Monday, November 22, 2010

A tale of two letters on tax, an apology - and some questions on the SNP's missing three years

I wrote last Friday of my anger that the SNP had allowed the Scottish Parliament's power to vary the rate of Income Tax, voted for by almost two thirds of the Scottish People in the 1997 referendum, to be rendered useless for the next 4 years. I made a mistake in that article by saying that the Scottish Liberal Democrats were the only party to seriously suggest using it. I hadn't realised that the Greens had suggested it earlier this month, The fact that they will now have to re-write their manifesto goes some way to explain why they are, understandably, so livid about this. Apologies for not including it earlier.

Nothing I've heard this weekend changes my view that both the Westminster and Scottish Parliaments need to investigate exactly what went on here. I've printed the correspondence between Michael Moore and Alex Salmond in full below but there's a huge gap that it just doesn't cover, the period from July 2007, when the original agreement lapsed, to July this year when Alex Salmond said the Scottish Government received a demand from HMRC for £7 million to pay for the ability to vary tax in Scotland to be written in their new IT system.

The SNP has in my view many questions to answer on this. Here are just a few:

Alex Salmomd's letter seeks to make this an issue about the forthcoming Calman reforms. He seems to have got the idea that the tax powers under Calman are going to come with a bill of tens of millions of pounds every year. I have absolutely no idea where he gets that from at all. It rather suggests that there has been more communication between Westminster and Scotland on this than the almost 3 year silence he suggests. Maybe he should enlighten us. While we're at it, though, I don't have a problem with the Scottish Parliament paying reasonable costs to HMRC on this one. As long as it's actual costs and not HMRC having a laugh. Part of being a grown up Parliament means that we pay our own bills. Why should we expect HMRC to pick up the tab for something we want?

What happened in July 2007 when the contract with HMRC expired? Can we see all the correspondence between the Scottish Government and HMRC on this issue. How hard did they try to reach a resolution?

We all know it's the SNP's usual way to try to resolve disputes with Westminster privately, with dignity. They aren't known for their willingness to pick a fight with the Westminster Government at the first sign of trouble, of course they aren't. Surely, though,  on an issue like this they could have made an exception and at the very least told the Scottish Parliament what was going on, that there was not a current contract with HMRC on the tax raising power. Why did they not do this?

Why, as Scottish Liberal Democrat finance spokesman Jeremy Purvis pointed out on the Politics Show yesterday, did the SNP Government not mention anything about this in 2008 when they were still saying that they would use the HMRC system to introduce a Local Income Tax?

On 12th November 2008, there was a debate in Holyrood about the state of the Scottish economy. Have a look at the following exchange between Mike Rumbles and John Swinney. Would that not have been a perfect opportunity for Mr Swinney to tell Parliament that in fact there was no existing facility to vary that power as no agreement had been reached with HMRC. I suspect if he had, that the combined political pressure from Holyrood and Westminster members would have been helpful in effecting a resolution.

  • Mike Rumbles: My point is on that issue. The measures that the cabinet secretary has mentioned were taken before the credit crunch and the downturn. I think all members agree that decisive action to cut taxes is important and that the cabinet secretary could use the powers that are available to him to cut income tax.

  • John Swinney: I look forward to Liberal Democrat members' speeches on their amendment. Mr Rumbles and his colleagues must explain to Parliament where the consequential reductions in the budget would come from to pay for their proposed tax cuts. We cannot advance propositions in Parliament unless we understand fully where the costs will be.

And I still don't think that the Labour Party is yet off the hook. Mike Moore's letter makes it clear that he's not privy to the discussions that went on between the previous Labour Westminster Government and the SNP. I want to see that Labour, whose PM and Chancellor were both Scottish MPs, did what it could to
 resolve the situation. It certainly wasn't in the interests of the Scottish people for them to let the issue drift.

There are many dimensions to this and I think we deserve a full analysis on what went wrong and why nothing was done to preserve the ability of the Scottish Parliament to set its own rate of tax in accordance with the overwhelming wishes of the Scottish people. To have to go for four years without this ability is not on.

The two letters in full:

From Michael Moore MP to Alex Salmond

Dear Alex

I noted that John Swinney MSP made the following remarks in the Scottish Parliament yesterday:

'Within the Parliament's existing revenue powers, we have explored options for maximising our income. We have been mindful of the need to consider the effect ofthe significant tax rises that the UK Government has announced before we act. Itherefore confirm that we will not raise the Scottish variable rate of income tax.'
I was about to write to you and others on the Scottish variable rate (SVR) to make it absolutely clear that this is a power which cannot, at this time, be exercised by the Scottish Parliament. Indeed, for the reasons I explain below, it could not now be used until 2013-14 at the earliest. You will be aware that the arrangements between HM Revenue and Customs (HMRC) and the then Scottish Executive, put in place at the commencement of devolution and intended to ensure the SVR of income tax could be invoked within
10 months, lapsed in 2007.

Section 80 of the Scotland Act 1998 allows for any administrative costs incurred by HMRC in relation to the Scottish Parliament's tax varying power to be met by Scottish Ministers. It is an established principle that the costs of devolution should be met from the Scottish Budget.

I am not privy to the dialogue which took place between your Administration and the previous UK Government in the past three years. However I do know that the Scottish Government confirmed in August this year that it was not able to commit the necessary resources to enable HMRC to proceed with work on PAYE systems to allow the SVR to be available in the first tax year after the 2011 election.

As the system has not been funded and maintained to allow for delivery within the ten month time frame under the original arrangements, HMRC would, in fact, now need two years' notice in order to invoke the SVR. This would mean that a new Scottish Parliament, elected at the May 2011 elections, would not be able invoke
the SVR until at least the 2013-14 tax year.

It is not yet publicly known whether the Scottish political parties will propose using the SVR in their programmes for the 2011-15 Parliament. I do believe that they must be advised well in advance of next year's elections that the SVR, in practical terms, cannot be invoked until the penultimate year of the next Parliament.

For that reason, I am copying this letter to Annabel Goldie MSP, lain Gray MSP, Margo MacDonald MSP, Tavish Scott MSP and Patrick Harvie MSP as well as to David Gauke MP, the Exchequer Secretary to the Treasury.

Yours sincerely


Reply from Alex Salmond to Michael Moore

Your letter of 18 November about the Scottish variable rate of income tax (SVR) is a travesty of the position.  The reality is as follows. 
The then Scottish Executive paid the UK Government £12 million in 2000 to add SVR functionality to Her Majesty's Revenue and Customs (HMRC) tax collection systems.  Thereafter, an annual fee of £50,000 was paid.  
HMRC said in 2007 that additional work was needed to maintain the readiness of the IT system, and in summer 2008 made clear that they would be installing a new IT platform.  Scottish Government officials attempted to elicit information on what this meant for Scotland and the functionality of the 3p tax power.  
We were finally asked on 28 July this year to pay over the sum of £7 million to HMRC for this purpose.  Why nowhere in your letter did you mention this.demand?  
Anyone proposing paying this £7 million to HMRC would need to explain where the equivalent cuts would be made in Scottish public spending.  
And even if we had paid it - at a time when Scotland is on the receiving end of massive cuts to our budget from your government - the SVR under the new system could not have been implemented until 2012/13: another key point which you failed to mention.  
In any case, at that stage it seemed an academic debate because the SVR itelf is set to be replaced under any version of the legislation which you intend to introduce in the next few weeks. 
On 20 August, Scottish Government officials offered talks with HMRC on the issue of the SVR - an offer which has not been responded to.  The first we have heard from the UK government on the matter since 20 August is your letter of yesterday. 
It is clearly unacceptable that Scotland should be asked to pay, again, for something which millions of pounds have previously been paid for.  If HMRC choose to replace their IT systems, that is clearly a matter for them.  However, anyone would expect them in specifying their new systems to replicate the functionality of the old.  
No Scottish administration has used the 3p tax power, none of the main parties in Scotland advocate using it now, and it is intended to be overtaken by the Tory/Lib Dem Calman financial proposals - flawed measures which, had they been established for the start of the current spending review, would have resulted in the Scottish Budget being £900 million lower in 2009/10. 
The real issue, therefore, would appear to be about the future. 
You stated - as did Danny Alexander in his letter to me of 20 October this year about the Spending Review settlement - that: "it is an established principle that the costs of devolution should be met from the Scottish Budget." 
This is not the case - in fact, the opposite is true.  
HM Treasury's recently-updated Statement of Funding Policy states at paragraph 3.2.8 that: 
"Where decisions of United Kingdom departments or agencies lead to additional costs for any of the devolved administrations, where other arrangements do not exist automatically to adjust for such extra costs, the body whose decision leads to the additional cost will meet that cost." 
The clear impression can only be that your letter was not about the cost of financial powers that are going to be superseded, but rather about establishing a precedent for the Scottish Government paying to instal and administer the Calman tax proposals - which unlike the SVR will require to be used every year. 
Given the huge pressures on the Scottish public purse because of your government's spending cuts - and the further threat to our budget from the Calman proposals themselves - we need answers to these key questions as a matter of urgency: 
How much is the UK Government intending to ask the Scottish Government to pay for the Calman tax powers - measures which could reduce Scotland's budget, as indicated above? 
When do you propose asking the Scottish Government, and therefore the Scottish people, to pay? 
Exactly when would these financial powers be capable of being implemented? 
A copy of this letter goes like yours to Annabel Goldie MSP, Iain Gray MSP, Margo MacDonald MSP, Tavish Scott MSP and Patrick Harvie MSP, and David Gauke MP, and also to the leaders of the Scottish parties at Westminster: Angus Robertson MP, Ann McKechin MP, and David Mundell MP.  I am also sending copies to John Swinney and Fiona Hyslop. 
Given that you released your letter to the media, I am also releasing this.

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