Economics of Independence

Explaining the limited tax powers in the Scotland Act 2012

Written by Michael Gray

This weekend there will doubtless be a scrutiny of Labour’s proposals for further devolution. It is expected that they will fall far short of the aspirations of those who support maximum devolution.

The Scotland Office cites the Scotland Act of 2012 as ‘the biggest transfer of fiscal powers in 300 years’. However, even a superficial reading of  the Act shows that those powers are in fact extremely limited and unambitious.

small increase in tax powers

Where does Scotland’s tax come from?

The recent Government Expenditure and Revenue Scotland figures present a full breakdown of Scotland’s tax revenue.

Last year’s total revenue came to £53,147 million.

The nine main sources of revenue are 1) Income tax, 2) Value Added Tax (VAT), 3) National insurance contributions, 4) North Sea revenue,  5) Corporation tax, 6) Fuel duties,  7) Alcohol and tobacco duties, 8) Council tax, and 9) Non-domestic rates.

These nine areas equal 85.6% of total income. ‘Gross operating surplus’ adds another 6.1%.

The other 8.2%  comes from  a variety of smaller taxes, such as capital gains, betting duties, air passenger duty and inheritance tax.

tax percentage breakdown image

What does the Scotland Act give Scotland control over?

The Scotland Act 2012 does not change eight of the nine important taxes.

It gives Scotland control over 10%  of its income tax revenue and also makes tiny changes to some of the smaller taxes.

Variation of income tax

The Scottish Parliament will have more powers to vary rates of income tax. Currently Scotland has power over  3%. The Scotland Act extends this to 10%.

No Scottish government has varied the income tax rate. The Parliament can only increase all the rates simultaneously or reduce all the rates simultaneously. This provides very little flexibility since the number of rates, the banding of them, and eligibility remain wholly UK responsibilities. Scotland also has no control over the tax thresholds.

For instance: the basic rate of income tax is 20%. The higher rate is 40%. The additional rate is 45%.

When the Scotland Act comes into effect in 2016,  a Holyrood Government could choose to reduce the rates to 10%, 30% and 35%, or they could increase them to 30%, 50% and 55%.  All three rates would have to move in tandem.

The Personal Allowance defines how much income you can earn before paying income tax. The tax threshold is £9,440 for 2013-14. This will still be controlled by Westminster.

Stamp duty and landfill tax

The Scotland Act devolves taxation on land (stamp duty) and landfill tax. In total these were worth £572 million last year. This amounts to devolving 1.08% of total Scottish revenue.

Stamp duty will be replaced by a Land and Buildings Transaction Tax. A Bill was passed by the Scottish Parliament on the 25th of June 2013. The Landfill Tax Bill received Royal Assent on the 21st of January 2014.  A Scottish version of HMRC called Revenue Scotland has been established to conduct tax services in Scotland.

Borrowing powers

The Scottish government will  also gain borrowing powers for capital investment projects up to a total value of £2.2 billion. This figure can only be borrowed from the Westminster government on appropriate terms.

So what has the Scotland Act achieved?

The Scotland Act was the result of the Calman Commission, which was launched in response to the SNP’s narrow election victory in 2007.  Calman proposed moderate tax devolution including a varying of income tax, the devolution of Air Passenger Duty and other minor taxes.

The aim of the Commission was to make the Scottish parliament more accountable for the money it spent, but some of its recommendations failed to be included in the Scotland Act. Before the Scotland Act 2012 was passed, its main architects in the Labour and Liberal parties recommended further devolution in response to the SNP’s 2011 election majority.

The Act did, however, lead to the creation of a Scottish tax system through Revenue Scotland – even if the proposals in the Act only devolve a further 1% of revenue directly to it. This was an important step that provides a framework for Scotland to control a far greater proportion of its tax in the future.

The shortcomings of the Scotland Act

Clearly the Scotland Act was not the significant transfer of fiscal powers that some politicians have tried to make it out to be. Even if you generously include the ability to vary income tax as ‘control’ over that revenue, then Scotland will still only have control over 15% of its total revenue.

Polls show that a big majority of Scottish voters support the devolution of more tax powers to Scotland. Yet when the opportunity arose to do just that, 85% was kept at Westminster and Scotland’s share was only increased by a marginal amount.

final version

What lessons can be taken from this process?

1) Devolution works at an astonishingly slow pace.

Scotland’s control over tax will have increased from 7% to 15% between 1999 and 2016 (when the Act fully comes into force). At that rate it would take 170 years for Scotland to reach Full Fiscal Autonomy within the UK.

2) Westminster refused to implement all of Calman’s recommendations.

The recommendations of the Calman Commission were not taken up in full by Westminster. Devolution of Air Passenger Duty, for instance, was rejected by MPs even though it was supported by the Scottish cross-party group.

3) Devolution has become a reactive process.

The Calman Commission was set up in response to the SNP minority government. Proposals for devolution beyond the Scotland Act were called for following the 2011 re-election of the SNP. If Scotland were to vote No, there would no longer be the same political pressure to devolve further powers.


It is difficult to judge the Scotland Act as a successful devolution of greater powers. In economic and business terms, it will have very little impact on Scotland’s economy. The next attempt at further devolution is likely to face similar criticisms. Proposals for independence have ambition for Scotland – which has so far been distinctly lacking within devolution proposals.

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About the author

Michael Gray

Michael is Head of Research with Business for Scotland.

A graduate from the University of Glasgow, he has carried out a series of interviews with academics, politicians and the public in Denmark, Iceland and Ireland. Michael's on twitter @GrayInGlasgow.


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