‘Brexit provides chance to devolve VAT to Scottish control’

Reform Scotland, the independent, non-party think tank says HM Treasury’s previous justification that EU law prevented VAT being devolved will no longer apply.

Its findings have been published in its submission to the Scottish Parliament’s European and External Relations Committee’s inquiry into Scotland’s relationship with the EU following the EU referendum.

In its response, which can be read below, Reform Scotland focuses on the Committee’s call for comments on ‘The implications for the devolution settlement of withdrawal from the EU’, in particular by calling for the devolution of VAT.

On 9th December 2015 David Gauke MP, then Chief Secretary to the Treasury, told the House of Commons: “The Smith Commission set the objective that more devolved spending in Scotland should come from tax raised in Scotland. Control over setting VAT rates is not being devolved to Scotland, because EU VAT law does not allow for differential VAT rates within a member state.”

As an alternative, a portion of VAT revenues were assigned to the Scottish Parliament as an incentive to find ways to increase them. However, there is no power to vary the rate because of EU law.

However, Reform Scotland now says this can now be revisited as there is now a case for VAT to be devolved in full and that the UK withdrawal from the EU provides the opportunity to significantly boost Holyrood’s revenue-raising powers.

Reform Scotland’s director Geoff Mawdsley said: “With the UK voting to leave the EU, there is no reason why the UK Government cannot give a commitment to devolve VAT in full to the Scottish Parliament once we have formally left the EU. With Income Tax being the only major tax to be devolved under the current proposed settlement, over two-thirds of all tax revenue raised by Holyrood will be from that single source. This over-reliance on income tax means that there is little scope to effect real reform and create a better environment for economic growth.

“The devolution of VAT would enable Holyrood to raise a sum roughly equivalent to that of income tax. Crucially, it would broaden the range of devolved taxes, which would present a better opportunity for tax reform, and mean that the Scottish Parliament is responsible for raising 63 per cent of the money that it spends.

“If the UK government still accepts the argument that VAT would be a useful tax for Scotland to have then it should devolve it to the Scottish Parliament. If it decides not to do so, it should explain why, because neither the UK nor Scottish governments have given any reasons why they oppose its devolution in principle.”