Holyrood new VAT plan likely to be postponed as devolution push reignited

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The Scottish government is likely to postpone plans for its budget to be assigned a share of VAT revenues, the finance secretary has indicated.

Half of the VAT receipts raised in Scotland had been due to be assigned to the Scottish government’s budget from next year.

But it has been difficult to calculate what the figure should actually be.

Derek Mackay said there was a danger this could short-change his budget by many millions of pounds.

He told Holyrood’s finance committee that he was therefore considering asking for the introduction of the VAT plan to be delayed.

First Minister Nicola Sturgeon later told MSPs that the Scottish government might instead push for full powers over VAT to be devolved.

It has been estimated that about £6bn of VAT revenues could have been assigned to Scotland under the proposals, with a consequent cut in the block grant it receives from Westminster.

The Conservatives claimed Ms Sturgeon’s government was continually demanding more powers – which it then either refuses to use, or hands back to Westminster.

What is the problem with the VAT plan?

Assigning a proportion of VAT receipts was first proposed by the Smith Commission following the independence referendum, before being included in the Scotland Act 2016.

The theory was that the amount of money that went to the Scottish budget would increase if Scotland’s economy performed well.

In reality, it has been extremely difficult – some would argue impossible – to accurately calculate what the figure should actually be.

This is because businesses are not required to report separate VAT returns for sales made in Scotland, and the potential cost and burden of making them do so would be large.

The two governments have therefore attempted to find a way of estimating how much money the UK Treasury should be giving to Scotland under the new VAT proposals.

But economists at the Fraser of Allander Institute warned last year that the way these estimates are calculated could see the annual Scottish budget fluctuate by “tens of millions of pounds, if not more”.

They said that this was “not because of changes in Scottish economic performance, but simply because of changes in the underlying dataset used by statisticians.”

Mr Mackay and Ms Sturgeon share these concerns, with the first minister saying on Wednesday that the risk to the budget was even greater because of the uncertainty over Brexit.

What will the Scottish government do now?

Mr Mackay told the finance committee that he was “minded” to ask for a delay to the new VAT system being introduced, and warned that the estimates may never be reliable enough.

Ms Sturgeon later said that Brexit could actually make it easier for full powers over VAT, including the ability to change the rate, to be devolved to the Scottish Parliament.

This is because EU rules prevent member states from setting different VAT rates within their own borders.

The first minister said: “The current proposal doesn’t devolve any power over VAT to the Scottish Parliament. The decisions around the rates and the levels of VAT will remain reserved.

“This is simply about assigning a proportion of the revenues from VAT to the Scottish government budget with consequent reductions in the block grant funding.

“The concern here comes from the methodology that’s been proposed for that. In the Scottish government’s judgment it could absolutely result in a significant hit to the Scottish budget.”

What have opposition parties said?

Scottish Conservative finance spokesman Murdo Fraser said: “This is a government which said it could have an entire separate country up-and-running within just 18 months.

“Yet when powers begin to arrive at Holyrood, instead of embracing them and making them work for Scotland, the nationalists hand them straight back.

“That’s the hallmark of a grievance-driven, incompetent administration whose time has long been up.”

His comments were echoed by Scottish Labour finance spokesman James Kelly, who said Mr Mackay’s “climbdown” made a “mockery of claims the SNP could have set up a separate state within 18 months”.

Scottish Liberal Democrat leader Willie Rennie said: “On the back of returning the social security powers to Westminster this shows the SNP are increasingly incompetent in government.

“This is a dramatic u-turn that shows they are turning their backs on creating a more powerful Scotland within the UK.”