
Lord Campbell of Croy
The noble Lord, Lord Molyneaux, raised an interesting point. Members of the new parliament may feel bound to fulfil all kinds of promises they have given and I can visualise the situation where the new parliament has already expended its 3p. on the basic rate of tax and still calls for more money to be available in Scotland. Then the local government would be able to raise more and the parliament would allow it.
For example, non-trunk roads in Scotland have, for at least 50 years to my knowledge, been a local government financial responsibility and the Scottish Office was entirely devolved in those matters. That would continue. The noble Lord, Lord Sewel, has explained quite clearly that if the central government considers that too much money—not only the 3p. but a whole lot more for local government—would be charged by the new parliament, then the Treasury would put on a squeeze. That would be the worst situation one can foresee in Scotland. We know that there will be rows between Westminster and Edinburgh. To invite a situation where the Treasury has to put on a squeeze and stop money being available in that way is a situation we should try to avoid.
§ Baroness Strange
I do not want to confuse the situation further or to try the patience of the Minister. We have been talking about income tax. Will the Scottish parliament have any power to raise capital tax? If you have a bed and breakfast it is presumed that you have a spare room, which is capital, on which you will raise money by having people staying in it. Will there be a tax on people having spare rooms, such as there was on windows? Perhaps the Minister will explain that.
§ Lord Sewel
No capital tax, no spare bedroom tax, no window tax, no horse tax, no hot air tax. It may be to the advantage of the Committee if I can now return to the amendments before us.
Amendment No. 281C, to which the noble Lord referred, relates to retrospection. Retrospection is possible and desirable only in the very limited circumstances of Clause 70(4)—that is where the UK tax rate has been set so late that a Scottish resolution has to be made after the new tax year has started. That is the only circumstance, stated in Clause 70(4), which allows this very limited degree of retrospection. It is a necessary degree of retrospection where the UK tax rate 270 has been set so late that the Scottish resolution can only be made after the new tax year has begun. That is the only possibility of retrospection.
As to Amendment No. 281D, I acknowledge that because of the way the tax provisions are structured and the dates on which the Scottish parliament will be elected it would not, in normal circumstances, be possible for the Scottish parliament to put in place a varied rate of tax before 2000–2001. There have been a great many theoretical and hypothetical exercises carried out to do with a new government, a general election and all sorts of weird and wonderful things before 2000, but there are extreme theoretical circumstances in which it could introduce the power before then were it not for Clause 70(6). I want to be absolutely clear that it will only be from 2000–2001.
We want to make that fact absolutely clear because many organisations have set great store by this provision in their planning and to remove it from the Bill now would undoubtedly cause confusion and would suggest to some, albeit erroneously—as the noble Lord, Lord Mackay of Ardbrecknish, recognises—that our intentions have somehow changed. It would be undesirable to introduce any such note of uncertainty at this stage when so much planning is already going on.
I have dealt with this particular group of amendments. The debate has gone into some interesting avenues and, indeed, some back-doubles which we have already travelled down at earlier stages. In view of the explanation I have given, I hope that the noble Lord will feel able to withdraw his amendments.
§ Lord Mackay of Ardbrecknish
I am grateful, at least in part, to the noble Lord the Minister. As to Amendment No. 281B, I am satisfied that the point about 2000–2001 is best on the face of the Bill. As to Amendment No. 281C, I accept the point that he has made quite firmly about retrospection. If ever there is any doubt, the words he has used to the Committee this afternoon will make clear the Government's intention.
As to Amendment No. 279B, I will leave that to one side and read what the Minister has said about it later. There is still a certain ambiguity about how the rest of income tax law will impinge on Scottish taxpayers if their basic rate is actually 3p. higher than the basic rate paid south of the Border. For the moment I am content to leave that.
Amendment No. 281A set a number of hares running. I suspect that the noble Lord the Minister has the noble Lord, Lord Steel of Aikwood, to thank for the hare beginning to run. That may be an unfair view of the "partnership" between the Labour Party and the Liberal Democrats. But it has been an interesting hare. I suspect that I have become more concerned as the hare has gone on running. We have the position where the Minister is doing his best to say, "There will be no other taxes. Don't worry", whereas his partner in devolution—I nearly said "in crime"—is busy saying, "We would like more taxes". As a Scottish taxpayer, one is left wondering where, exactly, one stands.
§ My noble friends raised some interesting points about exactly where we stand and, as usual, the noble Lord, Lord Desai, came to our aid on economic matters and 271 drew our attention to Schedule 5 to the Bill, which makes it clear, as he rightly pointed out, that taxes and excise duties are reserved matters. That suggests to me that the government of Scotland will not be able to change excise duties. The schedule refers to "taxes and excise duties", whatever that covers. I am not sure whether that covers corporation tax and other capital taxes, a point raised by my noble friend Lady Hogg. Perhaps the position will be made clearer later on in our discussions on the Bill.
§ If I am right, the Minister will agree and that will be fine. However, if the Scottish parliament decides that it wants to add 5 per cent. to excise duties in Scotland, my understanding, from what the Minister said and from what the Bill says, is that it cannot do that. But what would happen if it decided not to add 5 per cent. to excise duties but instead to have a sales tax on exactly the same goods and with exactly the same rules as with excise duties? I assume that "taxes and excise duties" means value added tax. As I understand it, the parliament cannot vary value added tax but it could introduce a sales tax, which would be the same as value added tax. It could add 5 per cent. It would come to an increase in value added tax but by a different name. Am I right about that? Is that what the parliament could do? If I am told that it could not do it, could local government do it? That is the point. Will the Minister help me? The Scottish parliament could not have a sales tax as that would be caught by the all-embracing reservation "taxes and excise duties". But local government could have a sales tax.
§ 4 p.m.
§ Lord Sewel
The noble Lord is correct in that the parliament could not introduce a Scottish VAT variant. However, I think that he has chosen a dodgy example in terms of a local sales tax as I think we would run into trouble in Europe if we had a sales tax raised locally and at different levels in different local authority areas. But I will take the point in principle.
As I said to the noble Baroness, Lady Hogg, it would be possible for the Scottish parliament to legislate in a way that established a new system of financing local government in Scotland, just as we moved from the community charge to the council tax and previously had domestic rates. That kind of change is clearly open to the Scottish parliament to make because local government and local government finance are devolved. But if then, as a result, local authorities raised taxes at an excessive level, the Treasury, much to the chagrin of the noble Lord, Lord Campbell of Croy, could move in and claw back that excess expenditure.
I have just been handed a note which says that my memory, which needs a little refreshing on this point, was correct on the local VAT issue because it would be incompatible with the EC sixth VAT directive.
§ Lord Fraser of Carmyllie
Perhaps I may try out this point on the noble Lord to see whether I have understood the device. It is entirely within the power of the Scottish parliament to change local government. For example, it could revert to a two-tier system of local government. It would be possible for the Scottish 272 parliament to introduce a local government Bill saying, "There shall be a single tier of local government for Scotland and the First Minister shall be the Mayor for Scotland". That is not altogether daft. The population of Scotland is 5.5 million—two-thirds of the population of London. By that device he could introduce a local income tax with all manner of bands and with all levels—perhaps up to 98 per cent. I believe that to be a ludicrous idea—of course, because I do not believe in high taxation. But, as a device, I would be interested to know where the flaw is in what I have put forward.
Before the noble Lord answers that point, I wonder whether he would also bear in mind that it follows from what my noble and learned friend has said that the Scottish parliament could transfer to the Scottish local authorities responsibility for the upkeep of all roads and make local rate payers pay for that.
§ Lord Sewel
Some noble Lords have been concerned throughout the debates on the Bill to prevent the Scottish parliament acting in an absurd and ridiculous way. I have greater confidence in the Scottish parliament. I do not think there is any need for us to go over everything and try to block every potential absurdity and ridiculous act that the Scottish parliament might, if it had a brainstorm, seek to carry out. In a similar way, we are not troubled by the powers of this Parliament. This Parliament could do the most ludicrous things and there are precious few controls and limitations on it. There are many more controls, limitations and constraints falling on the Scottish parliament. However, within those constraints, let us have confidence that the parliamentarians will act reasonably and responsibly; and if they do not, the Scottish people will kick them out.
§ Lord Mackay of Ardbrecknish
That is not a satisfactory answer when it comes to drafting legislation. The legislation ought to be clear. It ought to be clear whether the parliament has the power to do it—and not whether the Scottish people will decide to allow the parliament to do it. What some of us are trying to do is to prevent situations in the future where there will be some difficult disagreements between Westminster and the Scottish parliament, or perhaps between the courts and the Scottish parliament, about what this legislation actually means. It is not a sovereign parliament. It is a devolved parliament. The powers it has are the powers given to it in this legislation. That is why it is right that we should probe the matter.
I think we have made some progress. At least I have discovered that we cannot have a local excise duty or a local sales tax and that we have the European Union directive to thank for that. Some of my noble friends will find that that is one of the first things they have had to thank European directives for. But there you are. They must be thankful for small mercies.
However, I am still suspicious about extra taxation in the form of new taxes and what new taxes the parliament may be able to bring to bear on the Scottish people. I understand perfectly clearly the point that my noble friend Lady Hogg and the noble Lord, Lord Desai, 273 drew to our attention. The exemption from reservation could be local taxes to fund local government expenditure. Local government could use those powers that are not to be reserved to this House to make new taxes in order to pull in more money. While I am interested to hear that the Treasury may claw it all back, I suspect that the opinion polls in Scotland would begin to look very tartan indeed if the Treasury started to claw money back because local authorities had decided to use in one way or another the powers granted to them in this legislation, perhaps with the approval of their local electorates.
Therefore, that is all extremely dangerous. However, I shall not carry on with it any further at the moment other than to say that I take some comfort from the Minister's statement that the clause is drafted in such a way as to ensure that the Scottish Parliament can vary only the basic rate of income tax.
I noticed that the Minister said that my Amendment No. 281A could be defective because a higher rate taxpayer may well find that that portion of his tax bill which represents his basic rate would escape the extra 3p in the pound. He said that the amendment could do that. I have briefly taken some legal advice and that view is not shared universally by the people to whom I have spoken. It is very clear that the Bill says, "except the basic rate". It does not refer to the basic rate taxpayer. Therefore, I do not agree with the argument used by the Minister that somehow my amendment is ambiguous and open to the interpretation which he put on it. Before we reach that amendment, I shall have to reflect on what to do. However, I beg leave to withdraw Amendment No. 279B.
§ Amendment, by leave, withdrawn.
§ Lord Mackay of Ardbrecknish moved Amendment No. 279C:
§ Page 31, line 3, leave out subsection (3).
§ The noble Lord said: This amendment seeks to omit subsection (3) and is quite simply a probing amendment to ask the Minister what that subsection means. My amendment is grouped with Amendments Nos. 280 and 281. I am sure that my noble friends will explain the point behind their amendments. I believe that the main purpose of the amendments is to seek an assurance that all the allowances available to UK taxpayers will be available to Scottish taxpayers at the higher rate if the higher rate comes about.
§ I want to home in on the reference to the Income and Corporation Taxes Act 1988. Perhaps the Minister will explain to us what exactly is behind that. Does that mean that income from saving is to be exempt from Scottish tax? Perhaps I may explain my concerns about that.
§ Let us take three retired people. One has made provision for retirement through saving and investment. The second has put his money into a personal pension and has now bought an annuity to give him an annual income similar to the first person. The third person has been a member of a pension scheme which is exactly the situation which we have all wished to encourage. He 274 is paid a pension which is the same size as the annuity paid to the second person and the income from saving and investments paid to the first. Currently, all three are taxed by the Revenue in much the same way. Am I right in thinking that the annuity pensioner will be asked to pay 3p in the pound extra; the pension fund pensioner will be asked to pay 3p in the pound extra; and yet the person whose pension income comes from saving and investment will not be asked to pay 3p in the pound extra?
§ I simply ask whether that is correct and if so, whether that is fair. Is the Scottish taxpayer whose pension comes from saving and investment to be exempt from the 3p while the person whose income comes from an annuity or a pension fund is not to be exempt? Is that fair? If I am correct, I suggest that it is not fair. The Government should do something about it. I beg to move.
§ Lord Lyell
Amendments Nos. 280 and 281 stand in my name and several of my noble friends. My noble friend on the Front Bench said that I may speak on this group of amendments, and the Minister and the Committee will be delighted to know that I shall be extremely brief. The noble Lord, Lord Mackay of Ardbrecknish, made the point about pensions and annuities beautifully. I am a trained accountant. I see that the noble and learned Lord, Lord Hope, is not here today. He was astounded that that was all I was. I am a fairly strong Angus lad.
The Committee will see that the Income and Corporation Taxes Act 1988 is a fair weight. I shall desist from starting at page one. However, I was looking at Section 875. According to the Institute of Chartered Accountants of Scotland, and others who were behind the tabling of this amendment, and Amendment No. 281, that section is amended and clarified by Section 257, which goes under the attractive name of "personal relief'. Those two sections clarify much of the argument raised by my noble friend Lord Mackay. If the Minister will accept Amendment No. 281, that may clarify exactly what is in his mind and will put everything beyond any doubt.
§ 4.15 p.m.
Lord Campbell of Croy
Perhaps I may put an inquiry to the noble Lord, Lord Sewel. Savings and distributions are mentioned at various points in this part of the Bill. I should like to deal not only with retired people, to whom my noble friend referred, but also with those who are earning, who are in employment and of working age. It seems that dividends are distributions and are not to be subject to the 3p variation. I seek the Minister's confirmation, so that somebody whose income brings him into the basic rate but has an earned income from wages or salary will have to pay the extra 3p, if the tax goes up by that amount, whereas the unearned dividend part of the income of other people will not be taxed or subject to the 3p.
Financial experts commented on this matter when it arose before the referendum. They were told to shut up by the campaigners—not the noble Lord, Lord Sewel, but other people in Scotland—and were told that they 275 should stick to their banking and finance and not meddle in politics, even though the second proposition was entirely financial and about this very subject.
However, this is my opportunity to ask the noble Lord whether it is still the case that dividends will not be taxed in this way—the variation of 3p—whereas ordinary earnings will be so taxed. Does the noble Lord believe that he will be able to explain that to many of his followers in Scotland? Will he confirm what I am saying?
§ Baroness Carnegy of Lour
When the Minister replies, perhaps he will tell us precisely what distributions are, where they begin and where they end.
§ Baroness Strange
I support my noble friend Lord Lyell on this amendment which stands also in my name. However, as I am not a chartered accountant, I do not believe that I can explain it any better or more explicitly than he has. I am only a second-hand chartered accountant, being the mother of one.
§ Lord Selkirk of Douglas
I shall speak to Amendment No. 280 to which my name is attached. I should mention an interest in that I am a trustee of a small charitable trust.
Amendment No. 280 is designed to state the purpose and nature of the extended basic rate of income tax. At present, the Bill provides that the Scottish variable rate is to be a varied basic rate of UK income tax. If that policy is followed through, Amendment No. 280 is required to clarify the purpose of the legislation. The amendment's effect is to make certain that any reference to the basic rate will be at, for example, 26 per cent. for a Scottish taxpayer and therefore the withholding of income tax from a deed of covenant will be at 26 per cent. The full amount held may then be reclaimed by a charity to which the taxpayer wishes to donate. At present, when a basic rate taxpayer signs a deed of covenant to a charity and agrees to give a net amount of, for example, £77, the taxpayer's liability is the same whether or not he makes the deed of covenant payment. The recipient charity receives an amount net of basic rate of tax of £77. Because the charity is not liable to income tax, it can reclaim the basic tax of £23 and increase the income to £100.
The effect of the Bill on charities will be different depending on whether the taxpayer is in England or in Scotland. An English taxpayer will pay, on £100, £77 to the charity and £23 tax. A Scots taxpayer will pay £103; £77 to the charity and £26 tax—£3 more. The charity in Scotland will receive only £100, not £103. The charity is prohibited from collecting the additional £3 which should, according to the underlying principle, be available to it.
The advantages of this amendment are that it is a logical application of a varied rate tax and makes certain that covenants and other such charges are outwith the income which will be subject to the Scottish variable rate. It will help to prevent charitable giving from 276 further decline. In other words, it is an amendment which will help and benefit charities in Scotland. I commend it to the Committee.
§ Lord Sanderson of Bowden
I support this line of thought. A real problem exists in this regard unless the Government look again at the way in which this extra income tax is to be raised. I suggest that they might look and see whether it would be better to incur the extra 3p in the pound as a straight levy on Scottish residents rather than as an extra burden on income tax.
My noble friend raised an important point in relation to charities and I am certain that the Government will not be backed if the charities in Scotland are seen to do worse than those south of the Border.
§ Lord Eatwell
Perhaps I may speak on the issue of charities, being the head of a charitable foundation; namely, Cambridge College. I resist the amendment for the extraordinary complexity it would introduce into charitable giving.
At the moment there is a straightforward relief related to the standard rate of income tax—23p throughout the UK; there is not relief for any other rate of income tax. For example, the higher rate of income tax is not relieved; it is only the 23p. The complexity introduced would arise if persons in Scotland gave to English charities. Is the Treasury then to provide the extra 3p to an English charity? If someone in Scotland gives to a Scottish charity, from where will the extra 3p in the £1 come? Is it to come from the Treasury or from the financial offices in Edinburgh? That confusion and complexity would do great damage to charitable giving and anyone supporting charities should resist the amendment.
§ Lord Sewel
Amendment No. 279C would delete from the Bill the provision which makes it clear that income from savings, investments, dividends and the like does not fall within the ambit of the Scottish tax power.
As the UK tax system currently stands such income is taxed only at the lower rate or the higher rate of income tax. It is not taxed at the basic rate and will not therefore be affected by the Scottish power. But that does not mean that the provision is superfluous. Obviously, things may change.
In the first place, considerable concern was expressed to us, as we formulated this power, that to include income from savings and distributions—basically dividends—within the power would be a real threat to the continuing health and vitality of financial institutions in Scotland. We listened to those concerns. To make it clear that the exclusion of savings income from the power was a matter of deliberate policy and did not happen by default, we made specific provision in the Bill.
But equally, the power is important for the future, so that if anything which is currently categorised as income from savings and distributions were, in the UK context, to be included within the basic rate at some stage, there would not be an automatic translation of that into the 277 Scottish power. The exclusions would remain. That is important. The current tax rules are beneficial to middle income savers. If the tax-varying power extended to savings income, that could have a disproportionately burdensome effect on middle income savers.
Clause 69(3) is a provision which was sought by the Scottish financial and business community and which has been welcomed by them as a sensible policy which also provides certainty for the future. I agree with that assessment and, in the light of that explanation, I hope that the noble Lord may feel able to withdraw this amendment.
Perhaps I may refer to the example given by the noble Lord, Lord Mackay of Ardbrecknish, of someone whose income was dependent on savings income, someone whose income was dependent on an annuity and someone whose income was dependent on a pension. The noble Lord has got it right; there is no doubt about that. The person whose income is coming from savings would not be affected by the 3p variation; the person whose income was coming from an annuity would be caught by the 3p variation, as would the person whose income was coming from a pension.
However, differences already exist. That is the point. Those three sources of income are treated differently now in any case. There are differences between the rates at which those types of income are taxed and that is government policy; indeed, that was the policy introduced by the previous government in 1996. So we are accepting the policy differentiation which the previous government advocated. It was a differentiation clearly designed to encourage savings, and that is what we wish to encourage also. I hope that deals with the specific point raised by the noble Lord, Lord Mackay of Ardbrecknish.
I turn now to Amendments Nos. 280 and 281. I listened carefully to what the noble Lord, Lord Lyell, had to say and admired his weightlifting achievements. I am not, however, persuaded that these amendments are necessary or desirable. The effect of a tax-varying resolution would be only to provide that a different basic rate should apply to a particular class of UK taxpayers ("Scottish taxpayers"). This does not disapply the existing tax rules defining total income for tax purposes. Nor does it affect the entitlement of Scottish taxpayers to the personal allowance or to any other deduction which reduces their liability to income tax—a point raised also by the noble Lord, Lord Mackay of Ardbrecknish.
Any suggestion that the effect of the Bill is to deny Scottish taxpayers their personal allowance or any other allowance is entirely unwarranted. There is no intention to deny Scottish taxpayers any deductions or allowances currently available to them.
I turn to the point raised by the noble Lord, Lord Selkirk of Douglas, supported by other Members of the Committee. The government policy is that the tax relief on gifts to charities will be uniform across the United Kingdom, so the charities will not do worse. I can give the noble Lord an assurance that the point he raised will not arise. In any case, the amendment in his 278 name would not achieve his desired objective. We will achieve the desired result by exercising the power available in Clause 75(2).
There is therefore nothing between us in terms of the policy objectives identified by the noble Lord, Lord Selkirk. We simply arrive at the destination by a different route. I hope that on that basis the amendment will be withdrawn.
Lord Campbell of Croy
Perhaps I can say a word on dividends. The noble Lord, Lord Sewel, explained clearly and confirmed that dividends will be exempted from the extra 3p. But does the Minister accept that those who receive some of their income from dividends are, on average, likely to be better off than those whose income is entirely from their earnings? I raised all this over a year ago and I was told that the matter was much too complicated to try to include dividends. I am talking about them in general and not the savings of retired people only. I did see that it would be extremely complicated. Does the noble Lord foresee complaints in future about different treatment which means that on the whole the less well off will have to pay 3p on the part of their income that qualifies for the basic rate of tax whereas the better off will be excused that?
§ 4.30 p.m.
Baroness Carnegie of Lour
I asked the Minister whether he could define "distributions". It is not a technical point in which I have a remote interest in asking, but something that everyone in Scotland needs to know. What will be exempt? We understand about dividends and my noble friend has just asked questions about that. The Minister said that distributions are basically dividends, but what else are they? I do not believe that people in general know what it means because it is a word with which we are not familiar.
§ Lord Sewel
I can try to help on that point. As I said, distributions broadly mean dividends paid by companies, but they also cover other things, such as distributions by unit trusts and other such vehicles. I hope that that is helpful to the noble Baroness. I return to the point made by the noble Lord, Lord Campbell of Croy. I confirm that dividends are not caught by the 3p variation. We set out quite specifically and from the start to introduce a very limited tax-raising power for the Scottish parliament, which is up to 3p variation on the basic rate.
One of the difficulties we are faced with as regards dividends is that they are not taxed at the basic rate, but only at the lower rate or the higher rate. That is one of the factors that we have to take into account. I hope the noble Lord understands that point.
§ Lord Lyell
Before my noble friend winds up, I can save a lot of time by thanking the noble Lord, Lord Sewel, for what he said about Amendments Nos. 280 and 281. I am rather flattered that he treats me in a manner akin to Corporal Jones in "Dad's Army" as the "threat" in thinking that my amendments might be concerned with doing down the Scottish taxpayers. All the briefing I have had shows that the two amendments 279 in my name, that of my noble friend Lady Strange, and one in the name of the noble Lord, Lord Selkirk of Douglas, would clarify the entire position for United Kingdom taxpayers. The noble Lord has given a very full explanation, for which I am grateful. I shall digest what he said and I look forward to hearing what my noble friend on the Front Bench has to say.
§ Lord Selkirk of Douglas
I am also very grateful to the Minister. Can he state in a couple of sentences how the Government intend to use Clause 75(2) in relation to charities in future?
§ Lord Sewel
I shall take refuge in the time-honoured phrase; namely, that I shall take the opportunity to write to the noble Lord on that point.
§ Lord Mackay of Ardbrecknish
We have had an interesting debate. I am pleased to hear that Amendment No. 279C is in because, following consultations, the Scottish financial community is very keen on it. We shall come to amendments further on in the Bill about which the Scottish financial community is also keen. I look forward to the Minister being persuaded by its arguments to accept the amendments in the Marshalled List.
I am disturbed that the Minister confirms my example about the three sets of retired people. It will be seen to be unfair and unjust. I understand the arguments. I am puzzled as regards the position of a basic rate taxpayer who has some pension income and some dividend income. The pension income alone does not take someone into the basic rate and the dividend income alone does not do that either; but together they take a person into the basic rate. Will the portion of the basic rate on which a person has to pay the extra 3p come from the pension income or from the dividend income? I am sure that the Inland Revenue will have written pages to resolve that problem. Perhaps the Minister has read the pages and can help me, or will he write to me?
§ Lord Sewel
I made the earlier point that dividends are taxed in a completely different way from income. They are not taxed at the basic rate, but at either the lower or higher rate. Therefore the situation that the noble Lord envisages cannot come about.
§ Lord Mackay of Ardbrecknish
I shall read my self-assessment form again and the notes that go with it. I was not aware, when I read the calculations that go with it, that somehow or other they were separate. I will leave that and have a look at it. These matters are complex. The noble Lord, Lord Eatwell, made a brief intervention and left the Chamber before he heard the replies—but if one runs a great Cambridge college then I suppose one cannot spend too much time here. He complained about the complexity as regards charities. What has been made clear in the past 25 minutes, and in the previous debate, is that the whole issue is hugely complex. It is not just a question of the charities.
I believe that my noble friend Lord Sanderson made a good point. Instead of trying to suggest that it is an extra 3p on the basic rate of income tax, which could take the basic rate of Scottish tax to 26p; it could be simply said 280 that the basic rate would be 23p wherever one lives in the UK, and the Scottish taxpayers who pay at the basic rate will pay an additional 3p levy. One can call it what one likes. But it is not an addition to the basic rate. I wonder to what extent that would solve a great many of the problems. Perhaps the Minister will consider what my noble friend Lord Sanderson said. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ [Amendments Nos. 280 and 281 not moved.]
§ Lord Mackay of Ardbrecknish moved Amendment No. 281A
Page 31, line 19, at end insert—
("() For the avoidance of doubt, and notwithstanding any other provision of this Act, the Parliament shall not vary any tax except the basic rate of income tax.").
§ The noble Lord said: I wish to test the opinion of the Committee on this amendment.
§ 4.38 p.m.
§ On Question, Whether the said amendment (No. 281A) shall be agreed to?
§ Their Lordships divided: Contents, 92; Not-Contents, 115.281
|Division No. 1|
|Addison, V.||Kenyon, L.|
|Ailsa, M.||Kingsland, L.|
|Annaly, L.||Kinnoull, E.|
|Balfour, E.||Kintore, E.|
|Belhaven and Stenton, L.||Lang of Monkton, L.|
|Beloff, L.||Lauderdale, E.|
|Belstead, L.||Lindsey and Abingdon, E.|
|Berners, B.||Long, V.|
|Boardman, L.||Lucas of Chilworth, L|
|Brabazon of Tara, L||Lyell, L.|
|Brougham and Vaux, L.||McConnell, L.|
|Burnham, L. [Teller.]||Mackay of Ardbrecknish, L.|
|Cadman, L.||Mackay of Drumadoon, L.|
|Campbell of Croy, L.||Mancroft, L.|
|Carnegy of Lour, B.||Mersey, V.|
|Charteris of Amisfield, L.||Milverton, L.|
|Chesham, L.||Monro of Langholm, L.|
|Clark of Kempston, L.||Montrose, D.|
|Cork and Orrery, E||Mowbray and Stourton, L.|
|Courtown, E.||Munster, E.|
|Cox, B.||Naseby, L.|
|Dean of Beswick, L.||Nelson, E|
|Denham, L.||Nickson, L.|
|Denton of Wakefield, B.||Noel-Buxton, L,|
|Dixon-Smith, L.||Norfolk, D.|
|Donegall, M.||Norton of Louth, L.|
|Drogheda, E.||O'Cathain, B.|
|Ellenborough, L.||Oxfuird, V.|
|Elliott of Morpeth, L.||Pender, L|
|Elton, L.||Platt of Writtle, B.|
|Fraser of Carmyllie, L.||Rathcavan, L.|
|Gray of Contin, L.||Renton, L.|
|Haddington, E.||Roberts of Conwy, L.|
|Halsbury, E||Rowallan, L. [Teller.]|
|Harlech, L.||Saltoun of Abernethy, Ly.|
|Harmar-Nicholls, L.||Sanderson of Bowden, L.|
|Harrowby, E.||Sandford, L.|
|Hayhoe, L.||Selkirk of Douglas, L.|
|Hogg, B.||Sempill, L.|
|Holderness, L.||Sharples, B.|
|Inchyra, L.||Shaw of Northstead, L.|
|Jopling, L.||Stodart of Leaston, L.|
|Strange, B.||Swinfen, L.|
|Strathcarron, L.||Thomas of Gwydir, L.|
|Sudeley, L.||Wade of Chorlton, L.|
|Swansea, L.||Westbury, L.|
|Addington, L.||Linklater of Butterstone, B.|
|Allenby of Megiddo, V.||Listowel, E.|
|Amos, B.||Lockwood, B.|
|Annan, L.||Lofthouse of Pontefract, L.|
|Archer of Sandwell, L.||Lovell-Davis, L.|
|Ashley of Stoke, L.||Ludford, B.|
|Bach, L.||McCarthy, L.|
|Barnett, L.||McIntosh of Haringey, L. [Teller.]|
|Berkeley, L.||Mackenzie of Framwellgate, L.|
|Blease, L.||Mackie of Benshie, L.|
|Bledisloe, V.||McNair, L.|
|Borrie, L.||Maddock, B.|
|Bruce of Donington, L.||Mallalieu, B.|
|Burlison, L.||Mar and Kellie, E.|
|Calverley, L.||Mason of Barnsley, L.|
|Carlisle, E.||Milner of Leeds, L.|
|Carmichael of Kelvingrove, L.||Mishcon, L.|
|Carter, L.||Molloy, L.|
|Castle of Blackburn, B.||Monkswell, L.|
|Cledwyn of Penrhos, L.||Montague of Oxford, L.|
|Clinton-Davis, L.||Morris of Castle Morris, L.|
|Crawley, B.||Morris of Manchester, L.|
|David, B.||Nicol, B.|
|Davies of Oldham, L.||Orme, L.|
|Dean of Beswick, L.||Pitkeathley, B.|
|Desai, L.||Prys-Davies, L.|
|Dholakia, L.||Ramsay of Cartvale, B.|
|Dixon, L.||Redesdale, L.|
|Donoughue, L.||Rendell of Babergh, B.|
|Dormand of Easington, L.||Rodgers of Quarry Bank, L.|
|Dubs, L.||Rogers of Riverside, L.|
|Dunleath, L.||Russell-Johnston, L.|
|Eatwell, L.||Sainsbury of Turville, L.|
|Evans of Parkside, L.||Sefton of Garston, L.|
|Falconer of Thoroton, L.||Sewel, L.|
|Farrington of Ribbleton, B. [Teller.]||Shepherd, L.|
|Gallacher, L.||Shore of Stepney, L.|
|Gladwin of Clee, L.||Simon, V.|
|Goudie, B.||Simon of Highbury, L.|
|Graham of Edmonton, L.||Smith of Gilmorehill, B.|
|Gregson, L.||Steel of Aikwood, L.|
|Grenfell, L.||Strabolgi, L.|
|Grey, E.||Taverne, L.|
|Hardie, L.||Taylor of Blackburn, L.|
|Haskel, L.||Taylor of Gryfe, L.|
|Hayman, B.||Thomas of Macclesfield, L.|
|Hilton of Eggardon, B.||Thornton, B.|
|Hogg of Cumbernauld, L.||Thurso, V.|
|Hollis of Heigham, B.||Tomlinson, L.|
|Hoyle, L.||Tope, L.|
|Hughes, L.||Tordoff, L.|
|Hunt of Kings Heath, L.||Turner of Camden, B.|
|Hylton, L.||Walker of Doncaster, L.|
|Islwyn, L.||Watson of Invergowrie, L.|
|Jacobs, L.||Whitty, L.|
|Jay of Paddington, B. [Lard Privy Seal.]||Williams of Elvel, L.|
|Williams of Mostyn, L.|
|Judd, L.||Wilson of Tillyorn, L.|
§ Resolved in the negative, and amendment disagreed to accordingly.
§ 4.47 p.m.
§ [Amendment No. 281B had been withdrawn from the Marshalled List.]
§ On Question, Whether Clause 69 shall stand part of the Bill?
§ Lord Mackay of Ardbrecknish
Normally, I do not speak to the Question whether a clause shall stand part 282 of a Bill. However, we have had a divided Committee stage on this Bill in that part of the clause was discussed before the Recess and we are discussing the rest today. I should like to take a few minutes to ask the Government whether they have given any reconsideration to the proposal which I made to resolve some of the difficulties in Clause 69. If they had done so, they would not only have resolved the difficulties of Clause 69 but would also have made Clause 72 totally unnecessary. As Clause 72 is impossible to read and understand, I should have thought that that would be a good thing.
It all started when the Government decided that the Scottish parliament should have the power to raise an extra 3p on the basic rate of income tax. That was quickly translated to £450 million. As I said earlier, the question that then arose was: what happens if, because of changes, the 3p does not raise £450 million? The Government said, "Ah well"—without any thought at all, I suspect; I was going to say, "without a great deal of thought", but I have concluded that it was without any thought at all!—"if that happens, the House of Commons will amend the tax-raising powers to ensure the £450 million"—in some magical way.
The next question was obvious, except to the Government: how will you do that? Where will the new tax come from? We have been around that course this afternoon. We have had a bit of an answer. It is said that it will come from income tax, but we have no details. Nobody knows. It is a simple question so I should have thought that the Government ought to have an answer before walking down that road.
There has been a new twist. The sum is no longer £450 million, but £420 million, so the poor old Scottish parliament has lost £30 million before it is even up and running. We are talking about 3p or £420 million, but £420 million is the top line.
My amendment on the last Committee day before the Recess would simply have removed the "either/or", and would have stated that, up to £420 million, the Scottish parliament can raise or lower the amount that it takes and can do so by amending the basic rate. That would have made this part of the Bill much simpler and easier to understand. Clauses 69 and 72 would not be needed in the Bill at all. It seems to me that that would be a sensible idea. I wonder whether the Minister has had any thoughts on the matter over the Recess and whether he has come to a conclusion that that might be a better way to approach the issue than the way he has chosen in the Bill.
§ Lord Lang of Monkton
Like my noble friend Lord Mackay, I should like to address a few remarks to the debate on whether this clause should stand part of the Bill. It is a very important clause, giving as it does power to the Scottish parliament to fix the basic rate of tax for Scottish taxpayers. During the Second Reading debate I described the tax-raising powers as "pitiful and peripheral". I still hold to that view; indeed, at that stage I thought that they would raise £450 million, but we are now told that they will only raise £420 million. Once one deducts from that the cost of running the Scottish parliament, the cost of collection of the tax and other 283 overheads, it is easily seen that the revenue will be very small in proportion to the Scottish Office budget—something like 3 per cent. of the Scottish Office budget—or less than 2 per cent. of the total resources spent by the Government in Scotland. You cannot do very much with that.
There is a danger that this clause—the provision of tax-raising powers in the Bill—will lead to the dangerous misconception that a Scottish parliament can achieve something worth while with such resources. So, in a sense, we get the worst of all worlds because the Bill concedes the principle of tax-raising powers to this parliament but does not grant it sufficient power to raise a worthwhile amount of tax if it decides that that is necessary. Power without responsibility has been described for many years as the prerogative of the oldest profession, but responsibility without power, or the perception of responsibility without the reality of power, is perhaps an even worse situation.
Having conceded the principle of tax-raising powers, why do the Government not go the whole hog? Why do they seek to limit the level of taxation that can be raised under the Bill? Of course, that is a dangerous game but this is part of a very dangerous project; indeed, the whole establishment of this parliament carries with it great dangers. I shall quote the words of the noble Lord, Lord Sewel, on tax-raising powers in the debate in this Chamber on 23rd July. At that time my noble friend Lord Mackay of Ardbrecknish was seeking to protect the interests of Scottish businesses from the possible depredations of a Scottish parliament or of a local government given powers to vary business rates. In reply, the noble Lord, Lord Sewel, said:His approach seems to be based upon the perverse idea that almost as soon as a Scottish parliament is elected it will deliberately implement policies which would have as their primary objective the inflicting of damage on the Scottish economy … I am prepared to trust them and if they get it wrong they will simply suffer the judgment of the electorate. It is as simple and straightforward as that".—[Official Report, 23/7/98; col. 1051.]If it is as simple and as straightforward as that, why are the Government not prepared to trust the people when it comes to income tax? After all, businesses have no vote but the people do. The answer is that essentially the power that has been granted is not a power of any real substance; it is essentially cosmetic, a piece of pretence, and, as such, is no basis for constitutional change.
The provision of very limited tax-raising powers is dangerous for two further reasons. First, the distribution of resources from the Treasury through the Scottish block will come under attack; indeed, it is already happening. The fact that spending under almost all headings in Scotland is some 20 per cent. higher per head than it is in England is becoming increasingly well known and resented in other parts of the United Kingdom, the more so given the closer alignment of the Scottish economy with that of England which has been achieved in recent years. Why, the English ask, should Scotland with its own parliament continue to get more? They have tax-raising powers, let them use them. Scotland would no longer have power in the Cabinet, in the Government, in Whitehall and at Westminster to resist that.
284 The second danger that I see is that revenues per head in Scotland are lower than in the United Kingdom. Therefore, to raise the same revenue from within Scotland requires more per capita in tax than would be required from the UK as a whole. When this debate was taking place in another place in 1988, I calculated that a 10 per cent. increase in spending by the Scottish Office would require a 19 per cent. increase in income tax if levied only in Scotland.
Tax revenues in almost all cases are lower per capita in Scotland than in the rest of the UK. I published a Government paper in 1992 entitled, Government Expenditure and Revenues in Scotland which indicated that revenue from income tax, from national insurance and other contributions—for example, from VAT, from local authority revenues—were all lower per head in Scotland than in England. That was only marginally offset by the counter balancing lower benefits to be derived from tax reliefs and allowances. Only taxation revenue from tobacco and from drink was higher in Scotland. The Scottish Health Education Board has been working hard to put that right.
The debate is often clouded by references to North Sea oil, especially by the Scottish National Party. It points to the vast revenues which it believes belong in Scotland. That is a debate in itself which could take a long time to resolve and one which might have been valid when such revenues were over £12 billion as they were in the mid-1980s, but rather less so in the early 1990s when they fell to £1 billion and now when they are not a great deal higher than that. The fact remains that there is still a substantial structural budget deficit in a separate Scottish economy. Therefore, to start giving tax-raising powers to a Scottish parliament, and running the risk of a gradual transfer of resources from the UK Treasury to a Scottish tax base, is a dangerous trend to set loose. The Scottish parliament has a higher per capita spend to maintain—or, indeed, to increase, if that is what it wishes—and it will have to do so increasingly from a lower tax base.
Another point about these tax-raising powers which concerns me is the regressive nature of the proposals. Over the years the previous government sought to reduce the basic rate of income tax and to raise allowances. They brought in a lower 20 pence rate. Of course, we are talking about tax increases and not tax reductions. Although the Government have adhered to the claim that the powers are essentially tax-varying powers, Clause 74 makes it quite clear that the Scottish people will not have their tax bills reduced under the provisions of the Bill.
How would those tax increases be applied in relation to allowances and social security benefits? Clause 99 covers to some extent the answer on social security benefits, and no doubt we shall have the opportunity to debate that issue. However, will Scottish income tax—and I ask the Minister this question out of ignorance—simply be bolted on to existing tax rates, or will the allowance system and the grading of tax rates be rephased to take account of the quite substantially changed circumstances which would arise, particularly in the case of lower income earners? I understand that it is not to be applied to the 20p rate but only to the 285 basic rate. That offers some relief. But even at the basic rate of only 23p in the pound, the application of a 3p in the pound tax increase would raise the tax bill for a basic rate taxpayer by 12.5 per cent., whereas to a 40p in the pound taxpayer, the increase would only be 7.5 per cent. But, for a 20p taxpayer, whose income rises to bring him into the basic tax rate net, his tax bill would rise by 30 per cent. as it went up from 20p to 26p in the pound. That must have very clear and unsatisfactory implications for work incentives.
There are many other issues relating to the imposition of tax-raising powers through this Bill and under this clause—for example, the economic burden, the disincentive to industry to locate in Scotland, the disincentive to invest, the burdens on business, the cross-border anomalies and the other points that my noble friends raised in earlier debates. But, in essence, I submit that the power to raise taxes as worded in this clause, is essentially destabilising, It is dangerous because it pretends to do more than it actually allows and because it carries the hidden threat of other taxes, as my noble friends have said this afternoon. It also puts a disproportionately higher burden upon Scottish taxpayers, especially the less well off, in order to buy less than a comparable UK tax rate would do. It would, and will, undoubtedly be a focus for future conflict and tension and will be exploited by those who see a Scottish parliament as only half the story. I believe the measure will do no good, but if we have to have it I believe that we should release the Scottish parliament from the shackles imposed within the terms of this clause and let those who would raise the tax face the consequences more clearly, more honestly and more directly.
§ 5 p.m.
§ Lord Monro of Langholm
I follow my noble friend Lord Lang and refer to one or two issues that I mentioned on Second Reading relative to the principle of the tax we are discussing. The nearer one is situated to the Border, the greater the repercussions that appear to result from this measure. That is why Dumfries and Galloway voted against the tax raising powers. The figures were 51.2 per cent. against and 48.8 per cent. in favour. The neighbouring inhabitants of the Scottish Borders voted similarly, with 50.7 per cent. in favour of tax raising powers and 49.3 per cent. against. The majority was only 787. The people who live in these areas are aware of the taxation problem as regards cross-Border issues. Later we shall discuss the complications that arise as regards where one lives, where one works and where one pays tax. I should have thought that any company accountant drawing up weekly or monthly payslips would go round the bend trying to find out where his employees have been living and working. This is an important matter because employers may have to pay higher wages to employees in Scotland than to employees of the same rank just the other side of the Border in England in order to make their net pay the same. That is the least one can expect to happen.
286 One is aware that industry is considering this matter. I know of a company in my former constituency which is considering whether to locate a new factory in England or in Scotland. This dilemma has arisen because of the possibility of increased taxation in Scotland. We need to think hard about whether we are going down the right route. There is no doubt that anywhere with lower taxation becomes a honey-pot in terms of people moving to that area. I know from my occasional visits to the eastern seaboard of the United States that many people from New Jersey, Philadelphia and Maryland shop in Delaware where there is no sales tax. They perceive they are getting a bargain.
We do not want people to perceive Scotland as a country of high taxation with the tartan tax that we have discussed, because that will have an adverse effect not only in terms of attracting industry but also on those who live in Scotland who will have to pay higher tax for the somewhat doubtful privilege of receiving better services. However, that remains to be seen. We view with horror the Minister's words when he said earlier that it looks more than likely that local taxation will be increased to meet the aspirations of the Scottish parliament. I am sure that will happen. I can envisage that the council tax will be increased substantially with the alleged intention of improving services because people realise that they will not receive the money from the block grant.
I agree with my noble friend Lord Campbell of Croy that if the Treasury were to put a ceiling on local government expenditure all hell would break loose in Scotland as people would consider they were being governed by England yet again. That would negate the whole objective of the Government's wish to devolve a parliament to Scotland. I urge the Minister to look carefully at what the Government propose. The proposed measure could have many adverse repercussions. When one considers Clause 71 and the ins and outs of where one lives and where one will pay tax it is clear that many people will experience immense heartbreak because they will not have understood what hit them.
§ Lord Steel of Aikwood
Listening to the arguments that have been expressed so far, it appears to me that the noble Lords, Lord Lang and Lord Mackay of Ardbrecknish, are not singing from the same hymn sheet at all. The noble Lord, Lord Lang, made a convincing case for doing away with this miserly 3p varying power and opening the lid and allowing the Scottish parliament to do whatever it wants with regard to financial matters. He said this measure is a compromise. I agree with him that it is a compromise. However, if he casts his mind back to the 1970 proposals he will remember that one of the criticisms of the scheme that was put before the Scottish people was that there was no tax responsibility at all. As we all know, the whole of local government has operated on the basis of a minority element of tax responsibility while the majority of local government expenditure is provided by central government. As I said, the noble Lord is right to say this measure will be a compromise, but it is the compromise that was agreed in the constitutional convention. The 287 Government have faithfully introduced legislation to implement it. One can argue for or against a 3p limit or a 4p limit or a 2p limit, but the 3p figure seems to allow a reasonable amount of flexibility to enable the Scottish parliament to do some of the things it may wish to do.
I say to the noble Lord, Lord Monro—I almost addressed him as my noble friend as he is a friend in a personal sense—that I do not share his view about the problems of cross-border transfer. I agree with him that if there were different rates of sales tax as in the United States people would cross borders. I agree with him on that. However, in the United States, neighbouring states have variations in income tax of up to 5p but people do not move their residences across federal state boundaries to take advantage of fluctuating income tax rates. I believe this issue can be greatly exaggerated. I do not believe that that situation will occur here. In any case, the constant assumption from the Conservative Benches on this subject is that the Scottish parliament will be full of financial idiots who will be utterly irresponsible and who will do daft deeds. That may happen. Who knows, we may have a Conservative parliament? However, I think that is unlikely. We must proceed on the assumption that rational men and women will use these powers sensibly. One of the reasons I so opposed the amendment which we fortunately defeated a moment ago is that the phrase,for the avoidance of doubt".was mischievous, because the amendment proposed by the noble Lord, Lord Mackay, raised the question, when is a tax not a tax? The answer is, when it is a charge or a fee. I remember that the poll tax was called the community charge. I repeat my view that as regards devolved matters the Scottish parliament has total freedom to raise what charges, taxes, levies, tolls—call them what you will—it pleases. However, it will do so only with a sense of financial responsibility. At the end of the day, the Treasury will keep an eye on the public expenditure controls, as everyone has mentioned. The electorate will also wreak retribution on those who misuse financial powers.
I have a specific example in mind. My noble friend Lord Mackie of Benshie asked about dogs. There is a perfectly rational case, strongly supported by the farming community and by many in urban areas, for a dog registration scheme. Westminster has ducked that issue. However, there is no reason why the Scottish parliament cannot introduce such a scheme. If it introduces it, it will levy a charge and may decide to make a profit on it. I believe that would be a good idea. I believe the amendment of the noble Lord, Lord Mackay, would have cast doubt as to whether it would be able to do that. I believe that we should get on with the legislation, accept the 3p variation on the basic rate of income tax and allow the Scottish parliament to administer in a sensible way all the matters that we are devolving under this Bill. It will not act within the realms of fantasy, as the Conservative Party seems to imagine.
§ Baroness Hogg
I support a number of points made by my noble friends. In a spirit of pure helpfulness to the Minister I warn him against redeploying a fallacy in 288 his responses, which is to rely on the Treasury to resolve this issue in practice. If, as I am sure will be the case, expenditure rises in Scotland and taxation rises to match it, and the Treasury seeks to control the situation by withdrawing grant, as I am sure it would be only too delighted to do, taxation would have to be increased further in Scotland. It would not come down. If the Minister wants evidence of that fact, he has only to look at the dynamics of local government finance over the past 20 or 30 years.
§ Lord Sewel
I am intimately acquainted with the dynamics of local government finance over the past 20 or 30 years. We should bear in mind that this very specific proposal was put to the Scottish people in the referendum on 11th September last year. We were absolutely open and straight with the electorate of Scotland at that time. We sought their specific endorsement, and they endorsed the proposal by over 60 per cent. We are committed to legislate to give effect to the proposals placed before the Scottish people in the referendum.
Perhaps I may attempt to explain how we arrive at the figure of 3p. On the one hand it seems to be ridiculed as being of no consequence, and on the other as bringing about the flight of everybody of any value and merit from Scotland. It is not my job to attempt to reconcile those two positions.
There was general dissatisfaction regarding the 1979 proposals—the point was referred to by the noble Lord, Lord Steel, and was made strongly by some distinguished members of the party opposite—that they would establish a destabilising talking-shop with no fiscal responsibility. It was said that that would lead to an assembly pressing for improvements in services but being unable to secure those improvements because the level of income allocated to it through the block grant would not enable them to be sustained; that the argument would arise: "We want to do it, we have the political will to do it, but Westminster won't give us the money. If we had the right to tax, we would do so; we should look the Scottish people in the eye, go to them, receive their endorsement and get on with the job".
I have some sympathy with that type of criticism. That is why we introduced a tax-raising power. However, the power we have introduced is specific and limited in order to balance that sense of fiscal responsibility with a recognition that we live in an integrated economy and macro-economic policy is a reserved matter. It would therefore be totally inappropriate for the whole tax-raising power indicated by the noble Lord, Lord Lang, to be devolved. Clearly, control over income tax rates is a major tool in the management of the economy. Therefore a balance had to be achieved, and that is what we sought to do. The 3p rate represents £450 million a year. I do not deride that amount, and I do not believe that the farmers of Scotland would deride it. It is slightly short of the total amount paid to Scottish agriculture every year by way of public support. It is about the same amount as the combined budgets of Scottish Enterprise and HIE. That amount of money can make a significant difference— 289 slightly more than at the margin; it can make a significant difference across a range of activities in Scotland. If the Scottish parliament wished to use the power, it would have at its disposal an amount of money which cannot properly be called trivial. It would not, through its tax impact, disturb the macro-economic management of the economy. That is the way we arrive at the 3p figure. As the noble Lord, Lord Steel, indicated, it could have been 2p or 4p, but 3p seemed to create and sustain that balance.
Let us now turn to the £420 million/£450 million yield. The yield from the 3p rate will vary depending on the level of economic activity and on inflation. The best estimate we received when we produced the White Paper was £450 million. Subsequently the Inland Revenue was able to produce a more precise estimate, providing us with the figure of £420 million. That is merely a function of the increased sophistication of the ability of the Inland Revenue to provide a more accurate estimate of the yield.
Let us then turn to the slightly different argument, alluded to somewhat elliptically by the noble Lord, Lord Mackay of Ardbrecknish, relating to changes in the tax structure. As I have been at pains to point out, the present power is expressed purely in terms of 3p on the basic rate. We know that tax structures may change over time; there has to be a base reference point in order to know what amount of money should be raised after the tax structure has been changed. That is the reference back to the £420 million. It would then be a matter for the Treasury, in consultation with the Scottish parliament, to agree on a means by which, under a changed tax structure, as near an arrangement could be achieved representing the present 3p on the basic rate. So there is nothing strange, cynical or mischievous in the movement from 3p to £450 million, to £420 million. They all refer to the same thing.
§ 5.15 p.m.
§ Lord Mackay of Ardbrecknish
I thank the Minister for giving way. I follow his argument—at least, I thought I did for a moment or two, but then I began to have doubts. If he is saying that the decision is made by the UK Treasury (by the Chancellor) to change the structure of income tax so that the basic rate takes in less than £420 million to £450 million, then some other way would be found. If the shortfall comes from other economic factors—perhaps a downturn in the economy, or fewer basic rate tax payers—does that imply that the procedures in the Bill to allow the Treasury to make changes will not run?
§ Lord Sewel
The Scottish parliament would pass a resolution increasing the tax rate by, let us say, 3p. The Inland Revenue would estimate what the yield from that would be and make that money available. During the course of the tax year it could become clear that there was a difference between the estimate and the yield. Either an adjustment would have to be made during the course of the tax year, or an end-year adjustment would be made to take account of the difference between the estimate and the actual yield. I hope that explains the point satisfactorily.
290 I come back to the basic point in this debate as to whether Clause 69 should stand part of the Bill. The provisions which are captured in the clause were put explicitly and openly to the people of Scotland at the time of the referendum on 11th September last year. Over 60 per cent. of the people of Scotland endorsed those proposals and we are pledged to give legislative effect to them.
§ Clause 69 agreed to.
§ [Amendment No. 281BA not moved.]
§ Clause 70 [Supplemental provision with respect to resolutions]:
§ [Amendments Nos. 281C and 281D not moved.]
§ Clause 70 agreed to.
§ Clause 71 [Scottish taxpayers]:
The Deputy Chairman of Committees (Viscount St. Davids)
I should point out before calling Amendment No. 281E that if that amendment is agreed to I cannot call Amendment No. 282.
§ Lord Mackay of Ardbrecknish moved Amendment No. 281E:
§ Page 33, line 8, leave out subsection (6).
§ The noble Lord said: We now come to the part of the Bill which attempts to define who is a Scottish taxpayer and who is not. We shall come later to what I believe is a more elegant solution to this problem, but I have learned that the Government do not like elegant solutions and so I do not suppose that I shall make much progress on that. I therefore wish to look at some of the detail of the solution that the Government have brought forward as to who is a Scottish taxpayer and who is not.
In Clause 71 we look at place of residence. In subsection (6) we have the interesting issue of,
a vessel or other means of transport",
with which comes the question of where one is just before and just after midnight. Take someone who commutes on Sunday night on the Glasgow to London sleeper, which currently leaves just before midnight. I should say that I seldom use the sleeper so this is not a case of my seeking anything for myself. I assume that the sleeper is still in Scotland just after midnight and therefore the commuter is judged to live in Scotland for that day. If, however, the sleeper were to leave a little earlier and cross the border by midnight, the commuter would be judged to live in England for that day. If someone leaves London on the sleeper, goes to sleep before midnight in England and wakes up in Scotland, it will be decided that he does not spend that day in Scotland because just around the witching hour he was still in England, sleeping his way north. I wonder whether the Minister can help me with the sleeper quandary.
§ There is a similar problem with regard to transport which concerns lorry drivers, but perhaps one of my noble friends will take up that matter. Many lorry drivers do a lot of commuting and moving around. Sometimes they are in Scotland overnight, sometimes in England and sometimes on the Continent. They may, in fact, be on the Continent to such an extent that the 291 number of days on which they are in the UK calls their tax position into doubt and the matter may become very complicated for them. There are, for example, major transport firms in what was the constituency of my noble friend Lord Monro which operate cross-border and across Europe. Those firms will have drivers whose homes are clearly in Scotland but who will spend a lot of midnights outside Scotland, and I believe that that will be a problem.
§ I think the question of ships is the best of all in this particularly daft clause. A coaster may trundle around the coasts of Europe and spend some time in Scottish ports, some time in English ports and some time in European ports. I am happy to say that, thanks to the abolition of the dock labour scheme by the previous government, the ports in Scotland have seen a considerable revival of their trade, so it does happen that many sailors and merchant seamen spend many nights on their coaster in Scottish ports. They may live in England, they may indeed live in an overseas country, but they escape the tartan tax, at least so far. It seems to me odd that a merchant seaman who resides in England, and whose wife and family reside in England, but who spends a lot of nights in a Scottish port, may suddenly find himself having to argue with the tax authorities that he is not a Scottish taxpayer. I wonder what the position is if a ship leaves the Clyde on the tide and is still in Scottish waters at midnight. How would we resolve that?
§ The Inland Revenue has already sent out pages and pages of material to try to clarify the Scottish tax position. It has not succeeded as far as I am concerned, but I suppose it will all be to the benefit of accountants and such people who will be able to advise their clients as to the position.
§ I accept that there may not be many such people, but legislation is written to cover all eventualities and we must look at this matter very seriously. What will happen if someone spends a lot of time in coastal waters? It might be very relevant to the Scottish Fisheries Protection Agency, of which the Minister is the commanding officer, the commander in chief, the vice admiral, or whatever we want to call him. Many of the men of that agency will spend a lot of nights in Scottish coastal waters. Will they be able to say: "We are not Scottish taxpayers because we are not tied up at a Scottish port; we are out in the Minch somewhere watching the fishermen and making sure that they are all obeying the law".
§ The position will have to be clarified. If it is not clarified in the legislation or in the guidance, it will eventually have to be clarified by expensive court action, which we all want to avoid. I believe that this daft little subsection deserves some attention from the Committee to try to make sure that the Government know what they are doing. If it becomes clear to the Committee, as I am sure it will, that this is a pretty confused issue, I hope that Members and the Government will be persuaded that the simpler solutions 292 with regard to defining who is and who is not a Scottish taxpayer, to which we shall come later, should be accepted by the Government. I beg to move.
The Earl of Balfour
Grouped with Amendment No. 281E in the names of my noble friends Lord Mackay of Drumadoon and Lord Mackay of Ardbrecknish is my Amendment No. 282, which I realise will fall if their amendment is accepted. Mine is a purely probing amendment, but I should like to give the Committee a few examples of where I think a problem exists in respect toa vessel or other means of transport"—that is, ships, aircraft or road vehicles, which all have to be registered at some place.
When I was in Finland in June 1977 I was asked if it was still possible to obtain flax sail canvas and sail twine to equip a square-rigged sailing vessel. Upon my return, I contacted Webster & Sons, now called Millerain of Arbroath, who informed me that they could still make flax sail canvas to full Admiralty standards and sent me samples and prices f.o.b. a British port. Flax canvas is much nicer to handle in wet stormy weather than is cotton, which is horrible, or man-made polyester, which deteriorates in bright sunlight.
I also contacted Barbour Campbell Threads Limited of Lisburn, Northern Ireland, who make the best flax and polyester twine and thread I have ever seen and whose products are ideal for sewing anything from leather to the finest silk.
The order from Finland was placed with those two firms, who arranged delivery to Aberdeen where the bolts of canvas and boxes of twine went aboard a Finnish cargo ship. That ship regularly called at Aberdeen. That is my first example: I would not wish the Finnish crew to be subject to the tartan tax.
My second example is of the then well known shipping company Richard W. Jones of Newport, South Wales, which for many years had ships with cargoes of coal making regular voyages from a Forth port to the Mediterranean returning with full cargoes, including deck cargoes, of esparto grass (used in making the best quality paper) from North Africa. These ships sailed with mostly a Welsh crew and were always registered at Newport but seldom, if ever, sailed to their home port. In October 1950 I was fortunate enough to sail for the first time as second mate for one voyage on the "Uskport" when the regular second mate was home on leave.
My last example refers to the best shipping company with which I ever sailed: the Ben Line of Leith. All of its ships were registered at Leith but they were too large to get into Leith and their main port was London. Their regular voyages were to the Far East—Malaya, Hong Kong and Japan—which meant a round voyage of about five months. Although my parents' home was in Scotland, as was the case with most of the officers and crew, I was never at home in Scotland for more than two months in any one year. When I was at sea a person had to be out of the country for a full financial year and unmarried in order to claim any tax rebate. He could then reclaim the lot.
293 Under subsection (3) of this clause it appears that a single person is able to avoid tartan tax if he or she spends most of the time out of Scotland. I fear that a married person with a home in Scotland will miss out, as has been the case with income tax in past years. I should not like to see a situation in which a married person who is a householder in Scotland must pay Scottish tax but a single person is able to avoid it because that person has no home of his own in Scotland.
In conclusion, I draw the attention of the Committee to the concluding words "or other means of transport" of Clause 71. Some years ago when I attended the Peterhead Harbour inquiry chaired by the noble Lord, Lord Hughes, I was interested to learn that regularly two refrigerated lorries per week left Peterhead whose first stop was Rome. I believe that in this case the Government should take into consideration that our transport costs, including fuel costs, are very much higher at the moment than in most of Europe. I should not like Scotland to lose this important trade, which contributes to the balance of payments, due to any kind of Scottish tax.
I ask the Government to consider the question of a person's domicile. I hope that married people will not be penalised because they have homes in Scotland and that single people can get away with it.
§ 5.30 p.m.
§ Lord Mackie of Benshie
The fact is that the Inland Revenue already deals with a number of cases involving taxpayers who work both in and out of the country. They deal with people who work on rigs or drive lorries, and in respect of the whole of their tax, not just thruppence. I believe that we are making a little too much of it.
§ Lord Mackay of Ardbrecknish
If that is the case why should we not hitch a lift with the same rules and regulations that are already applied by the Revenue?
§ Lord Mackie of Benshie
I do not know. But I do know that what happens now does not appear to cause too much trouble. We have heard gloriously exaggerated examples about people travelling on sleepers and so on. I have a much better story about sleepers that I shall tell the Committee a little later. I believe that we are making a little too much of this, especially when the Inland Revenue is today dealing with this matter. Of course the Revenue will deal with the matter in the same way. I believe that we should get on.
§ Lord Dunleath
I apologise if I am labouring a point. I am very grateful to the noble Lord, Lord Mackay of Ardbrecknish, and the noble Earl, Lord Balfour, for their maritime expertise. In particular, I thank the noble Earl for his kind words about the Northern Ireland linen industry. I am vexed about the position relating to vessels. Currently, there is an extremely good and fast ferry service operated by two companies between Northern Ireland and Cairnryan or Stranraer in Dumfries and Galloway.
294 To return to the "midnight clause", the Northern Ireland Assembly that will shortly be up and running does not at the moment have tax-raising powers. However, as sure as night follows day it will have such powers at some stage. The wretched crews of high-speed vessels will have to wrestle with the question of whether they are in Stranraer, Cairnryan or Belfast. I suspect that they will have to spend so much of their time filling in their tax returns that the vessels will not sail at all.
§ Baroness Strange
I believe that subsection (6) has some vagueness about it in that it refers to "or other means of transport". Does it mean a raft, yacht, houseboat, barge or ark? Exactly what is it? Would it not be much easier not to have it at all?
§ Baroness Ramsay of Cartvale
It may be helpful if I deal first with the specific point raised by the amendment tabled by the noble Earl, Lord Balfour, before dealing with the wider point raised in Amendment No. 281E.
Clause 71(6) makes provision, for the avoidance of doubt, that a vessel or other means of transport can be regarded as a place of residence and can therefore in particular circumstances, be a person's principal residence in Scotland. For example, somebody living on a vessel permanently moored in Scotland could be liable for the Scottish variable rate of tax. To put it another way, if someone lives in a mobile home, either on land or water, in Scotland, if other conditions are met, he or she will be liable for the Scottish variable rate. That is only right if that person is benefiting from public services in the same way as a person who lives on shore.
It may also be possible for this clause to apply to a person working aboard a merchant ship. Various members of the Committee have given examples of such a situation. But it is important to recognise that for that to happen—it applies to everyone—all the other relevant conditions in the clause must be met. Since the Committee seems to be losing sight of that fact in some of the contributions it is worth dealing with the matter in detail. The other main relevant conditions are that he or she must be a UK resident for tax purposes. Then he or she would have to have a principal residence in Scotland or meet the "days spent in Scotland" criterion; or perhaps, more bizarrely, there are the cases we have had of an MSP, an MP or an MEP for a Scottish constituency.
The amendment would mean that a person whose principal residence was on a vessel could be a Scottish taxpayer if the vessel upon which he or she lived happened to be registered in Scotland, but could find himself or herself not liable if the vessel was, for example, English or Panamanian-registered. That would surely be illogical. In the light of that explanation, I hope that the noble Earl will not move his amendment.
I turn to Amendment No. 281E which would remove from the definition of a place of residence the clarification that that includes a boat, a ship or other means of transport. The amendment would not necessarily remove ships and so forth from the definition. It would just serve to make the position less 295 clear. There is no reason why houseboats and yachts sailed or moored in Scottish inland waters or territorial sea adjacent to Scotland should not be regarded as someone's principal home for tax purposes if such is the case in reality. I should make the point that someone living on, for example, a boat or ship would be liable only if the various criteria set out elsewhere in Clause 71, which I have already enumerated and will not repeat, are met.
Any time that the person was outside Scotland (as defined in Clause 112) would not count towards the various tests in the clause. Various Members of the Committee have raised various imaginative cases. My old acquaintance rather than friend, I have to say, in this place, the noble Lord, Lord Mackay of Ardbrecknish, mentioned the Scottish fisheries protection crew. In practice, such people are likely to have their principal home in Scotland, and will qualify as a Scottish taxpayer on that basis, regardless of the number of days spent in Scotland's inland waters. If any member of the crew lives outside Scotland, days spent in Scotland, including on inland waters, would be a factor in determining liability.
§ Lord Mackay of Ardbrecknish
Before the noble Baroness leaves ships, I am entirely with her about houseboats and the like, but on her answer to the last point about the fishery protection vessel I understand that if someone lives in Scotland, that is fine, but if someone lives in England and spends enough time in coastal waters—my understanding was that the fisheries protection service did not spend any time in inland waters, but in the sea in coastal waters—to break through one of the definitions, despite the residence in England, such a person would be considered to be a Scottish taxpayer.
§ Baroness Ramsay of Cartvale
I think that the answer is yes. If such a person qualified under the clause providing for days spent in Scotland, then he or she does, because in Scottish inland waters that is what applies.
§ Lord Mackay of Ardbrecknish
I know that I may be splitting hairs and that the noble Baroness may just be making a mistake in her reading, but I cannot allow her to keep on the record "inland waters". That is utterly wrong. It is not inland waters that bother me. It is not the fisheries protection vessel sailing up Loch Ness or Loch Lomond, it is the fisheries protection vessel sailing in Scottish waters; that is, the Minch, outside the Minch, and so on. I think that the noble Baroness has made a slip of the tongue, because she does not have much of a nautical background, despite the fact that she lives overlooking the sea.
§ Baroness Ramsay of Cartvale
Yes, but it is the Firth of Clyde. It is coastal waters. I agree with that. I thought that I said "coastal waters" the second time that I spoke about the point. I do not want to get into the question of sleepers crossing the Border. The noble Lord is technically right. Where one is at midnight determines where one spends the day—in Scotland or 296 elsewhere. Limits and divisions have to be drawn somewhere. I should like to set out the general principle rather than go into every example that has been given, although I cannot resist dealing with the Stranraer ferry mentioned by the noble Lord, Lord Dunleath. Workers on that ferry could, through months spent on the boat in Stranraer, qualify as Scottish taxpayers. To do that they would need, first, to qualify as UK residents for tax purposes and then have a principal residence in Scotland or qualify through the days-spent-in-Scotland rule.
If all those other criteria were met, there is every chance that such people would benefit from the Scottish tax power, and it is wholly appropriate that they should count as Scottish taxpayers. As a general principle, behind the liability rules, UK residents who are likely to derive benefit from the operation of the Scottish tax power, whether it is varied up or down—no one seems to mention that it might be down—through having a close connection with Scotland should be liable.
Clearly some people have closer connections with Scotland than others, but as I have said, limits have to be drawn somewhere. The lines drawn in Clause 71 are built around the general principle which I have just described. While there is scope for some dispute around the margins, there will always be a reasonable argument for the inclusion of those marginal cases within liability as well as for their exclusion.
It should be stressed that the difficult cases are almost by definition going to be at the margins, with the greater majority of taxpayers unaffected. About how many people are we talking here? I suspect that with most of these extreme examples it is very few indeed.
I am sure that everyone remembers the adage:Hard cases make bad law".Some people have a stronger case than others for counting as Scottish taxpayers. As I have said, divisions have to be drawn somewhere. Nothing that I have heard from anywhere around the Chamber tonight persuades me that we have drawn the lines in the wrong place, or that there are other options which are preferential in terms of equity or practicality. So I ask the noble Lord to withdraw the amendment.
§ Baroness Carnegy of Lour
Before the noble Baroness sits down, the noble Lord, Lord Mackie of Benshie, said—it is probably correct—that the Inland Revenue deals with these matters every day and so there is nothing to worry about. Will the noble Baroness reply to him now, or will she leave the reply for a later amendment, because it seems to me to be an important point? The Inland Revenue has ways of dealing with lorry drivers and so forth. Will she reply to that?
§ Baroness Ramsay of Cartvale
I was not conscious that the noble Lord, Lord Mackie of Benshie, had asked me a question.
§ Lord Desai
Perhaps I may make a point which I believe is important to make, because these things go 297 down in Hansard and have legal force. When arguing about the virtue of paying the higher rate of tax in Scotland, my noble friend said that such people have to do so because they derive benefit from public services in Scotland. That is all right as a general principle, but it is not true for individuals. I do not escape taxation if I demonstrate that I derive no benefit from public services in Scotland. One pays tax because one is a resident and one is subject to tax whether one benefits or not. That point has to be made clear. Taxation is not a give-and-take thing. One is presumed to derive benefit whether or not one derives benefit.
§ Lord Sanderson of Bowden
Before the Minister gives up on this subject, I am concerned about one thing. The Inland Revenue has good rules at the moment for residents as regards the UK. I do not know why we are going into so much detail about Scotland per se, as opposed to the Inland Revenue just adopting what are its existing rules about residents.
§ Baroness Ramsay of Cartvale
We are laying down what we think is right for the new situation in Scotland in regard to the tax powers. I make no apology for that. I do not understand why people are puzzled. We have laid down some practices that are already in use by the Inland Revenue, and also proposing new matters. We are debating the Scotland Bill and how tax variable powers will be implemented.
§ 5.45 p.m.
§ Lord Sanderson of Bowden
I agree that we are looking for something that is simple, which will not cause enormous problems in implementation. However, there are perfectly good rules already laid down by the Inland Revenue in check in regard to residence and raising taxes. I wonder whether we are making this a very complicated issue in what is already a very complicated Bill.
§ Baroness Carnegy of Lour
The noble Baroness should take the matter seriously and answer this very important point. There are in existence rules for residence which work: why are they not being used in this case?
§ Baroness Ramsay of Cartvale
The noble Lord, Lord Mackie of Benshie, said that all the problems that were being raised as though they were unique between Scotland and England are being resolved all the time in Britain and in Europe, and there is no reason why we cannot resolve the issue of tax variable powers to our satisfaction. That is what we are doing in the Bill. Neither of the amendments that we are debating now do anything to help the situation; they merely confuse the matter. We are only debating the two amendments before us.
§ Lord Mackay of Ardbrecknish
The amendments expose the House to the folly of the Committee and the folly of the Government's decision to redefine Scottish taxpayers in a way that is different from UK taxpayers 298 in laws that are already defined and operating. There is plenty of case law and many of these issues have already been resolved. The Government have decided to play a new game.
In the last half hour we have succeeded in showing that the Government have no justification for playing a new game. In trying to be helpful, the noble Lord, Lord Mackie of Benshie, set out how the matter had been dealt with already. But the point is that the Government are not using current procedures. They are trying to change the rules in certain circumstances. That is the folly of their position. We have shown, as in the previous debate, why the Government should back off from these complicated clauses and just use the current procedures.
We have established that a certain amount of confusion exists. A person who is resident in Northern Ireland, working on ferries which stay overnight in Scotland, will become a Scottish taxpayer. If that is the case, that is plain daft. I suggest that a little more thought ought to be given to the matter. We will return to the wider point, but in the last 32 minutes we have exposed the Government's clauses to be as confused as many of us have thought for some considerable time. I beg leave to withdraw the amendment.
§ Amendment by leave withdrawn.
§ [Amendment No. 282 not moved.]
§ Lord Lyell moved Amendment No. 283:
§ Leave out Clause 71 and insert the following new clause—