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Scots’ new powers may create two-tier tax regime

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Scotland may have voted to remain in the UK, but previously agreed tax-raising powers and further fiscal devolution could change company car tax.

Prime Minster David Cameron has said he intends to honour a pre-referendum promise to transfer certain tax powers to the Scottish Parliament.

Draft legislation is scheduled for January and although the extent of further devolution is unresolved, the Conservatives, Labour and the Liberal Democrats are committed to expanding Holyrood’s power to set income tax rates.

John Macintosh, tax partner at Deloitte in Scotland, explained: “The big difference is between Labour and the Lib Dems and Conservatives.

“Labour has proposed that the Scottish rate of income tax could be varied by up to 15 percentage points and the higher bands could be increased at a different rate to the lower bands, making it more progressive.

“The Lib Dems and Conservatives would devolve all income tax to Scotland, but the Lib Dems would also like Holyrood to alter the amount at which the different rates of tax are paid.”

However, Macintosh told Fleet News that the amount of tax employers will have to pay on any vehicles they provide should remain unchanged, because road tax, national insurance and capital allowances are not on the table.

VAT is also not being offered because EU law states that only one VAT rate can be applied to a member country.

However, if income tax is changed, it would affect the amount of company car tax employees would have to pay.

Company car or benefit-in-kind (BIK) tax is calculated by multiplying the P11D value by the BIK percentage banding then multiplying that figure by the employee’s tax band.

“The income tax rates may be different,” said Alastair Kendrick, tax director at MHA MacIntyre Hudson, “which means the amount of tax you pay on your company car could be higher, or lower, in Scotland.”

The potential for a two-tier system has actually been around since 1998, when the Scotland Act was introduced. It granted the Scottish Parliament the power to vary income tax by 3p in the pound – the so-called tartan tax, which Holyrood has never used.

However, the appetite for further autonomy suggests future Scottish parliaments may want to flex their fiscal muscle.

It has already been agreed – thanks to the Scotland Act 2012 – that Holyrood will have the ability to alter income tax by 10p in the pound from 2016.

“At the moment, the rates of income tax in the UK are 20%, 40% and 45%,” said Macintosh. “The Scottish rate of income tax says that from each of those UK rates you deduct 10 percentage points, which effectively means that the UK rate applied in Scotland would be 10, 30 and 35. Then Scotland, through Holyrood, could set what amount it wanted to on top of those rates to create the Scottish rate of income tax. However, whatever they add has to be the same across the three rates.”

Holyrood has already used devolved powers to replace stamp duty land tax – a levy on property purchases – with the land and buildings transaction tax, which comes into effect in April. Macintosh says the new system is more progressive.

However, all eyes are now on what further fiscal powers will be devolved to Edinburgh and how the fleet industry could be affected by the possibility of two UK tax regimes.

The BVRLA says it will continue to work closely with HMRC  and the Treasury to ensure that both the current system, and any future plans, operate in a fair and simple way, while incentivising the use of low-emission transport.

Chief executive Gerry Keaney said: “We will be closely monitoring any further developments in Scottish devolution and would look to ensure that any changes are well sign-posted and don’t end up distorting the UK market.”

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