Scotland to gain some income tax, energy and welfare powers as Westminster promises draft laws by January

Lord Smith of Kelvin has published his report outlining plans for further devolution (28-page / 400KB PDF) with the backing of the five political parties represented at Holyrood. That includes the main Westminster parties, the Conservatives, Labour and the Liberal Democrats. The report is the result of a process announced by prime minister David Cameron the day after Scotland voted not to become an independent country earlier this year.

The biggest change proposed is to the way that income tax is managed. Responsibility for it will now be shared between the Westminster and Holyrood parliaments, but the Scottish Parliament will gain the right to set rates of income tax and the thresholds at which they operate.

It will not gain the right to change the personal tax-free allowance, the taxation of savings or dividend income, the ability to introduce and amend tax reliefs or the definition of income.

Tax expert Karen Davidson of Pinsent Masons, the law firm behind Out-Law.com, said that the cost of implementing new rates will not be as significant for Scottish businesses as might otherwise have been the case because tax regime changes were already due to be implemented under the Scotland Act of 2012.

“From a business perspective many organisations will be relieved as the income tax proposals are similar to what was already happening under the new proposed Scottish rates of income tax," she said. "However, how the new fiscal levers are used will be the key concern from here on. The Smith Commission proposes a level of flexibility which means the government of the day will have free rein to set rates for different sections of the tax paying community as they see fit."

The proposals could lead to a rise in tax avoidance unless properly managed, said Davidson. She said that any increase or change to a tax regime inevitably leads to a rise in avoidance, and that it is unclear if the Scottish government would have to follow UK anti-avoidance provisions when dealing with income tax.

"The last time the UK government moved to the higher 50% tax rate it prompted a huge amount of avoidance activity so the actual tax take ended up not being as significant as it should have been," she said. "The Scottish government has been keen to point out it would take a much stricter view on what is defined as avoidance, and there could be an element of frustration if attempts to generate additional income are hampered because it does not have as wide ranging anti-avoidance powers as it might like.”

Some of the income from VAT will be retained in Scotland, though the block grant from Westminster will be reduced to take account of that. Control over airport passenger duty will be handed to Holyrood.

Some energy-related powers will also be newly devolved to Scotland. It will be responsible for the licensing of onshore oil and gas extraction, but power over offshore licensing will not be devolved.

Scotland will also be given control over how energy suppliers meet their energy efficiency and fuel poverty obligations, but not over what the obligations are or which companies they apply to.

Other powers to be devolved include the power to allow public sector operators to bid for rail franchises; control over mineral access rights for onshore oil and gas exploration; the right to require the Competition and Markets Authority to carry out an investigation; consumer advocacy and advice and increased control over the number of payday loan shops and fixed odds betting terminals.

Control over disability and carer benefits as well as support for unemployed people and other benefits will be devolved to Scotland, as will some administrative control over the universal credit system.

The UK government had said that it would implement the proposals, with drafts of laws to be ready by 25 January, which is Burns Night. Scottish secretary Alistair Carmichael told the House of Commons on behalf of the UK government today that "we back the agreement and will produce draft legislation in January".

David Cameron told BBC News: "The Scottish Parliament is going to have much more responsibility in terms of spending money, but it will also have to be accountable for how it raises taxes to fund that spending and I think that's a good thing."

"The recommendations set out in the agreement will result in the biggest transfer of power to the Scottish Parliament since its establishment," said Lord Smith in his introduction to the report. "These new powers will deliver three important overarching improvements to the devolution settlement, making it more responsive, durable and stable."