Devolved taxation and Government IT systems

About a year ago, I wrote a post expressing my concern that the implications for Government IT systems of Scottish independence had not been considered by politicians. Now, after a clear vote in Scotland against independence, a new set of proposals have been unveiled that, amongst other things, devolve income tax revenues to Scotland as well as a proportion of VAT revenue. Yet again, I’m afraid, nobody has thought of the IT system issues involved in implementing these proposals. I’ll only consider  2 of the tax proposals here but the same issues almost certainly arise for other proposals on welfare devolution.

The nub of the income tax proposal is that income tax raised in Scotland should be returned to the Scottish Government as part of their budget and that the Scottish Parliament would have the power to set income tax rates and bands. Let’s think about what this means for the tax collection system.

1.     There must be changes to the system so that, on the basis of postcode, the tax collected is allocated to Scotland or to the UK. Seems easy.  But what happens when:

(a)    There are address errors in the tax system and postcodes are wrong or missing. Hundreds of people change their address every day and, for sure, the address database is not up to date.

(b)     People move from/to Scotland during a tax year. Part of their tax should go to Scotland, part to the UK. This implies tax has to be allocated on a daily basis.

(c)      Employers have a workforce where some people are domiciled in Scotland, some outside Scotland. A great deal of UK tax is collected by employers through the PAYE system. If tax rates are different in Scotland and England, will they be expected to alter their collection system to collect the different levels of tax? If not, how will additional tax for people taxed under PAYE in Scotland be collected? In the short term this could perhaps be through the tax code system, but this is not a long term solution.

I don’t pretend to understand the incredibly complex UK tax system and I’m sure there are many more problems lurking in the woodwork.  I doubt if anyone can estimate at this time just how challenging it will be to update the collection systems.

The VAT changes are, if anything, worse. Under these proposals, 50% of the VAT collected in Scotland will be returned to the Scottish Government. But VAT is not collected directly by the government from individuals. Rather, it is collected by companies from their customers so does this mean that all companies selling goods and services must keep track of the postcodes of their customers for each transaction so that VAT collected in Scotland can be identified? But how do they do this for credit card purchases – the card billing address is not necessarily the user’s permanent domicile

Then the HMRC collection system has to be updated to handle and process these postcodes. Can it be changed to do so ? We simply don’t know.  My guess is that this will prove to be impossible and the VAT proportion will simply be allocated according to population.

So, look out for more reports of IT system fiascos and blame being assigned by politicians to the managers and engineers developing these systems. They never seem to learn that adding complexity to an already complex system is a recipe for disaster.

2 thoughts on “Devolved taxation and Government IT systems

  • November 30, 2014 at 7:20 pm
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    Re VAT: I would have imagined that it would be based on the business returning the VAT, rather than the customer. So if the business (or branch) is based in Scotland, only then you do the VAT split on what is returned to the Treasury.

    Reply
    • November 30, 2014 at 8:45 pm
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      Interesting – I never thought of that angle. Would certainly be easier to implement. This is, of course, not the same as VAT paid by Scottish residents.

      Reply

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