The pellet with the poison’s in the vessel with the pestle; the chalice from the palace has the brew that is true

The responsibility for VAT is being transferred, but not the rights that go with it. John S Warren explores the problem.

Fury, outrage and righteous indignation are the everyday currency of politics in Scotland, especially among the opposition political parties. The result is daily politics is now conducted by a mixture of bombast and accusation. The problem for the opposition leaders is that it is difficult to raise the standard level of hysteria, if something really important turns up. Even worse, this general atmosphere of constant Unionist opposition outrage at everything, means the considered debate on the technicalities of serious fiscal issues is simply evaded wholesale. Take VAT.

VAT has become an important and illuminating issue in the funding of Scotland (assignment of VAT is slowly being transferred from Westminster to Scotland, to be wholly implemented by 2021). Assignment of the tax will become part of the Scottish Budget, but it must be made clear that this transfer of taxation does not include the transfer from Westminster of the right to control or amend the tax. In a neat finesse by Westminster it intends to pass the poison vessel, while retaining for itself the brew that is true (words appropriate for such a plan, spoken by Danny Kaye in ‘The Court Jester’, Paramount, 1955). The responsibility for VAT is being transferred, but not the rights that go with it. Westminster cannot lose; it is win-win, for they can rest complacent in the knowledge that the Scottish electorate will become more and more confused about who is responsible for what. The constitution is slowly being hybridised by Westminster, guaranteeing that confusion and frustration alone will thrive, in the hope that Holyrood suffers the backlash; ensuring a routine political future of bombast, overblown outrage and faux righteous indignation for us all.

The First Minister has rejected the Westminster version of a VAT transfer plan. She informed MSPs (8th May) that the VAT proposal “has enormous risk attached to it”. The reason for that is the method Westminster, presumably deliberately, has used to identify the Scottish element of the tax. The FM went on: “The concern here comes from the methodology that’s being proposed for that. There was never intended to be any real out-turn data that will guide the decision – it’s based on estimates”. Based on estimates, and risky: where have we heard that concern before on the matter of government revenues or expenditures in Scotland? I will leave that here.

The change in VAT came about through proposals from the multi-party Smith Commission and were incorporated in the Scotland Act (2016). The (Unionist Party) participants to the Smith Commission were unfortunately reluctant to release Westminster central control over fiscal policy to the devolved Scottish Parliament without firmly retaining Westminster’s predominant grip on the purse strings; Westminster seems incapable of thinking of the UK as other than an incorporating, highly centralised, top-down State. Thus the devolution of VAT was intended to give the appearance of devolving power, by (grudgingly) passing the obligation to spend the tax to Holyrood, and identifying the quantum as part of the Scottish Budget through making some broad estimates, rather than identifying the facts rigorously: while retaining Westminster control over raising VAT. This was much like the origins of GERS in Ian Lang’s original, political smoke-and-mirrors confection; first designed and then retained, as much as a political trap for Holyrood to fall into, as it was a reform for the sake of good government in Scotland: and so it has now proved, with the VAT problem.

The Fraser of Allander Institute (FAI) produced a Blog on the problem the VAT transfer created, in December, 2018: ’VAT Assignment – A bridge too far for fiscal devolution?’, which provides the independent evidence for the shortcomings of the Westminster proposal. The FAI begins by establishing the background and outlining the failure:

“Working out how much VAT is raised in Scotland is exceptionally difficult. Unfortunately, a paper published recently by the UK Government on how it plans to do this suggests that little progress has been made in finding a robust way forward after over 3 years of trying.”

The FAI goes on to identify the nature of the underlying problem:

“There is one big challenge with assigning or devolving VAT to Scotland. Businesses are not required to report separate VAT returns for sales made in Scotland. Unlike income tax, which is based upon where a worker resides, VAT is much more complex to identify.”

In the 21st century, with Big Tech, and very usable, even personal, modern accounting systems this should not be as expensive or difficult to do, at least for the major contributors to the tax, as some critics claim, if there was the least political will to do it; although the FAI in passing makes an issue of the cost, without providing any evidence of insuperable difficulty. In any case, the FAI continues:

“Previous approaches have looked to regionalise this model to come up with a Scottish share for VAT. This has been done by using the Living Costs and Food Survey (LCFS) to produce estimates of the expenditure on different goods in Scotland (and rUK). An assumption is then made that the VAT gap is proportionately the same across the UK.
In some instances, other methods are used – e.g. for government and the exempt sectors – but the majority of revenues estimated hinge on the LCFS data.
But there are a number of issues with this approach. Chief amongst them is the robustness of the underlying statistics. The LCFS has a small sample size: prior to 2017-18, it was only 500 households per year. This means that the confidence intervals are significant – see Table 1 from GERS which shows that for 2017/18 the confidence interval was plus/minus £223m. In other words, we can be 95% confident that the ‘true’ value for VAT revenues in Scotland could lie anywhere between £9.9bn and £10.4bn. These are obviously significant fluctuations – arguably acceptable when the purpose is a statistical publication of Scotland’s overall public finances, but much less so when it comes to marginal changes in day-to-day Scottish budget lines.”

Notice the reference to GERS, and the statement that the chief among the “issues” with the approach is “the robustness of the underlying statistics”. Who knew? Actually, the list of GERS critics provides a starting point. I will pass over the rather strange and casually dismissive wording, that these estimates are “arguably acceptable when the purpose is a statistical publication of Scotland’s overall public finances”. What that Delphic observation actually means is challenging to parse. In any case the FAI argument proceeds from there as follows:

“Recognising that earlier estimates were weak in the context of the new tax powers, both governments started working on a better way to assigning such receipts to Scotland. Presumably, many approaches have been examined.”

The FAI Conclusions on these approaches is worth repeating:

“The amount of detail published on VAT assignment leaves a lot of questions unanswered. But from what we can tell, the method appears similar to previous approaches. This should cause concern for Scottish Ministers and MSPs. Given the reliance on survey based estimates, this has the potential to introduce significant fluctuations into the amount of VAT assigned year-on year, and therefore potentially into the Scottish Budget. A key aim of the Smith Commission was to improve accountability and make Scotland’s politicians responsible for the money that they spent. Unfortunately rather than helping to deliver this aim, the current proposals for VAT assignment risk undermining that principle. Perhaps it is wise to pause and think again.”

The FAI is a leading institution specifically analysing the Scottish economy, and its judgement on the Westminster plan for the management of a major Scottish tax begins with the qualification “from what we can tell”. From what I can tell, this is not a comforting starting point to understand or accept that British Government policy for Scottish taxation is well judged or has been wisely considered; in other words, that our fiscal policy is in good hands. The Scottish Parliament has been in existence for twenty years; it is not as if there has been no time to give the issues at stake ample consideration, for review and satisfactory resolution; to all parties who are sincerely involved or intend there to be fruitful outcomes.

The Scottish Government has not accepted the Westminster VAT proposal because of the inherent defects: a response that political opponents are hastily now attempting to ‘spin’ as Scottish Government incompetence, or proof that Scotland is basically incapable. This is the kind of vulgar party political juvenility, the slapstick politics of opposition that we have to endure in Scotland. No wonder we can’t fix on a solution for VAT.

For me, this strange approach by Westminster to serious matters of fiscal policy in Scotland provides an interesting, and rare insight into the deeply woolly, even casual nature of the approach to Scotland’s finances that Westminster is prepared to accept, and even promote in the 21st century: but everyone else really should wonder why this is still the case. GERS has generally and casually been accepted without sufficient consideration of the underlying problems it disguises, in spite of fair-minded warnings of the limitations: but as soon as a major tax is about to be used to transfer some of the responsibility directly to Scotland, that is based on the conventional Westminster approach to the sourcing of estimates of their yields (for example using surveys, or other relatively indeterminate or uncertain solutions), rather than providing accurate and robust data; the reliability of the proposed revenue or cost data relating to the tax suddenly collapses in a heap – for very good reason.

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  1. Charles L. Gallagher says:

    “Beware of Greeks bearing GIFTS”, especially if those GREEKS hail from WASTEMONSTER.

  2. Mike Vickers says:

    Enjoy the Original lines
    https://youtu.be/LS75NtlH3gI

  3. Alasdair Macdonald says:

    John S Warren, thank you for this clear exposition of the mendacity behind the assignment of VAT. I think that nothing needs to be added.

    I think you have made a powerful point in your opening paragraph – “Fury, outrage and righteous indignation are the everyday currency of politics in Scotland, especially among the opposition political parties. The result is daily politics is now conducted by a mixture of bombast and accusation.” Sadly, this describes the antics of the largest part of the opposition parties in Scotland. And, predictably, the Scottish media, with few exceptions simply parrot this cavilling and pettiness.

    On Good Morning Scotland the former First Minister, Henry McLeish, was unhappy about the lack of genuine constructive dialogue amongst parties. He proposed a full PR system, because the current system, which was introduced to avoid any party having an overall majority, had actually produced a majority for the SNP and almost another in the following election. While I think that Mr McLeish, on the whole is a pretty decent person and has been badly treated by the tribalists in his party, I think he is still a ‘Labour’ person and believes they should be the top dogs.

  4. James Mills says:

    One has to conclude that the deliberate myopia ( or is it ignorance ? ) of the Unionist parties attitude in Holyrood to the VAT question is that they are quite happy to damage the Scottish Finances for Party advantage !
    Shame on them !

    1. Kenm says:

      There is a very simple solution to the problem, which would produce actual VAT figures (inputs and outputs) and that is to devolve to Holyrood the right to demand that all VAT-registered businesses trading in Scotland (regardless of where their head office is situated) use a separate Scottish VAT number (as distinct from the pan-UK VAT numbers in current use). That would produce actual figures for Scottish VAT rather than estimates.

      However I can’t imagine that any Westminster government is going to agree to this even though the introduction of Scottish VAT numbers does not of itself affect their desire to keep uniform VAT rates and rules across the whole UK. THe reason for this reluctance is simply that they won’t do anything which might potentially make life easier for any Scottish government now or post-independence.

  5. Bruce McQuillan says:

    Wasnt there also the flagon with the dragon ? Or was that Plaid Cwymru ?

  6. Graeme McCormick says:

    Hi John,

    Your forensic analysis is always beyond enlightening. Would that the SNP members of the Smith Commission had walked away from its conclusions. As with VAT, income tax is a poisoned chalice .

    The only way to divest ourselves of this burden is for the Scottish Government to raise all public funding estimated by GERS through Annual Ground Rent then reimburse Scottish payers of UK taxes through the lock grant bestowed on us by the Smith Commission. Then the Scottish Government will be in control of Scotland’s public economy . The U.K. will not tolerate it so s constitutional crisis will follow which wil hasten I dependence as the Haves in Scotland will swing toward independence as they will not accept the U.K. of their gains through AGR

  7. Willie says:

    Interesting analysis of the VAT issue.

    The problem with so that many of the partial tax power transfers from Westminster to Hollywood is that they were recalcitrantly given with malice in mind. That together with a level of complexity that many ordinary folk do not understand this then leaves unionist media press pack free to pillory and assail the Scottish Government.

    Ostensibly give with one hand whilst the other hand takes away is the game. And it’s a good game for the player who set the rules because it gives Westminster the club with which to beat a hapless Holyrood quite unable to square the circle and defend itself against relentless criticism.

    In the early years of an SNP Government there was a dynamism to change and do things differently and that vigour nearly took us to independence. We need to re-establish that vigour. The tax traps and constraints of a failing UK destined to chaotically rip itself out of Europe in an orgy of Brittanic neo-liberalism requires that.

    Standing still is not an option. We either go forward or we go back.

    And so, in a few days time, let us send a clear message when we vote in the Euro elections. Tory, Labour or SNP – I know which one I will choose.

    1. John S Warren says:

      I do not doubt that the EU would be the better of reform; from the inside, but I am not inclined to ‘throw the baby out with the bathwater’ because Westminster will not produce reliable data to measure Scottish sources of taxation. Here and now, I am certainly not prepared to be side-tracked by a throwaway dismissal of VAT in principle, when the matter under consideration is quite different: the lack of credibility of critical data that is actually being used to govern Scotland. I consider my priorities here are more direct, urgent and relevant. If you wish to rewrite the rules on taxation on the grand international scale, by all means take on the burden. I am sure there is a lot to do; go ahead, good luck with it, but not with me and not here.

      Finally, I should make clear that while the EU is of critical economic importance, more fundamentally I am persuaded by the insight of Donald Tusk, a Pole with deep experience of Europe. For Tusk the EU is fundamentally; first and foremost, a Peace project. I consider that unanswerable.

  8. Derek Henry says:

    Sales tax/VAT is such a bad tax as well. It is regressive, subject to fraud, high dead weight costs.

    Japan shows what not to do with such a thing

    http://bilbo.economicoutlook.net/blog/?p=29506

  9. Derek Henry says:

    Why on earth would anybody sign up to this nonsense John after winning independence ??

    No wonder populism is now on the rise across Poland.

    https://ec.europa.eu/info/sites/info/files/2018-european-semester-convergence-programme-poland-en.pdf

    Indy ??? Is that really the kind of Indy you want ???

    1. John S Warren says:

      I have given you my reply to the points you made. Nine question marks, a declaration of “nonsense” and doubtful speculation about what I want; even with a link to Poland’s Convergence Programme Update, 2018 doesn’t change it. For me, candidly that kind of hyperbolic exuberance doesn’t form a compelling argument. It is quite beside the point that is at stake here. My focus on this thread is the highly unreliable revenue and expenditure data, produced and sanctioned by Westminster that is being used to govern Scotland: period. I am not interested in other matters of interest to you, but which I consider in this specific context, a sideshow. Europe and tax reform are simply not the central issues here. I consider I have given your opinion a fair response (twice), and will spend no more time on them.

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