COUNCIL TAX ABOLITION AND SERVICE TAX INTRODUCTION (SCOTLAND) BILL

Transcription

1 COUNCIL TAX ABOLITION AND SERVICE TAX INTRODUCTION (SCOTLAND) BILL FINANCIAL MEMORANDUM (AND PRESIDING OFFICER S STATEMENT ON LEGISLATIVE COMPETENCE) FINANCIAL MEMORANDUM INTRODUCTION 1. This document relates to the Council Tax Abolition and Service Tax Introduction (Scotland) Bill introduced in the Scottish Parliament on 11 November It has been prepared by Tommy Sheridan, who is the member in charge of the Bill, to satisfy Rule of the Parliament s Standing Orders. It does not form part of the Bill and has not been endorsed by the Parliament. Tommy Sheridan gratefully acknowledges the assistance of economists Mike Danson and Geoff Whittam and former SSP parliamentary researcher Gordon Morgan in preparing this paper, as well as the legal advice of Patrick McGuire of Thomsons Solicitors, Glasgow. COSTS ON THE SCOTTISH ADMINISTRATION 2. The Bill would allow local authorities to make arrangements with other bodies such as the Scottish Ministers and the Inland Revenue (IR) to impose and collect the tax. If such an arrangement is entered into with the Scottish Ministers there will be initial costs to the administration of ensuring their computer systems are able to calculate the tax due. As the tax will be centrally set, it is assumed that most IT system changes will be identical to those that would be required should the Parliament exercise its power to change the rate of income tax. The Chartered Institute of Public Finance and Accountancy (CIFPA) have estimated the time to test and change the systems as around 2 years. The member in charge, having discussed with IT Consultants, believes this would result in an estimated cost of between 3 million and 10 million. 3. Contracting with or re-employing IR staff based in Scotland would seem the most efficient means of administering the tax in Scotland. CIPFA have indicated that there would be a redeployment of some of those staff who currently liaise with local authorities over council tax SP Bill 31 FM 1 Session 2 (2004)

2 collection to the collection of employee address information from employers. There would be a one-off overlap of these staff. Based on the CIPFA estimates of staff costs and assuming a 2 to 3 month overlap, the member estimates the cost of employing and training IR administration staff, which would be borne by the Scottish Administration, would be between 2 million and 3.5 million. COSTS ON LOCAL AUTHORITIES Staff costs during changeover 4. The costs of redeploying and retraining local authority staff would be between zero and 20 million. The former figure would apply should local authorities enter into an agency agreement with the IR to collect the tax. The latter figure would arise if local authorities seek to collect the tax themselves and represents approximately 4 months of overlap when staff are required to collect Council Tax and to prepare to collect the Scottish Service Tax (SST) (based on current costs of staff collection). Tax collection 5. There are two reasonable scenarios for the collection of the SST. 6. In the first the local authorities collectively or in general enter into an agency agreement with the IR to administer both collection and assessment. In an agency agreement, the IR would no longer require to employ the staff who currently supply local authorities with information about Council Tax payers employment and local authorities would no longer have to employ staff processing rebate forms and collecting the tax. CIPFA have estimated the IR cost savings across the UK, resulting from not having to supply information to councils for Council Tax collection. Local authority collection costs are available from Audit Scotland. The member estimates there would be cost savings to the IR of 3.4 million and to the local authorities of 55.8 million and with no additional costs to employers, a total saving therefore, of 59.2 million per year. 7. In the second scenario, the local authorities use the IR to assess the SST but seek to collect the tax themselves. 8. Based on CIPFA figures for the UK disaggregated to Scotland (see paragraph 10 onwards), there would be an annual cost to the IR to collect information amounting to between 3.4 and 15.2 million. The cost to local authorities would be similar to the present 68.5 million, between 67.3 and 71.1 million. There would be an annual cost to employers in processing additional bills of between 87.4 and 91.8 million. 9. If local authorities chose to set up their own collection mechanisms but rely on tax assessment data from the IR then there would be a cost to IR to collect information amounting to between 3.4 and 15.2 million. The cost to local authorities would be similar to the present 68.5 million, between 67.3 and 71.1 million. There would be a cost to employers in processing additional bills of between 87.4 and 91.8 million. 2

3 Basis of Estimates of Costs 10. As part of the Balance of Funding Review carried out by the Office of the Deputy Prime Minister, CIPFA carried out a review of the Case for a Local Income Tax 1. The CIPFA paper has been used to derive the figures shown in paragraphs 6 to 9 as follows. 11. Section 7 of CIPFA s paper reviewed the Cost of Tax Collection. It noted the collection costs to the IR of Income Tax as a percentage of income received was 1.4% in 2001/02. It also noted that across the UK, the cost of collecting Council Tax amounts to 600 million. 12. CIPFA notes that were Councils to attempt to collect Local Income Tax (LIT) 2, Council Tax Revenues would need to account for more than half of local authority Net Revenue Expenditure before the cost of collection could approach the same sort of ratio of cost to yield as achieved by the IR on the collection of personal income tax. In other words, Income Tax is much less costly to collect than Council Tax. 13. CIPFA considers the ability of Councils to collect LIT as opposed to the ability of the IR to collect the tax and notes there can be no doubt that the IR is better experienced and equipped to administer the LIT. It suggests the possibility exists to form a LIT administration agency, perhaps in each nation capable of providing a scale of enterprise offering better economies. 14. Thus although under the Bill, local authorities would be free to collect the SST as they see fit, there is evidence that most authorities collaborating to set up a joint administration system would give cost savings and that the IR would be best placed to act as the local authorities agent. 15. CIPFA estimate that were local authorities across Britain to arrange to collect a LIT themselves and seek information from taxpayers in parallel with the IR, the cost to them would be 2,900 million. If they worked in collaboration with the IR, using IR information to pursue collection the costs would be 700 million, plus 10 million cost to liaise with IR Unless the IR was the collection agency, there would be additional costs to employers of processing bills. 17. The following summarises the costs of collection of the various arrangements for collecting the SST were that form of LIT adopted across Britain. This table is taken in its entirety from the CIPFA paper. 1 Balance of Funding Review 4 th March 2004, Paper BOF(19) Local Income Tax Reviewing the Case for a Local Income Tax The Chartered Institute of Public Finance and Accountancy. 2 Throughout this section, the Scottish Service Tax is treated as a specific variant of Local Income Tax, the various forms of which are discussed in CIPFA s paper. 3

4 Total m LA Cost m IR Cost m Employer Cost m Cost now 3, , Income Tax costs 3, , Council Tax costs IR administer SST 3, , savings of Savings of 420M on 80M on Council staff reduced info costs transfer to councils IR assess & LAs collect ,920 extra administration extra IR costs in supplying Extra 1,120M costs of info to LAs in filling 700M forms for LAs. 18. In estimating the costs of Scotland introducing the SST, the following assumptions are made: IR marginal costs following integration are proportional to the number of taxpayers i.e. 2.6 million out of 30.7 million i.e. 8.46% Employer costs are also proportional to taxpayers, however, costs to employers in England employing Scots may add 10% to these costs. i.e. costs between 8.46% and 9.3%. Local authority costs are in part proportional to the number of local authorities i.e. 32 out of 434 or 7.3% and in part to the number of taxpayers 8.46%. It is assumed to be 8.46% for IR administration and between 7.8% and 8.2% for the other options. 19. Based on these assumptions and removing the fixed cost of Income Tax collection to the IR and employers, the costs of collection of the SST in Scotland are: 4

5 Total m LA Cost m IR Cost m Employer Cost m Cost Now IR administer SST (1) reduced staff costs Remove the Council tax liaison costs IR assess & LAs collect 161.5: : : :91.8 costs of staff to collect SST additional staff required liaise LAs to with Additional cost of employers sending forms to LAs as well as IR 20. In summary if local authorities adopted an agency agreement with the IR then there would be cost savings to the IR of 3.4 million and to local authorities of 55.8 million and no additional costs to employers: a total saving of 59.2 million. This assumes the Exchequer charges actual cost to Local Authorities in their agency fee. 21. CIPFA suggest that at least a 2 year period would be required to develop and commission the computer systems required UK-wide. The member in charge considers that this period could potentially be reduced if the systems were to be used in Scotland only. Debt write-off 22. The proposed moratorium on Community Charge debt, and on Council Tax debt up to April 2004, would result in a one-off loss of potential future income against which must be set the cost of collection of the debt. At March 2003 there was 550 million of Council Tax debt outstanding across Scottish Local Authorities. In any given year around 10% of tax collected comes from previous years, however, the amount collectable diminishes dramatically in future years. Across Scotland, around 5% in any given year is likely never to be collected. We estimate the lost revenue resulting from the debt moratorium to be between 100 million and 150 million. Tax Revenue from SST as opposed to Council Tax 23. The expected revenues from the SST have been analysed by the Scottish Parliament Information Centre (SPICe) 3 and scrutinised by the Local Government Committee of the 3 Correspondence available from SPICe or from the member in charge. 5

6 Parliament previously. 4 The original analysis has been updated in August 2004 by professors Cooper, Danson and Whittam to reflect the recent income tax figures for 2001/ This analysis estimates that the SST would be expected to raise 2,154 million compared to Council Tax which collected 1,649 million. Thus the SST is expected to generate a surplus of 505 million. 25. Inflationary effects cannot be determined accurately, so it is assumed the actual amount collected could vary up or down by 1% i.e. 20 million in a year. 26. One previously mentioned risk factor is the removal of Council Tax rebate amounting to 285 million. Whilst no clear case has been shown why Scotland should lose that money by dint of changing the tax system, it is a risk. 27. The total annual surplus should therefore be estimated at between 485 million with complete loss of Council Tax Benefit and 810 million with retention of current Council Tax Benefit of 285 million. COSTS ON OTHER BODIES, INDIVIDUALS AND BUSINESSES 28. The Scottish Parliament Information Centre (SPICe) analysed the effect of the proposed SST on individuals and this information was incorporated in the consultation paper on the Bill The following sets out the expected effect of the tax on individuals in different occupations. Further information on some of the assumptions used can be found in paragraph 138 onwards of the Policy Memorandum. TABLE - THE DIFFERENCE BETWEEN COUNCIL TAX AND SST CONTRIBUTIONS BY OCCUPATION Occupation Council Tax Average Salary SST Payment Difference (i.e. SST CT) Bus Driver 1,053 (Band D) 17, Nursery Nurse 1,053 (Band D) 8, ,053 Postal Worker 1,053 (Band D) 15, Pensioner 1,053 (Band D) 8, ,053 Teacher 1,053 (Band D) 24, Refuse Collector 1,053 (Band D) 14, Social Worker 1,053 (Band D) 23, Police Constable 1,053 (Band D) 26, Nurse 1,053 (Band D) 20, Firefighter 1,053 (Band D) 23, Inquiry into local government finance (6th Report 2002, 20 March 2002) 5 The Case for a Scottish Service Tax : Update Mike Danson; Geoff Whittam; Christine Cooper August Correspondence available from member in charge or SPICe. 6

7 General Practitioners (GPs) 1,755 (Band G) 56, ,263 Solicitors 1,755(Band G) 36, MSP 1,755 (Band G) 50, ,198 MP 1,755 (Band G) 57, ,492 Advocate Example 1 (1) 2,106 (Band H) 121, ,193 Advocate Example 2 (1) 2,106 (Band H) 267, ,393 Local Authority Chief 2,106 (Band H) 112, ,476 Executive Communities Scotland 2,106 (Band H) 102, ,493 Director Scottish Water Executive 2,106 (Band H) 157, ,393 Board Member 30. Estimates have been made of the percentage of individuals and households who would benefit (i.e. pay less compared to Council Tax) under the SST. 31. SPICe estimates were that 72.68% of households would benefit under the SST. PRESIDING OFFICER S STATEMENT ON LEGISLATIVE COMPETENCE 32. On 11 November 2004, the Presiding Officer (the Right Honourable George Reid MSP) made the following statement: In my view, the provisions of the Council Tax Abolition and Service Tax Introduction (Scotland) Bill would be within the legislative competence of the Scottish Parliament. 7

8 COUNCIL TAX ABOLITION AND SERVICE TAX INTRODUCTION (SCOTLAND) BILL FINANCIAL MEMORANDUM (AND PRESIDING OFFICER S STATEMENT ON LEGISLATIVE COMPETENCE) Parliamentary copyright. Scottish Parliamentary Corporate Body Applications for reproduction should be made in writing to the Licensing Division, Her Majesty s Stationery Office, St Clements House, 2-16 Colegate, Norwich NR3 1BQ Fax , which is administering the copyright on behalf of the Scottish Parliamentary Corporate Body. Produced and published in Scotland on behalf of the Scottish Parliamentary Corporate Body by Astron. ISBN SP Bill 31-FM 1.20 Session 2 (2004)