The vast majority of taxes in the UK are set by central government in Westminster, with revenue collected by HMRC and the Treasury deciding how this should be distributed across government.
But there are some exceptions. The UK Parliament has legislated over recent years to devolve some tax powers away from Westminster. This means Scotland, Wales and Northern Ireland – and local authorities – have varying levels of power over some taxes.
When devolved administrations were established in 1999, there was a significant imbalance between their spending and tax raising powers. This meant that they were not responsible for raising any of the money they spent, relying instead on funding from the UK Government.
Tax devolution in Scotland and Wales is seen as a way of improving the financial accountability of devolved administrations, and encouraging them to choose policies that stimulate growth in their tax base.
During the 2014 Scottish independence referendum, UK party leaders also committed to create a more empowered Scottish Parliament by devolving substantial revenue-raising powers, as part of The Vow agreed in the final days of the campaign.
In Northern Ireland, tax devolution has been driven by different considerations, namely to enable the Executive to mitigate the effects of tax competition from the Republic of Ireland.
In England, decentralisation of business rates is intended to strengthen the incentives for local government to support the growth of business in their areas.
- Stamp duty land tax, landfill tax, and income tax (except for the personal allowance)
- Air passenger duty and the aggregates levy (a tax relating to rock, sand and gravel) will be devolved at a future date when legal issues around state aid have been resolved.
- In addition, half of VAT receipts collected in Scotland will be ‘assigned’ to the Scottish Government from 2019. The same VAT rates will continue to apply across the UK, but for the first time changes in Scottish VAT revenue will affect the size of the Scottish budget.
- Stamp duty land tax and landfill tax (as of April 2018)
- Partial income tax powers will be devolved in 2019 – UK income tax rates will be reduced by 10p in each band, on top of which the Welsh Government will set its own Welsh rate of income tax for each band.
- Long-haul air passenger duty (which was subsequently abolished in 2012)
- Plans to devolve corporation tax have been postponed indefinitely due to the collapse of power-sharing in Belfast.
English local authorities
- The UK Government wants all revenue from business rates to be retained by local government, but there is no confirmed timeline for full implementation.
When all the planned changes have been implemented, the devolved administrations and local government will control an estimated:
- 43% of tax revenue in Scotland (including assigned VAT revenue)
- 21% of tax revenue collected in Wales
- 14% of tax revenue collected in Northern Ireland
- 9% in England, including council tax and business rates, although in both cases local government will continue to operate within a nationally-controlled system.
Some taxes are easier to devolve than others. The easiest to devolve are those relating to land or property, where it is easy to attribute revenue to a certain part of the UK, and difficult for taxpayers to move their assets to avoid paying taxes. This is one reason tax devolution in Scotland and Wales started with stamp duty land tax and landfill tax.
Of the larger taxes, devolution of income tax was judged the best candidate for devolution. This was partly because of its high visibility, which makes it a good tax for enhancing devolved accountability. The devolution of other major taxes was ruled out for practical, legal or economic reasons:
- It would be complicated to break up the UK-wide system for national insurance.
- Devolving corporation tax could create unwelcome tax competition between different parts of the UK (as noted, it was proposed in Northern Ireland specifically to allow Belfast to compete more effectively with the Republic of Ireland).
- EU laws mean that the same VAT rates must apply across the UK. In principle, VAT could be a candidate for post-Brexit devolution, but this would run counter to the UK Government’s commitment to preserving the UK single market and avoiding new barriers for business.
Since 1999, tax capacity in Wales and Northern Ireland has been significantly lower than in England, while that of Scotland has been highly volatile.
There is also significant variation across the UK for individual taxes. Revenue varies more for income tax, which is being devolved, than for VAT and National Insurance, which are not. The greater proportion of higher rate taxpayers in England is one reason why this gap has widened in recent years. Corporation tax receipts have also shown huge volatility in Scotland due to rising and falling revenue from off-shore oil and gas.
Of the smaller taxes being devolved, stamp duty is again among the most volatile in terms of revenue. Here again England greatly outperforms the rest of the UK, but English tax receipts per person are lower than the other nations for taxes on fuel, alcohol and tobacco. Within England, there is also a huge variation in business rate revenue.
Tax devolution often ignites a debate about the wider allocation of resources within the UK. Ability to raise taxes varies in each part of the UK, depending on the strength on the local economy, so devolving taxes risks increasing regional inequality. In Scotland and Wales, there are frameworks in place to mitigate this risk, but in both cases reaching agreement was challenging. In England, the difficulty agreeing a new system for redistributing revenue from richer to poorer areas is one reason for delay in implementing business rate reforms.
Devolution also exposes devolved administrations to more risk. Some of the taxes being devolved – including income tax and stamp duty – can be relatively volatile, making it difficult to plan future spending. This risk becomes particularly challenging if devolved administrations rely on a small number of revenue streams.
There is also a risk that accountability could be weakened rather than strengthened if voters do not clearly understand which level of government is responsible for decisions on each tax.
The UK is an outlier by international standards. In 2014, every other G7 nation collected more taxes at either a local or regional level according to estimates by the Organisation for Economic Co-operation and Development.