Call for devolved VAT in Scotland

The Scottish parliament should be given responsibility for setting VAT rates post-Brexit as existing legal obstacles to VAT devolution will no long apply, according to Reform Scotland, an independent, non-party think tank, which says Scotland needs to widen its tax base

VAT was not devolved under previous Scotland Acts because it was illegal to do so under EU law.  However, the exit of the UK from the EU will remove this impediment.

EU rules mean the UK has to have a universal sales rate for the whole country. While the UK government can assign VAT revenues to Scotland, the Scottish parliament is not able to set a different sales tax rate to the rest of the UK. After Brexit, however, there will be no legal barrier to Westminster devolving VAT to Scotland in full.

Reform Scotland says devolving VAT to the Scottish Parliament would mean Scotland would be responsible for raising 60% of what it spends, passing the 50% threshold for the first time. This would also significantly reduce Holyrood’s reliance on income tax revenue.

The post-independence referendum Smith Commission recommended (and the Scotland Act 2016 delivered) the assignation of 50% of VAT revenues to the Scottish Parliament, acknowledging the link with growth but also highlighting the illegality of devolving the tax at that point.

Alan McFarlane, chair of Reform Scotland, said: ‘Whilst we supported the principle of devolving income tax to the Scottish Parliament, we have consistently expressed concern that the Scottish government’s powers are so heavily dependent on one tax.

‘The devolution of VAT, adding a consumption tax to an income tax, would help address this problem.  Politicians have previously acknowledged the benefits of devolving the tax, but it was never previously possible due to EU law. Brexit removes this impediment.

‘Devolving VAT would rapidly focus minds at Holyrood on promoting economic growth because of its direct link to tax revenue, and it would also give the finance secretary an important extra tool to change outcomes through tax policy.’

Reform Scotland’s report, The VAT Opportunity, is here.

Report by Pat Sweet

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