Scotland Bill

Lord Maxton Excerpts

Thursday 15th March 2012 Lords Chamber

[Lord Forsyth of Drumlean]

My Lords, I know that I am beginning to sound like a broken record.

[Lord Maxton]

Why change the habits of a lifetime?

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[The Duke of Montrose]

My Lords, this is a paving amendment, and I shall address my remarks also to Amendment 54BA and the other amendments in the group. Amendment 54BA will remove the close connection condition for the purposes of identifying a Scottish taxpayer. This is an effort to remove the complications that come from trying to prove a close association, which is a concept that raises many questions of definition and interpretation. The argument is that the best way to define a Scottish taxpayer is without reference to residence in Scotland. Instead, the definition should be based on being a UK citizen and spending more time in Scotland than in other parts of the United Kingdom. This argument has been put to me by the Law Society of Scotland, and I think it has weight.

Perhaps the definition I have just pointed out goes some way to answering the call of the Institute of Chartered Accountants of Scotland for a definition in statute of what constitutes a Scottish taxpayer. At present, new Section 80D defines a Scottish taxpayer as,

“an individual … who is resident in the UK for income tax purposes, and ... who, for that year, meets condition A, B or C”.

These conditions are that the taxpayer,

“has a close connection with Scotland … does not have a close connection with any part of the UK other than Scotland … and … spends more days of that year in Scotland”,

or is an elected parliamentary representative for Scotland.

The residence qualification is typical of the sort of issue that has raised controversy in recent legal cases. I mention Gaines-Cooper v Her Majesty’s Revenue and Customs and Tuczka v Her Majesty’s Revenue and Customs. New Section 80D, when combined with new Sections 80E and 80F, presents problems for those who move between jurisdictions within the United Kingdom inasmuch as they create uncertainty, difficulties of interpretation and potential problems regarding compliance. In particular, the definition of “close connection” contained in new Section 80E creates a difficulty of interpretation—and what does “place of residence” mean? It appears to be different from residence as understood in other areas of tax law, such as capital gains tax. Does “place of residence” imply ownership when juxtaposed with “main place of residence” in paragraphs (b) and (c) of new Section 80E(3)? “Place of residence” and “main place of residence” are not defined in new Section 80E, and therefore create potential problems of interpretation for those who may live in Scotland yet work in England, or vice versa, including those living on the Scottish-English border.

[Lord Maxton]

There are, of course, people who live in Scotland, who even work in Scotland, but who are paid from England or elsewhere in the United Kingdom. They, too, create a problem because, as far as I am aware, the PAYE system does not depend on where you live but where you work or who you are employed by.

[The Duke of Montrose]

My Lords, this is the type of complication that we are talking about. In fact, the way the Bill is at the moment, it will practically be a question of where you spend the night. There are commuters from Glasgow or Edinburgh to London, and a variety of public office holders, who may have a place of residence in Scotland yet work for considerable periods in England or Wales, such as Members of the House of Lords, who are not included in new Section 80D(4), or Supreme Court judges. If a clause such as this remains, should the Bill not contain an obligation for each individual to state what he regards as his main place of residence?

New Section 80E also highlights the issue of split-year residences. Unfortunately I just missed the debate immediately preceding this, but I thought that my noble friend Lord Forsyth would cover the point. Her Majesty’s Revenue and Customs currently applies, in extra-statutory concession A11, split-year treatment to individuals who spend only part of the tax year resident in the United Kingdom. The concession means that, for example, an employee who comes to the UK for a secondment beginning on 1 June would be regarded as a non-UK resident and therefore non-taxable in the UK on his or her general earnings from the same employment for the period from 6 April to 31 May in that year.

The Law Society of Scotland questions whether setting up the provisions of new Sections 80D, 80E and 80F will require the creation of a similar extra-statutory concession. It would seem more sensible to create a robust system that does not rely on extra-statutory concessions in order for it to work—one whose fundamental architecture takes account of movement of people within the United Kingdom, and therefore within different tax zones, in one tax year.

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[Lord Steel of Aikwood]

The noble Lord, Lord Foulkes, may not know that there are already people living just south of the border who take advantage of the services in the borders. I refer particularly to people from the Berwick-upon-Tweed area who make good use of the Borders General Hospital because it is a very good facility. I have a simple question for the Minister. How does Section 80F operate? It is about the number of days that people spend in Scotland or the rest of the UK. If we do not have any border controls we do not know who is coming in and out. I am assuming that we are not having that even under Mr Salmond’s proposals. Therefore, I simply do not see how it will work. Perhaps the Minister will enlighten us.

[Lord Maxton]

My Lords, quite properly everyone has been raising the issue of those people who live and work across borders, work on ships and trains, or are lorry drivers. My concern to some extent is those people—I could be one of them—who live in Scotland but whose sole income is a pension from the other place, and whose tax office is Cardiff and not East Kilbride or anywhere in Scotland. I am still not quite clear how that tax office will know that I am a resident in Scotland. As far as I know, it does not have to know my home address. I would accept that if this debate was back in the 1990s. Of course, technology has moved on and it may be that we now have a database that allows the Inland Revenue to know exactly where you live. I rather doubt whether it has ever bothered to update the records and keep them up to date. What happens to someone who lives in Scotland and should be paying tax in Scotland but whose sole source of income and tax office are outside Scotland? How does that person know what tax they should pay in Scotland?

[The Duke of Montrose]

I wonder whether the noble Lord remembers getting a demand for taxes from the Inland Revenue which, presumably, was sent to his house because it knows where his house is.

[Lord Maxton]

Oddly enough, I am in the unfortunate position at one level but fortunate in another that about five years ago, if not longer, I got my last letter from the Inland Revenue. It said, “Please do not send us any more tax returns because we know what your income is. It has been the same for the last 10 years so don’t bother any more”. If I moved house, I am not sure that anyone would know where I had gone. I assume that you have to tell the Inland Revenue but the fact is that there is this problem. As far as I am aware, PAYE is paid on the basis of where you are employed, who employs you and the income that you are paid. That can come from a variety of sources and is taxed at source. I am never quite clear whether one’s residence is an important part of that issue.

[Lord Campbell of Alloway]

My Lords, I support what has been said by and large for this amendment in the name of my noble friend the Duke of Montrose. This is a highly complex problem and very difficult to understand. The question is whether it falls within devolution or not. It is understood that an arrangement has been made for members of the Privy Council to consider, if a question such as this arises, whether it is within or without the concept of devolution. This matter is so complicated that I am only grateful for having been able to listen to what was said about it. I hope that it may be satisfactorily resolved.

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[Lord Forsyth of Drumlean]

Further to that point, this is a circular argument. My amendment chose to alter the provisions in the Bill because the test of close connection does not deal with the circumstances that the noble Lord just mentioned. On my reading of new Section 80E, which defines close connection,

“where T has 2 or more places of residence”,

a soldier may have one residence in the family home in Northern Ireland and the other may be barrack accommodation in Edinburgh or some other part of Scotland. As I understand it—the Minister can tell me if I am wrong—under that definition the soldier would be liable to pay Scottish income tax. That is clearly and absolutely not fair. He might be in Afghanistan or Scotland. No one expects him to pay Afghan tax.

I tabled my amendment to suggest a possible remedy, although it may not be ideal—perhaps my noble friend can comment further. I may be wrong but my recollection is that during consideration of this matter in the other place Ministers said that they would come forward with a view. My noble friend seems to be saying, “Well actually, soldiers are the same as everyone else”. They clearly are not the same as everyone else, and are not in the same position as someone who works for the Royal Bank of Scotland who gets posted from London to Edinburgh. I do not want to prolong the debate by talking about the military covenant and so on, but these service men and women are paid very poorly for the job they do, and therefore the burden of increased taxation could be significant.

What my noble friend said was very welcome if it was that where such soldiers are caught by Scottish taxation they will be compensated by having their gross salary increased so that their net position remains the same. That would be fantastic, but can we have that as an undertaking from the Government and perhaps have it written into the Bill at a later stage? Perhaps my noble friend will come forward with an amendment to achieve that purpose. Could we then also work out a system similar to the transfer payment that we mentioned when we talked about the impact of a higher tax rate on welfare payments that would be made in Scotland? Such a system would involve a transfer payment from the MoD budget to compensate for the increased revenue that was being raised from tax in Scotland. The MoD therefore would need to be compensated for that by a reduction in the Scottish block grant.

[Lord Maxton]

I am rather confused by this. After listening to the question of the noble Lord from Northern Ireland, I can see a situation arising in which a soldier could be posted to, say, Edinburgh, and could rightly show that his family, wife and children live elsewhere in the United Kingdom—in Northern Ireland—whereas a single soldier in the next room would be resident in Scotland, and therefore on a different rate of pay.

[Lord Forsyth of Drumlean]

I agree with the noble Lord, which is why my amendment proposes that if they are in military rented accommodation, they should not have to pay. Another way to deal with it would be to give them the choice of where they pay their tax. As it stands, their position is anomalous. I must say to my noble friend that if I were a member of the armed services listening to him saying that there are a number of options that the MoD will look at, I would not be very satisfied. We need clarity, particularly because so many Scots serve in the armed services and so many bases to which members of the forces are deployed are in Scotland. On the argument about accountability, as my noble friend said, many of them will not have had the opportunity to vote in the Scottish parliamentary elections on the taxes that will be imposed on them.

The military are a special case, and my noble friend ought to say that he will take this away and come back with a government amendment to deal with it, either in the terms that he suggested—that the MoD would provide compensation—or some other terms. Simply saying that the Bill provides for it and it is just about applying the test of close connection will not do.

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[Lord Forsyth of Drumlean]

My Lords, we have had a very useful debate. I am most grateful to the noble Lord, Lord Myners, for his contribution, which woke us all up a bit. I am not persuaded by my noble friend’s argument, at the end of which I think we got to the bottom of the matter—it simply is going to be too much trouble and, as regards these people whose tax status changes during a year, there might be rather a lot of them and we are not too bothered about it.

I venture to suggest that for those people the difference between perhaps paying Scottish tax and English tax might be significant. When my noble friend says, “Well you would be dealing with the whole of the Scottish population”, I do not think that the whole Scottish population will change their tax status in any one year. The Revenue is quite capable of dealing with changes in circumstances in a variety of ways. When my noble friend says that he wants to keep it as simple as possible, perhaps I may suggest that the way in which to do that is to drop this whole idea of having a separate Scottish income tax.

This is the Government’s idea and if they are going to change the tax system, they should be able to make sure that it is workable and treats people fairly, and that the answers to our questions are delivered. For the life of me, I cannot see how it can be right that someone who moves from Scotland to England continues to have to pay Scottish tax. Of course, at the other end of this building, none of this was discussed because it was guillotined and there was no opportunity. But I would not like to be a Member of Parliament living in England who receives a letter from a constituent asking why they are having to pay Scottish income tax when they are now living in England. I do not know the answer. If we sent a standard reply from the Treasury saying, “Well, it is administratively simple to make it this way”, that would be a vote lost and a very unhappy constituent.

[Lord Maxton]

When the noble Lord talks about voting, someone moving from Scotland to England would be able to move their vote. They would not be able to move their tax apparently, but they would be able to take themselves off the register in one place and put themselves on the register somewhere else.

[Lord Forsyth of Drumlean]

I would guess that that must be because electoral registration offices have far more staff than HMRC, so it is probably easier for them to cope with these matters. This is an important principle. The idea is that it is just too difficult and too complicated. When we raise the issue of how employers are going to deal with a payroll where people are constantly changing from being liable for Scottish or English tax, we are told by Ministers and the Treasury, “It is very simple. It is just a matter of changing the tax code, so it is not a problem”. But when it comes to the Treasury having to take account of liability, if it is about collecting the tax, then it is far too difficult and complicated. I think we are getting a bit of doublespeak here. I do not say that that applies to the Minister—

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[Lord Forsyth of Drumlean]

It may seem simple to my noble friend and it may have been discussed for 15 months, but I have to tell him that I am not a supporter of this Bill. I thought I made clear at Second Reading why I am not. I am somewhat surprised at the argument that my noble friend has put. The noble Lord, Lord Kerr of Kinlochard, put it quite clearly. I do not disagree about the impact of the policy but what is being said is that, if there is a change in the tax regime that results in the tax base being made narrower and from which people in Scotland will benefit, in addition people will benefit in Scotland by the cost of that change being added to the block grant. To me, that is double benefit and I do not see how that has anything to do with the accountability of the Scottish Parliament.

It arises because the Scottish Parliament is not solely responsible for tax policy, which would be an argument for fiscal autonomy that no doubt the noble Lord, Lord Foulkes, will put to us. However, the scheme in this Bill is a kind of charade whereby the Scottish block is always topped up regardless of the benefits that accrue to Scotland from the changes in the tax base, which cannot be right. I defy my noble friend to explain why, say, the Scots would get the benefit. Let us say that thresholds were raised to £10,000 so that no one earning less than that would pay income tax. That would have a dramatic effect on the Scottish block. I guess that it would be many hundreds of millions of pounds—perhaps £600 million or something of that order. My noble friend is saying that the Scottish Government would be compensated by being given that money, but the people living in Scotland would have benefited from the fact that they are not paying tax on the first £10,000. That cannot be right.

When my noble friend says, “Well, we have all known this for 15 months”, I had not appreciated that the situation was as stark as this. I thought that it might be a one-off thing at the start, but the idea that this should be a continuing matter is not about accountability; it is about giving people a guaranteed budget.

[Lord Maxton]

As the noble Lord understands it, would the reverse be true? If, say, Mr Alex Salmond decides that he has a project that he knows the Scottish people will support and he puts up the income tax to pay for it—for example, a free new hospital or something like that, on which he knows that the Scottish people will support him—will the block grant be cut accordingly to compensate for the fact that more money is now being raised in Scotland?

[Lord Forsyth of Drumlean]

I think the answer to that is no. As has been made clear, we are talking here about the Scottish block being compensated for changes in United Kingdom taxation policy. My difficulty with this concept is that the people in Scotland are within the United Kingdom. They benefit from those changes and then a compensating payment is made to the block grant to compensate for that, which cannot be right.

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My amendment may well not be appropriate for inclusion in the Bill, but it is certainly appropriate that the Government should consider how they will address these issues of funding in the context of the massive changes that they propose. My noble friend has performed valiantly today and I can just about get along with his argument that the time was not right, but not the argument that says, “We are concentrating on reducing the deficit”—they must have lines to take in the Treasury that they pull out for things that they do not want to do. The last time I heard this line was before the Scottish elections when I was trying to persuade my right honourable friend the Prime Minister to go for an early referendum. Even when we were in opposition, and the late lamented Wendy Alexander bravely said, “Bring it on and let us have a referendum”, the argument put by my own party colleagues in Scotland was, “We must concentrate on the economy”.

[Lord Maxton]

The noble Lord said “late lamented”—Wendy is still very much alive.

[Lord Forsyth of Drumlean]

She may still be alive but she is no longer leading the Labour Party in Scotland. I do not want to ruin what career she may have ahead of her, but in any discussions I had with her I found her to be exceptionally able and far-seeing, looking beyond the immediate prospect of events and what is in today’s newspapers.

I am not enthusiastic about this whole devo train that we have got on. I believed from the beginning that it would lead to the nationalists dominating the Parliament and that it could lead to the break-up of the United Kingdom. I am not particularly smart for thinking that. Enoch Powell was arguing that years ago. All I am saying is if we are going to go down this track, we should anticipate some of the problems and that Barnett is going to be one of them.

I sense that the House probably does not want to discuss this at any more length, so I beg leave to withdraw the amendment in my name and that of the noble Lord, Lord Barnett. I look forward to receiving some criticism by him for not making all the points that he would have made, and for not making them as eloquently as I am sure he would have done.