Official Report

  • Scotland Bill Committee 27 September 2011
    • Scotland Bill
      • Corporation Tax
      • Air Passenger Duty and Aggregates Tax
      • Excise Duties
      • Corporation Tax
        • The Convener: I am happy to reconvene the meeting. We will continue our scrutiny of the Scotland Bill by taking evidence on corporation tax and the creation of a favourable environment for business. I welcome our witnesses, who are Jim McColl, Professor Hughes Hallett and Norman Springford. We had an extremely interesting session on corporation tax this morning, and it will be good to hear more from you.

          I invite you to make short opening statements before we move to questions from the committee.

        • Jim McColl (Clyde Blowers): You would like a short opening statement?

        • The Convener: If you wish—you do not have to make one.

        • Jim McColl: I am quite happy to.

          The angle that I come from on corporation tax is that our business population in Scotland is way below where it needs to be. It is the generator of wealth that provides the funds for the social progress that we need to make. We have to do something to increase the number and size of businesses in Scotland.

          At the moment, we are at a disadvantage. Naturally, a company would want to go to the south-east of England. It is necessary to give business some reason to locate in Scotland. I have just come back from Germany. It takes too long to get to different markets from Scotland. There is an additional cost in time and money. I sometimes find it difficult to get customers over here because they have to make that extra leap. We need the power to do something to attract more businesses to Scotland.

          I was disappointed that the Calman commission’s brief was such that it was not allowed to look at that. It still comes through from Westminster that you cannot do something that disadvantages another part of the UK. What we need is something that gives an advantage to Scotland so that businesses will look at moving here instead of locating in the south-east of England. That is my basic argument. We cannot grow the Scottish economy without growing the business base here. We need something radical—it is not a case of tinkering at the edges.

          Calman’s 10p tax proposal would be damaging and unworkable. It is just a variation of the power to vary the rate by 3p, which was not used because it would not make sense to use it. If the 10p rate was reduced, the block grant would be reduced, and if it was increased, that would damage the people we want to help. We want to reduce the bottom rate, but we must find a way of funding that, and we will not be able to do so without additional tax-raising powers.

        • The Convener: Thank you very much. Perhaps Mr Springford would like to go next.

        • Norman Springford (Apex Hotels): Thank you.

          I have a more negative point of view in that I think that the corporation tax changes may be irrelevant. I have been a practising accountant for many years and an entrepreneur for even longer, and I have not yet met any emerging entrepreneur—which is the sector that we say the growth will come from—who puts taxation at the top of the list of drivers for their business. Someone who runs a small to medium-sized enterprise may well be concerned about their level of personal income tax, but I have not heard of anyone who will place corporation tax higher up than sixth or eighth in importance on a scale of one to 10.

          Entrepreneurs are driven by access to funding, which is clearly highly relevant at the moment. Another concern is the level of bureaucracy that is endemic in their business. A current issue is the level of non-domestic rates and of utilities charges. Those are the sort of drivers that I consider to be relevant to Scottish growth. Corporation tax is of low relevance when it comes to where we think that our growth will come from.

        • The Convener: I invite Professor Hughes Hallett to speak for a few minutes on the evidence that he submitted.

        • Professor Andrew Hughes Hallett (University of St Andrews and George Mason University): Not to be outdone, Drew Scott and I have submitted two lots of evidence. They are both summary statements, designed to review the major issues and the evidence on those issues in the Scotland Bill process at large.

          The evidence is in two parts. The first reviews the Scotland Bill’s financial proposals as they now stand, and we have a number of serious concerns about their implementation that have, surprisingly, never been addressed elsewhere. Mr Danny Alexander might be addressing them in another place today but I do not know what he is saying. If he is, it is two years after the event, which is worth noting.

          The second part of the evidence is a review of the case to be made for extending tax powers, principally corporation tax, which is presumably why I am sandwiched between two business types today. It also contains various ideas on how that can be implemented.

          Both parts of the evidence are important. The former is important because it has never been done, as I emphasised, and the latter is important because, one way or another, the issue has become a live one and I presume that the committee wants to know what the experience has been elsewhere and what the research has shown. As I said, our evidence goes through some of that.

          It is worth saying that those countries that have any form of tax devolution at all, without exception include corporation tax, among other things, so there is plenty of experience.

          Because the issues I have mentioned are important in practice for the implementation of the bill’s proposals, I ask the committee to read them carefully—that is a slightly barbed comment. The papers might be a bit dense but they are quite short. They are concerned with the likely economic impacts and justifications for what the committee is considering. It is not a case of marketing a particular agenda or anything. Our evidence just goes through what the economics would say.

          There are various issues to pick out, such as due diligence not being done yet, risks, the need to broaden the tax base, other taxes, how borrowing would work and—perhaps not for this meeting but for when my co-author is around—the European consistency problem. There are also lists of recommendations, which I will say up front because I might not get there later on.

          The income tax proposal in the Scotland Bill needs to be broadened to include the upper bands, savings income, thresholds and the tax base. None of those has been included and that is why most of the technical problems are coming up.

          There is an issue about national insurance contributions. If the UK Government folds that into income tax, will it be part of the deal? I raise that because there is a general issue that when UK legislation changes, it impacts on Scottish revenues. How that will be dealt with is not at all clear. Then, of course, all the technical stuff about forecasting, the reconciliation process and so on is not yet clear. There is also the question of what to do about volatile revenue streams that would normally force borrowing and the financing of that.

          Outside the Scotland Bill, excise taxes are one issue, and I underline their stability during recessions, which would make them suitable for funding any borrowing that might or might not have been done. The corporation tax is also a lever for growth.

          Another issue in our evidence that has not been cited, and which might be important for the committee to think about, is positive spillovers from anything that Scotland does on other tax revenues, which, of course, will go straight to London. It will increase the degree to which Scotland is subsidising the UK Government, and that needs to be addressed.

        • Jim McColl: Could I make one more point?

        • The Convener: If it is a very quick one, Mr McColl.

        • Jim McColl: It is. I agree with Norman Springford when he says that corporation tax is not of the first importance for entrepreneurs. The level of entrepreneurial activity in Scotland is very low because the critical mass of businesses here is so low. A bigger critical mass creates entrepreneurial activity to interact with those businesses.

        • The Convener: Thank you for that. The evidence that we took this morning was primarily about corporation tax, but the three participants were obviously keen to be creating a good business environment in Scotland. Every one of them said that, although they were in favour of the devolution of corporation tax so that a Government would have the right to use that within its country, they also felt that that could be properly effective only as part of what they described as a basket of taxes, with all the tools in the box to give Scotland the best advantage. Do you agree with that?

        • Norman Springford: I will comment based on my accountancy background. The difficulty that I see is that, unless you balance your taxes, the risk of the anti-avoidance legislation and the arguments that will proliferate between HMRC and the rest of the legal and accountancy fraternities will be quite damaging. The cost of implementing any changes might well be self-defeating, in terms of revenue generated.

          If one concentrates on corporation tax, the other direct and indirect taxes will have to be examined in the same way. Are we saying that we should change the level of VAT for a Scottish business? The situation becomes almost nonsensical when you start to consider the impact of taxation other than corporation tax.

        • Professor Hughes Hallett: I agree with that. I would be in favour of devolving a basket of taxes more widely, in the interests of broadening the base and so on. That follows on from my point about the spillovers of one tax on to another. That is probably true more in relation to corporation tax than the others, which means that it is more important in this context.

          Because taxes do not have the same cycles, there are stability factors, which it would be useful to get your hands on, so that you can benefit from them. It would be useful to have those in the basket.

          In passing, I point out that, for reasons of European integration—or, rather, European legislation, but also integration, I suppose—not all taxes can be devolved.

        • Jim McColl: I agree that it is more desirable to have a basket of taxes. With regard to the 10p variability, you need something to balance that. There would be difficulties, with people classing something as corporation tax instead of another tax, but I am sure that we could have some guidelines and rules to deal with that in the short term.

        • Richard Baker: What would be the optimum level of corporation tax in Scotland? What is an optimum level of corporation tax?

        • The Convener: Would anyone like to address that question? I assure you that it does not require a one-figure answer.

        • Richard Baker: No, simply a percentage; that is all.

        • Jim McColl: A good starting point is the Irish rate of corporation tax. Quite understandably, Ireland is fighting hard to hang on to that. If Ireland did not have the large number of businesses that have been attracted there because of the corporation tax, it would be impossible for it to fight its way out of this economic downturn. Only a few weeks ago, I read an article in a Sunday newspaper that said that Google has a £6 billion turnover in the UK and pays around £8 million in tax here. It diverts about £2 billion into Ireland and pays something like 10 or 12 times the absolute amount of tax there, because Ireland has a 12.5 per cent rate.

          I believe that it has been estimated that the amount of money that we collect from corporation tax in Scotland is £2.6 billion. Halving that would take that down to £1.3 billion. In order to get that tax take up to £2.6 billion again, you would probably need to attract only three FTSE 100 or 250 companies. That is nothing. If you got 10 companies coming in, you would be way ahead. Of course, it is not an exact science.

        • Norman Springford: I do not agree with Jim McColl’s point. My belief is that attracting companies to set up a head office structure in Scotland does not necessarily create growth in employment; it amounts to merely shifting money around. If you are asking what the level of taxation should be, my answer is that it should be set with regard to the unitary system of tax in the UK. Whatever tax rate the rest of the country is using should be the rate that Scotland uses too.

        • Professor Hughes Hallett: That is another point to do with forecasting: I will not give you a number, because I will certainly not make a forecast about the future.

          If you put the tax rates up by a great amount, you will lose revenue. If you put them down, you may gain revenue, but after a time you will lose it again. There must be an optimal value somewhere in the middle; I am not sure whether that would be in the Irish range, or something not far from it. The important point is that if you put the tax rates down, what typically happens—because the elasticity is bigger than one—is that the revenues actually go up.

          That is partly why corporate tax rates are falling worldwide, which would suggest—with deference to Norman Springford—that while the UK rate may be unitary it is not necessarily the right rate, and certainly not for Scotland.

          Finding the right rate involves a complicated calculation that will depend on circumstances and exemptions, and on compliance. Our second submission contains some remarks on compliance: it goes up as the rates go down, so you get more out of it.

          The interesting figure is—as Jim McColl said—the Irish case. To compare Ireland with Germany, Ireland has corporate tax rates of 12.5 per cent, from which it gets about 3 per cent of gross domestic product revenue, while Germany has corporate tax rates of around 30 per cent, from which it gets around 1 per cent of GDP. That suggests that 30 per cent is far from optimal. I do not know whether 12.5 per cent is optimal, but it is much closer to it than the German case. That has to do with all the things that I mentioned before such as elasticities, exemption and compliance, and incentives. It is perfectly possible to work out—although I will not do so this afternoon—the optimal rate within a range.

        • Richard Baker: That is an interesting response from Professor Hughes Hallett. The American Enterprise Institute for Public Policy Research has—as I am sure that you are aware—done some work on finding an optimal percentage for corporation tax by comparing OECD economies. It concluded that the optimal rate in the late 1980s was around 34 per cent, and that in the early 2000s, it was 26 per cent.

          In The Times today, Peter Jones makes the fair point that the optimal rate might therefore be around 23 per cent by now, which is of course what the UK’s corporation tax rate will be. After that, there is a diminishing return in terms of stimulating economic benefit, but one then has to deal with increased costs from funding cuts in corporation tax rates.

          The AEI study was quite intensive and took account of economies throughout the world, so I am interested to hear your response to it.

        • Professor Hughes Hallett: You are right that after a time, as I said, there is a diminishing return: if you set the corporation tax low enough, you will get nothing. There is a question with regard to where the diminishing returns set in; they do not always set in at the same level in different places.

          I suspect that Peter Jones and the others whom you quote are following the Springford rule: that whatever the UK does is absolutely right without question.

        • Richard Baker: I do not think that the American Enterprise Institute will, despite Mr Springford’s qualities, necessarily be following the Springford rule on this occasion.

        • Professor Hughes Hallett: No, but I would possibly not spend a great deal of time talking to that institute about its econometric skills.

        • Professor Hughes Hallett: With great respect, your point is irrelevant, as we are discussing whether the Scottish Parliament should be able to set the rate. If it chose 23 per cent as an optimal rate, that would be fine, but at the moment it cannot do any different.

          Say the UK Government decided on a rate of 20 per cent, which it might well do, and the Scottish Parliament decided that that was too low because it did not generate enough revenue for whatever programmes it had in mind. The Scottish Parliament has no right to resist that. If it were possible for the Parliament to choose the rate, it could do so. If it turned out that 23 per cent was correct, the Parliament could choose that rate. If it turns out—when I do my calculation tomorrow—that the optimal rate for Scotland is, let us say, 15 per cent, the Parliament would have the right to choose that rate.

        • Richard Baker: If I believe that devolving the tax rate will create tax competition, it is valid to ask what the process of devolution will lead to.

          If I can cut to my third question, convener—

        • The Convener: I thought that that was it.

        • Richard Baker: No, this is it, I am afraid. Even the Scottish Government said in its paper that the perceived benefits that it argues will come from a corporation tax cut will not come for several years. In the meantime, by the Government’s own estimates, a cut of 2 per cent will cost tens of millions of pounds—more than £100 million. The panellists heard the spending review announcements last week. Where in the Scottish budget should the money come from?

        • Professor Hughes Hallett: It is true that if corporation tax is cut it will take some time for the impact to be felt. That is probably true of many taxes. All the evidence suggests that a benefit of cutting corporation tax is increased investment, in particular foreign investment. That does not happen overnight, but just because a benefit takes a long time to emerge does not mean that it is a bad thing to have it—

        • Richard Baker: However, it is difficult, particularly in the context of the pressures on the budget that there currently are.

        • Professor Hughes Hallett: Of course things are difficult right now, but corporation tax is one of the few taxes that are likely to raise extra revenue, so if we want extra revenue to spend on various projects, that is a measure that we can use. We will not get that extra revenue from income tax, for example—all the evidence is that there is not the responsive power in that regard. That is a reason why some people around the table might argue against an income tax proposal. They would say that the approach should never be used, because there would be no benefit from it.

          The tax competition issue will come up sooner or later. There is no evidence whatever of tax competition in the longer term. All the studies that have been done—the most comprehensive one, from which we have quoted, was by the OECD, which has a whole department that looks at such issues—find no evidence of tax competition whatever. Tax competition is a fear that everybody has—and one can understand why that is—but the evidence is that it is simply not there.

          There are good reasons for that. A region or country will not get anything out of competition on cutting corporation tax, because it has to worry about what happens to spending on whatever Government services are offered, and it is obvious from the evidence from relevant countries, some of which are rich and some of which are less rich, that a region or country’s ability to generate new activity depends on its services and infrastructure—Jim McColl said that it took him God knows how long to fly from Munich this morning, which is a case in point. If countries do not look after that side of the business, they will not attract any business at all, which is why there is no competition.

        • Stewart Maxwell: Richard Baker talked about the loss of income that would be experienced if corporation tax were cut and asked how, in the tight financial circumstances that we face, we would fill the black hole until the future date at which the money started to come back in—I am paraphrasing. Surely the obvious point is that the Government would not just cut the tax rate immediately; instead, it would announce that it was going to cut corporation tax not this year but in three years’ time, which would give businesses the opportunity to plan for the cut. There would be no immediate, short-term loss of corporation tax, but the Government would have flagged up to the world that lower corporation tax would be coming in. Is that not how a Government would act, rather than cutting the rate immediately and suffering the consequences until business tax receipts recovered?

        • Jim McColl: I was going to make that point. The Government would signal a cut well ahead, which would increase the chances of attracting people who were considering inward investment, who might accelerate their activity or highlight Scotland as a potential area in which to invest. If the cut were signalled well enough ahead, there would be an increase in people looking to Scotland to base their businesses.

        • Joan McAlpine: I will return to what we are calling the Springford rule—the idea that it is always best to go for a unitary tax rate across the UK. We are in a recession at the moment, but a problem that people across the UK have constantly been faced with has been the economy of the south-east of England overheating. Under the Springford rule, the rate of corporation tax in the south-east of England is the same as it is in Stornoway. How can that be reconciled, given all the advantages that the south-east of England has?

        • Norman Springford: We have either to take a more parochial view and ask what is good for Scotland or to consider what is good for the UK as a whole. Some inequalities might arise because tax raising has different effects in different parts of the country, but the overall effect is still the same.

          The cost of compliance and of the difference is an issue. When such a difference exists, other parts of the UK will say, “If they can get that rate, why can’t we?” That creates a complete imbalance. A federal system might have some advantages for some things, but tax raising is not one of them.

        • Joan McAlpine: Are you saying that, if south-east England is booming, that is good for Stornoway?

        • Norman Springford: I am saying that that would be good for the UK—the whole country would benefit. I do not see the advantage of being able to manipulate our tax rates; it would not give us the growth that we look for—I do not see that growth.

          I see as much danger in Scotland, Wales or another part of the UK changing its rates as there may be advantage. As Mr Baker said, a place might decide that it needs extra funding now and increase corporation tax to get that. That is the opposite of what we say that we are trying to achieve, which is greater growth from a reduced corporation tax rate.

          That is where I am coming from. Compartmentalising a small area of the country would not necessarily benefit the whole country.

        • Joan McAlpine: If you are in favour of uniformity, are you in favour of the same corporation tax rate across the EU?

        • Norman Springford: No—I accept that different countries have different attitudes. If we are the United Kingdom, that is where our parochial nature applies. We are not members of the European Union in terms of taxation.

        • Joan McAlpine: You do not recognise the European Union as a country—not many people do. You recognise the UK as a country, but not Scotland.

        • Norman Springford: I recognise Scotland as a country, by all means, but it is part of a unified tax system. The UK should not be involved in the complexities of running separation of taxation.

        • Joan McAlpine: I will put my questions to Mr McColl, who—

        • The Convener: Ms McAlpine, if you paid attention, you would know that Mr McColl has been trying to speak for ages.

        • Joan McAlpine: Mr McColl might have anticipated my question.

          You have experience of operating companies across the world and you are used to subnational systems with different corporation tax levels. What is your view on what Mr Springford says are the problems?

        • Jim McColl: I disagree with what Mr Springford said. Canada, the US and Spain provide examples of successful decentralised tax systems. We operate in all those countries and we have no problems with the different tax rates. In fact, the tax rate might be one consideration in picking where we go in the US.

          The UK is one of the most fiscally centralised countries in the developed world. I know of no other country that is as centralised. Even in China, we receive different corporation tax treatment in different provinces. In China, we have had a five-year holiday from corporation tax, followed by two years at half rate and then the full rate. That is intended to help companies in the early stages of their business, when they need to reinvest in the business to grow it. There is absolutely no evidence to support what Mr Springford suggested. On the contrary, the evidence is that the UK’s system is far too centralised.

          London and the south-east is a city state. What we are discussing is a problem not just for Scotland but for the regions, too. However, we have a Scottish Parliament, which should look after the Scottish economy. To say to someone else, “How much will you give us?” and then work out how that will be spent is ridiculous.

        • Professor Hughes Hallett: Unitary rules? Well, as I am the academic, I can deal with that.

          In passing, and given the remark about announcements, you will be amused to hear that my students in the US—I am in the US this semester—are answering a question at the moment about the effect of announcing a tax cut to come in the future. I shall see what they say—in fact, I shall grade them against what you say in your report.

          On the unitary rule, the optimal currency area applies. That is to say that it is well known from all the economic analysis that different policy instruments, including corporation tax, need to be fitted to the place in which they operate. Jim McColl is right about the agglomeration effects. One reason why we find systematically not a tax competition but a level shift—with smaller places further away from “the centre” having slightly lower corporation taxes—is that they are rebalancing the competitive advantage that an agglomerated area has. The economies of scale mean that it is cheaper to operate in the agglomerated area so, by my definition, Stornoway should have a lower corporation tax to help it rebalance the giant sucking sound, to quote somebody else.

          On the question of responsibilities, if this committee has a responsibility at all, it is for the Scottish economy. If Scotland had corporation tax and was able to use it to grow the Scottish economy, it would have positive effects for the rest of the UK in performance and in trade—from the spillover effects of a stronger, growing Scotland—and there would be less pressure as a consequence on the UK budget. Those are not inconsiderable benefits. Scotland is not the biggest place in the UK but, nonetheless, it is not inconsiderable.

          On the evidence, I can quote from academic studies and empirical studies of what has happened. On growth, look at Ireland. On investment, look at Ireland and other places. A paper in the American Economic Journal—not from the American Enterprise Institute for Public Policy Research—states that the number of entrepreneurs per 1,000 and the number of company registrations are both higher in places with corporation tax freedom. Those are all things in which, unfortunately, Scotland is not performing so well at the moment.

          The Spanish example gives us clear evidence of a higher gross domestic product per head—that is not growth, but a level. To refer to an earlier argument, there is a difference between growth and a level. Nonetheless, it is desirable to have a higher GDP per head and higher productivity than we would otherwise. That is what tax freedom is good for.

        • The Convener: Would Richard Baker and Joan McAlpine please stop squabbling in the corner?

        • Richard Baker: We were doing it very quietly. [Laughter.]

        • Derek Mackay: Mr Springford, compared with what the other panellists have said, you seem to be saying that uniformity and a unitary system matter more than almost anything else and that, in a sense, lack of growth or missed opportunities for Scotland might be a price worth paying for hanging on to the unitary system. Would that not mean that we lose a competitive edge? That is especially the case given that we will not have a unitary system in the UK if the power is devolved to Northern Ireland. Would that not put Scotland at an immediate disadvantage if the powers were not devolved to this Parliament?

        • Norman Springford: I certainly do not accept the conclusion that the protection of the unitary system is worth any price. I am saying that the disadvantages that a difference in system would make to us, in cost of compliance and the complexities of how the figures would be manipulated and accounted for in the UK, mean that a level of complexity would be built in that would override the benefits that would derive from a reduced level of corporation tax. Furthermore, we are assuming that we are talking about a reduced level of corporation tax—subsequent politicians may say that they would like to raise it. I still say that I would like to see a unitary system and other methods of growth rather than corporation tax being used as a driver for growth.

        • Derek Mackay: My second question was what happens if there is no unitary tax. If Northern Ireland has the power and chooses to use it, would we not be at a disadvantage? Would that not be a risk to Scotland?

        • Norman Springford: Yes, it is a risk. That is the end of the argument on that one, as I agree with you.

        • Derek Mackay: If Northern Ireland gets the power, you would concede that Scotland should probably have that power too.

        • Norman Springford: Yes, I believe so.

        • Derek Mackay: Thank you.

        • Alison Johnstone: I thank the panel for coming. Mr McColl, I have read in the press that you do not pay full income tax in the UK but choose to do so in Monaco. Is that the case?

        • Jim McColl: That is the case. I am a resident there, but I pay income tax in the UK and I also pay tax in Monaco, which has a different tax system. The system there is indirect instead of direct, which is quite a good system. If you look at the wealth created here by me and my team, it puts into insignificance anything that I might pay if I was a full-time resident here.

        • Alison Johnstone: It is your view that we should, with a devolved corporation tax, look to lower the tax rate so that your companies would pay less tax.

        • Jim McColl: I am not fussed about my companies. I am looking at the Scottish economy and at increasing the population of businesses here. It is clear that we do not have a big enough business population. That is what generates the wealth; it is private enterprise that generates wealth. You should do everything that you can to stimulate the growth of private enterprise, because that is what will pay for the social progress that we need in Scotland.

          We have kept companies here. For example, a company that I saved from closure in 2007, when 535 people were going to be paid off, is now, four years later, a headquarters with 891 people working there. We chose to keep the company here because of our commitment to Scotland, not because of corporation tax. I am looking to find a way to attract people from outside the UK who are looking to come in. I could easily have located that company elsewhere or increased the number of jobs elsewhere at a big advantage to our company, but we have chosen not to do that. It would be wrong to assume that everybody in business is just out to maximise their own wealth against anybody else’s. People have corporate social responsibility.

        • Alison Johnstone: Indeed. Thank you.

          Do the panellists have any concerns about corporate tax avoidance as a result of lowering corporation tax in Scotland? The Institute of Chartered Accountants of Scotland has raised concerns about profit shifting. Ben Thomson, the chair of Reform Scotland, who was before us this morning, pointed out that companies can choose to take their tax in the lowest tax environment. ICAS also said:

          “The application of anti-avoidance provisions relating to profit shifting would have to be widened to deal with this”.

          Do additional safeguards need to be put in place to prevent corporations from relocating to regions with lower tax? If so, what might those safeguards be?

        • Professor Hughes Hallett: One observation is that, obviously, tax avoidance is likely to be lower the lower the corporation tax rate is, so I would not have thought that that would be a great problem.

          Many people are concerned about profit shifting—the brass-plaque syndrome. Other countries face the problem and are worried about it. A paragraph in my submission describes a way of dealing with the issue that is stolen from what the Americans do.

          How much corporation tax a particular corporation pays is a function of how much profit it makes, but if the proportion that it pays in this jurisdiction vis-à-vis the one next door is in proportion to its employment in each, that gets round the problem of profit shifting altogether. There is no reason for firms to shift their profits if the only way they will get the lower rate is by employing people, so it is about activity levels. The US states face this issue all the time and they have all kinds of complicated rules, which for one reason or another they think are useful. The version that is outlined in my submission is a simple version of such a system; it gets round the complexity problem.

          If you were to assess corporation tax in that way, the firms would not have to keep two sets of accounts or two sets of records and they would not have to supply any more information than they supply already through national insurance contributions. We can tell how many people are working here and how many people are working, for the sake of argument, in London, and we can divvy corporation tax up in proportion. The computer does it in a nanosecond.

        • The Convener: It is a wonderful theory that computers do these things in a nanosecond.

        • Professor Hughes Hallett: You have to remember to switch them on.

        • The Convener: I remind everyone that they do not have to press the button on their console to switch their microphone on—they come on automatically. Mr McColl, did you want to comment?

        • Jim McColl: Yes. I think the opposite is true. As Andrew Hughes Hallett said, anti-avoidance legislation is needed more if the corporation tax rate is higher, because companies will look for a way to reduce it, and they will find a way. However, if the rate is lower, doing that is not worth the effort, so companies will just pay it.

        • Norman Springford: The main plank of my argument is probably about the level of anti-avoidance. It is true to say that, in times of high taxation, the black economy is much bigger than it is in times of low taxation. The argument here is not necessarily about how low the corporation tax is; it is about the differential between the two levels of corporation tax. If the rate was as low as 10 per cent in Scotland but was 15 or 20 per cent in the rest of the UK, there would be serious anti-avoidance, because the differential is greater. To my mind, it is not a case of saying, “Let’s try and put in a few rules.” That is the game that HMRC and the rest of the professionals play day in, day out. Companies will look for a loophole; they will exploit it; HMRC will close that loophole; and on it goes. Anti-avoidance legislation creates a whole new industry; there will be even more opportunities for that if we have a differential rate.

        • John Mason: We have talked mainly about rates of corporation tax so far, but there is a suggestion that, if we had control of corporation tax, we could target small businesses, which I think we have fewer of than other places do—we need new ones—and we could target particular industries that are perhaps more important to us, such as the games industry. Does any of you see scope in that area, leaving aside the headline rate of corporation tax?

        • Jim McColl: Yes. I think that it is accepted now that, in the past, the UK economy has focused too much on banking and housing, or property, and that we really need to get manufacturing industry going again. I think that having control of corporation tax would perhaps give you the opportunity to give particular incentives to help to grow manufacturing and attract new manufacturing companies into Scotland.

        • Professor Hughes Hallett: Yes. [Interruption.] Sorry, it is a knee-jerk reaction to try to switch on the microphone. If you look at the experience in other countries, you see that they nearly always have different rates for small businesses and big businesses or different conditions attached to the rates. Spain has used corporation tax in its different provinces quite a lot, where there are different rates. In the Basque Country, for example, which is the one that I happen to know about for various reasons, the rates are lower for small businesses, which are defined at a certain level—you obviously need to worry about the definition of small businesses. The amount by which the corporation tax rate can differ from the Spanish average varies for small businesses, so small businesses have some advantages there.

          You might well want to target a particular industry. There is a slight sore point there. You could argue that you have a set of policies that would help high-value-added and high-productivity businesses to be founded and grow up in Scotland, but then you realise that you have very little in the way of levers to help that to happen and you have to do something on the cost side to make it attractive, because such businesses can go to Latvia, too. Corporation tax is one lever for doing that; there are other things that you could think of. One in particular that you might be interested in, which I think is a bone of contention in other debates, is to favour companies that do a lot of R and D with R and D credits. You could control that to some extent. You could do a range of things, all of which I think would be helpful. By definition, if they were not helpful, you would not do them.

        • Norman Springford: We are now getting near the nitty-gritty of where it becomes useful to have this devolved power. I very much agree with the other two members of the panel. If you have a level of corporation tax that applies under the unitary system, the power of the devolved corporation tax rates could be applied to the smaller businesses. If we are looking for growth in SMEs, let us give them the incentives. As Jim McColl said, let us give businesses a five-year tax holiday until they reach a certain number of employees or a certain level of profitability. The power should be used to create growth among SMEs, because that is where growth will come from. By all means attract inward investment, but growth in Scotland will come from the smaller entrepreneur. Let us use the Scottish Government’s power to produce a nil rate, a low rate or an escalating rate—whatever method is best. That is how we could create some genuine growth.

        • John Mason: Would you be happy for things to be slightly different in Scotland from the rest of the UK?

        • Norman Springford: Yes. It is almost falling within my original argument to say that we should try to retain a unitary rate but should use the powers that we have to incentivise locally—if we can refer to Scotland as a local community—and to try to create growth ourselves and get a competitive advantage. That has to be done through the smaller businesses.

        • The Convener: I am keen not to misunderstand. Are you saying that it would be good for Scotland to have the devolved power as long as it was used wisely? For you, using the power wisely would involve targeting SMEs.

        • Norman Springford: Yes. Clearly, politicians have different views and it is their views that count. However, if I were a politician, I would say that we should keep the main level of corporation tax for the larger companies—they generate the bulk of the revenue in any event—but give incentives to SMEs. That is not a particularly expensive option, because they are not paying all that much in corporation tax anyway, in relation to the big guys. However, doing that will create a level of growth.

        • Jim McColl: A total of 97 per cent of companies in Scotland are SMEs, and there are three key ways of stimulating growth in them. One is to halve the corporation tax rate. That would allow SMEs to accommodate the additional costs of being located in Scotland. For a small company, it is relatively very expensive to consider international markets, which is where the room for growth is. By definition, an SME has a small percentage of the available market. The economic climate does not matter. It does not matter if the economy halves; SMEs will still have fantastic opportunities to grow, because they start with such a small share of the market. They have to get out there and engage in markets outwith their home market, but they often cannot afford to. Secondly, therefore, we need to find a way of supporting them, and a third angle of approach is from the banking side. Debt finance is tough for SMEs, so some sort of industry bank would be helpful.

          Corporation tax would give a lever to help small companies—along with some support from Scottish Enterprise on exploiting international markets.

        • The Convener: Before Mr Rennie asks a question, I ask everyone to wish him a happy birthday. [Laughter.]

        • John Mason: How old is he?

        • Willie Rennie: I have even brought some fudge.

        • The Convener: I am not that soft—we will have to wait for that until we finish the meeting.

        • Willie Rennie: Professor Hughes Hallett, you have kindly provided us with a formula that I have not seen since I was studying—which was a few years ago. You call it “simple”, although it is not very simple to me. Maybe I am just a simple politician. How many other academics or tax accountants would share your view that the process is simple and easy to calculate?

        • Professor Hughes Hallett: You have switched questions: you started on the formula and you are now on the process. They are two different things.

          The formula is simple and you do not even have to worry about it. As I say, it is in the computer. If you think that it is complex, I wish you luck when you try to work out how the Treasury will produce its forecasts for the income tax component. Unfortunately, as things stand, you will not get to look at that and neither will I—nor will anybody in Scotland. We will be presented with a number and we can like it or not like it. One of the things that the Treasury needs to do is to bring it out into the open. At least this formula is out in the open.

          On the process, I am not entirely sure what you are referring to, but I assume that you mean the one on corporation tax.

        • Willie Rennie: Yes, that is what we are talking about.

        • Professor Hughes Hallett: All it does is work out the proportion of profits that you allocate to the Scottish tax as opposed to the rest of the UK tax. It is no more complicated than proportions. There are two elements: employment in Scotland versus employment in the rest of the UK. I think that it is reasonably clear.

        • Willie Rennie: Is this widely shared?

        • Professor Hughes Hallett: What do you mean?

        • Willie Rennie: Do people agree with you that it should be the process?

        • Professor Hughes Hallett: Fifty US states agree with me, which is a good starting point. They actually have something more complicated, which the accountants—not the academics—dream up. From their point of view, the formula is simple because the alternatives are much more complicated.

        • Willie Rennie: The corporation tax rates have fluctuated quite substantially, even just in recent years. How do you estimate how the Scottish block, as derived from the Barnett formula, should change from year to year? How would you make the calculation?

        • Professor Hughes Hallett: If I had a free hand, I would not make it at all because I would not have the grant.

          The question touches on other aspects of the problem when you refer to fluctuations—the volatility in the revenue coming from the different sources. The highest volatility comes from the grant, not income tax. Based on GERS calculations, the second highest is North Sea revenues, the third highest is income tax, and the fourth highest is corporation tax. I stopped after the fourth because I got bored with the calculations. Corporation tax is the most stable.

          Going further down the track leads to smaller taxes that are more stable, such as excise taxes, which is interesting from a different perspective. If you want stability, you want excise taxes, whose revenue increased during the recession. If you want a secure income stream, for example to ensure that you have the adequate resources to pay on any borrowing, excise taxes—and particularly sin taxes—are the ones to go for. Correspondingly, my guess is that taxes on pollution would also be fairly stable, though probably not quite as stable. If you view these matters in terms of volatility versus stability, you get quite a different ordering of the taxes that you would want to be able to use. Corporation tax is relatively good, the reason being that it is not that large and if it fluctuates, in terms of pounds rather than in proportional terms, it will make a smaller hole in the budget.

        • Willie Rennie: We do not have fiscal autonomy on the table; we are discussing corporation tax in isolation. What would you say the reduction in the Scottish block should be in order to accommodate fluctuations?

        • Professor Hughes Hallett: If I had to do it that way, I would have to use some form of forecasting because I would have to know, ex ante, how much I was taking off the grant before I gave you the grant. There is no getting away from forecasting. I would find out the best forecasting formula, which I promise you is more complicated. From the one thing I have read on the UK Government’s response, it seems that it has no idea on forecasting. I therefore do not know the UK Government’s view on forecasting, but that is my view.

          The reconciliation must be factored in. As all forecasts—like weather forecasts—are by definition somewhat in error all the time, it would pay to have frequent reconciliations rather than waiting three or four years, as is proposed in the case of income tax. Each time new numbers came in on actual revenue, you could reconcile it with the forecast and make adjustments accordingly, at much more frequent intervals. Other than using borrowing, I do not see any way of operating with a mixed scheme of devolved tax plus a grant.

          If you use borrowing, the problem goes away. Every time you make a mistake or the forecast goes the wrong way, you can borrow; then, when things are more favourable, you can pay back a bit. However, that is not allowed under the current Scotland Bill.

        • Willie Rennie: So what is the number? You have given us a long explanation but, given the consequences, we could do with a number. We have heard criticism of the UK Government for what you have called its failure to provide forecasts or indicate what the impact might be. However, you are doing exactly the same now—you are not giving us the figures. If you are seriously putting forward the proposition, we need to know the figures.

        • Professor Hughes Hallett: If you have corporation tax, the conventional way of doing it is to take twice the standard error. In the written evidence, I have set out the standard error for corporation tax as £377 million. That means that you would need about £700 million.

        • Willie Rennie: So £700 million.

        • Professor Hughes Hallett: About £700 million.

        • Willie Rennie: The figures estimate the corporation tax take for Scotland at £2.6 billion. You are saying that there would be a £700 million reduction in the block.

        • Professor Hughes Hallett: That is the cushion that you would need. On the other hand, the standard error for an income tax would be around £4 billion, which means that you would need £8 billion. Which would you rather have?

        • Willie Rennie: For Scotland to get the corporation tax, surely the block will have to be reduced.

        • Professor Hughes Hallett: But you have switched again. You were talking about volatility a minute ago.

        • Willie Rennie: I have been consistent throughout. I want to know what the reduction in the block would be.

        • Professor Hughes Hallett: On average, it would be whatever the corporation tax is now.

        • Willie Rennie: Okay. Would you take into account any changes in the corporation tax in the UK, say, or companies shifting profits?

        • Professor Hughes Hallett: Why would I do that?

        • Willie Rennie: Because the UK gives a block grant to Scotland, so—

        • Professor Hughes Hallett: Compensating the UK for being disadvantaged is not part of the philosophy behind the Scotland Bill.

        • Willie Rennie: But obviously any profit shifting in the UK would impact on the UK’s finances.

        • Willie Rennie: Should that not be taken into account?

        • Professor Hughes Hallett: It is for the UK to take that into account, not the Scottish Parliament.

        • Willie Rennie: So Scotland gets all the take but none of the give.

        • Professor Hughes Hallett: Which is exactly what happens with the current income tax arrangements.

        • Willie Rennie: But there are compensatory elements in the income tax arrangements.

        • Willie Rennie: That is the whole point. That is what I am trying to work out.

        • Professor Hughes Hallett: Well, that is precisely the problem. In the last UK budget, the lower income tax threshold was raised. Had the Scottish income tax been in operation, such a move would have lowered the revenues coming into Scotland. In England—I am sorry; I should say the rest of the UK, although I pretty much mean England—compensation comes through the raising of national insurance contributions and capital gains tax. In Scotland, those two taxes cannot be raised to compensate in that way. The London Parliament has not thought for a moment that it might have to compensate; of course, it has now been told to work out some way of doing that but when you ask the secretary of state he says, “I don’t recognise that number” or “Calm down, dear. It’ll be all right. We’ll think of something”. We do not have a clue.

        • Willie Rennie: That is rather insulting to the secretary of state. He is actually working—[Interruption.]

        • The Convener: Hold on. Mr Rennie, your job is not to put Professor Hughes Hallett on the spot over something that the UK Government is responsible for and about which it said it would provide a model and forecasting.

        • Willie Rennie: It was a rather silly criticism of the secretary of state—

        • Stewart Maxwell: No, it wasn’t.

        • Willie Rennie: I am sorry to disagree about this but—

        • The Convener: I think that we will have to agree to differ but I will not have our witnesses harangued—even if it is your birthday. [Laughter.]

        • Willie Rennie: I am not haranguing anyone. Still, I will make one more attempt. Even though there could be profit shifting in the UK and even though the UK Government is considering similar measures for the other taxes that it is looking to devolve, you still do not think that there should be any compensatory arrangements.

        • Professor Hughes Hallett: That is correct. Indeed, the same holds true for all of these taxes. It is up to the responsible Parliament to put in place the responsible compensation arrangements. It is perfectly open to the UK Parliament to find another tax to substitute, to change the arrangements of a particular tax or, indeed, to do anything else. It could even ignore it. It is a free choice—and vice versa. Given that the spirit of the Scotland Bill is such that these arrangements are not built in for income tax, why build them into corporation tax once the initial calculation has been done?

        • Willie Rennie: Okay. I am finished.

        • The Convener: Did you wish to come in, Mr McColl?

        • Jim McColl: What we are trying to do with the measure is to compensate Scotland for its disadvantages. If you compensated the UK Government for the people that moved business to Scotland, all that you would be doing is re-establishing the disadvantage. What we want is for the people who locate in London or the south-east to move here. They go naturally to those areas because things are much easier: there is more of a critical mass, the cost of doing business is less, and it is easy to get to every country in the world. If I want to go anywhere from Scotland, I have to add in extra days, it takes longer, and it is more expensive. I need compensation for that. I cannot see how a reduction in corporation tax would provide that compensation if the UK Government simply said that we have to give money back to compensate it.

        • The Convener: I think that we have to conclude this discussion because we are running out of time and Mr Ingram still has to ask his question. The no-detriment issue has been discussed at great length and can be raised later with the Treasury minister and again with the secretary of state when he returns.

        • Adam Ingram: I have a brief question for each of our panellists.

          Mr Springford, do you approve of the tax powers in the Scotland Bill, bearing in mind the potential for different income tax across the UK?

          Mr McColl, you described your experience of different corporation tax rates both throughout Europe and in relation to your worldwide business interests. I presume that you also have experience of various tax authorities in the world. How would you rate HMRC and would Scotland benefit from a fresh start, as it were, with a basket of taxes governed by a new authority?

          Professor Hughes Hallett, as a former professor at the University of Strathclyde, you will have noticed that the Scottish Government used the Strathclyde model to describe how a reduction in corporation tax might impact on economic growth. The model suggests that there is an inverse relationship—in other words, if you reduce the tax rate, you will increase economic growth. Is that analysis robust?

        • The Convener: Was your first question for Mr Springford?

        • Norman Springford: If it was, I have probably forgotten it by now.

          I think that you asked whether I approved of the powers in the bill to change tax, whether it be income tax, corporation tax or whatever. My answer is still no—I prefer the UK’s unitary system of taxation. However, if those powers are to be devolved, I would like corporation tax and income tax rates to be maintained at broadly the same level as the rest of the UK, although I would also like the kind of flexibility that was being discussed just a moment ago to give incentives for growth to smaller SMEs. I say smaller SMEs, given Jim McColl’s comment that most businesses in Scotland are SMEs. We need to use the power wisely to create growth.

        • Jim McColl: HMRC has one of the most complicated tax systems. Given the volumes of things that you have to go through, it is a nightmare. Giving Scotland all its own tax-raising powers would create a fabulous opportunity to do everything in a more cost-effective way; after all, you should see the number of people who are employed by HMRC to collect the money.

          I can give you an example of how bureaucratic and difficult the system is. One of our companies applied for an R and D tax credit, which we were assured we would get. Here, you have to claim such credits from the tax people, who are not known for giving out money and who, in the end, said that we did not qualify for them. Out of principle, I employed PWC to fight our case. We won it, but the money I got for the tax credit was less than the amount that I had to pay PWC to fight the cause. There were all these complicated tax rules that I could not go through myself and which I had to get in some outside body to help me with. The system itself is too complicated.

        • Professor Hughes Hallett: Are the Strathclyde results robust? Of course they are. Where else would you go?

          From the evidence, it appears that, in all instances where corporation tax has been lowered, there has been some effect on growth. Perhaps, though, I should be more careful with my words. In the long term, what it really does is raise GDP per head; it does not necessarily result in a permanent increase in the rate of growth. That said, if you get richer, you must also have grown along the way.

          The analysis is robust in the sense that all the other evidence suggests the same thing. The American Economic Journal paper that I cited, which looked at what I consider to be the right comparator group—the 22 OECD countries—shows as much. It also shows that investment increases and, of course, increased investment enables growth to happen a bit later on. Many other studies show the same.

          In the submission, I have included a quick calculation that shows that the studies come to roughly the same number. The period under consideration might vary—I believe that the Strathclyde study was over 20 years—but it is clear that, if you cut down to get the proportional effects over a shorter time period, you seem to come to the same figure, which is around an extra 1 per cent growth in GDP per head after five to 10 years. It might not be the biggest number in the world but you would certainly feel it if you did not have it. Indeed, it is amazing how it adds up when you project it forward over a number of years.

          I have not seen the details, but as far as I know the Strathclyde calculations were for corporation tax, which is only one tax in the basket. Of course that brings us back to our very first discussion about whether it would be better to have a basket of taxes. The answer is yes, but corporation tax is probably the most responsive and useful tax in that basket for generating the necessary results. As I have said, the results are pretty robust.

        • The Convener: I thank our three witnesses for their evidence and members for their questions. We have had a robust but, I think, respectful evidence session.

          I suspend briefly for a changeover of panels.

          15:36 Meeting suspended. 15:42 On resuming—
      • United Kingdom Minister