Scotland Bill

Lord Sassoon Excerpts

Thursday 15th March 2012 Lords Chamber

[Lord Davidson of Glen Clova]

If such an event came about, any retractions that might be required from any quarter could also be added into the consultation. We support the amendment.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, as my noble friend Lord Forsyth of Drumlean has explained, Amendment 53A would require the Scottish Parliament to consult interested parties prior to passing a resolution that would see a Scottish taxpayer paying a higher rate of tax on non-savings income than the equivalent UK taxpayer. Of course, my noble friend has also explained in passing that there is no such requirement on the UK Government to consult interested parties when they make similar decisions.

There are two reasons why the Government do not see merit in my noble friend’s amendment. First, the underlying purpose of the Bill is after all to provide for greater financial accountability of the Scottish Parliament to its electorate and give the Scottish Parliament a real stake in Scottish economic performance. I hear, and heard in our previous sitting, my noble friend’s doubts about that, but that is the purpose of the Bill. Devolving the right to set a Scottish rate of income tax to the Scottish Parliament is absolutely key and central to that, which clearly my noble friend accepts. In devolving that key power, I do not believe that it is right for the Government to impose conditions on how the power is used. Ultimately, as the noble Lord, Lord Browne of Ladyton, pointed out in the previous discussion, the Scottish Parliament is and will continue to be subject to regular elections. My noble friend seems to be blithely suggesting that somehow the income tax rate will go up and up in Scotland without reference to the fact that it might not be an election-winning strategy. The Scottish Parliament should not be fettered in the consultation processes through the legislation.

[Lord Forsyth of Drumlean]

My Lords—

[Lord Sassoon]

I shall, if I may, continue and complete the two legs of this argument. If the setting of the Scottish rate becomes part of the existing budget process of the Scottish Government, my noble friend’s amendment will be unnecessary because currently the draft Scottish budget is published in September or October, following which the public and Scottish parliamentary committees are consulted on its proposals. A budget Bill is then typically passed in the spring and, if the Scottish rate is announced as part of the draft budget and the resolution is passed as part of the Bill, the Scottish Government’s existing processes will already include the type of consultation that my noble friend envisages, irrespective of whether it is an increase in the rate or not.

[Lord Forsyth of Drumlean]

That is very helpful, but on the previous point that it would be wrong to constrain the Scottish Parliament and that this is about accountability, the Bill is bristling with provisions that require the consent of the Treasury before the powers can be enacted. Is it not a bit strange to argue that it would be wrong to constrain the Scottish Parliament in consulting the people in a Bill that requires and constrains it to consult the Treasury?

[Lord Sassoon]

No, I do not accept the logic of that. We can debate as we go through which powers require what sorts of consents, but the central nub of the Bill is to devolve income tax rate-setting to the Scottish Parliament. That is what is envisaged. As I say, I believe that it should be done in a clean and clear way and it is then for the Scottish Parliament and the Scottish Government to decide what consultation there is. As I pointed out, the Scottish Government at the moment consult in a very sensible and open way for their budget Bill. There is no reason to doubt that they would do something sensible and proportionate with the new power.

To answer my noble friend’s question about allowances of one kind and another in the context of a higher Scottish rate, the position is that the Government are consulting with representatives from the pension industry, charities—which he specifically mentioned—and other interested parties through the Scotland Bill technical groups. There will be a technical note setting out proposals in these areas after the Bill receives Royal Assent, so it is very much work in progress. My noble friend identifies important issues but, on the basis of my explanation, I ask him to withdraw his amendment.

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[Lord Davidson of Glen Clova]

I am guided by the noble Lord, Lord Forsyth, as to how one should approach the Minister. I note what he has said and I hope that I have at least given the noble Lord some useful advice that will allow him to look at certain issues. However, I will await the answers from the Minister.

There is one further point that I should raise with the Minister, which to an extent echoes what the noble Lord, Lord Kilclooney, said. We are in a position where devolution seems to be taking us to where we may have a separate tax system in Scotland, in Northern Ireland, possibly in Wales and in England. Under the coalition Government there is a new Office of Tax Simplification. It would be helpful to know whether some guidance might be sought as to how simplification might be assisted. I do not mean that entirely frivolously because it is plain that this is an area of great complexity. It would be useful at least to recognise that there may be a step away from a unitary tax system to something that is more complicated, so guidance on simplification from every quarter might be useful. In relation to the various amendments, it will be detected that we are broadly in support of seeking clarity.

[Lord Sassoon]

I am grateful to the noble and learned Lord, Lord Davidson of Glen Clova, for his measured and reasonable approach. I think that I have had 57 varieties of questions and counting. Some of the questions are very technical and possibly do not go to the heart of the clause, but I will make sure that a letter sweeping up as many of the points as possible is written ahead of the Report stage so that all noble Lords have their queries addressed in good time.

There are one or two questions that I had anticipated which we did not get to, such as the tax position of Scottish astronauts. I am sure that we could have found one or two other cases. The serious starting point of all this is that, as the noble and learned Lord, Lord Davidson of Glen Clova, points out, there is huge complexity already in the UK system on residence matters. We do not want to add unnecessary complexity in this Bill. Quite a number of the issues that have been identified in this interesting discussion already arise under UK tests, and are not particular to Scotland. Others are very much issues particular to Scotland. I believe that they have all been given consideration, but I certainly do not pretend that any of this will be simple.

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[Lord Forsyth of Drumlean]

As my noble friend is dealing with these issues now, it might be in the interests of saving a little time if he addressed the position of members of the Armed Forces.

[Lord Sassoon]

I am very happy to address the position of the Armed Forces, but, if my noble friend will allow, we should perhaps deal with that when his amendment on that subject—if he wants to move it—comes up a little later.

[Lord Lyell]

It has gone.

[Lord O'Neill of Clackmannan]

The Minister has not addressed the interface of tax and benefit. Tax credits perhaps give rise to some of the most complicated questions. Speaking as a former Member of Parliament, I am aware of the issues that arise when there is the slightest adjustment to the income of some of the poorest people in our community. It would be remiss of us not to address that aspect of taxation being imposed at different rates on different sides of the border.

[Lord Sassoon]

I will come back to that point because the question of credits is very important. I am happy to talk to that but let me answer one or two of the other questions that have already arisen. I shall pass over some of the detailed questions that are largely in the same category as some that I have already addressed.

On the question of safeguards and appeals, the appeals process will apply as it does to appeals and disputes with HMRC across the rest of the UK. That is clear and straightforward and, in general, applies to a number of the concerns of the noble and learned Lord, Lord Davidson of Glen Clova.

Let me address the issue of personal service companies as that has been somewhat topical recently. The Calman commission recognised that the changes would need to apply the Scottish rate of income tax to income from savings and dividends. The changes needed to apply the changes to savings and dividends would be prohibitive and so, as noble Lords know, savings and dividends are not within the scope of the Scottish rate of income tax. However, HMRC’s compliance work, including that relating to IR35, will continue to ensure that all taxpayers pay the correct amount of tax and national insurance contributions, including those who are liable at the Scottish rate. As is evident, all noble Lords who are here today are expert in these matters and I hardly need remind them that the aim of IR35 is to eliminate the avoidance of tax and national insurance contributions through the use of intermediaries such as personal service companies or partnerships. The noble and learned Lord is right to be concerned about this but the matter has been considered by HMRC in the construct that we are talking about today.

[Lord Forsyth of Drumlean]

Could the Minister elaborate on that? Setting up a bogus company in order to avoid tax is clearly black and white, but where someone living in Scotland who meets the test has multiple sources of income, perhaps through being on several boards and so on, surely they could legitimately set things up so that their only income was paid as dividend income and therefore avoid, quite legitimately and within the rules, the Scottish tax. Or is he saying that there will be some additional anti-avoidance measures?

[Lord Sassoon]

My Lords, depending on the nature of the scheme, it may or may not be caught by the anti-avoidance rules that already exist. Clearly HMRC, in its compliance role, will have to ensure that the issue of avoidance is fully addressed. These are complex areas and perhaps my noble friend will permit me to consider whether there is anything I can do to help where we see new areas of avoidance, if any, potentially being opened up, and what the technical thinking is about how these might be closed down. Some of the areas referred to by my noble friend sound as though they are getting precious close to artificial schemes that would be covered at present. However, let me take the matter away.

Let me address a couple of more points. On the broader question of the noble Lord, Lord Foulkes of Cumnock, of what had changed since the workshop, yes, I appreciate that the workshop raised a number of issues and I wrote to all noble Lords who were there answering the questions that arose. There have not been any changes proposed as a result of the issues that came up but it was a useful session. As noble Lords who were there will know, HMRC was there and listening hard. All the issues raised were already being thought about and, of course, this will be reflected in the guidance. It was a useful session because it will inform the drafting of the guidance. As the noble and learned Lord, Lord Davidson of Glen Clova, said, there will need to be clear guidance around this issue and therefore the more questions that are raised generally—but, please, not immediately—will help HMRC with the drafting of the guidance that will be needed.

Finally, I want to come back to this question of benefits and the universal credit, which is a very important area. The clause does not address it directly but it would be wrong to dismiss it at this point. The universal credit forms the background against which we must look at this. As noble Lords know, the universal credit is going to deliver a dramatically improved, simpler benefits system that smoothes the transition into work and improves work incentives. By 2016, when the Scottish rate of income tax is proposed to come into effect, the transition to universal credit will almost be complete, as that will be finished by April 2017. Universal credit is expected to be awarded on the basis of income net of tax, as existing income-related benefits are now. If the Scottish rate and the UK rates differ, then net incomes may of course differ depending on the amount of income tax paid, so that it is possible that there would be a difference to an individual’s universal credit entitlement as a result of the Scottish rate.

However, it is worth bearing in mind that many factors determine an individual’s net income and that a range of local factors could determine their universal credit award, such as housing or childcare costs. The Scottish rate would be another factor to be taken into the calculation. The extent of any divergence of entitlement would depend on a number of factors, including the prevailing rates in the United Kingdom, the rate set by the Scottish Government and whether an individual’s income is subject to income tax at all. I hope that gives the noble Lord some reassurance that the linkage with universal credit has been carefully considered.

[Lord O'Neill of Clackmannan]

I am grateful to the Minister for seeking to respond to this very complex issue. The kind of people who are likely to be affected by this may well be those who are currently employed in the public sector and whose wages are being considered for possibly no longer having a national rate. We could have the anomalous position of someone working for a local authority in Berwickshire being paid the same rate as someone in Northumberland—which is probably less than some other parts of the county—but ending up, because of the universal credit, getting paid more through benefit compensation than people south of the border in Cumbria or Northumberland, because they are being charged a higher rate of tax in Scotland. This kind of anomaly is going to create all kinds of difficulties. This form of taxation may not be the cause of it, but it will certainly be an exacerbating factor and have social consequences of quite a dire character.

[Lord Forsyth of Drumlean]

My Lords, I was going to follow up on the noble Lord’s point by saying that one of the consequences of this will be that the Scottish rate of income tax is higher in order to fund the Parliament’s additional commitments, but the English taxpayer is going to have to foot the Bill for the increased benefits payments that arise. Will my noble friend make arrangements so that the additional cost of the benefits that arise, because of the increased taxation being levied on benefit recipients, is taken from the Scottish block grant?

[Lord Sassoon]

My Lords, as I have tried to explain—and we can talk about the block grant at another point—the key point for these clauses and the interaction with the benefit system, which is very relevant, is that there will be a range of factors that will already be taken into account in calculating net income for the purposes of universal credit. I do not think that is conceptually any different for somebody who is working on one side of the border and living on the other. As we have been discussing during this really useful and important debate, the main-residence test will be the key driver here for most people. That will underpin all these considerations. In a sense, the points that the noble Lord has raised in relation to benefits are actually income tax points, which I have tried to cover by explaining that we are keeping this as simple as we can.

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[Lord Forsyth of Drumlean]

I appreciate that my noble friend may not have had briefing or thought about the question of benefits, and I must say that I had not thought about it until the noble and learned Lord, Lord Davidson of Glen Clova, and the noble Lord, Lord O’Neill, raised it. But it is an important point because of how very small changes in income make a huge difference to the benefits that people are entitled to, because of the nature of the taper. So there is the effect on the individuals of the use of these powers by the Scottish Parliament; they will not be dealing with the Scottish Parliament or Scottish Government but with the Department for Work and Pensions.

There is a serious point here, because if the Scottish Parliament substantially raised income tax so that net incomes were lower there could be very significant increases in benefit costs arising from that action. My noble friend finished his speech by saying that this was all about increasing accountability of the Scottish Parliament for its decisions, but how can it be increasing accountability if the result of its decisions was to send a bigger Bill to my right honourable friend Iain Duncan Smith in his department and perhaps, thereby, create pressure on payment on benefits in England because of the unexpected consequences of this provision? So this is a transfer payment.

Before we get to the next stage, could my noble friend have a word with his colleagues whose responsibilities lie in this area and write a letter to those of us taking part in these proceedings, indicating how the circle will be squared?

[Lord Sassoon]

I am very happy to give that confirmation and will write.

[Lord Gilbert]

I distinctly heard a few minutes ago the noble Lord, Lord Forsyth, refer to bogus companies. This is a new concept to me, but the phrase did not seem to throw the Minister at all. Will he tell us what he thought the noble Lord referred to when he mentioned bogus companies?

[Lord Sassoon]

My Lords, if the noble Lord had heard the richness of this debate he might have understood the context in which all this was raised. I was pointing out that quite a lot of what my noble friend raised, if it relates to bogus companies and other things, will already be under the microscope of HMRC, which will deal with it as part of its normal UK responsibilities.

[Lord Lyell]

I commend my noble friend and express my enormous gratitude for the huge patience he has shown. He has promised to write to me, but could he please also ask his colleagues to look at col. 250 of our Second Reading debate on 6 September of last year? If he and his colleagues are able to look at it they will find that it is very much at variance with everything that he has said, and with what his colleague down the corridor has said, about lorry drivers. They said that there would be “very few” of those drivers. However, 360 of them drove for this company, as the noble and learned Lord knows well, because it is eight miles from his home and one mile from mine in Kirriemuir. Of those 360 drivers, they had identified 26 straight off as Scottish taxpayers. They had not had the indication, but they thought that 75 would be caught by this legislation. My noble friend and his colleague down the corridor might think that the figure was small, but it was 20 per cent, and that was just one tiny company in Scotland. Will my noble friend consider all the trucks crossing the border transporting food and 20 per cent of the drivers being caught? That is a little more than a few.

[Lord Sassoon]

My Lords, I will of course have a look at it again.

[The Duke of Montrose]

My Lords, this has been a very far-reaching and complicated debate and I must thank all those who participated in it. I must also apologise to your Lordships for starting off in such a rushed manner. I had gone out of the Chamber to see if I could find out what on earth the order was that we were trying to follow. Outside, I could find no evidence of what the order was, which was what brought me back in again—luckily, I was just in time.

Most of my amendments in this group were consequential with the exception of the last one, Amendment 54FB, which the Minister very kindly answered even though I had not spoken to it. It was about the definition of a day. The idea of saying that a day,

“means a period of twenty-four hours terminating at midnight”,

was to couple it on to subsection (1)(a) of proposed new Section 80F, which refers to,

“the number of days in the year on which T is in Scotland at the end of the day”.

The Minister seems perfectly happy to leave this as a vague definition, but to some of us it is hard to know whether,

“the end of the day”,

is the end of the working day or when you finally get home for your supper, or when you go to bed. Apparently in tax terms it is perfectly natural and normal to leave it completely undefined, which is certainly an interesting explanation.

I was interested when the noble and learned Lord, Lord Davidson of Glen Clova, raised the definition of a residence. It is reassuring to hear that the Government are already on to the case and are hoping to define a residence in statute. Although that is obviously a little further down the line, it will presumably be in place before the measures of this Bill come into effect. There is still the question of how HMRC will have a way of determining the total number of days that somebody has spent in Scotland for those who require this definition, in order to know whether they are taxpayers. I thought that the Minister was not quite correct to say that the object was to simplify the definition, because what I presented in my amendments is by far the simplest form of definition. The Minister seems to think—he might be right; I could not say until I look into it some more—that by bringing out a slightly more complicated definition he is making it simpler in application, which perhaps has much to recommend it.

The noble Lord said that nobody had raised the question of what would happen to Scots who were astronauts. However, if the Scottish Government start playing rather extraordinary games and the Bill does not pass in its present form, the Minister might have to address what will happen to a Scotsman living in Antarctica. In the mean time, I beg leave to withdraw the amendment.

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[Lord Forsyth of Drumlean]

I am most grateful for that guidance and I apologise for having spoken too early to this amendment. We have had quite a long debate about the incidence of liability for Scottish income tax. I thought that I might be able not to move this amendment, which is why I interrupted my noble friend and asked him to say something about the Armed Forces. I am very concerned about the position of people serving in the Armed Forces who may be stationed in Scotland, and whether they will be liable for the Scottish income tax. This is an important point which touches on a later amendment—which the noble and learned Lord, Lord Davidson of Glen Clova, mentioned—to do with the period to which Scottish income tax relates. Regardless of whether the test is no longer met, this could create an anomalous position in respect of servicemen.

During consideration of the Bill in the other place, the Government promised to bring forward a definition that dealt with servicemen. I have included one in the amendment—which is probing and not meant to be the answer—in the hope that I might provoke my noble friend into providing an answer that makes the system simpler. Judging by his remarks about the very concise definition in the 1998 Act and the definition in the Bill, that may mean that it looks more complex. However, at the moment, it seems that the position of people in the Armed Forces who perhaps live in rented or service accommodation is not clear. I beg to move.

[Lord Sassoon]

My Lords, Amendments 54A and 54E would add this new condition—condition D—to the definition of a Scottish taxpayer. If I understand rightly, my noble friend’s intention here is that a serving full-time member of the Armed Forces should be a Scottish taxpayer only if their main place of residence for any part of the year is in Scotland and that residence is a property that they own rather than one provided by their employer.

The Government have given careful consideration to the treatment of serving members of the Armed Forces in relation to the Scottish rate of income tax. We have consulted with the Scottish Government and following that consultation the Government have decided that members of the Armed Forces who meet the close-connection test should be liable to pay income tax at the Scottish rate. Prior to the introduction of the Scottish rate, HMRC will work with the Ministry of Defence to ensure that guidance is available to service men and women on their particular circumstances.

My noble friend raises a perfectly reasonable question about whether there is or should be an alternative test. At present, however, members of the Armed Forces will be Scottish taxpayers if they meet the close-connection test. It is difficult to see any justification for distinguishing between those who rent and those who own property, or the extent to which members of the Armed Forces do or do not rent property from the Ministry of Defence rather than having their own. Therefore, we believe it is appropriate to keep the basic test also for members of the Armed Forces. On that basis, I hope that my noble friend will withdraw the amendment.

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[Lord Lyell]

Before my noble friend replies on that point, perhaps I may say that I also had it in mind. Indeed, 18 miles from my home, and not far from the place of birth of my noble friend Lord Forsyth, is 45 Commando at Arbroath. I took the trouble to ring the electoral office in Angus. I was told that servicemen can vote in Westminster general elections—not Scottish elections—when they nominate their place of residence. Is my noble friend saying that the Government have consulted him, the Treasury and the Scottish Government and are laying down a new law whereby servicemen will be taxable even though they cannot vote in Scotland? Of course, the Scottish Government would like to get more tax from servicemen, even if the latter are not getting a vote there. Will my noble friend please check that?

[Lord Sassoon]

My Lords, in answer to the first question, there are lots of situations where employers may move people around as a requirement of their employment contract. That is not by any means confined to the Ministry of Defence. People in a number of professions and occupations are moved around from one tax jurisdiction to another. Differential tax rates comprise a factor that needs to be taken into account in the total benefit package. The Armed Forces build that into the packages of servicemen working here or elsewhere.

As regards voting, I am getting into difficult philosophical discussions concerning tax without representation that could keep us going deep into the night. However, my understanding is that we are talking about a very specific matter to do with a rate of income tax which is quite separate from the law that relates to where people can vote.

In answer to the question from the noble Lord, Lord Browne of Ladyton, I have made the general point that employers need to consider total packages. However, I can give him specific reassurance that in the event that Scottish and UK rates differ at any point in the future, the Ministry of Defence will do what I suggested any employer has to do, which is to explore options to mitigate the effects of different rates of tax by using processes which are currently used for personnel serving abroad. I am glad to confirm that it will do what I rather expected it would.

[Lord Kilclooney]

My Lords, as I said earlier, there is a general impression in Northern Ireland that as Scotland moves towards greater devolution, perhaps even independence, there will be a higher level of taxation in Scotland than in the rest of the United Kingdom. That is the fear in Northern Ireland, because we have particularly close connections with Scotland, and we do not like the idea of paying more tax. Many people from Northern Ireland are in Scottish regiments and are based in Scotland. Are they going to have to pay higher taxation because they are in Scottish regiments, or, because their homes are still in Northern Ireland, will they still be paying United Kingdom taxation?

[Lord Sassoon]

My Lords, they will pay the Scottish rate of tax only if they meet the close-connection test that is at the heart of the clauses we debated in the previous group of amendments. It therefore entirely depends on the close-connection test, and particularly where their main place of residence is.

[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 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.

[Lord Sassoon]

My Lords, at the risk of repeating myself, the Government undertook to come back, having looked at this again. We have; we consulted the Scottish Government; and we consider that there are lots of individual situations that can be called anomalous, but that there are just lots of individual circumstances related to Armed Forces personnel and a lot of other categories of people who should be taken into account when considering how the Bill will operate. On reflection and after consultation, it was decided that the basic test of close connection should apply to the armed services, as it will to everybody else. I accept that how it works out will depend on an individual’s circumstances.

As I explained as clearly as possible, not only will guidance be given so that individual members of the armed services know how to interpret the test, but—I repeat again—in the event that Scottish and UK rates differ at any point in future, the Ministry of Defence will consider exploring options to mitigate the effects of different rates of tax by using existing processes used for personnel serving abroad. The metric is already there for service personnel sent abroad.

In answer to my noble friend’s further point, I do not believe that that should be written into the Bill. It is something that the Ministry of Defence does in the normal course of events—it looks at the anomalies, in his terms.

[Lord West of Spithead]

My Lords, I apologise to the House because I have not been here for the whole debate. Indeed, I only came in because I suddenly became aware of this point. This is an issue that could easily be resolved, but the position we have got ourselves into stands against reason. It will not go down well with people. Perhaps the Government could take it away to think about it. If it gets someone like me dragged out of my office when I am working because I suddenly become aware of it, my goodness, I can tell noble Lords what effect it will have on the military across the board. I beg the Minister to think about making some concessions along the lines suggested by the noble Lord, Lord Forsyth.

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[Lord Forsyth of Drumlean]

My Lords, I shall try once more with my noble friend. Perhaps he could translate the language that he used, which I recognise as coming straight out of the script of “Yes Minister”. I know that this is fed to him from elsewhere and we are not supposed to notice but, when he said that the MoD would use its usual procedures and look at all the options, did that mean that the MoD would pay the tax if soldiers stationed in Scotland were subject to a higher rate of income tax? If that is clearly and absolutely understood, I am less concerned about the definition. However, his language was a bit fuzzy and he did not really seem to make that absolutely clear. If he is giving an undertaking on behalf of the Treasury and the Government that servicemen stationed in Scotland will not lose out as a result of the incidence of Scottish income tax, I shall be very happy to withdraw my amendment.

[Lord Sassoon]

The words were carefully considered. I have put them on the record twice and my noble friend knows perfectly well that I am not going to go any further, whether I have a script or not. The Ministry of Defence will do just what I said it will do in these circumstances, if and when they arise.

[Lord Sewel]

My Lords, I think we all appreciate that the Minister cannot go further today than he has gone. However, we have Report stage. Is he prepared to come forward with something more specific on Report—or does that remain at least a possibility?

[Lord Sassoon]

I am not sure what it is that the noble Lord wants me to come forward with. There are two things here: the basic test, where the Government’s position is that the close-connection test should apply; and the question of what the compensation arrangements might be in the hypothetical circumstances, which are quite possible, of a higher rate of Scottish tax being imposed. I cannot give a commitment to come back with anything more on either point, although I am taken in particular with the very practical points that might arise if, for example, there are security reasons for not disclosing the address of a main residence. These are the sorts of important and practical issues that need to be taken account of in the guidance which serving personnel clearly need to be given, as and when they have to apply the test.

[The Duke of Montrose]

My Lords, it is probably not my role to get the Minister off the hook in any way but we are, quite rightly, taking the sober and, one might say, realistic view that Scottish tax might go up. We are obviously missing what one might consider to be the almost messianic view of Alex Salmond that everything is going to be paid for by North Sea oil, renewable energy, and marine and wind energy, and that tax rates might go down.

[Lord Forsyth of Drumlean]

Picking up the last point made by my noble friend the Duke of Montrose, the Bill does not provide for North Sea oil, wind energy or any of those things, and that is why the tax will go up. If Alex Salmond were here, that is what he would say and it is what he will say. He will say that the Scottish rate of tax has to go up because Scotland does not have the power to deal with all these other things. I can write the script; it is not very difficult. The tax is going to go up.

I thank everyone who has participated in the debate. I think that my noble friend should be very influenced by the words of the noble Lord, Lord West, who knows a bit about the military. He should also be very influenced by the position in Ulster that has been spelt out. It is simply not fair to expect members of the Armed Forces who are deployed and living in barracks in Scotland to pay a higher rate of tax. When my noble friend says, “We consulted the Scottish Parliament and it was happy to leave it as it is”, of course it was happy to leave it as it is; it wants the money. It is in its interests to have as many people as possible paying. My noble friend shakes his head. Why is it not in its interests?

[Lord Sassoon]

It is simply that it is a matter of principle how tests should apply to different categories of people. It is not a numbers game as to how many will necessarily fall into what categories. It is a matter of principle as to how members of the Armed Forces should be treated. The Scottish Government—not the Scottish Parliament, to correct my noble friend—believe that the proper principle here is that the close-connection test should apply.

[Lord Forsyth of Drumlean]

I stand corrected. If my noble friend followed any Scottish business, he would realise that the Scottish Parliament and the Scottish Government are treated as the same thing by the First Minister.

I am so pleased that my noble friend has made this point. It is a matter of principle that members of the armed services who are deployed to Scotland, living in barrack accommodation, who have no choice in the matter, being under military discipline, should not be required to pay the additional tax. If the Government take the view that the additional tax should fall on them because it is administratively convenient for them, they should get a clear and absolute undertaking that the Ministry of Defence will meet the costs of that. The costs should fall not on the English taxpayer but should be rebated back by the Scottish Parliament. Otherwise it is a transfer of money from the MoD to the Scottish Government because they have put taxes on members of the armed services who are stationed in Scotland.

I will happily withdraw the amendment but we will come back to this at a later stage in the Bill. I advise my noble friend to discuss with his colleagues how he can improve the position. I do not believe that it is sustainable. It is an extremely unfair position, and for us to be doing it at this moment—of all moments—when the whole country is very conscious of how much we owe the armed services, would be a mistake. I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Sewel]

My Lords, I do not want to keep on going back to 1997-98, but this was the sort of problem that arose then. I shall take the argument slightly further forward, because we now hear that the Welsh Assembly wants to have tax-varying powers. That is very understandable. If the same test is applied in Wales as has been applied in Scotland, it would be possible for a person to be a national taxpayer in Scotland and a national taxpayer in Wales for the whole of a tax year.

[Lord Sassoon]

My Lords, my noble friend’s amendment would introduce the concept of split-year treatment for those who move between the UK and Scotland during the tax year. I quite accept that a more accurate split of tax payments based on the time an individual spends in Scotland and the rest of the UK might in theory be desirable, but it would add very considerable cost and complexity to the system. As I took pains to point out in the previous discussion, in the Bill, we have been trying to keep the overlay of the application of the Scottish rate as simple as possible. My noble friend continually postulates circumstances in which there is a higher rate of income tax in Scotland and he puts the case of somebody who is disadvantaged by spending a relatively small amount of the year in Scotland but being caught by the definition for the whole year. I could equally well give cases that might apply the other way round. I accept that, in theory, the system should more closely be related to the amount of time an individual actually spends in Scotland. Theoretically, one cannot argue about that, but it would introduce cost and complexity into the system without the advantage or disadvantage going in one particular direction. What should rule here when we come to the practical application—

[Lord Myners]

I listened carefully to the Minister’s response to the previous amendment and to this amendment. I see a policy unravelling here. I see the Treasury having to bring the objectives of this Bill into line with practical implementation and finding it extremely difficult to do so. The Minister has just told us that there is a practical difficulty in addressing the amendment proposed by the noble Lord, Lord Forsyth. Can he explain why that practical difficulty does not also arise with people who are able to change their non-domicile status in the middle of a tax year and, indeed, change twice during a tax year? If that can be managed for the super-rich, why can it not be managed in this situation?

[Lord Sassoon]

First, if the noble Lord, Lord Myners, had actually been here for the substantive discussion of the enabling clauses of the Scottish income tax rates, he would know we discussed residency questions at length, including people who are part resident here or overseas. I think he has come in for the wrong part of the Bill, but I appreciate that he is a very busy man. We are sorry that we did not have him enrich the debate. We are sorry that he did not come and discuss the clauses where the basic residence test was—

[Lord Myners]

That is language of asperity. If the Minister does not withdraw, I will move a Motion that the House vote on that. I have made a perfectly reasonable contribution. We are in Committee, so I am perfectly entitled to do that. The fact that the Minister is struggling to answer the question is not a justification for personal rudeness and language of asperity, on which the rules of the House are very clear.

[Lord Foulkes of Cumnock]

I was here for the paving debate and the Minister did not deal with the specific point that my noble friend Lord Myners has just raised.

[Lord Sassoon]

This is all very good theatre, but we discussed the basic question of UK residence earlier this afternoon. As I said, I am very sorry that the noble Lord, Lord Myners, was not able to be here to enrich that discussion, but that it not what we are talking about in this debate. We are talking about different matters, which are important and the ones that we should concentrate on.

[Lord Myners]

I am sorry, but I have asked the Minister a very simple question. He has told us that for practical reasons it is not possible to accept this amendment. I am arguing that exactly the same practical issues arise with non-domiciles and it is possible for them to change their status more than once in a year. Can the Minister explain what practical reason frustrates the amendment moved by the noble Lord, Lord Forsyth, but permits non-domiciles to do this? It is a very simple question.

[Lord Sassoon]

I repeat that if the noble Lord, Lord Myners, had been able to be here for the earlier discussion, the key question about the residence test in this Bill is that it builds on UK residence; you have to be a UK taxpayer before the question of the Scottish status applies. We discussed that at some length earlier, and the whole concept is to keep it as simple as possible for the basic overlay of the Scottish status on the UK status. Exactly the same thing applies in respect of this proposed amendment—which goes directly to his challenge—which is that theoretically we could find more perfect concepts but we have to live in the real world. We want to make this fair but we want to make the tests workable for both the individual and, of course, HMRC, but particularly for the individual.

[Lord Forsyth of Drumlean]

My Lords—

[Lord Sassoon]

Perhaps I can come back to my noble friend’s point before he jumps in again. He gave an example to make a particular point, but I should have drawn his attention to the fact that the example he gave of residency of two months—April and May—in Scotland of course does not make that individual a Scottish taxpayer. The basic test, as we have discussed at some length, is if your sole or main place of residence is in Scotland for the majority of the tax year. We need to be very careful about what examples we give.

[Lord Forsyth of Drumlean]

That is definitely a point to the noble Lord. I was thinking on my feet and of course he is quite right. If he wants, I can spend the next 10 minutes giving him examples where it does apply but I suspect he would rather I did not.

Following up on the point made by the noble Lord, Lord Myners, it is the case that for wealthy people who are non-doms, the Revenue can accommodate them. My noble friend said—I thought very unfairly—that the noble Lord, Lord Myners, had not been here for the bit of the debate where he dealt with these issues. I have been here since the beginning and nothing he has said addresses this point.

[Lord Sassoon]

My Lords, I am sorry, but we discussed at some length the fact that the Government are working to introduce a statutory residence test that deals with these things. Forgive me, but that goes absolutely to the heart of the point that the noble Lord, Lord Myners, is raising. I suggest that we have actually gone to this point very directly this afternoon.

[Lord Forsyth of Drumlean]

I think that my noble friend is missing the point that is being made; namely, that the Revenue is able to deal with people who are flitting in and out of being liable for UK tax. It has nothing to do with the test of residency. In this case, it is about fairness and whether you are liable for the tax arising from whether you are a Scottish taxpayer or an English taxpayer. The noble Lord was simply making a parallel case and asking why the Revenue can accommodate some people. I suspect the reason is that there are a few of them and they pay a lot in tax. The Inland Revenue might look at this and say, “Oh well, we could have a lot of people who might be moving and it will be difficult”. I thought that the whole argument for this was based on it being terribly simple because it simply means changing someone’s tax code. Tax codes are changed all the time. What is so difficult about changing someone’s tax code when they have moved from Scotland to somewhere else or to change their liability for Scottish income tax during the course of the tax year?

[Lord Sassoon]

My Lords, let me have a go again. I think that my noble friend has answered the key part of the question. As we have been discussing for a long time today, we want to make this construct as simple as possible for the great majority of people. That is why the test is the close-connection test, which comes back essentially to where the main residence is for the majority of the year. It is as simple a test as there can be.

As my noble friend rightly points out, these questions about non-residents, non-doms and all that refer to a comparatively tiny number of people with complex tax affairs. Suggesting that the Revenue can deal with individuals with complex affairs and usually high incomes is quite a different matter from requiring the majority of the Scottish population, for example, to have to deal with a complex test of coming in and out of Scottish tax treatment.

[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.

--- Later in debate ---

[Lord Forsyth of Drumlean]

Actually, I am not a tax expert. I think that my noble friend is taking us down a diversion, because Members of the House of Lords are not paid, they are reimbursed for their expenses. It is not a taxable benefit. My beef with the Bill is that it singles out elected Members for particular, special tax treatment. It does not really matter whether it is to their advantage or disadvantage. I was not raising a general point about the taxation of travel by Members of Parliament or Members of the House of Lords.

[Lord Sassoon]

Well, my Lords, let me give it a go. My noble friend is not easy to satisfy on these things, but I argue that it is entirely consistent with my arguments for the rest of this afternoon to say that this provision, as drafted, gives simple and clear guidance for a category of individuals, namely Members of any of the three parliaments, that they do, for the avoidance of doubt, have a close connection with Scotland and should therefore fall into the “Scottish taxpayer” definition. It is as simple as that. Once one accepts, which I am not sure that my noble friend does, that the close-connection test should be at the heart of this, I suggest that this is a simple follow-on from that, an avoidance-of-doubt provision which is entirely appropriate. We have spoken today about members of the Armed Forces who may not have a choice about where they serve, but it is right that a Member of any Parliament who has chosen to serve a Scottish constituency is for the avoidance of doubt treated as a Scottish taxpayer. They have a clear connection to Scotland which should be recognised and which is consistent with the basic provisions of the test that we are talking about.

[Lord Foulkes of Cumnock]

However, will the Minister confirm that not all Members of this Parliament are treated as British taxpayers and are not resident in Britain for the purposes of tax?

[Lord Sassoon]

My Lords, I would like to keep this debate to discussion about Scottish taxpayers. As my noble friend has already said, discussion about the status of Members of this House is something of a diversion whose relevance to this clause I do not see.

[Lord Foulkes of Cumnock]

With respect, throughout the previous debate, the Minister said that the definition of Scottish residents and Scottish taxpayers was based on British residence. He had used the British example as the template in coming to a conclusion in relation to Scottish residents and Scottish taxpayers, so this matter must be relevant.

[Lord Sassoon]

Forgive me, my Lords, I thought that we were straying into questions about tax status and Members of this House. We are talking about Members of another place with a constituency in Parliament, Members of the European Parliament and Members of the Scottish Parliament. Most Scottish parliamentarians will already meet conditions A and B in new Section 80D, but there may be circumstances where this may not apply. For example, a Member may have gained or lost a seat at a recent election—it could have happened when an election was held early in the tax year—and decided to move elsewhere in the UK. The test here is that there should be clarity. If the person has been a Member of one of these Parliaments for a Scottish seat for some part of the year and has chosen to be so, they should be Scottish taxpayers for the year, but I appreciate that, depending on whether they come in or go out at different points of the year, the situation could be different. However, this is consistent with what I have been saying today: that the basic test is a close-connection test and that it should be simple and clear. Members of both Houses of the UK Parliament are deemed to be UK-resident for tax purposes if they are a Member for any part of the tax year. If the noble Lord, Lord Foulkes, wants to draw a parallel between the two Houses of this Parliament and what we are applying through the Bill as it stands, I say to him that the situation would be entirely lined up. If you are a Member of either House of the UK Parliament for any part of the year, you are deemed to be UK-resident for tax purposes. That is completely consistent with what is proposed in the Bill for Members who sit for Scottish constituencies. That is how the Bill should stand.

[Lord Steel of Aikwood]

My Lords, I suspect that there is nobody listed in the category in the Bill who does not live in Scotland, but the Minister is right in one respect: it was not always so. My predecessor as MP for Roxburgh, Selkirk and Peebles lived in London—I do not say that critically; that was a fact. He did not come from Scotland but he had a Scottish constituency. He came to visit the constituency dutifully from time to time, but he certainly would not have been regarded as having a close connection with Scotland, nor would he have spent the majority of days in Scotland. So, although I cannot think of anyone who would be excluded by taking this out, as my noble friend Lord Forsyth suggests, it could happen.

It reminds me of a story that Jo Grimond used to tell about coming across one of the knights of the shires at King’s Cross station at the start of the Summer Recess. He was putting his trunk into the guard’s van on the train and he was in a very bad mood. Jo Grimond said to him, “Why are you so upset?”. He said, “It is not the thought that I am going to my constituency; it is the thought that I shall have to go next year as well”. Fortunately those days have gone and I do not think that that would apply now. None the less, it is a reasonable safeguard to have this clause in the Bill.

--- Later in debate ---

[Lord Davidson of Glen Clova]

My Lords, might I also perhaps encourage the noble Lord, Lord Forsyth of Drumlean, to consider the position of judges. One of the great strengths of the United Kingdom is that Scotland has access to the whole Supreme Court, and therefore some of the finest minds and judiciary in the world. All those members of the Supreme Court have responsibilities for Scotland and it would perhaps be unfortunate if all 12 members of the court were to suddenly find themselves subject to the Scottish rate of income tax. I know he is looking for suggestions for his list, but possibly that one should be removed.

[Lord Sassoon]

My Lords, I see a clear distinction between the previous category of people and parliamentarians, who are different in a number of respects, not least because they are specifically tied, in a very clear way that we well understand, to the electorate and a constituency in Scotland. However, the extent to which a judge, a Peer or a civil servant could be said to have responsibilities for Scotland will vary enormously from case to case. My noble friend has said that this is a probing amendment and that he is not serious about it, so it would be wrong to criticise the amendment for the flaws in its drafting, but goodness knows how one would go about defining what “responsibilities” means in this context and how the test would apply in practice. It would be very difficult.

I certainly agree with the sentiment that we do not want to go down the slippery slope that the noble Lord, Lord Kerr of Kinlochard, identifies of putting lots of people into some special category. Obviously, many judges, civil servants and, dare I say it, Peers will have a close connection with Scotland and will therefore be caught or encompassed by the definition of “Scottish taxpayer” as defined in the draft Bill. I am with the noble Lord, Lord Kerr, in that I do not think we should go further down this route other than in the specific case of the parliamentarians, where the considerations are different in a number of respects, not least because they are very specifically tied to Scotland in a way that this other, looser, category would not be. It is right that the individuals identified in Amendment 54D should have the conditions A and B applied in the same way as all other taxpayers. On that basis, I would yet again ask my noble friend to withdraw his amendment.

[Lord Forsyth of Drumlean]

Well, I am absolutely persuaded by my noble friend’s argument that it would be wholly inappropriate to list these people in the Bill, but I am not persuaded by his suggestion that Members are in some special category that requires them to be defined in that way. Indeed, the only example that my noble friend could come up with was the example of someone who had lost their seat and had moved to England. I certainly lost my seat, but I did not move to England. That is really stretching it, because presumably if they have lost their seat it no longer applies, but he was arguing that they should pay tax for the part of the year when they were not actually liable for tax, which related to one of my previous amendments. We are really therefore in Humpty Dumpty territory here: when I say something means something, it means what I say. There is an anomalous position here, which the amendment highlights.

I do not agree on the point about judges. The last thing I want to do is to increase the taxes of someone for whom I have considerable regard, such as the noble and learned Lord, Lord Hope of Craighead, who lives in Edinburgh and sits in the Supreme Court. I do not know whether it is formal or informal, but in the Supreme Court we have always had an outstanding judge. Sadly, one of the Scottish judges, Lord Rodger, passed away. Clearly, those judges have a connection to Scotland, and I could make as strong a case as my noble friend makes for Members of Parliament, but I would not dream of doing so because I think that it is rubbish. I do not think that the arguments apply.

It is a very bad principle to use legislation as a chalkboard to write political statements. It could very well backfire. There is not the slightest possibility that there will be a reduction in income tax as a result of the power being available to the Scottish Parliament, unless a Government come in who are both mad and committed to slashing public services in a big way. However, if it worked the other way round and, of all the Members of Parliament sitting in the Chamber, those from Scotland paid a lower rate of tax because it was written into statute, that would be a tricky thing to defend, not because they were liable for the lower rate but because it had been written into statute that their status applied in that way.

These are not trivial points. It has been a useful debate, if only to illustrate that this has not been properly thought through. We will return to it at a later stage. I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Davidson of Glen Clova]

My Lords, I support the noble Lord, Lord Forsyth, in seeking further areas of consultation. How true it is that the Scottish Parliament, under improved devolution, will have greater powers. None the less, it remains part of the United Kingdom and therefore it would be very important that consultation on areas which could have a significant effect throughout the United Kingdom should be put in place by the Treasury.

[Lord Sassoon]

My Lords, Amendment 54G would indeed require the Treasury to consult interested parties, specifically including the Scottish Government and Parliament, on its plans. It may be helpful to explain the Treasury’s new approach to tax policy-making, which was published with the 2010 Budget, because that sets out the Government’s commitment to consult on tax changes in legislation. Secondary legislation made under the power in proposed new Section 80G would be treated no differently, so we already have a commitment to consultation through the Government’s general approach to consultation on tax changes. Indeed, in the context of the Bill and through its technical groups, the Government are already consulting on further changes needed as a result of the Scottish rate. The Scottish Government have been involved in these discussions, so I have absolutely no difficulty with the underlying concern that my noble friend seeks to address here. I simply point him to the fact that since 2010, under the new framework which the coalition Government have put in place, we are doing all these things already on a UK-wide basis under the policy that we announced.

It is important to recognise, nevertheless, that any changes which are made as a consequence of the introduction of the Scottish rate will still need to fit within the wider UK income tax system. I believe it is correct that while the Government are committed to consulting with the Scottish Government, Ministers and Parliament, and with others as part of our general approach, the Government should nevertheless have the final say on how these matters are handled, just as they do on how matters are handled across the UK tax system. On that basis, I again ask my noble friend to withdraw his amendment.

[Lord Forsyth of Drumlean]

I thank my noble friend for that answer. I have noticed that there is quite a lot of consultation going on these days on tax policy, in the run-up to the Budget. I accept that the Government have made strides in this respect and that my amendment may indeed be redundant. I beg leave to withdraw it.

--- Later in debate ---

[Lord Sassoon]

My Lords, as my noble friend said, Amendment 54H would remove the retrospective element of the power to make supplementary changes. It gives me the opportunity to reassure the House—which I hope is what my noble friend seeks—that the Treasury does not seek a general power to impose retrospective legislation. This is a very limited power to make any changes retrospective to the start of the tax year. Because of the timing of the budget cycle, most finance Bills receive Royal Assent after the start of the tax year and so contain proposals that come into effect before Royal Assent. It is therefore important that, where necessary, any consequential change made using the order-making power can also take effect from the start of the tax year. The power is identical to that in Section 79(4) of the Scotland Act 1998 for the Scottish variable rate. I hope that my noble friend is reassured that this is just a necessary provision to take account of when Royal Assent is given to finance Bills and that, yet again, he will be prepared to withdraw his amendment.

[Lord Forsyth of Drumlean]

My Lords, on the basis of that very helpful response, I am pleased to withdraw my amendment.

--- Later in debate ---

[Lord Sassoon]

As my noble friend said, this point is very similar to the issue that came up on Amendment 54G. I suggest again that the coalition Government’s new approach to the transparency of policy-making, and our commitment to consulting in advance on tax changes and legislation, means that not only the Scottish Government but any other interested party will have an opportunity, under the normal framework that we now apply, to see what is going on. It will be transparent to the Scottish Parliament as well.

I think that this is consistent with what the noble and learned Lord, Lord Davidson of Glen Clova, said. If I interpret coherence as opposed to unity in the correct way, I believe that the process is achievable through the approach that we now adopt to consultation. However, as I said in relation to the previous amendment, we can achieve that while not fettering the hand of the Government in how they go about consulting on and consenting to taxation changes that may impact on the wider UK tax landscape any more than it is fettered in respect of other aspects of UK taxation.

[Lord Forsyth of Drumlean]

I am afraid that I am not as convinced by the response to this amendment as I was by the response to the previous amendment, as this one is rather more far-reaching in its possible impact. Given what my noble friend said, and the Government’s view of the Scottish Parliament, I have no doubt that they might well be inclined to do this anyway. However, Governments come and go; it is important that the rules of the game should be clear.

One aspect of the Bill that is very striking is the number of powers that are given to the Treasury to bring forward regulations and changes that are not specified, are not clear and which in the other place were subject to comments from Ministers to the effect that there was a working group looking at this and something would be published in due course. I am not absolutely persuaded on the matter. I have every faith in my noble friend ensuring that there is consultation, but he did not quite deal with the question of why the consent of the Scottish Parliament should not be sought before using the powers. I hope that he will respond to that.

[Lord Sassoon]

I am not sure how much more I can do to help my noble friend on this point other than to repeat that we need to see that any changes that are made as a consequence of the introduction of the Scottish rate will fit within the wider UK income tax system. Therefore, in my view and that of the Government, this blanket provision goes a step too far. We are in favour of consultation but this provision would fetter the hand of the UK Government on matters that would impact on the wider tax architecture. Therefore, I believe that obtaining the consent of the Scottish Parliament is a step too far, although I completely accept the need to consult broadly.

[Lord Forsyth of Drumlean]

Perhaps I can help my noble friend. Perhaps I misunderstand the position but he speaks from the point of view of adjusting the rest of the tax system in the event of the impact of a Scottish tax. But what would happen if this was done the other way round? What would happen if the Treasury proposed to change the tax system in a way that would adversely affect the revenue base of the Scottish Parliament? As I understand it, as the Bill stands, there would be no requirement either to compensate it or to seek leave to do so. Perhaps I misunderstand what these powers enable the Treasury to do but that is my understanding. If so, surely it would be appropriate to seek the consent of the Scottish Parliament. Perhaps my noble friend is suggesting that that consultation would involve asking the Parliament and allowing the ability to ignore it. I can see a difficulty here. For example, suppose some new rule were to be introduced to provide substantial tax relief for particular categories—charities, pensions or some other relief. That could greatly reduce the tax base for the Scottish Parliament and, as far as I can see, there is no provision in the Bill to compensate it for that. There ought to be some basis on which the Parliament’s consent is sought.

I feel as if I have become a sort of advocate for devo-max on this, because I am making a case that might be made by one of the enthusiasts for devolution. However, I am doing that from the point of view that, if we are going to go down this track, we have to make it workable, and I am not sure that it is.

[Lord Sassoon]

Perhaps the difficulty here is that there is a broader principle underlying the matter raised by my noble friend that is completely fair but is not directly addressed by this technical provision. Ministers and Scottish government Ministers have agreed that there should be an underlying principle of no detriment. Now that I understand the matter, I can confirm to my noble friend that if there is a UK decision on income tax that impacts on receipts for the Scottish Government, they will be compensated. If that has teased out the important underlying point, I am happy to give that confirmation. My noble friend’s amendment, which would have a wider and different effect, is not the way to tackle this issue. However, I can reassure him that there is an agreement between Ministers and the Scottish Government that the no-detriment principle will apply, as it should do, along the lines he suggested.

[Lord Forsyth of Drumlean]

I am alarmed by that because my noble friend tells me that there is a no-detriment agreement, but there is nothing in the Bill that tells us that. Does it mean, for example, that if the Chancellor of the Exchequer were able to achieve his youthful ambitions and introduce a flat tax in the United Kingdom at, say, 25 per cent, the Scottish Parliament would be compensated for the loss of revenue that would arise? I do not understand what this no-detriment agreement means. Does it mean that if any change in the tax system resulted in a reduction of revenue in England, the Scottish Parliament would be compensated by sending it a cheque for the equivalent amount?

[Lord Sassoon]

My Lords, this is not something that has come out of the blue from my mention of it now. It has been quite clear from the start—in the Command Paper—that that principle should apply. I am merely articulating something that has been in the construct all along.

[Lord Forsyth of Drumlean]

It is reassuring to hear that, but can the Minister answer my point? Does it mean what I have just said?

[Lord Sassoon]

Perhaps it would help if I write to the noble Lord to make clear exactly how the principle is intended to operate before we get to the next stage of consideration of the Bill.

[Lord Forsyth of Drumlean]

I do not want to press my noble friend; I am happy for him to elucidate what the position is; but throughout this afternoon, his speeches have been peppered with the word “accountability” and how this is making the Scottish Parliament accountable. If the suggestion is that the Scottish Parliament get compensated for the effects of changes in the tax base in England by the English taxpayer, that is not accountability; that is subsidy. It is about maintaining the status quo.

My noble friend shakes his head. Perhaps I have got it wrong. I thought he was saying that if changes are made to the tax system in England which have the result of narrowing the tax base, the Scottish Parliament will be compensated by being sent a cheque. Is that not what he is saying?

[Lord Sassoon]

What I am saying, and why I disagree with my noble friend’s analysis, is that this is all about getting decisions about a certain part of the tax system to be made by the Scottish Government and the Scottish Parliament, and for the Scottish Government to be accountable to the Scottish Parliament and the Scottish people for a part of the tax system to have a clearer linkage between tax and spending in Scotland for the electorate and for the performance of the Scottish economy. Beyond that, there are certain areas where we want to ensure, as is only right and proper, that Scotland is not at risk of detriment because of decisions taken in interlinked parts of the tax system which disadvantage it.

[Lord Forsyth of Drumlean]

I hesitate to press this at this hour but, to give a real example, suppose that it is 2015. We are all enjoying paying these high Scottish taxes. There is a lower tax in England and the Government decide that they are going to introduce a far more generous scheme of tax relief on contributions to charity. Let us say that they make them wholly allowable and the result is that there is a reduction in the overall revenue available to the Scottish Parliament from the tax base on the Scottish income tax, because people are eligible for that. Of course, we are not yet clear whether that would apply to Scotland, but this power would enable the Treasury to implement a policy without any agreement of the Scottish Parliament and it would have a detrimental effect.

My noble friend appears to be saying that the answer to that is that they would be compensated for that, but there would be a transfer of resource from England to Scotland to compensate them for that change in the tax policy. Why would that be appropriate?

[Lord Sassoon]

My Lords, it has been a fundamental principle of devolution from the start that if a decision of one Administration impacts on another, the other Administration should be compensated. We are not doing anything different from the principle under which devolution has existed from the start. Yes, the tax base is shared, so if the UK changes allowances and thresholds, it is quite right that the effect of that should not fall to the detriment of the Scottish Government. As I said, that follows the general principle that applies across devolution spending, as it has from the start.

[Lord Foulkes of Cumnock]

I am not sure exactly where we are, but as my noble friend Lord Maxton drew my attention to the fact that there is this very interesting dialogue taking place, I was listening carefully to it. I am grateful to the noble Lord, Lord Steel, for his immediate understanding.

I am slightly disturbed because all along we have been talking about giving the Scottish Parliament greater accountability. That is why I am in favour of full fiscal autonomy, as I shall be arguing later. However, even if Scotland has full fiscal autonomy, if at any point it then goes, Oliver Twist-like, back to the Treasury and says, “I want some more”, then that will not be full fiscal autonomy.

With these proposals in the Bill we are halfway towards full fiscal autonomy. I do not know whether the Treasury Minister, the noble Lord, Lord Sassoon, has seen that Alex Salmond has now come up with a list of what he calls shovel-ready projects—an awful-sounding term—that he wants the Treasury to provide huge amounts of money for. This is his technique. I am not sure whether I have got to the nub of the point that the noble Lord, Lord Forsyth, is making but at least it has given him an opportunity to sit down and think for a while. I was enjoying the Forsyth saga—that was inevitable—but I question whether it has revealed a flaw, in that we are not going to get the kind of autonomy that we want.

[Lord Sassoon]

No, my Lords, I do not believe that it has exposed a flaw. The decisions which under the Bill, if and when enacted, would be for the Scottish Government are quite clear and the Scottish Government will bear the fiscal consequences of those decisions. What I have described is made quite clear at greater length in the November 2010 Command Paper, Strengthening Scotland’s Future. If parts of the UK tax system are not devolved but remain the responsibility of the UK Administration, then, if something changes to the detriment of Scotland, the no-detriment principle will kick in, the block grant will be adjusted and, as set out in the Command Paper, the Office for Budget Responsibility will work out all the numbers and establish the fiscal impact. Of course, the adjustment would not necessarily go one way—it would depend on the nature of the change. We have talked this afternoon as though everything is always going to go in one direction. However, this could conceivably be a two-way detriment that had to be adjusted through the block grant.

[The Earl of Caithness]

My Lords, can my noble friend give us an example of the two-way process? If he cannot do so now, perhaps he can include it in the letter that he is going to send us.

[Lord Sassoon]

My Lords, one example is personal allowances, which have a potential impact on tax receipts, and that example is highlighted in the command document.

[Lord Foulkes of Cumnock]

I want to test this with one other example. Does the Minister recall when, under a previous Labour Government, the Scottish Executive introduced free personal care for the elderly? As a result of that, the old people who had free personal care no longer got the benefits that they had previously received. Malcolm Chisholm, the then Minister, sought a grant of hundreds of millions of pounds, which he claimed the UK Government had saved because they were no longer paying benefits to the people who were now getting free personal care. Would not that kind of situation arise in a number of areas under the scenario that the Minister is describing?

[Lord Sassoon]

My Lords, that was not a tax issue, and I do not know the detail of that case, but we are talking about changes to the structure of the UK income tax system, which is something that is done by the UK Government. We are talking about circumstances that are rather far away from a Scottish spending matter that the noble Lord described.

[Lord Kerr of Kinlochard]

I am lost. I fear that I do not understand this no-detriment principle. I may be showing my ignorance coming late to this subject. I thought that I understood the rationale for the Scottish rate: the UK system would remain the same but there would be this variable—take 10 per cent off and top it up. I assume that the allowances, thresholds and system would be the same over the UK. If, for example, a Government believed that more growth could be obtained by going for a lower rate of tax, or higher allowances, and thus lower revenue, that would be the case across the United Kingdom, including in Scotland. The only thing that would move would be the variable rate if the Scots chose to move it. What is this detriment? Are we saying that the Scots could enjoy the advantages of the greater growth in the United Kingdom but that the detriment to their revenue would be compensated through a block grant system? That would be winning twice. That cannot be what is intended. Will the Minister explain how the no-detriment principle works?

[Lord Sassoon]

The noble Lord has explained the construct absolutely correctly, so I have no problem with that at all. However, if the UK Government decide to raise personal allowances to take more people out of tax, that will flow through to a reduction in the receipts to the Scottish Government under the construct that he has described. The UK will compensate the Scottish budget through the block grant for such a reduction of the tax base for Scotland, based on forecasts by the independent Office for Budget Responsibility.

[Lord Kerr of Kinlochard]

That is marvellous news. I do not have a house in Scotland now but I need to get up there fast and get a close connection. If, on the Minister’s example, the allowances improve, that will suit me personally, but the Scottish Government and the First Minister will have more cash through compensation to make sure that the services I draw on in Scotland are in no way diminished.

[Lord Sassoon]

I would not want to get the hopes of the noble Lord or anyone else up too high. It will just bring Scotland back to where it was before we started this. It is not that Scotland will gain; it will just make sure that Scotland is brought back to where it was going to be before the change.

[Lord Kerr of Kinlochard]

May I ask the noble Lord about the economic benefits of the change and the reduction in the tax take, and to confirm that it would not suffer a reduction in its tax take?

[Lord Sassoon]

That is correct, and so it should be. If the UK Government decided to rebalance the taxes in some fundamental way, of course it would be wrong to take away the expected income tax take for Scotland that itself is reflected in all the calculations of the block grant. Again, I can attempt to see whether I can put down a worked example to show how the money flows will go, but this is not intended to give Scotland some great bonanza. It is a two-way balancing mechanism to make sure that neither Scotland nor the rest of the UK is disadvantaged by the way in which the effect of personal allowance changes will flow through the system.

[Lord Stewartby]

For information, is the no-detriment principle embodied anywhere in statute within the devolution area?

[Lord Sassoon]

I will correct this if I am wrong, but I believe that it is set out not in statute but, along with a lot of other critical issues relating to the financial arrangements, in the financial accords with lots of other things that support the way in which money flows through to Scotland.

[The Duke of Montrose]

Is it a convention?

[Lord Sassoon]

My understanding is that it is not a convention as defined.

[Lord Forsyth of Drumlean]

My Lords, this has been a very illuminating debate. I have to say to my noble friend that this principle is bonkers. It says that if a Government take people out of tax by raising the threshold because they think that will help with welfare policy and encourage people to go to work because of the effects of the why-work taper, they follow the example that was given by the noble Lord, Lord Kerr, or they cut the top rate of tax—would that they would in order to generate growth and get the economy moving again—Scotland gets a cheque and gets the benefit. So a Treasury Minister trying to find the money to raise thresholds does not just have to find the money to compensate for the loss of receipts but has to send a cheque to Scotland to compensate it. It makes “We’re all in this together” rather strange because we are not all in this together. There is a different rule.

It shows the paradox of this whole Scotland Bill. If anything, it almost makes me become a devo-max person. It almost makes me think that we should go for fiscal autonomy, because it is absolutely bonkers. It is saying that this is not about giving the Scottish Parliament tax-raising powers and accountability for what it does but about taking the block grant and pretending that it is a tax-raising power and, when the tax-raising power does not quite work because of changes in the tax system, topping it up. This is just about recreating the block grant, calling it a tax-raising power and dressing it up as accountability. That is what this principle means. I have studied this quite carefully, and I think that if this principle is to be applied, it is quite shocking that it is not in the Bill, because it is fundamental. It changes the whole architecture. Not many people follow this subject, but I do not believe that among them there is an understanding that changes in the position in England will be compensated for by expenditure north of the border, if, indeed, that is the position.

I would like to give an example from ancient times when I was in the Scottish Office. In England, water was privatised; in Scotland, it was not. The result was that there was no expenditure on water services because they were provided by private companies in England. The result was that the Barnett consequences did not come to Scotland. Under the ancien regime, we did not get an extra grant from the Treasury to compensate us for not doing what would have been the sensible thing, which was to privatise water services in Scotland. This is wholly new, although perhaps I am wrong.

--- Later in debate ---

[Lord Forsyth of Drumlean]

I am most grateful for that very helpful intervention. I am glad that the noble Lord has a clear understanding of how this principle will be applied. However, I do not buy the argument that it is about the UK. Of course it is about the UK, but we still elect Members to the House of Commons from Scotland who are responsible for tax policy in the United Kingdom as a whole. If they support a Government who decide to cut taxes to create growth, they are accountable at the ballot box.

Let us take one of the recommendations of my tax reform commission—it has been abducted by the Liberal Democrat party—to raise the threshold for basic rate taxpayers. That is an example of something that would be compensated for. That is an example of a policy that is being applied across the United Kingdom. The threshold is being raised and it is very expensive. There is a substantial cost to it, and in order to achieve it other services are going to be less generously dealt with than they would otherwise be. Members of Parliament standing at a general election for the House of Commons are accountable for that. However, it is very odd indeed if it is argued that the Member for Stirling in the House of Commons is accountable for the policy that cuts the taxes, whereas the MSP for Stirling is not accountable because a cheque is sent north of the border to compensate for the consequences of this.

[Lord Sassoon]

Perhaps I might try again here. I do not think that my noble friend portrays it as it is going to be, and I am very grateful for the intervention of the noble Lord, Lord Browne of Ladyton. I am sorry that my noble friend portrays this as a great surprise. This was all discussed at length in the November 2010 Command Paper.

[Lord Forsyth of Drumlean]

That does not make it right.

[Lord Sassoon]

It does not make it right, but what we are discussing this afternoon is nothing new. This has been on the table for 15 months or however long it is, a good long length of time. The essential point that we have to understand is that there is going to be a permanent adjustment, as my noble friend knows, to the block grant for the move of the Scottish income tax to Scotland. The compensation that we are talking about is merely that if the basis on which the carve-out of income tax changes so that the relationship between the adjusted block grant and the income tax that Scotland expects to raise changes because of a subsequent decision, in effect we are saying that the permanent deduction needs to be adjusted because we have changed the income base from what it was expected to be, which seems entirely reasonable.

This is not the blank cheque that my noble friend is portraying it as: that the UK Government will be prepared to write whenever the income tax changes. The deal with Scotland is that there will be a one-off change to be worked on, as my noble friend knows. If the basis of that is subsequently changed because the UK Government change the base on which income tax is raised, it is perfectly right and proper that a compensating adjustment is made. It is as simple as that. It is not that there is a double whammy for the UK.

--- Later in debate ---

[Lord Kerr of Kinlochard]

My Lords, I thank the noble Lord for trying to cast light into my ignorance, but it is getting worse; the fog is getting thicker. Does the no-detriment principle have a reciprocal? If not, why not? Should there not be a reciprocal? Let us suppose there was a tax change that widened the tax base. Would that be no detriment just to the Scots, or no detriment to the UK? Before the Minister responds, perhaps I may make a second point. I see two little gleams of light from the lighthouse in the fog. One was the suggestion made by the noble Lord, Lord Browne, that it might be good if one could set out on paper how this is to work. I should have got there long ago, but I had not realised it. That is central to the issue of accountability, but I had not quite got it. I turn now to the noble Lord, Lord Stewartby, for the second light. Since it is so central to the issue of accountability, should it not be on the face of the Bill?

[Lord Sassoon]

First, I shall repeat what I believe I said earlier. This adjustment would go two ways. We have talked about so many things as being a form of one-way traffic this afternoon, but that is not the case. However, we want to make sure that the Scottish Government are accountable for what they are responsible for under the construct in this Bill, which is the effects of their powers to set a Scottish rate of income tax. They are not accountable either for a windfall gain or a windfall loss—if you can have a windfall loss—resulting from things that are done by the UK Government subsequent to the setting of the block grant adjustment. If we set out a worked example of how this will operate, I would like to think that it will be made clearer.

[Lord Forsyth of Drumlean]

My Lords, that is probably a very sensible suggestion. We have had a useful debate, if for no other reason than that it has persuaded me that there is a stronger argument for fiscal autonomy than I had thought, although it is not one that I accept. I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Forsyth of Drumlean]

My Lords, by way of explanation, I felt that we had done to death compensation for the Scottish Parliament, which is why I did not move the amendment which would require the bill for costs of collecting Scottish income tax to be sent to the Scottish Parliament. We can return to that later in the context of a debate to which we have yet to come.

Amendment 58A is similar in its impact to Amendment 58C. It would simply ensure that if the Scottish Parliament decides to set different rates of tax as part of the development land tax powers that are set out in the Bill under Clause 33, they should be applied uniformly throughout Scotland. They cannot be used to create different tax levels in different local authority areas. I do not know whether the Government were thinking that that might be the case, and that is why it is not made clear in the Bill that the rate should be applied uniformly, or whether the Government think that it is desirable. The purpose of the amendment is to tease out the Government’s view on this. I beg to move.

[Lord Sassoon]

My Lords, I will speak to both Amendments 58A and 58C, which have similar effects—namely that they would require the Scottish Parliament to set uniform rates across Scotland for taxes on land transactions and on disposals to landfill. My noble friend’s amendments would be an inappropriate restriction on the power of the Scottish Parliament in this area. The purpose of devolving tax powers is to transfer some of the responsibility for public funding services in Scotland to the Scottish Government. My noble friend says that he has been converted to devo-max, whatever that may be, and that he wants more of it. Here is a good example of where we are suggesting in the Bill more devolution than the noble Lord would like through his amendment.

Accepting as I do that we should wholeheartedly support improvements in the accountability of the Scottish Parliament to the people of Scotland, the devolution of stamp duty, land tax and landfill tax is very important. The Calman report estimated that these could yield the Scottish Government over £600 million a year, so it goes to the heart of the accountability issue. Also, a key premise of the Calman report is for the Scottish Parliament to be fully accountable for its devolved taxes, a principle which the Government support. To achieve this, the Scottish Parliament must be allowed the full power to vary the rate of the devolved taxes. It is for the Scottish Government and its Parliament to take decisions over the design of the taxes through consulting the Scottish people and passing its own legislation. Scottish Ministers may well decide to set uniform rates of tax on land transactions, or on disposals to landfill, across Scotland, but I suggest that that decision is for them and not for this House or this Parliament. I cannot see a strong argument—any argument—as to why we should interfere with the Scottish Parliament’s freedom to set its own taxes across Scotland as it sees fit, once there has been an agreement that a particular tax should be devolved. For that reason, I urge my noble friend to withdraw his amendment.

[Lord Forsyth of Drumlean]

When my noble friend says that the Scottish Parliament should not have to apply it uniformly throughout Scotland and thatit could be used in different areas, does he mean the Scottish Parliament, or does he mean local authorities?

[Lord Sassoon]

To be clear, my noble friend talked about different areas. I do not know how a rate may be changed, but it would not necessarily be changed on a geographical basis. There could be changes of rate based on other parameters which would not necessarily be geographic. The policy and the ability to deal with these taxes are entirely devolved to the Scottish Parliament and the Scottish Government. It is for them, on a national basis, to decide how they design the taxes from thereon.

[Lord Forsyth of Drumlean]

My Lords, I can see how the Calman commission had to scrape around to find taxes that the Scottish Parliament could be allowed to levy. As my noble friend has touched on the amendment which deals with landfill, I shall, if I may, speak to that issue at the same time to save the time of the House.

I do not really have a problem if the Scottish Parliament wants to set the tax on landfill or on development land. I do have a slight problem with my noble friend’s suggestion that it could be different in different parts of Scotland, which he is enunciating as a principle, without it being clear who would set it in different parts of Scotland and who would get the money. If it is proposed that it should be possible for the tax-raising power to be devolved still further to local government so that we could have differences in different areas, the Bill should spell that out and make clear who is responsible for collecting it and who gets the money.

I can see how the development land tax could be used to make it more difficult to develop particular areas; I can see how it could be used positively—perhaps by not having the tax at all—to encourage development in particular areas. However, on the landfill tax—and I am all for competition in taxes—the idea that you should combine raising the revenue with creating some kind of competition between local authorities is a little worrying, because, on the whole, people do not like having landfill sites next to them and local authorities like having sources of revenue. I would have thought that if one was planning where the landfill sites were going, and wanted to have a sensible allocation and availability of landfill sites, how and where the taxes were levied would be rather important. I would feel much more comfortable if this power was being exercised by the Scottish Parliament on a uniform basis. If that is not so, the Bill should indicate how it would operate and who would do it. Just by devolving the power and leaving it to the Scottish Parliament, we may be creating difficulties caused by the desirability of the revenue over the proper planning of landfill and development activity throughout Scotland. Perish the thought that political and other considerations might fall into this, but I am very nervous about the laissez-faire attitude that my noble friend is taking towards this tax.

[Lord Sassoon]

Laissez-faire can be a good thing or a bad thing. I suggest to my noble friend and to the Committee that we must treat Scotland more respectfully than this. As Calman recommended, these are two taxes that should be devolved. If it is right to devolve them, as the Government believe, in line with the Calman recommendations, my noble friend should not suggest that it is inappropriate for the Scottish Government and the Scottish Parliament to determine—whether on a regional or any other basis—how they levy them. I am sure that all the considerations about the design of the taxes which my noble friend mentions, which are perfectly proper and important, will be taken into account by the Scottish Government and the Scottish Parliament. In our proposing the devolution of these taxes, that is precisely what is intended.

[Lord Forsyth of Drumlean]

Perhaps I may ask my noble friend just one more question. Does he think that it might be a good idea to devolve both these taxes to local authorities in England?

[Lord Sassoon]

I am sure that my noble friend is not proposing that the Scottish Parliament should somehow devolve the taxes on to England. I merely say that it is a decision for the Scottish Parliament and the Scottish Government, just as the UK Government decide how the taxes should be handled in the UK. The Scottish Government and Parliament may decide that the design of these two taxes should be much as it is now—I do not know. It will be for them. If they have a good reason for doing it differently in the circumstances of Scotland, that is what devolution is all about. It is their responsibility; their accountability.

--- Later in debate ---

[Lord Davidson of Glen Clova]

I am obliged to my noble friend. There is considerable difficulty in identifying where that line should be drawn. However, where there is a significant tax, the view from this side is certainly that there would be virtue in its being found in primary legislation. If one were using a power under new Section 80B, it would be primary legislation in the context of the Scottish Parliament. I hope that helps.

[Lord Sassoon]

My Lords, I think I should allow the noble and learned Lord, Lord Davidson of Glen Clova, to continue; he seems to have made the points in a way that I could not hope to match. I suppose I should do more than say that I agree with everything that he said and sit down.

I do not want to reopen all the discussions that we had in the previous Committee session but it is important to recognise that, as the noble and learned Lord said, there is an appropriate series of checks on both sides before any power could be devolved under Clause 28. I remind my noble friend that a similar power exists under Section 30 of the Scotland Act. I see the noble Lord, Lord Sewel, nodding. A power already exists for the Scottish Government to request new powers, including on taxation, under Section 30 of the Scotland Act. Perhaps I should not have gone into this territory, but it provides important background to this matter.

My other point is that Scottish Ministers referred to the Section 30 power when seeking legislative responsibility for a whole range of things, from firearms to consumer protection. As noble Lords will know, in each case the Government rejected the requests made by the Scottish Government. As background to this discussion about air passenger duty, it is important to remind ourselves that there are proportionate powers under Clause 28.

[Lord Forsyth of Drumlean]

I have the Explanatory Notes to the Scotland Act here. They state:

“Section 30 … permits certain alterations to be made to the legislative competence of the Scottish Parliament but only with the agreement of both Parliaments”.

As I am sure my noble friend will agree, tax has always been dealt with entirely differently, not least in the exclusion of this House from consideration of tax matters since the 1911 Act. Tax is dealt with by a procedure under the Finance Act and is subject to a proper Committee stage on the Floor of the House of Commons. I believe that that is still the case. To suggest moving to a situation in which taxes can be introduced and imposed by orders—which are not amendable and which, traditionally, we do not vote against in this House—is to stretch the elastic to breaking point.

[Lord Sassoon]

I merely refer my noble friend to the arguments that I made on this point in our previous Committee session two weeks ago. I will not repeat them because it would take up too much of the Committee’s time to refute those points. It is important, as other noble Lords, including my noble friend, have said, to remind ourselves of the context in which specific taxes are referred to in the Bill. I certainly agree that, as the noble and learned Lord, Lord Davidson of Glen Clova, said, the reason not to take the issue of air passenger duty further at this time rests partly on the existence of the powers in Clause 28.

[Lord Sewel]

I thank the noble Lord for giving way. I have had a reply to my question from my noble and learned friend on the Front Bench; perhaps the Minister could also reply. Where does he draw the line between those taxes that can be transferred or created through primary legislation and those that should be created or transferred through orders?

[Lord Sassoon]

I think that the line is drawn as the Bill stands in its present form, as we debated at considerable length on a previous Committee day.

[Lord Sewel]

Will the Minister outline the principled argument on which the division is based?

[Lord Sassoon]

No, my Lords; I do not propose to repeat the arguments and debates—interesting, important and lengthy though they were—because we should turn to the specifics of air passenger duty, which is the subject of the proposed new clause. Air passenger duty is an important issue on its own account, but it is not an easy one, for reasons to which my noble friend and others have referred. It is precisely because air passenger duty is so important that the Government have specifically sought views on the merits of devolution from a UK and a devolved perspective in their recent consultation. The responses provided arguments both for and against. Several respondents argued that devolution was necessary to reflect the distinct economic and social conditions in Scotland, and the impact that this has on flights to and from Scotland, in support of the Calman recommendations. Others opposed any devolution of air passenger duty, arguing that it would complicate the APD system and create potential distortions in the market for flights. There was no clear view either way. The Government’s response to the consultation was published on 6 December 2011.

[The Duke of Montrose]

I hope that the Minister will forgive my ignorance on this matter, but he put forward in support of his argument the power under Section 30 of the Scotland Act. My noble friend Lord Forsyth was looking at that, as am I. Section 30(4) states:

“An Order in Council under this section may also make such modifications of—

(a) any enactment or prerogative instrument (including any enactment comprised in or made under this Act), or

(b) any other instrument or document”.

Does that cover tax?

[Lord Sassoon]

My Lords, I think my noble friend will find that taxation is set out in Schedule 5 to that Act, if memory serves. Section 30 can amend Schedule 5, so tax—

[Lord Forsyth of Drumlean]

My Lords—

[Lord Wallace of Saltaire]

My Lords, it would be appropriate to allow the Minister to finish answering one point before the next one is made.

[Lord Sassoon]

I hope that I may finish. I merely wanted to remind noble Lords, as a background to this discussion of whether it is appropriate for this tax to be in the Bill at this time, that there is a power, which we debated extensively, that would enable air passenger duty to be devolved in due course, if appropriate. I also remind noble Lords that there are similar powers in Section 30 of the Scotland Act. Of course they are not exactly the same; they work in different ways. However, we are not going into uncharted territory. This is territory in which the Government have been requested to devolve powers—not tax powers, although they could have been requested, but powers in other important areas. The Government have consistently said no because they do not believe that the arguments for that have been made.

[Lord Forsyth of Drumlean]

Section 30 clearly does not provide for tax powers. But if my noble friend is correct and it does, then why does he need the powers contained in the Bill to implement the taxes?

[Lord Sassoon]

My Lords, I think that we will have to differ on the construction of powers under the 1998 Act. However, I am quite clear on it. Now, instead of an Act with a construct providing for a general power for the Scottish Government to make requests to the UK Government, and for the UK Government to accede to those or not, and because we are now getting to a very significant devolution of tax powers, it is entirely appropriate, as I hope my noble friend will agree, that if such devolution is to go ahead as the Government wish, the full structure should be set out as it is in this Bill although not in the 1998 Act. I hope that that explains that one. Perhaps I should carry on with air passenger duty, which is the narrow but important subject of these amendments.

[Lord O'Neill of Clackmannan]

If the Minister is discussing air passenger duty then it is surely incumbent on him to try to put it in another context apart from the rather narrow one of revenue-raising, namely its impact on the provision of transport. Transport is a devolved responsibility, but sometimes that devolved responsibility seems a moveable feast. We talk about a high-speed train and claims are made that it should start in either Edinburgh or Glasgow, or at least finish in one, but there is no clear indication of who will fund it. But let us face the fact that regardless of whether the funding comes out of a block grant or a form of increased air passenger duty, a fast train would largely eliminate the need for Edinburgh-to-London or Glasgow-to-London air journeys. However, that would be the case only within the United Kingdom. The paradox is that were we to have the power to reduce airport duty, we might well have a situation in which transatlantic travel from Edinburgh or Glasgow is a more attractive option than travelling from Manchester and London, which are currently the main—almost oligopolistic—providers of transport across the Atlantic.

It is therefore incumbent on the Minister to get away from this narrow tax-raising, shopkeeper approach. This is a matter of greater significance to Scotland, given the devolved powers. The Government must consider this issue rather more seriously than their current, somewhat blinkered approach would suggest. Although I realise that the noble Lord, Lord Forsyth, has framed the issue in the context of taxation, it has implications which make taxation itself not a sufficient context in which to consider it. It has to be done on a broader basis. I would therefore be grateful if the Minister considered it in his response.

[Lord Sassoon]

Before this stream of questions and interventions I made precisely the point that, in response to the consultation, arguments were raised pro and against the devolution of APD on grounds relating to distinct economic and social conditions—indeed, those were the points that I was addressing rather than revenue-raising points. I am slightly surprised at the noble Lord’s intervention on this. I completely agree with him that APD has all these potential effects. Some of the effects that he suggested go very wide, but I agree that this is complicated and the economic and social issues are relevant.

[Lord O'Neill of Clackmannan]

My Lords—

[Lord Sassoon]

Forgive me if I do not give way to the noble Lord immediately. His last intervention was rather long and I had already covered the point. May I carry on with the argument?

[Lord O'Neill of Clackmannan]

We have spent 30 minutes on this amendment, and that is not unduly long.

[Lord Sassoon]

I would suggest that it is really very long for this amendment. The previous intervention from the noble Lord asked me to address points that I had precisely addressed: the non-tax-raising issues indeed include important issues related to APD. Those were the issues that, among others, came up in response to the consultation. That is why, in the response to the consultation published last December, we continued to explore the feasibility and likely effects of devolution of APD to Scotland—for the very reasons, among others, that the noble Lord sets out. That is what we will do.

I should like to think that not only the noble Lord, Lord O’Neill, but other noble Lords would recognise that it would be inappropriate for the Government to devolve APD until we have considered the impact of the proposals fully from both the Scottish and the UK perspectives. In this connection, I say to the noble Lord, Lord Kilclooney, that a particular consideration applies in Northern Ireland because of the land connection in Ireland and competition on flights of a different nature, which is why a particular stance was taken on Northern Ireland.

[Lord Kilclooney]

I certainly accept that point, but my question particularly related to Scotland. There are people in Scotland and Northern Ireland who increasingly want tax-raising powers devolved to Edinburgh and Stormont. They seem to think that they can then reduce taxes in Scotland and Northern Ireland without any implications. If the Scottish Government has air passenger duty devolved to Edinburgh and reduces the duty in Scotland, will it or will it not mean a reduction in the block grant to the Scottish Government?

[Lord Sassoon]

I thought that the noble Lord, Lord Kilclooney, asked me two questions. I answered one; I was coming on to answer the second; although I know that he asked them in the other order. It is completely clear that there will indeed be a permanent adjustment to the block grant for any devolved tax, including, if it came about, APD. That is unequivocal.

We need to consider the full impact. The Bill contains powers in Clause 28 which would enable the Government and Parliament to devolve APD should they decide to in future. Although I fully agree with my noble friend about the importance of the recommendation for APD, I agree on this point with the noble and learned Lord, Lord Davidson of Glen Clova, that now is not the time to amend the Bill. APD can be looked at on its merits under the framework of the Bill in due time. I therefore again urge my noble friend to withdraw his amendment.

[Lord Forsyth of Drumlean]

My Lords, the St Augustine approach to the Calman commission is upon us. We have heard repeatedly that the Bill is to implement the Calman recommendations, which included devolving air passenger duty. Now we are being told by both Front Benches that the time is not right: “Oh Lord, make us have air passenger duty, but not yet”. The reason that the time is not right is that the Government are reviewing air passenger duty. We learnt from the noble Lord, Lord Kilclooney, that the Government are prepared to devolve it to Northern Ireland and that the Secretary of State is prepared to give it to Northern Ireland. We are told that it would be difficult to include it in the Bill because there could be all kinds of implications because of changes to air passenger duty. We already have differences between Scotland and England. My noble and learned friend Lord Wallace will know the answer to this question, but I am pretty certain that highlands and islands airports are exempt from air passenger duty.

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[Lord Foulkes of Cumnock]

While the noble Lord, Lord Forsyth, has been talking, and now that he is talking about aggregates tax, I have been aggregating the time that we have taken to deal with half a dozen or so groups of amendments. I see that we have about twice as many groups still to deal with before we reach the target that the Government have set themselves. We have taken six and three-quarter hours to deal with these half a dozen or so groups of amendments, and at the rate we are going it will take until about 7 o’clock tomorrow morning to deal with the rest.

Although I am prepared to stay here, I think that it really is unfair on all the staff—on Hansard, on the catering staff, the doorkeepers, the civil servants and the clerks of course—who do such a wonderful job on our behalf. It is incumbent on the Minister and the noble Baroness the Whip to start thinking about how the Government will deal with this. We lost one whole day of our Committee stage because the Welfare Reform Bill took it up. We all sat round for a whole day but eventually the Government said, “We are not having it today. You can all go home”. That was a wasted day for many people. We are having a detailed debate on this Bill. I have not participated in much of it but I have been listening to all of it—and yes, as a noble Baroness says, I nodded off on one occasion as well.

It is incumbent on the Government to give an indication to the staff—to everyone around the House—of what will happen. How late will we go tonight and what is the target? They should also give us more time to deal properly with this very important constitutional Bill. It was not dealt with properly in the other place, but it is our responsibility to deal with it properly. There is plenty of time after Easter for Report. We could continue the Committee stage in the two days that are allocated for Report and deal with it properly then. I hope that the Government will give that serious consideration. Otherwise, we will not be treating dedicated staff as we should if we are to be a good employer.

[Lord Sassoon]

First, on my count of the progress that we are making, I have ticked off 19 groups and we have 10 to go, given the breaking up of groups and regrouping. My understanding is that the usual channels agreed that we should target and complete Amendment 87A. It was made quite clear in everything that I have read that there was that expectation. I very much appreciate all those who support us in keeping the House going, but I know that their expectation and our expectation over the past few days is regrettably that we will rise considerably later than normal today. Rather than spending too much time confirming what the usual channels have agreed, I think we should press on.

[Lord Foulkes of Cumnock]

Perhaps the Minister’s count is more accurate than mine—I would split the difference—but it is still going to take a long time. We have important issues to deal with such as the Barnett formula, the referendum, the Scottish Consolidated Fund, the Civil Service in Scotland, surcharges, financial privileges, legislative consent Motions and the delay in legislation on a referendum. If we are going to deal with all these things properly, we cannot deal with them now. We have all been sitting here for six and a quarter hours already. It really is important that we consider the staff in this. I hope the usual channels will have another look at this.

[Lord Sassoon]

Right. I had quite forgotten that we are on the aggregates levy. Let me answer my noble friend’s points. Yes, the Calman commission recommended the devolution of the aggregates levy and, as my noble friend knows, the Government agree with that recommendation. We are committed to devolving the aggregates levy to the Scottish Parliament but, to confirm what he said, we believe that that can and should be done only once the complex legal challenges against it in the European and UK courts have been fully resolved. The Government were clear about their position in the Command Paper for the Scotland Bill, and we remain firmly committed to it.

The position is still moving on the court challenge. The European General Court delivered its judgment in the case of British Aggregates Association v the Commission on 7 March this year. The judgment does not conclusively resolve the legal challenges. Appeals can still be brought against the judgment to the European General Court. Once the action in the European General Court has concluded, action in the UK Court of Appeal will resume. As we have discussed at considerable length, the Bill enables the Government to devolve taxes in future, and it means that devolving the aggregates levy after full resolution of the legal challenges can be achieved quickly. I am happy to say that my noble friend’s very extensive amendment technically broadly works. He is too modest. There would be one or two things to look at, but that is not the issue.

To make sure that things continue and we do not lose momentum on this, as a practical and necessary step to prepare for devolving the levy the independent Office for Budget Responsibility will start to provide forecasts of Scottish aggregates levy receipts from April 2012. The Treasury will also notionally assign these forecast receipts to the Scottish budget. Together with the tax powers in the Scotland Bill, this will allow for the speedy devolution of the levy when the legal challenges have been fully concluded. At that time, the order can be drawn up to reflect the position post the completion of the challenges.

I hope I have made it clear that the Government’s desire to devolve the levy as soon as is feasible continues. It is not feasible to do it while the legal challenges are ongoing. The Bill gives adequate powers for that devolution in future. I thank my noble friend for putting forward a carefully thought through amendment, but I ask him to withdraw it.

[Lord Forsyth of Drumlean]

My Lords, I am very puzzled by this. The Minister says that the amendment is competent. The Minister says that it was included in Calman. The Minister says that the Bill is about implementing the Calman proposals. The levy is certainly subject to a legal challenge. He did not explain why the fact that it is subject to a legal challenge precludes accepting my amendment and putting it in the Bill, and making that a devolved tax for the Scottish Parliament.

[Lord Sassoon]

I tried to make it clear that while we could draw up—as he has had a shot at drawing up—a technical solution within the framework of the levy as it exists now, and put through something in the form that he has proposed or a government amendment to do it, until we know whether it is premised on a legally sound basis it would be a waste of time to do so. We need to have a firm legal basis on which the levy exists before we can be sure of the proper basis to devolve it to Scotland. It is as simple as that.

I am surprised that he expresses such puzzlement. As I said, in the mean time we are doing all the practical things we can to make sure that when we have the legal green light, the devolution powers can be progressed as speedily as is appropriate.

[Lord Forsyth of Drumlean]

I am still a bit puzzled. Perhaps I do not understand it. Are the Government still collecting this levy?

[Lord Sassoon]

Yes, they are.

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[Lord Sassoon]

Let me make one last attempt at trying to help my noble friend as to why particularly the legal challenge means that it would be foolish and unsafe to try to draft an appropriate devolution mechanism now. As he may know, a central aspect of the challenges has been allegations of tax discrimination across borders. We do not know where it will come out and what the constraints may be, but since we might be doing something where borders would be relevant, we need to understand the legal ruling before we can construct a robust, devolved approach to this. It would be a ridiculous waste of our time and would make no sense to put up something if we thought that it would be immediately knocked down and that we would have to rewrite it in a year’s time.

[Lord Forsyth of Drumlean]

I have to say to my noble friend that at 7 pm on a Thursday night, after six hours of this Bill, to use an argument about wasting time is grave to say the least. The whole process that we are going through is in order to work out an appropriate Bill in terms of the Calman recommendations. If he is saying that if we make aggregates tax a devolved tax, although it might change as a result of changes arising from the legal challenge, I can just about get there, but when he says that it is about cross-border issues, presumably that refers to such issues between countries in the European Union and not within countries in the European Union. If we are now starting to say that we cannot devolve measures because of cross-border issues within the United Kingdom, are we not ceding a very important principle? He surely is not talking about the Scottish border in this context.

[Lord Sassoon]

I simply do not know where the courts will come out, but there are some constraints. As regards some of the amendments that my noble friend did not speak to, alcohol duties are one area where we are constrained by Europe, which says that there should be a uniform rate nationally. Therefore, there are other areas, although my noble friend might not like it. Alcohol duty is one area where there are precisely those constraints.

This illustrates why I do not think that it would be productive—there is a challenge, which is still not resolved and final—to base new legislation on an insecure foundation. In the mean time, as I have explained, we are operating the levy on a shadow basis, with the help of the Office for Budget Responsibility, so that we know what is attributable to Scotland from April 2012.

[Lord Forsyth of Drumlean]

That is to concede the point. If my noble friend is saying that the legal challenge might result in the Scottish Parliament not being able to have a higher or lower duty, should there have to be a uniform duty throughout the United Kingdom because of EU rules, that is not an argument for allowing the Scottish Parliament to have the revenue that arises from the aggregates levy. It is not just about setting the rate; it is also about having the revenue and broadening the tax base.

Perhaps the noble Lord is right. Who knows what the EU is capable of? The fact that we may end up with a uniform application, as in the case of alcohol duty, is not in itself a reason for not providing for this power in the Bill. If my noble friend’s concern is that the nature or the application of the tax may vary as a result of the legal case, and if he says to me, “Withdraw your amendment and I will come forward with a government amendment that provides for the aggregate levy but gives us the flexibility”, and my goodness, this Bill is bristling with examples, “for the Treasury to provide for it in secondary legislation”, that would be a much more desirable position—I know my noble friend hates it when we go back to this—than the general power to invent new taxes that is being justified on the basis of the Government’s inability, which I do not understand, to include in the Bill provisions that would allow for the aggregates levy and for air passenger duty. Can he help me with that?

[Lord Sassoon]

No, my Lords, I am afraid that I will not be able to help my noble friend. There is one subsidiary point on which perhaps I can do so. To be clear, I have said that it is a case against the Commission. For the avoidance of doubt, it is not that the UK is continuing to collect this levy on some inappropriate basis; it is just that the Commission is facing a case that may mean that the whole basis on which the levy system operates may have to change. I am afraid that I cannot give him any comfort on that. We shall draft the provisions as and when we have a safe basis on which to bring them forward.

[Lord Forsyth of Drumlean]

When my noble friend says that we will draft them when there is a safe basis on which they can come forward, I hope that by the time this Bill is given Royal Assent there will not be an open-ended power for him to come along and, by order, invent taxes that have not been subject to proper scrutiny as this aggregates tax would be, if he were to accept the amendment, by the House of Commons using the established procedures that we have always had for the consideration of tax.

There is one other question I want to ask my noble friend. Given the very strong line that he has taken on this matter—that it would be impossible to do so because of the legal challenge—and on the previous matter, the development land tax, which we have been told that it is not possible to put into the Bill, can I assume that this is no part of the negotiations that are going on with the Scottish Parliament to get legislative consent? I hope that the Government are not saying one thing to this House and another thing privately. Can he confirm that we are not going to be faced with this being delivered as the result of some deal, because of course that could not be done given the very firm line that my noble friend has taken on the impossibility of including those taxes in the Bill?

[Lord Sassoon]

My noble friend may have misunderstood me because I am sure that it would not be out of mischief, but I have never said that any of this is impossible. This Parliament can do whatever it wants in this area, but I have explained the practical and other reasons why it would be inappropriate at this time. I certainly do not want him to go away with the suggestion that any of this is impossible. It would just be wrong in the case of both of these taxes to proceed at this time for the reasons that I have set out at greater length than I thought I would have to, but I am happy to have had this debate.

[Lord Forsyth of Drumlean]

I am sorry that my noble friend is getting bored with this, but he has not actually answered my question. Let me put it in another way. Is he saying that if this House were minded to see the inclusion in the Bill of both these taxes—let us stick to the one we are on at the moment, the aggregates tax, although the development land tax had the support of those on both Benches—that whatever the strength of the arguments that are put, or even if this House were perhaps to vote in that direction, although that does not look particularly likely, he would resist it, but that it could be conceded as part of a negotiation with the Scottish Parliament in order to get its legislative consent, which is not required by statute? If he is saying that, that gives us considerable cause for concern, because what that says—and my noble friend talks about wasting time—is that it does not really matter what we say or do, or what arguments we advance.

In the end, what goes into the legislation will be determined by a backroom deal between Ministers and the First Minister on the basis of a legislative consent Motion that, right at the beginning of our debate, my noble friend refused to say would allow the Bill to go forward if it was accepted. It is a very simple question: will the line that my noble friend has given be held in the negotiations with the Scottish Parliament? It is a relevant question, because the committee that has looked at this wants it included in the Bill.

[Lord Sassoon]

I am struggling to see where this is going. The Government have said all along that we intend to devolve the aggregates levy. I think there was a slip somewhere, and perhaps I misheard, but the aggregates levy and the APD are the two taxes that we are talking about, for which it is inappropriate to bring forward measures at the moment. On the aggregates levy, we have been completely clear all along, so there is no question of any negotiation on this.

[Lord Forsyth of Drumlean]

Right. Well, on the basis of that undertaking, I am happy to beg leave to withdraw my amendment.

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[Lord Sassoon]

My Lords, the short answer to the noble and learned Lord, Lord Davidson of Glen Clova, is that the additional safeguard proposed in his amendment does not need to be written into the Bill in this way because the limit and sources of borrowing are already controlled in the legislation and the Command Paper. I could leave it at that, but I feel that I should say a little more, because I understand what the noble and learned Lord and the noble Lord, Lord Browne, are driving at in their amendment. I agree that control over the borrowing powers needs to be careful and considered. They have given us an important opportunity to look at this matter and to confirm what I believe to be the case; namely, that sufficient controls exist.

The extended current borrowing facility proposed will provide Scottish Ministers with a lever to deal with the deviation between forecast and actual outturn receipts from devolved taxes. It will also enable them to deal with the volatility in revenue flows from taxes as they enter the Consolidated Fund at different times over the tax year and beyond. The current borrowing power will come into operation when the taxes are devolved, up to a limit of £500 million. I do not think that the noble and learned Lord is suggesting that there is anything inappropriate about that—he is confirming that he does not challenge the logic of that. In addition to the current borrowing facility, Scottish Ministers will have the power also to borrow to fund capital expenditure to a limit of up to 10 per cent of the Scottish capital budget in any year, with the overall stock of debt for capital purposes not exceeding £2.2 billion.

Such borrowing will need to be self-financed through increased revenue from taxation in Scotland or a reduction in public spending. So there are controls in place on the levels of borrowing, as there must be. On that basis, the Bill allows Scottish Ministers to access the most competitive source of lending, which is the National Loans Fund.

All other things being equal, Scottish borrowing will increase UK borrowing and debt. The limits in the Bill and the controls set out in the Command Paper will ensure that the Scottish debt is affordable from within the UK fiscal position.

While I support the intention behind the noble and learned Lord’s amendment, which is that borrowing by Scottish Ministers must not risk the UK’s fiscal position, I believe that the borrowing limits reflect a judgment of what is affordable and do not put that position at risk. The limits on borrowing for capital expenditure were judged by my right honourable friend the Chancellor of the Exchequer to represent an acceptable level of risk that he was willing to place on the UK’s public finances. The limits on borrowing for revenue expenditure were based on an assessment of the size of forecast errors in income tax in normal times. Unlike capital expenditure, where a stock may build up, borrowing for revenue expenditure is related to a technical assessment of forecast errors and the timing implication.

The protections already in place in the Bill are sufficient to ensure that the UK’s fiscal position is fully protected. I again thank the noble and learned Lord for stimulating this short discussion, but ask him to withdraw his amendment.

[Lord Davidson of Glen Clova]

I am obliged to the Minister for his careful clarification of the position. There is much content in what he has said and I shall reflect on it. Meanwhile, I beg leave to withdraw the amendment.

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[Lord Sassoon]

My Lords, first, it is a pity that the noble Lord, Lord Barnett, has not been able to join us this evening to discuss his eponymous formula. Nevertheless, we have had an interesting debate. I am afraid that, in the words of the noble Lord, Lord O’Neill of Clackmannan, I am probably going to take the feeble-argument way out of this, although he has given it a degree of respectability. I fully share the concerns about the formula that have been expressed in this House and in another place, but I think that this is the wrong time and place to be dealing with it. Perhaps I may explain a little more fully why I say that.

What is the Bill about? It is about increasing the accountability of the Scottish Parliament to its people by devolving fiscal powers from Whitehall to Holyrood. In this debate we have heard a number of Peers say that they would like much more to be devolved. I suppose that at the extreme end the noble Lord, Lord Foulkes of Cumnock, my noble friend Lord Caithness and others have pointed out the limits to the amount of devolution of tax powers and accountability that can take place. Nevertheless, I still contend that an important and significant step in the right direction is contained in the Bill and we should not minimise that.

Future decisions taken by Scottish Ministers will affect the overall level of funding for Scotland’s public services as they decide whether to increase or decrease devolved taxes relative to the UK. That happens whether or not there are any changes to the Barnett formula in the future. I think it is quite appropriate to link considerations of the Barnett formula with what we are discussing in the Bill. On the other hand, I argue that it is not necessary to reform the Barnett formula for the Bill that we are discussing to have real impact. I would not go as far as saying that reforming the Barnett formula is an entirely separate issue but I do not think that it is necessary in order to let the Bill have full effect. Incidentally, the Calman commission remarked on the Barnett formula but it made no recommendations in relation to it.

[Lord Forsyth of Drumlean]

I have been listening quite carefully to my noble friend’s argument and I see the logic of where he is coming from. It is this wretched Augustinian argument—the time is not right. My noble friend may not want to say this but if he thinks that the Barnett formula is unfair and will need to be dealt with at some stage in the future, would it not be much harder to deal with it then? At the moment, if you dealt with Barnett you could phase in the reduction in the grant that would follow. In circumstances when the Scottish Parliament has the power to raise income tax to make up the gap, it would be politically very much more difficult to deal with Barnett because people would be able to translate the reduction in Barnett into huge and geared increases in income tax. I wonder whether my noble friend will think about that and indicate whether he thinks that that may be a reason why it is better to proceed with funding and tax-varying powers in parallel.

[Lord Sassoon]

My Lords, I do not know whether it was an Augustinian argument but I was going to start by saying that the pace is not right rather than that the time is not right. However, we might come on to the time as well. I appreciate that the two things are much of a muchness. Let me continue with the reasoning.

First, as my noble friend knows full well, the current formula is an administrative procedure. It does not appear in legislation so it is not itself something that requires to be dealt with in legislation. More importantly —something that has been alluded to by one or two noble Lords—we need to have in the centre of our thinking that it is not specific to Scotland; it is a mechanism for allocating funding across all four countries of the UK. It would not be appropriate to legislate to alter the formula—a formula that is not in legislation anyway. If we were to legislate for something else, we could not do it in isolation for Scotland.

To reiterate, the Government understand the concerns that have been expressed in both Houses about the devolved funding arrangements. I say that loud and clear, I hope, to my noble friend Lord Lyell in particular. He gave examples of how other countries do it and sought reassurance that we have the matter under consideration. I certainly believe that it is a matter that will not and should not go away. My noble friend Lord Maclennan of Rogart also stressed the importance of this. Unlike some other noble Lords, he made the point that this is a United Kingdom and four-country matter. I agree with the noble Lord, Lord O’Neill of Clackmannan, that while we recognise the difficulties, the Government’s position—Augustinian or otherwise—is that at this time the priority has to be to reduce the deficit. I hear my noble friend loud and clear, and he would not expect to hear anything else from me. Any change to the current system and to the formula must await the stabilisation of the public finances.

Let us remember that the Bill does nothing to rule out or rule in reform of the formula in future, so we are doing nothing through this Bill to make it any more difficult to do it. I understand the logic of much of what my noble friend says but, as he would expect, I conclude that the Barnett formula is not the purpose of this Bill. It would not be appropriate to legislate for it in this more targeted piece of legislation, so I ask my noble friend to withdraw the amendment in his name and that of the noble Lord, Lord Barnett.

[Lord O'Neill of Clackmannan]

I am a wee bit suspicious of Conservative government Ministers when they tell me that they agree with me. I want to make it perfectly clear that I do not criticise the Barnett formula in respect of any aspect of deficit reduction, because I consider that we have reduced too much too fast. I would be in favour of the reallocation of resource within the United Kingdom and the reallocation of resource within Scotland, because the priorities of the Scottish Government are wrong at this time. I may agree with the Minister on this Augustinian position, but not on any other aspect of his analysis of the economic situation.

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[Lord Sassoon]

I am very glad that we have that clearly on the record. I did think at one point at the beginning of the remarks by the noble Lords, Lord O’Neill and Lord Foulkes, that I would be able to say that I agreed with everything they said. I agree with their conclusion that this amendment should be opposed or, I hope, withdrawn, but I certainly accept that we are probably not in full agreement.

While I am on my feet, it gives me the opportunity to say that the Calman report said that the Barnett formula should continue to be used as the basis for calculating the block grant so, for the avoidance of doubt, when I said there were no recommendations, there were no recommendations to deal with it along the lines proposed in the amendment. The report went on to say quite a lot of things because this was only recommendation 3.4, but perhaps I can end by asking my noble friend to withdraw his amendment.

[Lord Forsyth of Drumlean]

I am most grateful to my noble friend. The only sadness I have about this debate is that we did not have the noble Lord, Lord Barnett. We will clearly have to have another go at this when he can attend at a later stage in the Bill. My noble and learned friend Lord Wallace has lost his sense of humour—I was joking.

As I said, it is a shame that the noble Lord, Lord Barnett, was not here. We have had some interesting speeches. I have to say that I am not an authority on Calman. The report certainly says that, but I think it goes on to say that it should be reviewed. I think it was important to have this debate. I entirely accept that it does not have to be included in the Bill, but given that the Government are bringing forward this Bill, it was an opportunity to raise the important question of Barnett and the consequences of not addressing the issue now.

I thought that what my noble friend Lord Maclennan had to say was entirely sensible both because this is a United Kingdom issue, not a Scottish issue, and because there should be a commission. I think it was the noble Lord, Lord O’Neill—or was it someone else? I cannot remember—who said that there are endless commissions, that we had the Barnett commission that did not make much difference and that commissions come and go.

I think there is a misunderstanding. The Select Committee on Barnett recommended that a statutory commission along the lines of that in Australia should be set up with the job of working out the formula on a fair basis for the United Kingdom as a whole. I do not know, because he is not here, but I suspect that that is what the noble Lord, Lord Barnett, is referring to in his amendment. I agree with my noble friend Lord Maclennan that it would be sensible to get that work under way because the tax-raising powers are not going to happen until 2015.

I also agree with the noble Lord, Lord O’Neill, that this is probably not the moment to start unwinding the Barnett formula, but we would need to have a commission of that kind in order to move to a fairer system, and that work will take four or five years. The Select Committee of this House on the Barnett formula recommended that any changes, and they would be considerable, should be phased in over a very long period of 10 to 12 years. My anxiety is that as we move down this track and as it generates heat and anxiety in parts of the United Kingdom, it may be very much more difficult to do this in an orderly way that produces the minimum stress for the union and for our public services in Scotland. That is where I am coming from on this issue.

I have to say to my noble friend Lord Caithness, who seems to have joined the devo-max party of the noble Lord, Lord Foulkes, and wants to have more taxes, I have not seen his name on any of the amendments that have argued for an extension of the tax-raising powers of the Scottish Parliament: the aggregates levy, the air passenger duty and so on. Of course, this whole Bill as it is currently constituted in respect of the income tax powers is very narrow. It is only the product of 10p.

The noble Lord, Lord Foulkes, is trying to get me into his camp because I said that I was beginning to see the merits of the argument for fiscal autonomy. However, that was only in the context of what my noble friend was saying, which was that the Scottish Parliament will be compensated for any changes that are made in the tax base south of the border.

--- Later in debate ---

[Lord Forsyth of Drumlean]

I was going to say that I was once given the advice, which I believe is part of the Whips’ Office mantra among all parties: namely, that whatever you do, you should not listen to the debate because it might make you inclined not to take the Whip. The great thing about this House is that that does not work in quite this way here, so one carries on in the hope that the arguments move Ministers a little. However, my complete failure to persuade the Minister that it is necessary to change speed limits to cover HGV vehicles as well as cars makes me think that perhaps one is trying to push water uphill. Nevertheless, I will have another go on this amendment, which I think is rather important.

The amendment would help Scottish Ministers in the Scottish Parliament to carry over expenditure which they have not spent in any financial year. I could keep going for about half an hour with stories of local authorities that rush out and buy street furniture in February and sleeping policemen in March. We are all familiar with that practice. It is an old saw. Anybody who has been a Member of Parliament can recount endless examples of constituents who have pointed out how ridiculous it is. I believe that this amendment would be welcomed by Ministers in the Scottish Parliament. The arguments are well understood so I will not dwell on them. I live in hope that my noble friend might be listening and might offer me some comfort that on this occasion he can see the sense in allowing surpluses to be carried forward from one financial year to the next. That seems to me to encourage good planning, good use of resources and proper stewardship of public money. I beg to move.

[Lord Sassoon]

We might get through this one tonight.

[Noble Lords]

Oh!

[Lord Sassoon]

As I say, we might get through this one tonight. I well understand what my noble friend wants to achieve with this amendment. There are two aspects to this question: first, whether the amendment would achieve what he wants it to achieve; and, secondly, whether it would be a good thing to achieve it. If the intention is to allow the Scottish Government to carry forward unspent funds and spend them in the next year, this is not the mechanism with which to do it. The amendment would accumulate funds in the Scottish Consolidated Fund but would not permit the expenditure of those funds since they are controlled by departmental expenditure limits which would remain controlled as they are now. Therefore, the amendment would not achieve that objective. Furthermore, it would deprive the Exchequer of revenue. The direct cost to the Exchequer of this proposal is around £100 million per annum. If the principle was extended to the other devolved Administrations, it would cost a lot more.

I shall not debate the effect of the amendment further, unless my noble friend would like me to. However, I suggest that, whatever the merits of the case, this amendment would not achieve them because it does not get round the expenditure controls which are agreed on a departmental basis. It would merely lock up funds and worsen the borrowing and fiscal position of the UK, which I know my noble friend thinks we are probably too lax about already. Therefore, I ask him to withdraw the amendment.

[Lord Forsyth of Drumlean]

My Lords, I am perfectly content to accept that the amendment may not have been perfectly drafted, but I am not content with that response, because I was clearly advancing the principle that the Scottish Parliament should be able to carry forward surpluses. If my noble friend can perhaps deal with the issue of whether it is able to do that, and whether he favours it in principle, I should be very grateful.

[Lord Sassoon]

My Lords, we need to make sure that UK expenditure, including Scottish expenditure, continues to be controlled in a way that imposes appropriate disciplines. The purpose of the Bill is of course to give the Scottish Government more responsibility for a proportion of their tax-raising powers, and that is linked to the expenditure. However, the expenditure having been agreed, it is appropriate that money from taxation should continue to flow as it does now into the Consolidated Fund, subject to the current regime under the Scotland Act 1998, which permits the Treasury, after consultation with Scottish Ministers, to designate receipts that go to the Consolidated Fund.

The devolved Administration in Scotland is currently required to surrender receipts from fines, forfeitures, fixed penalties, dividends on public dividend capital and most interest collected by Scottish Ministers. So there is currently a provision to recognise the flow of funds between Scotland and the UK Consolidated Fund. At the moment, the vast majority of the income in question is derived from fines and fixed penalties, which the Office for National Statistics defines as analogous to taxes. That arrangement is consistent with the Government’s view that taxes that are not devolved should be collected centrally and then redistributed across the UK. We continue to believe that, with the exception of what is explicitly devolved, the revenue should flow into the Consolidated Fund and that expenditure controls should otherwise continue to be exercised on the current basis.

There are much wider questions to be asked about end-year flexibility in individual departmental expenditure in the rest of the UK, and there is certainly a debate to be had—it is well outside the scope of the Bill—on the appropriateness for all government departments across the UK to carry forward expenditure from one year to another. The Treasury rules on this have changed over the years. I cannot remember in which year it was, but health expenditure got out of hand in the latter stages of the previous Government. I cannot remember if it was when the noble Lord, Lord Browne, was Chief Secretary. The noble Lord is indicating that it was, so he will know very well the difficulties of any regime under which expenditure is carried forward.

I do not want to be dismissive of my noble friend’s point, because there is a real issue here.

[Lord Browne of Ladyton]

For the purposes of clarity, my recollection is that the problem arose before I became Chief Secretary to the Treasury. However, it was brought under control when I was Chief Secretary.

[Lord Sassoon]

If my memory serves me, it was got under control by ending the system of end-year flexibility for departments to carry forward expenditure. There is an important debate to be had about this, but locking up funds in the Scottish Consolidated Fund, as a sort of back-door way of addressing the question of what should or should not be carried forward, which applies to the whole United Kingdom, is not the appropriate way to deal with this. However, I recognise that there is a broader issue here which the Treasury has wrestled with over a number of years.

[Lord Forsyth of Drumlean]

Again, I struggle to see the logic of the Government’s position. Throughout the course of today, we have heard how this is about increasing accountability and ensuring that the Scottish Government raise more of the resources that they need for the financial commitments they make.

I find it odd to compare the position of the Scottish Government after the Bill is fully implemented with a government department. We are not talking about a government department, although the Treasury appears to be treating them as if they were. If the Scottish Government decide to increase income tax by 5 per cent to fulfil some commitment to increase nursery education, or whatever, and if at the end of the financial year they find that they have been able to implement that policy in an efficient and effective way, I do not see why the Treasury should be able to claw back some of that money and why they should not be able to carry it forward to use in subsequent years. Why does the Treasury need to keep control of that matter? It already has control over the general macroeconomic position. It is controlling the borrowing. I do not see the issue. I can see how the high priests in the Treasury have brought down their tablets of stone and said, “We have always done it this way. Therefore we have to do that”, but it is the Minister and his colleagues who are proposing that revolutionary change to the financing of the Scottish Parliament.

My noble friend is absolutely right: the Treasury has thought about this and resisted it for years. That is why every year we see money being squandered and wasted at the end of the financial year to spend the budget because it gets clawed back otherwise. I fully accept that my amendment may not be the best way to achieve the right result, but I ask my noble friend to consider bringing forward his own amendment, which would be technically effective and allow for carryover from one financial year to another. I do not really understand why that should be a problem, given the model and how he has described the responsibilities of the Scottish Parliament.

There is a separate issue, which relates to revenues which go into the Consolidated Fund in Scotland and the issue of assigned revenues for particular things such as fines. It is too late to start a debate on that, but my noble friend has given me some ideas for later stages of the Bill. It does not seem such a foolish idea to me, if the purpose of the exercise is to make the Scottish Parliament more accountable for its actions by making more of its revenue arise from its policies in Scotland, to assign some of those revenues and reduce the block grant accordingly.

I can see that there might be difficulties. It might encourage people to impose fines more enthusiastically than would otherwise be the case, but in terms of the general philosophy—I am trying to tune into the Government's approach to devolution—it seems a bit of a contradiction that my noble friend is so resistant to provision for carryover. Entirely accepting that my amendment may not be well drafted, is my noble friend prepared to bring forward his own amendment allowing for some carryover by the Scottish Government if they wish it? That would encourage proper fiscal behaviour, which I should have thought that the Treasury would welcome.

Of course, what the Treasury cannot bear is losing control. You can see that throughout the Bill. The rhetoric is all about how we are making them accountable, but everywhere we read, “You cannot do this until the Treasury has agreed this, that and the other”. I appreciate that when he goes back to his department, my noble friend will be surrounded by the high priests of the orthodoxy of the Treasury telling him that this could not happen, but this is a great opportunity to set a new style of government in Scotland, and I should have thought that carryover would be widely welcomed. This practice certainly leads to the most common complaint made about all public bodies, not just in Scotland but throughout the United Kingdom, so perhaps I could have one more go at asking my noble friend whether he will go away and think about this. If nothing else, it would be an amusing discussion for him to have back in his department.

[Lord Sassoon]

As I have already explained to my noble friend, the Treasury—we have one former Chief Secretary here—has looked at and experimented with giving flexibility to departments and devolved Administrations, so it is a topic that comes and goes and will continue to be live. However, I cannot give my noble friend any particular cause for hope that some new orthodoxy will be handed down in relation to this Bill. Even if it were, as I said, I do not think that the mechanism that he suggests of tying up cash in a Scottish Consolidated Fund is the right one. It is a broader question about the flexibility that the Treasury allows departments. The Treasury is not closed in its thinking, because it has allowed carry-forwards on different conditions in the past and will continue to think about that.

[Lord Forsyth of Drumlean]

I shall not pursue this matter ad nauseam but I have to say to my noble friend, very politely, that Ministers are there to instruct their departments, not to reflect what their departments think and say. If my noble friend thinks that carryover for the Scottish Parliament is a bad idea, that is fair enough, but one would like to know why it is a bad idea and how it does not fit into the Government’s overall view of their approach to devolution. We have heard the argument that the Treasury has been innovative and has allowed this and that, but this Bill is supposed to be about freeing people from those constraints and making them accountable to their voters. I am a bit disappointed that my noble friend is simply telling me what the Treasury thinks. I want him to go back and change the thinking in the Treasury in order to ensure that I, as a taxpayer living in Scotland, now and in the future get better value from my money which is spent by the Scottish Parliament.

I can see that if I press on with this, my noble friend will just get up and say, “As I have already told you”. Therefore, if I may, I shall return to this at a later stage with an amendment that is more carefully drafted. I beg leave to withdraw the amendment.