The Commission on Local Tax Reform: Volume 1 – Just Change: A New Approach to Local Taxation
08 When and How Could an Alternative Tax be Implemented?
- New primary legislation to establish a wholly new system of local tax could not be delivered before the Local Government elections in 2017.
- Structures already exist to administer alternative property taxes, but transition would still incur costs and take a number of years to implement – even more so if land was to be taxed separately.
- Establishing a locally determined income tax would be a substantial administrative task, although a system of assigning income tax revenues to Local Government, potentially by local authority area, would be much less challenging.
- Any change will lead to some individuals paying more and some paying less. A transitional framework to avoid sudden changes to their tax bills, and allow taxpayers to adjust to new liabilities, is desirable and the cost of such an arrangement should be assessed.
8.1 Whilst the previous chapter considered how taxes might be collected in the long term, our remit requires us to consider “the costs of transition” and “potential timetables for transition, with due regard to the 2017 Local Government elections” and means that we have to consider what would be necessary to get from the present arrangements to the alternative tax systems we identify.
8.2 To be legal and enforceable, a tax must be set out in law. The present Council Tax is defined in the Local Government Finance Act 1992. However, changes to the valuation of properties, the ratios that determine how much properties in each band are charged as a proportion of Band D and the Council Tax Reduction scheme can be made by secondary legislation. Any more substantial changes would require an Act of the Scottish Parliament. Speed of parliamentary passage and complexity are not however necessarily linked – the present Council Tax Reduction scheme is set out in secondary legislation but is considerably longer than the primary legislation setting out the Council Tax itself.
FIGURE 8.1: LAW MAKING IN SCOTLAND
Primary legislation is initially set out as draft law in a Bill. In most cases, the Scottish Government will conduct a 12-week public consultation on a proposed policy. Once the Bill has been introduced to Parliament, the lead Committee may issue a call for written evidence and take oral evidence from witnesses. Further stages provide for amendments to be proposed and the content debated, before Parliament votes on whether to pass the Bill. If passed, the Bill is submitted to Her Majesty The Queen for Royal Assent, after which it becomes an Act of the Scottish Parliament. Overall, the passage of a Bill through Parliament can take over 12 months, depending on its length and complexity. The Act will then come into force on a designated date some time thereafter.
Subordinate legislation (often called delegated or secondary legislation) is law most often made by Ministers under powers granted to them in primary legislation (for example to prescribe timing and implementation). In most cases the Scottish Government conducts a 12-week public consultation of its proposals for subordinate legislation. Parliamentary scrutiny of subordinate legislation involves fewer stages than for primary legislation and is usually conducted by Committees. This entire process can take as long as between 8-12 months, although is frequently less.
8.3 A switch to a fundamentally different local tax system would require primary legislation. There would need to be substantive consultation to inform the significant administrative effort in drafting a Bill which would be subject to full parliamentary scrutiny. Depending on the scale of the change and likely political challenge arising, this process might be expected to be achieved in perhaps two or three years, meaning that any alternative system introduced in this way could not be enacted before the Local Government elections in 2017.
8.4 This timetable may need to be extended further if the legislation for a new tax collection arrangement was dependent on the UK Parliament and Government. This would be the case for a locally determined income tax collected by HMRC, but also if the existing legal provisions for the sharing of data held by other government departments, such as HMRC or DWP, needed amendment.
8.5 Changing the basis of local taxation will have an impact on the derivation and collection of Scottish Water charges. Although not our primary concern, this secondary impact will need to be addressed.
8.6 As discussed in the previous chapter, local authority staff presently collecting Council Tax provide the obvious means to collect an alternative local property tax in the future. Transition to a new arrangement would place additional demands as IT systems and business processes would need to be revised whilst the existing Council Tax continued to be collected. This could be expected to carry additional costs and there will need to be a common understanding between Local Government and the Scottish Government of how these might be met. We have not sought to quantify these costs as they depend on whether an alternative property tax – and any relief system – could be implemented and administered by the adaptation of existing systems and using existing staff or whether new software, systems and staff structures are needed. This also impacts on the likely time needed to implement an alternative tax. A further consideration is whether sufficient certainty can be provided in advance of legislative change for resources to be committed before the parliamentary scrutiny is concluded and a new tax system passed into law.
8.7 Transition to a locally determined income tax would represent a more far-reaching change from existing arrangements. In the previous chapter, we identified that a locally variable income tax could, in theory, be administered by three alternative mechanisms. The most practicable solution with the least compliance cost is likely to be for HMRC to collect this by identifying taxpayers by local authority area and extending the SRIT to apply income tax varied in each of the 32 local authority areas. We have not estimated the cost of this transition, but HMRC‘s start-up costs for the SRIT of £30 million to £35 million might indicate the likely order of magnitude. Part of these start-up costs will have arisen from identifying Scottish taxpayers – we do not know the extent to which the information captured for this purpose could be further broken down to individual local authority areas. The remainder of the start-up costs will have arisen from extending HMRC systems and business processes to administer the SRIT itself. HMRC have not estimated the likely compliance costs of employers changing payroll systems to support the SRIT, but this will need to be considered for a local income tax.
8.8 In the previous chapter, we also considered the possibility of local authorities, or a national Scotland-wide body, collecting a locally variable income tax by either replicating the existing PAYE and self-assessment systems or collecting the tax wholly by self-assessment. We did not take evidence on the likely establishment costs of these options, but common to all is that they would require the creation of entirely new administrative capabilities to duplicate some of HMRC‘s existing income tax administration.
8.9 Collection of local taxes by a body other than local authorities would impact upon the revenue and benefit functions within local authorities, potentially reducing the numbers of staff needed, although it may be that TUPE conditions might apply.
8.10 The previous chapter also noted that some countries assign a proportion of national tax receipts to Local Government. This might be enhanced if it was possible to estimate the income tax receipts in each local authority area in order to assign each council a share of national income tax estimated to have been paid by residents. The latter, more sophisticated option, could be achieved by estimation (and indeed is likely to depend on bespoke analysis of various HMRC statistics such as the Survey of Personal Incomes and information regarding tax credits). Although not without its complexities, this would be a simpler exercise compared to the changes needed to implement a local variable income tax.
The Valuation of Property
8.11 Whilst we note in Chapter 5 the potential desirability – and associated political challenge – of the revaluation of property to support an alternative property tax, the act of revaluation is significant and distinct from other changes needed to administer a property tax. If a move to an alternative property tax required all properties to be revalued (whether on an individual property basis or to bands), this would have an impact on the cost and scale of the exercise. The SAA estimated that a revaluation exercise to a revised system of property valuation bands could be achieved at a cost of £5.5 million to £7 million and take two to three years. This would require additional resources, which could be minimised if this exercise could be achieved around the workload associated with the 2017 revaluation of business property. An exercise to revalue properties to discrete values would, according to the SAA, cost £7.5 million to £8.5 million. The SAA also highlighted the likely volume of appeals that would arise from a revaluation exercise, with revaluation to individual property values (as opposed to bands) increasing the likelihood of appeals and potentially increasing the cost and time needed to complete such an exercise.
8.12 We worked closely with Heriot-Watt University to model the impacts of revaluation by using Computer Assisted Mass Appraisal (CAMA) techniques – the first time this has been achieved for local authority areas in Scotland. In correspondence to us, the SAA indicated that the two to three year estimates to revalue properties may be shortened and the costs decreased by developing this methodology alongside more traditional valuation techniques.
8.13 Given that revaluation becomes more politically and administratively challenging as the time since the last valuation increases, there is a strong case for distancing any revaluation process from short-term political pressures. This could be achieved by making regular revaluations, for example every five years, a legislative requirement.
8.14 These considerations are all based on an alternative property tax being based on the capital value (either as part of a banded system or a discrete value) of buildings and land combined and hence informed by current sales data. Switching the basis of a property tax to land values only would be complex – we heard evidence of potential ways this could be achieved, but a concern was expressed that knowledge of land ownership and land values was not sufficiently complete to support an early implementation of a land value tax. The evidence suggested that a more realistic approach to such a tax might be based on estimates of land values being developed and disaggregated from overall property values over a number of years, with this data combined with Registers of Scotland’s Land Register. This would still incur costs, with the SAA estimating that doing so would at least double its equivalent estimate for a revaluation of buildings and land. However, the experience of countries such as Denmark demonstrate that a land value tax can be made to operate.
Protecting Taxpayers from the Impact of Change
8.15 Irrespective of what the preferred alternative tax system is, our analysis confirms that any replacement for the present Council Tax would see the tax liabilities of many individuals and households changing – some will pay more and some less. A fairer, more progressive property tax, for example, would see those in lower value homes pay less but the tax due on higher value homes increase. Such changes would ultimately be the purpose of making a local tax fairer, but the change should not be introduced in such a way as to impose sudden and extreme increases in people’s tax liabilities.
8.16 A similar problem of change creating sudden large increases to individual liabilities could face the recipients of discounts under the present Council Tax system, such as people with disabilities or full-time students. Any changes either to an alternative property tax or a local income tax would need to consider continuing discounts to avoid unforeseen sharp increases for categories of household currently receiving them.
8.17 Structural changes to tax systems can create particular issues, potentially changing the way in which local tax is paid. For example, a couple who presently make one household payment on their home for Council Tax would, under a local income tax, see local tax deducted from both their individual incomes.
8.18 A robust transitional framework is therefore needed. This would ensure that people have enough time to take any action needed to be able to pay their tax bills into the future. Such a framework could also help a new system gain public acceptance, although the visibility of local taxation means that change will remain politically challenging to deliver. Evidence from Northern Ireland and Wales, however, demonstrates that this is achievable. Furthermore, the conclusions from the review of international literature by Policy Scotland at the University of Glasgow note that “anticipating….short run transitional problems in advance of desirable long term impacts is a key way to lay the ground for reform”.
8.19 Both the Welsh and Northern Irish examples were based on additional funding being added to support the schemes. It may be possible for the transitional relief framework to be designed to be self-financing (i.e. the phased application of higher bills operates in step with the phased application of lower bills). This highlights that the costs of a transitional framework should be assessed and considered as part of any projections of how much revenue would be raised by an alternative tax system.
Figure 8.2 Transitional Relief Frameworks Used Elsewhere in the UK
|How it worked||What it cost||When it took place|
|The Northern Ireland Executive reformed the Domestic Rating system in April 2007 based on individual capital value assessments for domestic properties.
A transitional scheme was introduced and applied to private dwellings, private storage premises and private garages. Households automatically qualified for transitional relief where they experienced an increase of more than 33% in their rate liability on moving to the new system, compared to what the liability for the property would have been had no revaluation taken place.
|£32 million over three years.
This was paid by the Northern Ireland Assembly to Local Government to compensate for tax revenues foregone.
|The scheme was phased in over 2007-08, 2008-09 and 2009-10.
Relief was tapered, with full relief in year one, 66% relief in year two and 33% in year three. The full rate bill was payable in year four.
|Following revaluation and re-banding of domestic properties, the Welsh Assembly Government introduced a transitional relief scheme to ensure that no household’s Council Tax liability would rise by more than one band in each of the first three years above the band that they were in immediately before revaluation took place.
Transitional arrangements were applied automatically; there was not a requirement for taxpayers to apply for the relief. The scheme did not extend to protection for second homes.
|£11 million in year one.
This was paid by the Welsh Assembly Government to Local Government to compensate for tax revenues foregone.
|The schemes operated between 2005-06 and 2007-08.
In year one, dwellings did not experience more than a one band increase above their pre-valuation band.
In year two, dwellings did not experience more than a two band increase above their pre-valuation band.
In year three, dwellings did not experience more than a three band increase above their pre‑valuation band.