Coming soon: our new £40 million tax bill !

Coming soon: our new £40 million tax bill !

by Bill Jamieson
article from Wednesday 21, November, 2012

IT'S NERDY, it's complex but it matters: in fact it matters to the tune of £40 million plus – and that’s assuming nothing goes wrong.

On Wednesday and Thursday of this week Scottish Parliament's Public Audit Committee will be holding two open meetings to take a close look at the arrangements for the introduction of the new Scottish rate of income tax (SRIT) effective from April 2016.

Among those being questioned on the management and administration of the SRIT will be Edward Troup, the Second Permanent Secretary at HMRC (who has been appointed as the “Accounting Officer with responsibility for collection of the Scottish rate of income tax”) and the head of the National Audit Office.

Scottish government officials are already in regular contact with staff from HMRC to plan for the implementation of these measures. Officials and HMRC will be drawing up a Memorandum of Understanding on how the change will be implemented – and policed.

The Scottish government will be responsible for the tax rate - but it is not a devolved tax. This will remain a tax administered and managed by HMRC (new taxes to replace UK Stamp Duty and Landfill tax will be devolved and administered here).

The introduction of SRIT is passing by largely unnoticed in the greater war of attrition over the independence referendum. How this tax change, brought in under the 2012 Scotland Act is administered – who polices it and to whom the HMRC is accountable – are critically important questions – not least given the eyebrow raising cost of this income tax change whether we decide to have different rates of personal tax here in Scotland or not.

The lump sum cost for the IT system for the new Scottish Rate of Income tax is currently estimated at c £40-£45 million with running costs of about £4 million to £4.5 million a year.

The purpose of this week’s hearings by the Public Audit Committee chaired by former Scottish Labour leader Iain Gray is to ensure effective stewardship and accountability of this change and that the Scottish parliament exercises its watchdog function properly.

Two big issues are of immediate concern. Audit Scotland and MSPs will need to be on their toes to guard against a government IT debacle. They will also need to be vigilant that costs do not run out of control and that HMRC is held to proper account for value-for-money management, administration and implementation. The lump sum figure of £40-45 million and the annual running costs of £4-£4.5 million are only estimates at present and by no means set in stone.
IT project over-runs have blighted the UK government in recent years. A report by the European Services Strategy Unit (which took over the work of the Centre for Public Services) identified 105 outsourced public sector ICT contracts in central
government, NHS, local authorities, public bodies and agencies with significant cost overruns, delays and terminations. The summary of findings were:
• 105 outsourced public sector ICT projects with significant cost overruns, delays and terminations;
• Total value of contracts is £29.5 billion
• Cost overruns totaled £9.0 billion;
• 57% of contracts experienced cost overruns;
• The average percentage cost overrun is 30.5%;
• 33% of contracts suffered major delays;
• 30% of contracts were terminated;
• 12.5% of Strategic Service Delivery Partnerships have failed.

A recent example is the £385 million immigration IT system. This is running £28 million over budget and is twelve months behind schedule. The NAO found that the management of the immigration casework “suffered from a loss of focus, poor governance structures and optimism bias in planning and reporting… At the outset, there was a lack of strategic direction: the programme's board did not challenge the IT contractors about their use of resources”.

Now this does not mean that the introduction of the new Scottish Rate of Income Tax is doomed to hit problems. But these examples do underline the need for proper oversight, accountability and vigilance to ensure that (1) the Scottish government secures value for money and (2) costs do not run out of control.
Many problems remain unresolved - about the machinery for regulatory oversight, the identification of Scottish taxpayers and the exact status of HMRC officer in Scotland.

Not to be overlooked are the envisaged arrangements governing the reduction in the Scottish block grant. In April 2016 the basic higher and additional rates of income tax levied by the UK government will be reduced by ten pence in the pound for those individuals defined as Scottish taxpayers. The Scottish government will thereafter be able to levy a new SRIT which will apply equally to the basic, higher and additional rates of tax. Strangely, investment income from savings will not be affected, though how long this anomaly may persist is moot.

To balance the reduction in the standard and higher rates of tax by 10p the amount paid over by way of block grant will be reduced – the actual amount will be based on twice yearly forecasts by the Office of Budget Responsibility of Scottish income tax receipts - oh dear - not a body with a whistle clean record for accurate forecasting!

Finally, around 13 per cent of HMRC’s 72,770 staff are employed in Scotland providing a service to HMRC customers both within Scotland and across the UK. As such they are part of the UK civil service – not part of Sir Peter Housden’s army at St Andrews House.
How long will it be before a turf war erupts and we start hearing demands for a “proper Scottish HMRC” – particularly given the fact that the replacements for the Landfill Tax and Stamp Duty Tax will be administered by the Scottish Revenue Service?

A hefty lump sum charge, a regular annual payment to HMRC – and all this with the potential both to add to the HMRC empire and blow up in a turf war: one needs to ask, qui bono?

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