Scotland Bill

Stewart Hosie Excerpts

Monday 29th June 2015 Commons Chamber

[Sir Edward Leigh]

As I explained, my personal view is that we should devolve the whole thing. It makes logical sense. As I said, setting the thresholds is often much the most interesting part of tax policy in modern Parliaments. When our friends the Liberals were in power with us—we remember those happy times—was not their proudest boast that they, as members of the Government, had lifted hundreds of thousands of people out of tax altogether?

There is an interesting argument here. For the record, I am dubious about lifting the threshold. It is expensive, and surely more, not fewer, people should have a stake in the income tax system. But that is my personal view, and I accept that there are countervailing arguments. For instance, lifting the threshold reduces the pressure on tax credits. I recognise that it is an interesting political debate.

Setting rates and bands without being able to set thresholds makes no sense. Of course, raising thresholds and personal allowances is dramatic and expensive, which is presumably why the Scottish Parliament is being denied the power, but leaving aside the need for and desirability of full control, does not full fiscal autonomy lead to full fiscal responsibility? The more autonomy a Parliament is given, the more responsible it becomes. Countries such as Belgium and Spain—not without their own separatist problems—provide exceptionally broad autonomy to their constituent parts.

That is certainly the case in the United States, where the states have full fiscal autonomy, including the power to issue bonds and the like—the whole lot, as far as I know. This country is definitely not the United States, despite the best efforts of Mr Blair, but if there is one aspect of America we should like to emulate, it is its vigorous civic culture. Its states, counties and towns have real power and the capability to respond to people’s needs and democratic desires. Surely we all want Scotland to have that capacity, just as we want the whole UK to have it. The fact that fiddling with thresholds is so expensive makes Governments and Parliaments niggardly about raising them—each £100 is inordinately expensive—but why should the Scottish Parliament be less responsible than the UK Parliament? Can anybody tell me why a responsible Scottish Parliament should not also be niggardly about that power and use it in a very conservative—small c—way?

Of course, full fiscal autonomy requires a set of support mechanisms through a formula-based grant. That should be based on need, not obscure variations on English spending, which is why I am opposed to the Barnett formula and want to replace it with one based on need—but that is a debate for another time. If the UK Parliament issued a sensible grant formula based on the specific needs of the Scottish Parliament, and if that were followed by full freedom for the latter to set personal allowances, bands and rates, I believe the Scottish Parliament would use that power responsibly and carefully. I contend that the more power we give the Scottish Parliament, the less it will be a grievance Parliament and the more the forces of canny, prudent Scottish financial conservatism will be unleashed. Indeed, the best way to encourage the growth of the Conservative party in Scotland is to give the Scottish Parliament more power. At the moment, all the pressure on it is to spend more money and blame the UK Government when we indulge in any austerity programme.

In the current situation, it is perfectly logical for the voters to choose whichever party complains the most and makes the biggest fuss. I do not blame the Scottish people for doing that. The current system leads to that sort of mindset, whereas the UK system leads to an alternative mindset—we want politicians in power who are careful about how they vary thresholds and bands. It is because Treasury Ministers have that power that people are careful about whom they elect, and Conservatives do not do too badly in that UK set-up.

With full home rule and full fiscal autonomy, the voter would be in charge and would choose representatives who would raise and spend money wisely rather than just go cap in hand to Westminster. That is surely what we want to achieve, so what is the objection? If it is said that the Barnett formula makes such natural freedom unobtainable, the solution is not the denial of power or freedom but the end of the formula. If the argument is that the Scottish tax system could undermine full UK fiscal responsibility, I find it unconvincing. For instance, the Scottish Parliament spends £37 billion and raises £30 billion—quite responsible, actually. The UK spends £732 billion and raises £648 billion. [Interruption.] I thought Scottish National party Members would respond in that way, but I could not resist helping them along.

The serious point that I am making is that the Scottish budget is very small compared with the UK budget. If we gave the Scottish Parliament full fiscal responsibility, it is extremely unlikely that it would upset our fiscal responsibility. The Secretary of State may, of course, be able to deal with that point. He has many more expert advisers than I do, and I will listen to the arguments that are made today and wait for his response. Perhaps he will indulge me, if not with a yes to my arguments then at least with a willingness to listen and, in time, to move. If he is not interested, we could return to the matter on Report.

I make my comments in the spirit of trying to be creative and helpful. We can return to these matters, but I hope that the Secretary of State will not just provide a throwaway line from the civil service brief but will try to respond to the arguments that are made. We are trying to create a responsible Parliament; let us give it full fiscal autonomy.

[Stewart Hosie (Dundee East) (SNP)]

It is a pleasure to serve under your chairmanship in this Committee, Sir David, and to speak to our new clause 54. I enjoyed much of what the hon. Member for Gainsborough (Sir Edward Leigh) had to say, apart from his description of the “separatist problem”, which we tend to call “national aspiration”—I think I know what he meant. I am conscious of the time, so I shall try to cover the debate as briefly as I can.

Paragraphs 75 to 79 of the Smith agreement covered issues of income tax, and stated that income tax would remain a shared tax and that both the UK and the Scottish Parliaments would share control of it. The agreement said essentially that MPs representing constituencies across the whole of the UK would continue to decide the UK’s budget, including income tax. That certainly makes sense with the very partial devolution suggested by the Bill.

Within that framework, the Scottish Parliament will have the power to set the rates of income tax and the thresholds at which they are paid for non-savings and non-dividend income only. As part of that, there will be no restrictions on the thresholds or rates that the Scottish Parliament can set. All other aspects of income tax will remain reserved, as the hon. Member for Gainsborough said, so that even such things as the definition of income could be changed by a UK Government, making subsequent and consequential serious change to the yield forecast by the Scottish Government. That is one reason why, with the partial devolution, we should all continue to vote on that component of income tax in the Westminster Parliament—and it is an even stronger reason, of course, for the devolution of all income tax.

The Scottish Parliament Information Centre analysis for the Scottish Parliament Devolution (Further Powers) Committee—for the rest of the evening, termed “the devolution committee”—found in its interim report on the draft Scotland Bill that draft clauses 10 to 12, now clauses 12 to 14,

“broadly seek to give effect to the extension of income tax powers recommended by the Smith Commission. These would give the Scottish Parliament the power to set rates and bands in relation to non-savings and non-dividend income…above the UK personal allowance.”

Clause 14 also deals with the interaction between income tax and capital gains tax. Currently, individuals who pay income tax at the higher rate also pay CGT at the higher rate. The clause sets out that the rate of CGT that applies to Scottish income tax payers will continue to be calculated using the UK income tax rate limits. That would create an imbalance should there be a change or proposed change for Scotland and people choose to do something in a different way.

There were, however, no draft clauses in relation to the corresponding adjustment in the block grant or the Scottish Government’s reimbursing the UK Government for costs arising from implementation or administration of the powers. Can the Secretary of State confirm that these recommendations do not require legislation?

The Scottish Parliament’s devolution committee interim report said in its conclusion about income tax powers that

“the essence of the Smith Commission’s recommendations has been translated appropriately by the previous UK Government into the draft legislative clauses”,

and that it had “no particular concerns” with “the drafting”. However, it highlighted the

“significant issues still to be resolved regarding the implementation of the new powers, such as an appropriate definition of residency…the details of the administration of the new regime (who collects the tax and how it will function…the need to avoid double taxation and the timing and phasing of the new powers on income tax relative to those already devolved under the Scotland Act 2012”.

Those are all matters that I am sure the Scottish Secretary will address. At paragraph 166, the devolution committee also recommended that

“details on the implementation of the new powers over income tax be produced before the Scottish Parliament is expected to give its legislative consent”.

That is extremely important. It concluded, too, that

“any final detail of the fiscal framework and the other matters we have considered is provided to the Scottish Parliament before the question of legislative consent to any new bill is considered”.

That is a view endorsed by the Scottish Government, and I understand that discussions on these issues are ongoing with the UK Government, in parallel with the passage of the legislation.

It is normal practice for the Scottish Parliament to consider legislative consent before the final stage of a Bill in the Commons; with the Report stage likely in the autumn, usual practice would suggest September. However, the devolution committee suggested 2016 as a more likely date, so when does the Secretary of State believe the Bill will reach Report?

Because of the lack of information on the various technical aspects of the delivery of the tax powers, beyond the wording of the Bill, the committee said:

“As yet, we are not able to conclude that we are content with the fiscal framework and no detriment arrangements as these details are currently being discussed between the two governments.”

Will the Secretary of State confirm that discussions are under way and update us on progress, particularly in respect of the no detriment and no advantage clauses—principles agreed by Smith before the committee reported?

The devolution committee also said:

“both the process of these negotiations and the outcome requires proper parliamentary scrutiny. We recommend both Governments reach an urgent agreement on just how this will be achieved and for the Scottish Government to report to the Committee on what arrangements it proposes to put in place for parliamentary oversight.”

Will the Secretary of State describe what actions his Government are taking in respect of parliamentary oversight, particularly if we do not—as may well be the case—get through the debate on all the clauses and groups of amendments tabled for debate today?

In their response to the devolution committee’s interim report, the Scottish Government made it clear that they were

“broadly content with the clauses in the Scotland Bill relating to taxation”.

It added, however:

“as the Committee recognised, there will need to be extensive discussions between the Scottish and UK Governments over the plans for implementing these provisions.”

I note at this point that there were changes between the draft clauses and the Scotland Bill. In paragraph 165 of the interim report, the devolution committee highlighted one area that required specific clarification, so I ask the Secretary of State to confirm—I am sure he will—whether clause 12(5) of the published Bill now contains a change to specify that a zero rate of income tax is possible?

It is also worth saying a little about the nature of the taxation powers, which has been touched on. They are very limited. Even if we include the VAT assignation, the Scottish Parliament would raise the equivalent of around 50% of devolved expenditure. However, excluding the VAT assignation, the figure falls to barely a third. That is important because many of the submissions to the devolution committee called for more. In its written evidence, the Scottish Trades Union Congress called in its recommendation 2.1 for the

“devolution and assignment of taxation amounting to…two thirds of Scottish public spending (over 50% of all spending in Scotland)”.

The Bill clearly does not reach that standard.

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[Sir Edward Leigh]

rose—

[Stewart Hosie]

I shall give way once, yes.

[Sir Edward Leigh]

That is a very important point. We always moan about tax avoidance. I have been talking to people in Scotland, and it appears now that wealthy people will be putting more and more money into dividends precisely to avoid tax. I cannot understand the logic of encouraging people to avoid paying tax by putting their money in dividends.

[Stewart Hosie]

I agree entirely. None of us should be encouraging tax avoidance or evasion—not least a Tory Government, which is why I am sure the Secretary of State will want to support the full devolution of tax on earned and unearned income. It is a jolly good idea.

However, whether the devolution of income tax is extended or not, issues of implementation must be fully resolved. I ask the Secretary of State to confirm that, as part of the fiscal framework discussions, the following issues are now being fully addressed: the timing of the implementation of the Smith provisions; the length of the transition period and how it relates to the transition period for the Scottish rate of income tax; how the costs of implementation will be met; whether there will be an agreement to revisit the memorandum of understanding between the Scottish Government and HMRC for the Scottish rate of income tax, to ensure that it remains fit for purpose; the enforcement and compliance regime under the Smith income tax proposals; how gift aid and pensions relief will be treated under Smith; how the block grant adjustment will work, although that is much broader than simply income tax; the forecasting of revenues, the interaction between the Office for Budget Responsibility and the Scottish Fiscal Commission and the detail of how we calculate the transfer of revenue; and the continued role of the National Audit Office in working in partnership with Audit Scotland.

The key issue is the forecasting that will drive the revenues that the Scottish Government will get and the block grant adjustment. There has to be a fair balance between the role and input of the OBR and the Scottish Fiscal Commission, particularly given that the OBR uses Treasury numbers to drive its calculations.

As I said at the outset, I am conscious of time; we have many groups of amendments to get through and others will want to speak. I hope that the Secretary of State can answer those important detailed questions on the proposed devolution. I commend amendment 54 to the Committee.

[Ian Murray (Edinburgh South) (Lab)]

I was not able to make it to the House earlier, Sir David; I would like to express my sympathies to everyone involved in the tragic events in Tunisia. Our thoughts are with the families all across the United Kingdom, but especially the people in Scotland who have been caught up.

I want to speak to new clause 32. Part 2 of the Bill devolves significant new powers to Scotland over income tax and other taxes, and it is a real opportunity to provide the powerhouse Parliament promised by the Smith agreement. Clauses 12, 13 and 14 make provision for transfer to the Scottish Parliament of the power to set rates and bands of income tax, including, as the hon. Member for Gainsborough (Sir Edward Leigh) was pushing for, the ability to set a zero rate. The full impact of that and other tax measures should not be downplayed.

Lord Smith himself outlined that the measures proposed in the agreement would create one of the most powerful devolved Parliaments in the world. When taking taxation and spending clauses together, Scotland would be only slightly behind the Canadian provinces and Swiss cantons. Likewise, according to the OECD, in exercising power over setting both the rates and bases of income tax, Scotland would rank above sub-central legislatures in Sweden, Norway, Finland, the US and even Germany.

The economic evidence suggests that fiscal devolution can work. It is our responsibility, and that of the Scottish Government, to make sure that it does—that is the genesis of our new clause 32. However, these are hugely complicated processes; anyone who has tried to read the fiscal framework analysis in the Smith agreement will know that. I note that the Scottish National party and its new friend, the hon. Member for Gainsborough, have tabled new clauses that would seek to devolve income tax in its entirety.

I should say at the start that those are perfectly legitimate arguments that have been debated at great length at both the Calman and Smith commissions. Labour disagrees, because we believe fundamentally in the pooling and sharing of resources across the United Kingdom; that is not a criticism of the SNP position, but merely a disagreement on a fundamental broad principle. We have rightly and repeatedly criticised the Smith agreement and the Bill on a number of occasions, particularly on Second Reading and in last Monday’s debate, but I agree with the hon. Member for Dundee East (Stewart Hosie): in this instance at least, the Bill and the Smith agreement have got it right. That is probably why there are so few substantive amendments to the income tax clauses. The Chartered Institute of Taxation has echoed that by saying that the commission has made a

“pragmatic set of proposals which shows a lot of thought has been given to balancing the desire of Scots for greater tax powers against the practical obstacles to devolution”.

It is worth reflecting on the Scottish Parliament’s current position on income tax. Since 1999, Scotland has been able to vary the rate of income tax by 3p in the pound. Despite the current clamour for more powers, that power has never been used—incidentally, I believe that it has now lapsed, which shows the problems with the fiscal framework. Notwithstanding that, under the Scotland Act 2012, and as a result of the Calman commission, the Scottish Parliament has been afforded control over the first 10p of the basic rate of tax. Obviously, the Smith agreement and the Bill go much further.

The Scottish Parliament will have total control over income tax rates and thresholds and complete freedom over the levels at which those rates and thresholds are set. That is significant as the estimated devolved income tax liabilities on income tax in 2013-14 amounted to almost £11 billion. That is a considerable sum, the collection and deployment of which confers a substantial degree of responsibility on the Scottish Parliament. If they wish, the Scottish Government—of any colour—can increase or decrease that liability.

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[Ian Murray]

I am delighted by that intervention, because I was going to speak about that issue later. Given the time constraints, I will take that point out of my speech, because my hon. Friend has made it well. The Scottish Council for Voluntary Organisations has raised the relationship between income tax and gift aid. Although that matter is not mentioned in new clause 32, I hope that if there is a reporting mechanism, it will look not only at gift aid, but at pension relief. That is another matter that was not mentioned by the Smith agreement, but which has been raised by many of the organisations that have been in touch with us about the Bill. Gift aid is worth £1 billion a year to charities, so we must ensure that it is considered properly.

[Stewart Hosie]

The hon. Gentleman spoke about the principle of pooling and sharing, and I have heard that argument before. However, if it were a real principle, it would apply to the aggregates levy, landfill tax, air passenger duty and other small taxes that have been devolved. There is no principled reason why it is required to be applied to income tax. He rather gave the game away when he spoke about the ability to vary the rate by 3p either way, which was the original plan, and the ability to set the first 10p of income tax. Why does he think that so little is enough for a nation like Scotland? Why is he so afraid of giving our national Parliament all the powers it needs to tax income properly?

[Ian Murray]

What the hon. Gentleman is asking for is full fiscal autonomy. There are many amendments that will allow us to have a full debate about that later this evening, but I fundamentally disagree with that principle because the pooling and sharing of resources is important. The difference between income tax and the aggregates levy, landfill tax and all the other taxes he mentioned is that they are removable taxes, whereas income tax is not. We should be pooling and sharing resources, and we should therefore ensure that the significant sum of £11 billion is part of the overall matrix of the United Kingdom.

As I said at the start of my speech, I do not disagree with everything that the hon. Gentleman said, but we disagree on the fundamental principle of pooling and sharing. His speech was completely reasonable in terms of what he is seeking to achieve, but Labour Members simply disagree with the broad principle of not pooling and sharing. There is no right or wrong on these issues in terms of what should be devolved; the issue is whether one believes in these broad principles or not.

I find it difficult in these debates to have 56 SNP MPs braying at me from behind, when I am actually agreeing with them. I have no idea what they will be like when I disagree with them. I am paying a compliment to the hon. Member for Dundee East, which I do not do often, and he is still unhappy with my contribution. Never mind; given that they have signed most of our amendments to the welfare clauses, perhaps we will be much more collegiate tomorrow.

I was explaining new clause 32. The Scottish Affairs Committee report on the fundamental principles of the Smith agreement, which was published in March, said:

“The Smith Agreement represents the best of both worlds. It presents Scotland with much greater powers over taxation, meaning for the first time the majority of the money the Scottish Government spends will be paid for by its own taxation. This will make it more fiscally accountable to the people of Scotland for how it spends their taxes.”

I am confident that the income tax provisions in the Bill strike the right balance between reserved and devolved taxation, although I agree with the hon. Member for Gainsborough that some movement might be required in the future.

I believe that these clauses are in the spirit and the letter of the Smith agreement and the vow. The vow is quite concise on these issues. It says very little or nothing at all about taxation. One thing that it does say, which goes back to the pooling and sharing of resources, is that the Barnett formula should be maintained. The Bill and the Smith agreement are utterly in accord with that stand.

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[David Mundell]

The Scottish Government already have to manage their finances by building in estimates of revenue. That is part of the system in which we operate and part of the decision to have a United Kingdom-wide tax. I will come on to that point in a moment.

The Deputy First Minister has confirmed that the Scottish Government are already considering using the tax powers that they will shortly receive under the Scotland Act 2012 to put up income tax. The powers contained in these clauses will increase the scope for action considerably. With the SNP in government, Scots might pay the highest income tax in the UK. Perhaps the party will dust down its old “penny for Scotland” policy, although now, with inflation, it might need a little more.

[Stewart Hosie]

Will the Secretary of State please tell the House which person in the Scottish Government has suggested that income tax is going up in Scotland?

[David Mundell]

The Deputy First Minister, Mr John Swinney.

Ruth Davidson, however, has set out the Scottish Conservative position by saying that Scotland would never have higher rates of income tax than the rest of the UK. If people elect Scottish Conservative MSPs next May, that is what they will get. Scots voted decisively to remain within a United Kingdom. The UK is more than just a name and a flag; it is a social and fiscal union in which risks and rewards are pooled and shared. The Smith commission looked closely at a range of tax powers and agreed on a package of devolution that enhances Scotland’s place within the United Kingdom. It strikes the right balance, by empowering the Scottish Parliament, while maintaining the UK’s strength and coherence. There is a good reason for transferring every power that we are devolving in the Bill, and a good reason for keeping in reserve everything that we are not devolving.

Turning to amendment 124, devolution of income tax is a significant step, but it is important to remember that in the independence referendum only last September, the Scottish people decisively opted for the security of being part of the UK family of nations, and part of that is a single, cohesive income tax system. That is why HMRC will administer Scottish income tax for the Scottish Parliament as part of its UK-wide management of income tax, thus minimising the burdens on employers and individuals. It is also why the Smith commission—which it is important to remember all parties present in the Scottish Parliament signed up to—specifically decided after careful consideration not to devolve the personal allowance.

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[Wayne David]

No, of course not. What I am saying is that it would have been far better if the Government in Scotland and the Government in London had sat down maturely and worked things out for the benefit of services in Scotland rather than pursue a fixation with the idea that things had to be brought together on a centralised basis in Scotland, irrespective of the consequences. The Government were absolutely adamant on this. Presumably they could not find parliamentary time, or did not have the political inclination to bring forward an amendment to have a scheme that would have benefited everyone.

The sensible thing would have been to do precisely what I have said, but that is in the past. The important thing now is to move forward and resolve this situation. Our proposed new clause 20 calls for a review of the situation. It is a modest request, which I very much hope that the Government will accept. If they do accept it, it could provide an opportunity for everyone to get together and, hopefully, resolve the issue.

It has been suggested by the Scottish Council for Voluntary Organisations that VAT rebates should be devolved so that they better conform to devolved policy to support society and public services. A suggestion has been made that the UK Government could allocate a Barnett formula-based share of the VAT rebates to the Scottish block grant. That is one possibility, but, like all the other suggestions, it needs to be soberly and carefully discussed. It could be a part of the review that we propose. I hope that the Government will accept our amendment so that we can have that meaningful discussion and reach a decision for the benefit of Scotland.

[Stewart Hosie]

It is a pleasure to take part in this debate on clause 15 stand part and proposed new clause 20 in the name of the Labour party.

Let us turn to the way that the Smith commission has spoken about the assignation of a proportion of VAT. It said:

“The receipts raised in Scotland by the first 10 percentage points of the standard rate…will be assigned…All other aspects of VAT will remain reserved.”

The Scottish Parliament Information Centre analysis for the Scottish Parliament Devolution (Further Powers) Committee referred to it in its interim report on the draft Scotland Bill clauses. It said:

“Draft clause 13 [now 15] would give effect to the Smith Commission recommendation that the Scottish Government be assigned receipts from the first ten percentage points of VAT. With the agreement of both governments it also proposes to go slightly further by notionally assigning 2.5 percentage points of the reduced rate of VAT as well…The amount of VAT receipts attributable to Scotland is to be the subject of an agreement between the UK Government and the Scottish Government.”

It did point out that there are no draft clauses in relation to the corresponding adjustment to the block grant. Hopefully, the Minister will confirm that that does not require legislation. In effect, the Scotland Bill proposes the assignation of half of VAT receipts to the Scottish Parliament. However, that will provide no actual control of VAT.

The Devolution (Further Powers) Committee had no particular concerns with the draft clauses, but it did want details of the assignment of VAT revenues and the share of any benefits to be produced—the mechanics of the assignment—before the Scottish Parliament could be expected to give its legislative consent. The committee said:

“There is still significant uncertainty on how the assignment of a share of VAT revenues will be calculated and whether the Scottish Government will be able to reap the rewards of any economic stimulus that yields higher VAT revenues.”

It is also worth noting that the Devolution (Further Powers) Committee’s analysis paper, which set out the differences between the draft clauses and the published Bill, noted that:

“No further detail is provided on the assignment of VAT revenues, or the corresponding block grant adjustment.”

There are a number of technical issues for consideration notwithstanding the fact that there is no particular issue with the legislation as such.

The committee’s interim report considered the evidence on VAT assignment from a range of sources. It said that the bulk of the evidence received by the committee, while welcoming the principle, called for greater clarity in how the assignment of revenues would work. As the Institute of Chartered Accountants of Scotland told the committee:

“Clause 13 in the ‘Draft Scotland Clauses 2015’ regarding VAT delivers the mechanics of the assignment of VAT, but with the large caveat that it applies ‘where there is an agreement between the Treasury and Scottish Ministers’...The rules for agreeing this have not been provided and it may not be easy to identify ‘Scottish VAT’”.

I take on board what the Scottish Secretary said earlier about not giving a running commentary, but on that specific point—and I shall have more specific questions—at least I hope we can get clarity.

In oral evidence to the Scottish Parliament committee, Charlotte Barbour of ICAS elaborated:

“The assignment of VAT offers more opportunity for discussions on how that might be calculated. It slots in with the difficulties with the fiscal framework”—

we discussed those in the last debate—

“and some of the no-detriment issues”—[Scottish Parliament, Official Report, Devolution (Further Powers) Committee, 5 February 2015; c. 4.]

I mentioned those previously. The Scottish Trades Union Congress was broadly supportive of the assignment of VAT. Its deputy general secretary told the Committee that

“I am quite a fan of assigned revenue”,

but he took the point that

“it is not a power in the sense of being usable to promote particular behaviours”.

However, he said:

“A degree of assigned revenue clearly rewards the Scottish Government for economic growth and, in our view, the closer we get to an amount of revenue that is derived from positive actions undertaken by the Scottish Government, the better.”—[Scottish Parliament, Official Report, Devolution (Further Powers) Committee, 15 January 2015; c. 13.]

I do not think that any of us would disagree with that. We want responsibility, which rather prompts the question that given that there is no control over VAT, why assign only half of it? Why not assign it all? The Scottish Government could then quite rightly benefit, if there was a benefit, from the entire rise in VAT in Scotland rather than just half of it and could take responsibility if there was a shortfall, not just for half the shortfall.

Speaking to the committee, John Swinney, the Cabinet Secretary for Finance, Constitution and Economy, highlighted two issues for discussion with the UK Government, which are both important:

“One is establishing the analytical base for how VAT should be apportioned and the other is the policy question of guaranteeing that if those estimates are exceeded, Scotland retains the benefit of that improved economic performance”.—[Scottish Parliament, Official Report, Devolution (Further Powers) Committee 12 March 2015; c. 26.]

The former Secretary of State for Scotland also commented on the issue of VAT in a letter to the Committee, in which he said that he could

“confirm that VAT assignment will link the Scottish Government’s budget with economic activity in Scotland, providing incentives for growth. The amount of VAT to be assigned…will be based on an estimated share of the total VAT generated in the UK...The UK and Scottish Governments will need to agree a methodology”.

Will the Minister provide further details, not on the specific discussions with the Scottish Government but on the themes? What are the options for how VAT will be assigned? Will it, for example, be a consumption-based approach? How can we improve the robustness of the measure and the timescales, for example by improving the survey data? What will be the costs of implementation and how will they be met? Does there need to be a proxy measure over a transition period until the methodology is robust? Has any thought been given to indexation and comparable measures of growth? What has been said about governance and accountability, for example developing a separate strand to the memorandum of understanding with the HMRC on VAT to expand the role of the project board?

The question of the robustness of the survey data is vital. At present, VAT is estimated by the Scottish Government in the Government Expenditure and Revenue Scotland report, based on a household survey of expenditure, therefore missing tourism spend entirely. That is corrected by a percentage share adjustment, meaning that the Scottish Government estimate what percentage of UK tourism happens in Scotland, but if the Scottish Government managed to increase tourism spend through other actions, such as reducing air passenger duty, that would not show up according to the current methodology. We therefore need to agree a new robust methodology and, perhaps, an interim measure until that methodology is in place.

As the Minister has said, VAT cannot be varied within a state and we understand and respect that. So let me repeat the question: why give only half rather than all, unless to camouflage the fact that the tax over which Scotland will have control will be such a small share of our tax base? Could the assignation of VAT revenue be designed simply to make that number seem a little bigger?

Let me turn to new clause 20, on the subject of VAT on Police Scotland and the fire service. We heard the hon. Member for Caerphilly (Wayne David) describe the amendment, which proposes a review of the application of the VAT refund scheme for business in Scotland. It has been tabled with the intention, it would appear, of addressing the anomaly of the inability of the Scottish Police Authority and the Scottish Fire and Rescue Service to reclaim VAT. Although we agree that that is an inequitable position for both services, we do not necessarily believe that a review is the way to address it. Instead, the UK Government—as the hon. Gentleman said, where there is a will, there is a way—should simply amend the VAT status of the single police service and fire and rescue service in Scotland.

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[Wayne David]

rose—

[Stewart Hosie]

In a moment. We think that the better approach to fix the problem might be through a forthcoming Finance Bill after the Budget in July, but nevertheless we are happy to back the new clause today if Labour presses it to a vote.

[Wayne David]

I was going to ask the hon. Gentleman if he was going to support us, but he has pre-empted me. It is very good that he will, because, of course, the SNP did not table an amendment on this issue. I thank him.

[Stewart Hosie]

We did not table an amendment because there was not an amendment that we could table to fix the problem. As I have just said, that requires an amendment to a Finance Bill. One might have thought that an experienced old hand like the hon. Gentleman might have known that and advised his younger and less experienced colleague, the shadow Secretary of State, on how things work. Having said that, and that we are happy to support new clause 20, I will sit down and hopefully we can move on.

[Mr Alistair Carmichael]

I rise to say a few words in support of new clause 20, tabled by the hon. Members for Edinburgh South (Ian Murray) and for Caerphilly (Wayne David). When considering schemes such as those that lie at the heart of the new clause, it is worth starting with the principle that underpins them. Is it, as the Financial Secretary to the Treasury suggested, the principle that local government finance should not go straight into Treasury coffers? I can understand that principle and it holds water in so far as it relates to the scheme for police and fire services across the UK, as originally envisaged. The difficulty for the Minister, however, is that there are other schemes of a similar nature that go beyond the ambit of police, fire and other rescue services. The hon. Member for Caerphilly mentioned one related to the national health service.

The principle that underlines such schemes is fairly sensible—that for public services to pay money back into the Treasury is essentially an exercise in robbing Peter to pay Paul. It only creates work for accountants and achieves no public good. There is a more fundamental principle at stake, however, in the proposal before the Committee and in the new clause tabled by the Labour party. That is the principle that there should be equality of treatment across the board and across the United Kingdom. The hon. Member for Aberdeen South (Callum McCaig) hit the nail on the head when he referred to the pooling and sharing of risks. I think I have perhaps a greater commitment to that principle than he has, but I must say in all candour to those on the Treasury Bench that if they are sincere in their belief that risks and rewards should be pooled and shared across the UK, whatever the technicalities this situation should not be allowed to continue. Whether it is done through the review in the new clause or through action in the forthcoming Finance Bill, amendments for the sake of the continued constitutional integrity of the United Kingdom should be produced in early course.

--- Later in debate ---

[Mr Gauke]

The Isle of Man has different constitutional arrangements. What we are proposing is consistent with the conclusions reached by the Smith commission.

The hon. Member for Dundee East (Stewart Hosie) made a number of technical points about how that will work. I accept that a number of details will need to be worked out as part of the fiscal framework. There is a need to agree the methodology for estimating how much VAT is generated by Scotland and by the rest of the United Kingdom. The UK and Scottish Governments will also need to agree the operating principles, including mechanisms for verifying that the methodology has been applied correctly, how many adjustments might be carried out and arrangements for audit and transparency, including publication of results. It is worth pointing out that other countries operate similar systems and could provide a reasonable starting point from which to build.

Again, those considerations will be part of the fiscal framework, and I think that it is agreed on all sides that it would not be helpful to provide a running commentary on it. Of course, there have already been meetings with the Deputy First Minister and the Chief Secretary to the Treasury on some of those points. All I will say to the hon. Member for Dundee East is that the UK Government are determined to work constructively, as I am sure the Scottish Government are, to ensure that we reach an agreement that is fair and reflects the appropriate assessment that should be made.

[Stewart Hosie]

I thank the Minister for that answer; it is genuinely helpful, as he always is. However, will he confirm for the Committee that the agreement will be reached in good time for the Scottish Parliament to consider it fully before any legislative consent motion has to be passed?

[Mr Gauke]

It is kind of the hon. Gentleman to say that I am being helpful. In the spirit of continuing to be helpful, let me say that I certainly hope that that will be the case, but of course agreements will require both parties to act in a co-operative way, which I have no reason to doubt will be the case.

With those remarks, I hope that the Committee will support clause 15 and that I have said enough to persuade the Labour party not to press new clause 20.

Question put and agreed to.

Clause 15 accordingly ordered to stand part of the Bill.



Clause 16

Tax on carriage of passengers by air

Question proposed, That the clause stand part of the Bill.

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[Graham Stringer]

I do not agree with the point the hon. Gentleman makes in his fourth intervention. Demand management is not the solution for our regional airports, which have huge extra capacity, but if I went down that line, I expect you would rule me out of order, Mr Crausby. I look forward to the Financial Secretary’s response.

[Stewart Hosie]

I will come on to the comments made by the hon. Member for Blackley and Broughton (Graham Stringer) in a moment.

The provisions relating to the devolution of air passenger duty—I will concentrate on the duty, rather than the aggregates levy or the further provisions in clause 18—were set out clearly in the Smith agreement:

“86. The power to charge tax on air passengers leaving Scottish airports will be devolved…The Scottish Government will be free to make its own arrangements with regard to the design and collection of any replacement tax, including consideration of the environmental impact.

“87. In line with the approach taken in relation to the Scotland Act 2012, if such a tax is introduced by the Scottish Parliament to replace Air Passenger Duty (APD), the Scottish Government will reimburse the UK Government for any costs incurred in ‘switching off’ APD in Scotland.”

Given that they simply would not collect it, I do not imagine those costs would be very high. The provisions also require:

“88. A fair and equitable share of associated administrative costs will be transferred to the Scottish Government. The…block grant will be adjusted”.

A wide range of organisations that gave evidence to the Scottish Parliament Devolution (Further Powers) Committee backed the devolution of APD, including the Institute of Directors Scotland, Glasgow chamber of commerce, the Scottish Chambers of Commerce and the Scottish Council for Development and Industry. As the report says:

“This was coupled with support for either a reduction or scrapping of this duty after devolution had taken place.”

The Scottish Parliament Information Centre analysis for the Committee, referred to in the report, found that:

“Draft clause 14”—

now clause 16—

“would make this a devolved tax, as recommended by the Smith Commission. It would give HMRC the ability to ‘switch off’ these UK taxes in Scotland from a date to be set by secondary legislation.”

As with many of the clauses we have discussed, there is no recommendation as to how the transfer would work or how the block grant would be adjusted, but, as I understand from other clauses, there is no requirement for legislation to achieve that. Essentially, the legislation delivers on the Smith agreement in the way anticipated. We have no concerns with the drafting of the clause, which did not change between the Command Paper version and the Bill.

In terms of the policy approach on air passenger duty, on which much of this clause stand part debate is centred, the Scottish National party supports the devolution of air passenger duty to the Scottish Parliament. We are pleased that the Scotland Bill will deliver this recommendation. We have previously set out our proposals to halve APD when control over the tax is devolved, and we fully intend to abolish it when public finances allow. We believe that taking that action will encourage greater tourism and investment in Scotland, boosting our economy and creating new jobs.

There are a substantial number of benefits for consumers from the reduction of air passenger duty, not least because the UK levies are some of the highest aviation taxes in the world—indeed, APD is relatively rare in other countries. APD is currently £71 for an economy class long-haul flight, which is extraordinary—that is over 2,000 miles. Abolishing APD would mean that a family of four, with children over 12-years-old, would save something under £300 per long-haul flight—a substantial saving by any measure. Reducing APD would therefore save consumers money, and, in certain circumstances, significantly reduce the cost of family holidays.

There are broader economic benefits from a reduction in air passenger duty. A report commissioned by Edinburgh airport in March 2015 found that a reduction in APD would bring considerable economic benefits to Scotland. The report argued that the Scottish Government’s policy of halving APD in the first instance would create new jobs, and that a failure to take action would cost Scotland tourists and tourism revenue. Its key findings included the fact that a 50% reduction would provide benefits to Scotland worth £200 million a year, meaning a £1 billion economic boost over the lifetime of a Parliament; and that a 50% reduction would bring considerable benefits to local communities, creating something in the order of 3,800 new jobs by 2020. On the other hand, it was estimated that we could lose out on about 1 million passenger journeys a year if APD was not reduced. Again, by 2020, that would cost the Scottish economy up to £68 million in lost tourism expenditure every year. It is clear, therefore, that devolving and reducing APD would have a considerable economic impact on Scotland and that failure to act would mean Scotland missing out on significant tourism and hospitality revenues.

We have heard what happened in the Republic of Ireland and Northern Ireland. Although the 2014 study by Ulster University was a little more ambivalent and suggested only a limited number of scenarios in which Northern Ireland might benefit, supporters of a reduction pointed to the success of this approach in the Republic of Ireland. As the BBC reported:

“Tourism NI chairman Howard Hastings said: ‘If you compare with our nearest neighbour in the Republic of Ireland, in the two years since they abolished air passenger duty, they've seen arrivals grow by 1.1 million passengers.’”

It is self-evidently a success, and if we can replicate that, we can deliver the benefits I have described. If we do not, we will face the cost of failure.

The hon. Member for Blackley and Broughton and others tabled amendments that are not being debated—although the debate has been very similar to the one I would have heard had we been debating them—and expressed concern that the devolution of APD to Scotland would disadvantage airports in the north of England, as travellers journey across the border to Scottish airports in order to travel to holiday destinations abroad. The SNP makes no apologies for championing Scotland, and we believe that the reduction and eventual abolition of APD would benefit Scotland’s economy and tourism sector in particular. Its devolution is also a cross-party commitment agreed through the Smith commission.

Attracting more tourists to Scottish airports by reducing APD could also benefit the north of England by rebalancing the economy away from London’s pull and bringing more visitors to the northern parts of these islands as a whole. If one considers Edinburgh to be a hub airport, I am sure that businesses in the north of England would rather spend an hour on the train from Newcastle to Edinburgh than four, five or six hours on the cross-London journey to Heathrow, let alone travelling to a hub airport such as Schiphol or Charles de Gaulle. Edinburgh is the ideal solution for people from Durham, for example.

A stronger Scottish economy will also bring significant economic benefits to the north of England, as new trade and investment opportunities arise. However, we are concerned about some of the UK Government’s threats in relation to APD—this relates to what the hon. Member for Blackley and Broughton said about competition. During the election, the Prime Minister astonishingly expressed concerns that a reduction in APD would “distort competition”. He said:

“The SNP government in Scotland is committed to using its new powers to cut and eventually abolish air passenger duty for flights from Scottish airports. That could distort competition and see business drawn north of the border with a huge impact on airports in the rest of our country so we’re reviewing the way air passenger duty works to make sure other cities don’t lose out”.

Devolving and amending APD is not a distortion of competition; it is competition.

The Prime Minister’s comments chimed with his so-called Carlisle principle. It was reported that the Prime Minister had

“outlined plans for an annual review of the impact of Scottish Devolution on the rest of the UK. He announced what he’s calling the ‘Carlisle principle’”.

He did that during a speech in Crewe—one would think he would go to Carlisle to do it, but Crewe it was. He said that the aim was to make sure that policies devolving more power to Scotland did not have a negative impact on other parts of the UK—in areas such as air passenger duty, tax rates, university tuition fees or energy policy. If only we had thought of that, we would not have abolished the subsidies for onshore wind.

The Prime Minister said:

“I want to set out a new principle—you could call it the Carlisle Principle—that we will make sure that there are no unforeseen detrimental consequences to the rest of the country from Scottish devolution, for either England, Wales or Northern Ireland.”

Will the Minister explain what the Carlisle principle—whatever it actually is—will mean in practice for the devolution of APD? I hope that when he gets up, he will say precisely nothing.

--- Later in debate ---

[Ian Murray]

That is a rather strange intervention. If Members read new clause 1 and new clause 21, they will see very clearly that what we are asking for is an independent commission to analyse the consequences for Scotland of full fiscal autonomy. If the SNP is so confident about its figures, it should back that proposal and then we will have the transparency, impartiality and independence of those policies. If it is so confident that it was not fiddling the figures, it should help us to set up a Scottish office for budget responsibility and let that body analyse its figures. However, it is clear once again that, when we shine the light of scrutiny on SNP policies, its Members want to talk about the process but not look at the impartial and independent evidence before us. If they are so confident, they will back new clause 1 and new clause 21 and bring much needed transparency, credibility and accountability back to the Scottish Parliament’s finances.

[Stewart Hosie]

We have just listened to one of the worst speeches I have heard in 10 years. The Labour party now has one argument: we have gone from being too small, too poor and too stupid for independence to being too small, too poor and too stupid for any powers at all. The hon. Member for Edinburgh South (Ian Murray) spoke about something that was “credible”. Credible? The Scottish people decided what was credible at the election in May, and they did not say it was his party. He spoke about right-wing, Thatcherite Tories, but it sounds to me like the core vote of the only Labour MP left in Scotland.

New clause 33, which stands in my name and those of my hon. Friends, would require the Scottish and UK Governments to enter into an economic agreement setting out a plan for implementation of full fiscal autonomy for Scotland and establishing a framework within which the two Governments co-ordinate their economic and fiscal policies in the context of full fiscal autonomy for Scotland. The Scottish Parliament and Government would have competence for revenue raised in Scotland through taxation and borrowing and for determining levels of public expenditure in or as regards Scotland.

We see the framework including arrangements for facilitating fiscal co-ordination, overseeing economic co-operation, safeguarding fiscal sustainability, and setting out the joint responsibilities in certain areas. In the agreement, the two Governments must seek to ensure the maintenance of monetary stability throughout the UK and the single market of the UK and the EU. They must also ensure co-operation in the exercise of all the respective functions relating to the administration and collection of taxes and an equitable and transparent approach to the consequences, resources and rewards. The Scottish Parliament and Government would retain the benefits of increased tax revenues as a result of positive policy impacts and would have the powers they need to manage the consequences of full fiscal autonomy.

I turn briefly to new clauses 1 and 21. New clause 1 would require that a Tory Secretary of State appoint a commission of between four and 11 members, none of whom can be a Member of Parliament, a Member of the Scottish Parliament or an employee thereof. It is backed by Labour and United Kingdom Independence party Members, so we have a Labour amendment backed by UKIP asking a Tory Secretary of State—

[Ian Murray]

rose—

[Stewart Hosie]

No, no, no.

The new clause asks for a Tory Secretary of State to appoint a commission of the great and the good from the House of Lords to determine Scotland’s future. What a lot of absolute rubbish!

[Ian Murray]

On that point, Madam Deputy Speaker. For the sake of clarity, the Committee will know that the procedure of this House is that any hon. Member can sign any amendment they so wish.

[Stewart Hosie]

So we have confirmation—Labour and UKIP hand in hand, empowering the Tories to run the rule over Scotland again.

As for new clause 21 on a Scottish OBR, we already have one—it is called the Scottish Fiscal Commission. The consultation on its expanded power closed on Friday. One would have thought that Scotland’s sole Labour MP might actually have known what was going on.

New clause 33 would have the Scottish and UK Governments enter into an economic agreement that set up a plan for the implementation of full fiscal autonomy and establish a framework within which the two Governments would co-ordinate their economic and fiscal policies in the context of full fiscal autonomy. That would mean the Scottish Parliament and the Scottish Government having competence for determining revenues raised in Scotland through taxation and borrowing, and for all of the spending, paying compensation to the UK for shared services. This is the right approach to take. I am just disappointed that we did not have proper time to debate it rather than being subject to the nonsensical rant and talking Scotland down by the so-called shadow Secretary of State. By taking responsibility for key areas of Scottish life, we can improve the Scottish Parliament’s ability to deliver real progress for the Scottish people. New clause 33 does that. It rejects the miserablist approach of the Labour party, and I commend it to the Committee.

[David Mundell]

I do not need a commission to tell me what a disaster full fiscal autonomy would be for Scotland. The hon. Member for Dundee East (Stewart Hosie) set out the facts, and the facts are clear—a £10 billion black hole for Scottish taxpayers to fill. We do not need a commission to tell us that.

I do not accept the new clause on a Scottish OBR, because one thing that the hon. Gentleman said is correct—it is for the Scottish Government to determine for the people of Scotland how they will ensure independent oversight of fiscal policy. The UK Government would like legislation brought forward by the Scottish Government to be consistent with OECD principles for best practice in independent fiscal institutions. We therefore look to have those discussions during the negotiation of the fiscal framework.

I therefore reject the new clauses and propose that we pass the clauses as stated.

Question put, That the clause be read a Second time.