It appears that where we are with tax devolution in the “United Kingdom” is that the corporation tax rate will not be devolved, but the levels of personal tax, property tax and inheritance tax could be.
It should be relatively straightforward to devolve property tax, as the location of property is fairly clear. It poses some interesting issues for the so called Mansion Tax which I will deal with in a separate post.
Inheritance tax poses more issues. Which assets are subject to which form (and rate) of inheritance tax? Will moving within the UK to mitigate an inheritance tax liability be avoidance?
But personal tax poses the greatest issues. At OECD, we spent a lot of time (and I mean a lot of time!) discussing the taxing rights for the work of the “polish painter” operating in another country and what sort of presence created a permanent establishment. Recently at the EC forum on tax governance, the Czech delegate eloquently described the problems in assigning personal taxing rights when Czechoslovakia split into the Czech Republic and Slovakia. So what are the issues within the UK?
A large number of people live in one “country” and work in another, so who should get the taxing rights for employment income and self employed profits? Who will define when a taxable presence exists? Which court will review this decision and where will the court be based?
We also enter the realm of “no taxation without representation”. People will be subject to tax in one country but only be able to vote on the personal tax policy in another.
My examples are about Wales but could apply to Scotland or Northern Ireland.Let’s assume John lives in Wales but works in England. He is employed. He will pay tax in England, will he also pay tax in Wales if tax rates and allowances differ, in addition to his English tax? He will be able to vote on Welsh tax rates but not English taxes. He will have the compliance cost of two systems and he will bear the higher tax rate unless Wales provides a refund mechanism and Welsh tax rates are lower than English.
If instead John is employed in Wales, but works a significant part of his time in England he may be taxed at source on his employment income in England , while still being taxed on all his income (including his employment income) in Wales. He will suffer a cash flow disadvantage until Wales credits his English tax which has been withheld against his Welsh tax liability. He will also need to check that what has been withheld is the correct English tax liability.
An esoteric issue would be how Welsh team players will be taxed when their team plays in England in an English league and vice versa? What will happen to Swansea in the Premier League when it plays 19 games in England, what will happen to Rugby Union teams and Glamorgan when it plays in the County Championship?
Jane is self employed and based in Wales. She spends roughly 60% of her time in England. Under most international rules, she will have a permanent establishment in England and need to complete tax returns in both countries which (hopefully) will allocate her income between the two countries and not tax more than her income – so that she does not suffer double taxation.
All these scenarios result in a larger compliance burden, possible negative cash flow and possible increased tax.
Perhaps the politicians involved who are demanding these changes to taxing rights should think about the impact on the people they represent?