Draft Scottish Rate of Income Tax (Consequential amendments) Order 2015

Baroness Keeley Excerpts

Wednesday 16th September 2015 General Committees

[Barbara Keeley (Worsley and Eccles South) (Lab)]

It is a great pleasure to serve on the Committee with you as Chair, Mr Bailey. The order makes a number of consequential amendments to specific references to tax rates in existing legislation, which the Minister talked us through, so that Scottish rates can be used when it is appropriate to do so.

Labour believes that Scotland should have more autonomy over its taxation decisions. In the general election, we promised to make the Scottish Parliament

“the most powerful devolved Parliament in the world.”

Although the order will simply adapt legislation to take account of any changes to income tax, the Scottish Parliament may undertake no tax changes in the future without this complication. A number of concerns remain about how the changes will be implemented.

The Institute for Fiscal Studies report on the Smith commission made it clear that in many ways, the most difficult work lies ahead, and that the details of how taxes and benefits are devolved will be crucial. We must also consider the practical implications of tax devolution for businesses such as insurers and pension funds. Concerns have been raised about how to identify who is liable to pay the Scottish rate of income tax. What measures has the Minister taken to ensure that Scottish taxpayers will be identified without significant additional costs?

Concerns have been raised by the pensions industry about how to implement pension relief at source in light of the change, which follows the implementation of a range of other pension measures introduced in 2014. The purpose of those measures was to provide customers with greater pension freedom, but there is clearly already a significant amount of strain on the pensions industry, causing difficulties for many pensioners. Last year, Scottish Widows admitted that it had reached breaking point because of the reforms, which have had a significant negative impact on its ability to provide its customers with a quality service.

Pension providers have stated that they will struggle to implement the new round of reforms. Many pension scheme providers have pointed out that the new arrangements will have significant administrative implications. The National Association of Pension Funds has said that the higher operational costs are likely to be passed on to scheme members. I do not know whether the Minister agrees with the NAPF that those changes will lead to higher costs. If he does, can he give the Committee a figure of what the costs might amount to for scheme providers and individual members who will end up having the costs passed on to them? That raises the question of who will bear the impact of higher operational costs. Will those additional costs be borne solely by scheme members in Scotland or by members across the UK?

As the Minister mentioned, because of the pressures and strains on the industry, HMRC has given it more time to implement the changes. Between April 2016 and April 2018, relief will be given at main UK rates, with an adjustment being applied later. Given the delay, does the Minister think the planning for the arrangements has been adequate? Have the cost and administrative implications for pension scheme providers and their members in Scotland been sufficiently taken into account? What steps is he taking to ensure that the reforms do not impact negatively on the service that customers receive from their pension providers?

The future implementation of the Scottish rate of income tax remains unclear. The explanatory memorandum states that after April 2018 Scottish taxpayers will

“as far as possible…receive the correct amount of relief into their pension pot.”

Will the Minister clarify to the Committee what is meant by “as far as possible”? It implies that the implementation of the changes may not be completed even within the grace period given to pension providers. It raises concern that, even by 2018, there will still be cases in which individuals are not receiving the correct amount into their pension scheme. Will the Minister explain to the Committee what will happen in those cases?

It is clear that there are lessons to be learned from the implementation of the Scottish rate of income tax. The Scotland Bill outlines devolution plans that include the devolution of far more substantial income tax powers to the Scottish Parliament. Will the lessons learned from the introduction of this tax change inform the Government’s approach to the management of the reforms that are yet to come? HMRC has published draft guidance on how it will interpret the definition of “Scottish taxpayer”, but concerns have been raised about the helpfulness of that guidance for more complex cases. At the moment it is unclear whether that guidance will be amended to take account of the feedback. Will the Minister provide further information on that?

Overall, there is still very little guidance for taxpayers about this important matter. Employers and taxpayers need to be in possession of clear guidance, and they need to be given enough time to plan for changes that they may need to implement. Will the Minister tell us what plans have been made to ensure that information is provided to taxpayers and employers in a timely manner?

We must bear in mind the wider changes that may result from this tax change. The Association of British Insurers has warned in its response to the Smith commission:

“Over an extended period any adjustment to the value of tax relief would affect the…value of an individual’s pension fund and their income in retirement. As a result, employees in Scotland could receive different levels of pension income (lower or higher) than colleagues in other parts of the UK, even if they are making the same contributions into the same scheme over the same period of time.”

Clearly, that seems totally wrong.

What assessment have the Government made of the impact on financial services currently based on the UK income tax regime if the Scottish income tax regime were to differ? The UK Government are currently undertaking a comprehensive review of pension tax relief in the UK. The review will consider potential reforms to how pensions are taxed, which could have a significant impact on pension policyholders. Does the Minister anticipate that the UK Government’s review and any changes arising from it will have an impact on the operation of pension tax relief in Scotland?

Although Labour does not intend to oppose the order and we support the move to devolve further tax powers to the Scottish Parliament as outlined in the Scotland Bill, we have concerns about the practical applications of the changes. I look forward to hearing the Minister’s reply and any assurances he can give about the issues I have raised.

--- Later in debate ---

[Mr Gauke]

Let us not detain the Committee too long on that ancient history. However, it is great pleasure to respond once again to an intervention from the hon. Gentleman.

The Scottish rate of income will apply to Scottish residents. In the circumstances that the hon. Gentleman sets out, where somebody is not a Scottish resident, the UK rate of income tax will apply. I hope that provides clarity.

I should point out that there is no definitive list of Scottish residents, but HMRC has been and will continue checking its address data against third-party information, for example the Scottish electoral register, to check accuracy. HMRC expects to contact Scottish taxpayers later in 2015, well in advance of the introduction of the Scottish rate in April 2016.

Work on making changes ready for the Scottish rate of income tax is well advanced. It is on schedule and will support further devolution. While it is clearly vital that the public have all the information necessary to understand the Scottish rate of income tax before it comes into force, all the customer research that HMRC has commissioned shows that the timing of information is equally important. If guidance or information highlighting the changes is provided too early, it will not be at the forefront of busy people’s minds.

UK employers and pension providers are amending payroll software to take into account the introduction of the Scottish rate of income tax from next April. Technical guidance on Scottish taxpayer status was published for consultation in June and will be published in its final form, along with a raft of more general support and guidance, later this year. HMRC will write to those whose records show that they are a Scottish taxpayer later this year and tell employers and pension providers which of their employees or pensioners are Scottish taxpayers. I reassure the Committee that progress towards the introduction of the SRIT appears to be well in hand.

[Barbara Keeley]

We have talked in other debates about such things as insurance premium tax. There are considerable pressures and strains on the pension industry, and one of the serious concerns we came across was the higher cost to pension scheme providers. As I said earlier, Scottish Widows said that its systems were at breaking point. This change comes on top of others, and we are even changing insurance premium tax. I do not know whether he was going to respond to that point, but will he do so? Given that even insurance premium tax is being put up, there is concern that pension scheme providers will be suffering from extra administrative cost. What might that cost be?

--- Later in debate ---

[Mr Gauke]

If the SNP is suggesting that it has a plan to reduce taxes and reduce spending accordingly, I look forward to hearing it. In the absence of that, let me make the point that what is set out in the Scotland Bill—I appreciate that we are not debating the Scotland Bill today—will give the Scottish Government a huge amount of flexibility. I am sure the people of Scotland are looking forward to hearing, at some point, what the Scottish Government intend to do with it. I note that we hear no further information at the moment on that point.

[Barbara Keeley]

The Minister has not really answered all my questions, so I would like to make some key points again. Given that much more is to be done in future years—there is to be more devolution—the issues I have raised and the questions I have asked are important. If the Minister does not have the details of the higher costs that will hit pension scheme providers, he needs to write to me about them.

I really do take on board the point about the potential impact on individuals. The ABI believes that, because of all the difficulties and the time it is taking,

“employees in Scotland could receive different levels of pension income”

from others

“making the same contributions into the same scheme over the same period of time.”

I feel strongly that that is not acceptable. There is much more work to be done. We cannot have individuals losing out on their pension funds because the pension schemes are on their knees trying to cope with the changes that are being thrown at them. It is clearly not acceptable that individuals will be affected in that way. If the Minister is not able to assess that and tell us what he thinks the impact will be, perhaps he could write to me. He will have the note with all my questions.

[Mr Gauke]

As I said, we do not have the specific numbers for the costs of administration by pension providers, but I reassure the hon. Lady that individuals will not lose out. HMRC will ensure that all pensioners pay the correct tax—that is what the system is designed to do. There is an interim arrangement, so to speak, but there is also a reconciliation process, and the correct tax will be paid. I hope that the Committee will take note of those points and support the order.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Scottish Rate of Income Tax (Consequential Amendments) Order 2015.