Scotland to gain half of its VAT revenues

Fri 28th Nov 2014

In the Smith Commission report  issued today on the devolution of powers to the Scottish Parliament, UK VAT has been included in the list of taxes to be potential changed.

Other proposals include the devolution of income tax and more welfare payments to Scotland. The report comes following the near success of the independence vote at the 18 September 2014 Scottish referendum.

The proposal is for Scotland to retain the ‘first 10 percentage points of the standard rate of Value Added Tax (VAT). There will be a subsequent adjustment to Scotland’s block grant received from the UK government.

It is not clear that such as division of VAT is permitted by the European Union Directive on the harmonised tax.

What appears like a good clear division of VAT charged in Scotland will be a challenge to administer. The location of where VAT is charged within countries is complex and not fully defined, and will put a huge burden on companies to understand the location of their customers. It comes on top of 1 January 2015 EU VAT changes on electronic services which is threatening the livelihood of many small digital businesses.