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Scottish taxpayers are soon to take on a new burden – the £40 million plus bill for the IT system to administer the new Scottish Rate of Income Tax (SRIT) in 2016. The lump sum cost for the IT system for the new Scottish Rate of Income tax is currently estimated at c £40-£45 million with running costs of about £4 million to £4.5 million a year. 

The Scottish government will be responsible for the tax rate - but it is not a devolved tax. This will remain a tax administered and managed by HMRC (new taxes to replace UK Stamp Duty and Landfill tax will be devolved and administered here). The introduction of SRIT is passing by largely unnoticed in the greater Hatfields v. McCoys war of attrition over the independence referendum.

How this tax change, brought in under the 2012 Scotland Act  is administered – who polices it and to whom the HMRC is accountable – are critically important questions – not least given the eyebrow- raising cost of this income tax change whether we decide to have different rates of personal tax here in Scotland or not.

How can it cost so much?

Last week the Scottish Parliament's Public Audit Committee chaired by former Scottish Labour leader Iain Gray held two open meetings to take a close look at the introduction of the new arrangements ushered in under the Scotland Act 2012.  How can it cost so much? Will we be spared another government IT debacle? And who is keeping an eye on how well and effectively this money is spent?  Among those being questioned on the management and administration of the SRIT was Edward Troup, the Second Permanent Secretary at HMRC (who has been appointed as the “Accounting Officer with responsibility for collection of the Scottish rate of income tax”) and the head of the National Audit Office. Scottish government officials and HMRC will be drawing up a Memorandum of Understanding on how the change will be implemented – and policed. The purpose of this week’s hearings was to ensure effective stewardship and accountability of this change and that the Scottish parliament exercises its watchdog function properly.

Keeping a close watch on HMRC

Two big issues are of immediate concern.  Audit Scotland and MSPs will need to be on their toes to guard against a government IT debacle. They will also need to be vigilant that costs do not run out of control and that HMRC is held to proper account for value-for-money management, administration and implementation. The lump sum figure of £40-45 million and the annual running costs of £4-£4.5 million are only estimates at present and by no means set in stone. 

IT project over-runs have blighted the UK government in recent years. A report by the European Services Strategy Unit (which took over the work of the Centre for Public Services) identified 105 outsourced public sector ICT contracts in central government, NHS, local authorities, public bodies and agencies with significant cost overruns, delays and terminations.

The summary of findings listed

  • 105 outsourced public sector ICT projects with significant cost overruns, delays and terminations;
  •  Total value of contracts is £29.5 billion
  •  Cost overruns totalled £9.0 billion
  •  57% of contracts experienced cost overruns
  •  The average percentage cost overrun is 30.5%
  •  33% of contracts suffered major delays
  •  30% of contracts were terminated
  •  12.5% of Strategic Service Delivery Partnerships have failed.

Oversight, accountability, vigilance

Now this does not mean that the introduction of the new Scottish Rate of Income Tax is doomed to hit problems. But these examples do underline the need for proper oversight, accountability and vigilance to ensure that (1) the Scottish government secures value for money and (2) costs do not run out of control. Many problems remain unresolved - about the machinery for regulatory oversight, the identification of Scottish taxpayers and the exact status of HMRC officer in Scotland.

Nor should the envisaged arrangements governing the reduction in the Scottish block grant be overlooked. In April 2016 the basic higher and additional rates of income tax levied by the UK government will be reduced by ten pence in the pound for those individuals defined as Scottish taxpayers. The Scottish government will thereafter be able to levy a new SRIT which will apply equally to the basic, higher and additional rates of tax. To balance the reduction in the standard and higher rates of tax by 10p the amount paid over  by way of block grant will be reduced – the actual amount will be based on twice yearly forecasts by the Office of Budget Responsibility of Scottish income tax receipts - oh dear - not a body with a whistle clean record for accurate forecasting!

A Home-Grown Tax Collector?

Finally, around 13 per cent of HMRC’s 72,770 staff are employed in Scotland providing a service to HMRC customers both within Scotland and across the UK. As such they are part of the UK civil service – not part of Sir Peter Housden’s army at St Andrews House. How long will it be before a turf war erupts and we start hearing demands for a “proper Scottish HMRC” – particularly given the fact that the replacements for the Landfill Tax and Stamp Duty Tax will be administered by the Scottish Revenue Service?

A hefty lump sum charge, a regular annual payment to HMRC – and all this with the potential both to add to the HMRC empire and blow up in a turf war. One needs to ask, qui bono?