FCC/S5/19/6/A

FINANCE AND CONSTITUTION COMMITTEE

AGENDA

6th Meeting, 2019 (Session 5)

Wednesday 13 March 2019 The Committee will meet at 9.30 am in the David Livingstone Room (CR6). 1. Scottish VAT Assignment: The Committee will take evidence in a roundtable

format from—

Mark Taylor, Assistant Director, Audit Scotland; Charlotte Barbour, Director of Taxation, ICAS; John Cullinane, Tax Policy Director, Chartered Institute of Taxation; Professor Graeme Roy, Director, Fraser of Allander Institute; John Ireland, Chief Executive, Scottish Fiscal Commission; Dr Paul Mathews, Senior Analyst, Office for Budget Responsibility.

2. Subordinate legislation: The Committee will take evidence on The Budget (Scotland) Act 2018 Amendment Regulations 2019 [draft] from—

Kate Forbes, Minister for Public Finance and Digital Economy, and Scott Mackay, Head of Finance Co-ordination, Scottish Government.

3. Subordinate legislation: Kate Forbes (Minsiter for Public Finance and Digital Economy) to move—S5M-16046—That the Finance and Constitution Committee recommends that The Budget (Scotland) Act 2018 Amendment Regulations 2019 [draft] be approved.

4. Subordinate legislation: The Committee will take evidence on The Scottish

Landfill Tax (Standard Rate and Lower Rate) Order 2019: SSI 2019/58 from—

Kate Forbes, Minister for Public Finance and Digital Economy, and Ewan Cameron-Nielsen, Finance Directorate, Scottish Government.

FCC/S5/19/6/A

5. Subordinate legislation: Kate Forbes (Minister for Public Finance and Digitial Economy) to move—S5M-16045—That the Finance and Constitution Committee recommends that The Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2019 be approved.

Jim Johnston Clerk to the Finance and Constitution Committee

Room T3.60 The Scottish Parliament

Edinburgh Tel: 0131 348 5215

Email: James.Johnston@parliament.scot

FCC/S5/19/6/A

The papers for this meeting are as follows— Agenda Item 1

Cover note

FCC/S5/19/6/1

Agenda Item 2

Cover note

FCC/S5/19/6/2

Agenda Item 4

Cover note

FCC/S5/19/6/3

FCC/S5/19/6/1

1

Finance and Constitution Committee

6th Meeting, 2019 (Session 5), Wednesday 13 March 2019

Scottish VAT assignment roundtable discussion Introduction

1. At its meeting on 6 February 2019, the Committee agreed to explore themethodology being used for Scottish VAT assignment given the impact that VATassignment will have on the Scottish Budget. This paper provides some context forthe Committee’s roundtable discussion on VAT assignment in Scotland.

Background

2. The Scotland Act 2016 provided for the first 10 pence of the Standard Rate ofValue Added Tax (VAT), and the first 2.5 pence of the Reduced Rate, to be assignedto the Scottish Government.

3. The Fiscal Framework set out that VAT assignment will be implemented in2019-20. There will be a one-year transitional period during which VAT assignmentwill be forecast and calculated, but with no impact on the Scottish Government’sbudget. From 2020-21 the Scottish Government’s budget will in part be determined byforecast and final estimated VAT receipts in Scotland.

4. The assignment of VAT will be based on a methodology that will estimateexpenditure in Scotland on goods and services that are liable for VAT. The draft modelfor calculating Scottish VAT receipts1 was published by HM Treasury on 22 November2018 and is expected to be finalised by the Joint Exchequer Committee in spring 2019.This is attached at Annexe A.

5. It highlights that the household component of the model accounts for around70% of total VAT receipts and arises from spending on household goods and services.The estimate of UK households’ total VAT liability is based on the Household FinalConsumption Expenditure (HHFCE) quarterly data set classified by Classification ofIndividual Consumption by Purpose (COICOP), at current prices and not seasonallyadjusted (CPNSA), published by the ONS.

6. The Committee’s Adviser, David Eiser, has produced a briefing paper on thedraft assignment model which is attached at Annexe B.

1 https://www.gov.uk/government/publications/scottish-vat-assignment-summary-of-vat-assignment-model

FCC/S5/19/6/1

2

Forecasts 7. On the 12 December 2018, the Scottish Fiscal Commission (SFC) published itsfirst full VAT forecast in the Economic and Fiscal Forecasts publication2, whichaccompanied the 2019-20 Scottish budget.

8. The forecasts are based on the concept of a VAT total theoretical liability whichis the total value of VAT that could theoretically be collected from the tax base acrossvarious sectors. The report outlines the variability in the assignment outturn model.

Volatility 9. During our pre- budget and budget scrutiny, the Committee explored themethodology being used to forecast VAT assignment and how robust it was. TheCommittee was told that the Cabinet Secretary continued to have concerns that theassignment of VAT to Scotland will be based on a statistical model rather than actualoutturn VAT receipt data.

10. The Committee concluded3 that basing VAT assignments for Scotland onestimated figures could introduce further volatility into Scotland’s finances andrecommended that both Governments should continue to review the methodologyused for assigning VAT to Scotland during the implementation year to ensure itsrobustness and reduce the risk of introducing yet further volatility into the Scottishbudget.

Roundtable

11. The witnesses taking part in the roundtable discussion are:

• Mark Taylor, Assistant Director, Audit Scotland;• Charlotte Barbour, Director of Taxation, ICAS;• John Cullinane, Tax Policy Director, Chartered Institute of Taxation;• Professor Graeme Roy, Director, Fraser of Allander Institute;• John Ireland, Chief Executive, Scottish Fiscal Commission;• Dr Paul Mathews, Office for Budget Responsibility.

12. The discussion will be based around the following themes:

• How VAT can be assigned to Scotland effectivelyo What is the purpose of VAT assignment? Will VAT assignment

influence the type of policies that the Scottish Government implements?

o To what extent is it fair or sensible to hold the Scottish Government to account for changes in Scottish VAT revenues?

2 http://www.fiscalcommission.scot/media/1435/scotlands-economic-and-fiscal-forecasts-december-2018-full-report.pdf 3 https://www.parliament.scot/S5_Finance/Reports/Budget_Report_201920_-_FINAL(2).pdf

FCC/S5/19/6/1

3

o Does reliance on an uncertain estimate of VAT receipt – ratherthan on outturn data – undermine the case for tax assignment?

• The robustness and transparency of the VAT assignmentmethodology

o To what extent does the governments’ joint paper on VATassignment provide sufficient information on the VAT estimationmethodology? On which aspects is further information needed?

o How robust is the VAT methodology proposed by thegovernment?

o How much uncertainty is acceptable in estimates of VATreceipts where these inform the budget?

o In estimating Scottish VAT, how should the complexity of thecalculations be balanced against the need for transparency?Does the methodology set out in the governments’ joint paperstrike the right balance?

• Issues around VAT forecasting and risks to the Scottish Budgeto What risks does VAT assignment pose the Scottish budget?o What is the short term risk from forecasting error, and how might

this be managed?o What risks arise from the fact that the Scottish VAT revenues

could grow more slowly than rUK VAT revenues?o What can the Scottish Government do to maximise growth of

Scottish VAT relative to rUK VAT revenue?o Is forecasting Scottish VAT revenues more or less difficult than

forecasting Scottish income tax?o Is the error associated with Scottish VAT forecasts likely to be

higher or lower than the error associated with Scottish incometax forecasts?

Next steps

13. The Committee will hear from the Cabinet Secretary for Finance, Economy and Fair Work at a future meeting on issues raised during discussion.

Committee Clerks, March 2019

Scottish VAT Assignment: Summary of Assignment Model

November 2018

Annexe A

Scottish VAT Assignment: Summary of Assignment Model

November 2018

Annexe A

© Crown copyright 2018

This publication is licensed under the terms of the Open Government Licence v3.0 except

where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-

government-licence/version/3 or write to the Information Policy Team, The National

Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk.

Where we have identified any third party copyright information you will need to obtain

permission from the copyright holders concerned.

This publication is available at www.gov.uk/government/publications

Any enquiries regarding this publication should be sent to us at

public.enquiries@hmtreasury.gov.uk

ISBN 978-1-912809-18-9PU2222

Annexe A

1

Contents

Chapter 1 Introduction 2

Chapter 2 VAT assignment principles 3

Chapter 3 The Scottish VAT assignment model 4

Chapter 4 Categories of expenditure 8

Annex A VAT assignment and the Scottish Government Budget 15

Annexe A

2

Chapter 1

Introduction

1.1 In 2015 the Smith Commission, convened to examine which further powers

could be devolved to the Scottish Parliament, recommended that “the

receipts raised in Scotland by the first 10 percentage points of the standard

rate of Value Added Tax (VAT), and the first 2.5 percentage points of the

reduced rate of VAT, will be assigned to the Scottish Government’s budget.”

The Commission further recommended that “these receipts should be

calculated on a verified basis to be agreed between the UK and Scottish

Governments, with a corresponding adjustment in the block grant….”.

1.2 Following the Smith Commission’s recommendations, the UK and Scottish

Governments subsequently agreed in the Scottish Government’s Fiscal

Framework that a VAT assignment methodology would be jointly developed

by UK and Scottish Government officials, to calculate the Scottish share of

UK VAT receipts. The fiscal framework also set out how the Scottish

Government’s block grant would be adjusted, to account for the fact that

more of the Scottish Government’s spending power will be determined

through assigned VAT.

1.3 This paper outlines the Scottish and UK Governments’ implementation of the

assignment of Scottish VAT and details the methodology for calculating

Scottish VAT receipts - the Scottish VAT assignment model. In line with the

Smith Commission’s recommendations, the model outlined in this paper was

jointly developed by HMRC, the Scottish Government and HM Treasury. It is

based on HMRC’s VAT Total Theoretical Liability (VTTL) model, which is an

internationally recognised method for calculating the theoretical amount of

VAT that should be received by a tax jurisdiction. We are publishing this

paper at this time to invite comments and provide technical detail for the

Office for Budget Responsibility and Scottish Fiscal Commission’s benefit.

1.4 Further detail on how VAT assignment will interact with the Scottish

Government’s Budget is outlined in Annex A.

Annexe A

3

Chapter 2

VAT assignment principles

2.1 VAT is a tax on final consumption and applies to most goods and services.

Although VAT is borne by consumers it is collected by HM Revenue and

Customs (HMRC) through VAT registered businesses across the UK.

2.2 The information collected by HMRC through its VAT compliance work does

not specify the UK region in which goods and services are consumed.

Therefore, to calculate the Scottish share of UK VAT, a VAT assignment

model is required to estimate the VAT incurred on goods and services which

are consumed within Scotland compared with other UK regions.

2.3 VAT on final consumption is equal to the VAT incurred on expenditure which

is not reclaimable from HMRC under VAT recovery and refund rules. The

Scottish VAT assignment model uses this principle to calculate the Scottish

share of UK VAT. It uses comprehensive UK expenditure data, together with

Scottish shares of that expenditure, and applies relevant VAT rates to derive

an estimate of the VAT receipts attributable to consumption in Scotland. This

model therefore calculates the VAT Total Theoretical Liability (VTTL) for

Scotland. The VTTL is a measure of the theoretical VAT collected by a

jurisdiction’s tax authority assuming there are no losses in collections from

non-compliance.

2.4 UK VAT forecasting currently uses the internationally recognised VTTL model

to estimate theoretical VAT liabilities for the UK as a whole. The Scottish VAT

assignment model is similar to the VAT revenue sharing arrangements the

Canadian Government uses with some Canadian provinces.

Annexe A

4

Chapter 3

The Scottish VAT assignment model

Summary of the model

3.1 The VAT assignment model calculates the theoretical proportion of UK VAT

that would arise in Scotland in the absence of any compliance losses. This is

calculated by multiplying comprehensive categories of expenditure in

Scotland by their appropriate VAT rates, allowing for any other relevant rules

determining liability for tax, and calculating the share that this represents of

the Total UK VAT.

3.2 There are a number of areas of expenditure which contribute to the UK VAT

base, with the largest contribution coming from household spending. The

VAT assignment model is made up of five spending components and two

adjustment components.

3.3 Each spending component represents an area of expenditure where the

consumers are ‘final consumers’. As noted in Chapter 2, VAT is collected

from consumers through the VAT registered businesses that sell goods and

services. VAT registered businesses can generally recover VAT that they

incurred on their purchases to the extent that those purchases are used for

taxable business activity and are therefore not final consumers. In addition,

some charities, local government and central government organisations can

also recover the VAT they incur on certain purchases through special VAT

refund rules for these organisations.

3.4 The VAT assignment model therefore calculates the VAT on expenditure in

Scotland by consumers, businesses and other organisations who cannot

recover the VAT they incur (final consumers). The majority of these

consumers are private individuals and families and their expenditure is

included in the Household component of the model. Others include VAT

exempt businesses (financial services, property, health etc.), non-VAT

registered traders, charities and central government organisations.

3.5 The adjustment components take into account special rules in VAT which

may allow some organisations or individuals to recover VAT which would not

normally be recoverable or vice versa. These components are outlined in

more detail in Chapter 4.

Annexe A

5

Box 3.A: Categories of expenditure contributing to VAT base

Expenditure components

3.6 The VAT Assignment model takes the expenditure in Scotland in each of the

above expenditure components and then estimates the amount of that

expenditure that is subject to VAT. This can be compared to the same

expenditure component analysis for the whole of the UK to calculate the

Scottish share of UK VAT. The Scottish share of VAT can then be applied to

VAT receipts to calculate the Scottish share of UK VAT receipts.

3.7 The model analyses these expenditure components using data from multiple,

mostly publicly available, sources of information including, but not restricted

to: the ONS Blue Book, ONS Living Cost and Food Survey, ONS International

Passenger Survey, VisitBritain and Statistical tables published by other

government departments.

VAT liability of expenditure components

3.8 The VAT liability of the expenditure components outlined above is

determined by the VAT treatment of the goods and services that are

included in the expenditure component. Although most goods and services

are subject to 20% VAT, many are subject to the zero and reduced rates

(5%) of VAT. Therefore, expenditure categories need to be disaggregated to

goods and services that have consistent VAT rate treatment in order to

accurately calculate the VAT liability relating to that expenditure.

3.9 For example, certain foods in the UK are subject to the zero rate of VAT. The

model must therefore disaggregate food expenditure by type of food in

order to determine the proportion of food consumption which is subject to

VAT at 20%. This analysis can then be used to calculate the VAT liability of

the total food expenditure.

Calculation of Scottish share of VAT

3.10 In simple terms, the model establishes expenditure on goods and services in

the UK as a whole and then calculates an estimate of the proportion of that

expenditure which took place in Scotland, using official statistics. It then

Household (70% total)

Charities (<1% total)

Central Govt (11% total)

Exempt (16% total)

Housing (5% total)

Consumer spending serving households

Public non-profit making bodies and

non-profit institutions serving

households

Current and capital expenditure

Intermediate consumption & other

input tax blocks where VAT cannot be

reclaimed

Household’s capital expenditure by the public and private

sectors

DIY House Builders, Retail Export

Scheme, Museums & Galleries, Tourism,

DIY builders, Contracted out VAT

Trading below the VAT registration

threshold

Corrections Unregistered

Traders

Annexe A

6

establishes the amount of VAT that would have been paid on that

expenditure in both Scotland and the rest of the UK. The ratio between

VATable expenditure in Scotland versus the rest of the UK can be applied to

VAT receipts to calculate the Scottish share of VAT receipts.

3.11 The following example illustrates how this works in practice and has been

simplified to show the core calculations required. In brief, the method

comprises:

1 Calculation of Scottish VATable expenditure

a) UK expenditure is split according to the expenditure components

outlined above.

b) Each expenditure component is split by country/region to determine

the Scottish percentage of expenditure – this uses mostly publicly

available data (outlined in chapter 4).

c) This data is analysed further to calculate the VAT liability of each

expenditure component in Scotland (outlined in chapter 4).

d) Combining each expenditure component provides the total VATable

expenditure in Scotland.

2 Calculation of UK VATable expenditure

a) UK expenditure is analysed according to the expenditure components

outlined above.

b) This data is analysed further to find the VAT liability of each

expenditure component in the UK.

c) Combining each expenditure component provides the total VATable

expenditure in the UK.

3 Calculation of Scottish share of UK VAT receipts

a) Scottish VATable expenditure as calculated in step 1 is divided by UK

VATable expenditure as calculated in step 2. This percentage is the

Scottish share of UK VAT.

b) This percentage is applied to UK VAT receipts to provide the Scottish

share of UK VAT receipts.

Annexe A

7

Box 3.B: Simplified calculation of Scottish share of UK VAT

3.12 Chapter 4 provides further details on each of the expenditure components

that make up the mode and outlines how the Scottish proportion of

expenditure and the VAT liability is calculated.

UK expenditure

UK expenditure

Scottish proportion of expenditure

(from surveys)

% Scottish expenditure

subject to VAT

Scottish VATable

expenditure

% UK expenditure

subject to VAT

UK VATable expenditure

Scottish VATable

expenditure

UK VATable expenditure

Scottish share of UK VAT

Annexe A

8

Chapter 4

Categories of expenditure

4.1 The following chapter outlines the calculations required for each expenditure

component of the model:

• Household expenditure

• Charities and Central Government

• Exempt sectors

• Housing

• Corrections

• Unregistered traders

4.2 For each expenditure component, the data sources and method for

calculating the UK and Scottish VATable expenditure is outlined below.

Household expenditure

4.3 The household component of the model accounts for around 70% of total

VAT receipts and arises from spending on household goods and services,

such as adult clothing and fuel and power.

4.4 The estimate of UK households’ total VAT liability is based on the Household

Final Consumption Expenditure (HHFCE) quarterly data set classified by

Classification of Individual Consumption by Purpose (COICOP), at current

prices and not seasonally adjusted (CPNSA), published by the ONS.

4.5 The calculation for estimating the Scottish share of household VAT is

outlined below:

1 Relevant VAT rates are assigned to each category of expenditure. In most

cases a single rate of VAT applies and can be assigned as standard, reduced

or zero rate or as exempt expenditure. In other cases, expenditure must be

split using additional data to assign appropriate VAT rates (an example

with respect to clothing is outlined below).

2 Expenditure is split by country/region to determine the Scottish percentage

of expenditure. Detailed series from various sources are used to determine

the Scottish proportion of the expenditure at the different VAT rates. The

main source of the data for Scottish proportions is the Living Costs and

Food Survey (LCFS). The high-level data from this survey is a major

contributor to the calculation of the HHFCE and the detailed information

can be used to provide the Scottish share. In order to increase the accuracy

of the regional splits HMRC and the Scottish Government have jointly

Annexe A

9

sponsored a boost to the sample size, the first results of which are due in

March 2019.

4.6 An example with respect to the VAT receipts attributable to clothing

expenditure in Scotland is provided below:

1 Clothing is generally standard rated however, children’s clothing and

footwear is zero rated where it is designed for children 13 years old and

younger.

2 The ONS Living Costs and Food Survey reports clothing expenditure with

respect to children under 16 years old. Therefore, for the purposes of the

model, Scottish population demographics are used to calculate the

proportion of this expenditure spent on clothing for under 13s. This

calculation provides the proportion of Scottish spending on clothing which

is subject to VAT at the standard rate and zero rate.

3 Regional expenditure data is used to calculate VATable expenditure in

Scotland. The Scottish VATable expenditure in spending categories which

contribute to clothing are combined to calculate the Scottish share of

VATable expenditure on clothing.

4 This process is repeated for the UK.

5 The Scottish and UK VATable expenditure on clothing is combined with all

other VATable expenditure in the household sector. The proportion

between UK and Scottish Expenditure provides the Scottish share of VAT.

Charities

4.7 There are several complex VAT rules for charities which mean that, unlike

most businesses, they do not recover all of the VAT incurred on their

purchases. This means VAT incurred by these bodies should be included

when calculating the UK VAT base and the Scottish share of UK VAT

receipts. Therefore, a separate component of the VAT assignment

methodology is required to calculate the VAT on consumption of goods and

services by these bodies in Scotland and the UK.

4.8 For the purposes of the charities component of the model, only VAT incurred

in relation to charitable activities is considered. Some charities carry out

business activity as well as charitable work and where this business activity is

VAT exempt it is accounted for as part of the VAT Exempt Businesses

expenditure component of the model (see below). Where charities carry out

taxable business activity, then this VAT is recoverable and therefore does not

form part of the UK total VAT receipts.

4.9 The VAT assignment methodology uses NPISH (non-profit institutions serving

households) data which includes charities, higher and further education

institutions, political parties and trade unions to calculate VAT incurred by

charities.

4.10 Relevant VAT rates are applied to expenditure in these sectors to calculate

the total VATable expenditure of in the charities component:

• Research and development

Annexe A

10

• Other professional, scientific and technical activities

• Services to buildings and landscape activities

• Office administration, office support and other business support activities

• creative arts and other entertainment activities

• Sports activities, amusement and recreation activities

4.11 The Scottish share of charitable expenditure is calculated using labour

market data. The proportion of staff costs (full time employees) arising in

Scotland is calculated using data from the Annual Survey of Hours and

Earnings (ASHE) and the Business Register Employment Survey (BRES).

Central government

4.12 Most government activity is outside the scope of VAT as it is part of the

statutory functions of government organisations. However, some central

government bodies do not recover VAT on certain expenditure and therefore

VAT incurred by these bodies must be considered for the purposes of the

model.

4.13 VAT incurred by local government does not need to be considered for the

VAT assignment model. This is because local government organisations and

other bodies funded through local taxation can recover the VAT they incur

when carrying out local authority activities.

4.14 VAT rates are applied to each component of central government current

expenditure included in the model. The following categories of central

government current expenditure are used:

• Public administration and defence services; compulsory social security

services

• Education

• Human health activities

• Residential care activities

• Social work services without accommodation

4.15 The Scottish share of central government current expenditure is calculated

using labour market data. The proportion of staff costs (full time employees)

arising in the government sector in Scotland is calculated using data from

the Annual Survey of Hours and Earnings (ASHE) and the Business Register

Employment Survey (BRES).

4.16 Central government capital expenditure is analysed separately in the VAT

assignment model. VAT rates are applied to the following categories of

central government capital expenditure included in NPIS:

• other buildings and structures,

• transport equipment

• other machinery and equipment

Annexe A

11

4.17 The Scottish share of central government capital expenditure is calculated

using identifiable capital spending.

4.18 The final part of government expenditure regards the VAT on Contracted

Out Services. These are services on which central government departments

can recover VAT and therefore do not form part of the VAT incurred by

central government. As this expenditure is included in the current and capital

central government expenditure calculations outlined above, a correction

must be made to the model to deduct any VAT that departments can

recover.

4.19 For the purposes of this correction, the VAT assignment model uses data

that HMRC receives from government departments on the VAT relating to

Contracted Out Services. The Scottish share of this VAT is calculated with

reference to the expenditure incurred in relation to devolved responsibilities

and regional employment splits by government departments. Exceptionally

for defence, the VAT on contracted out services is shared on the basis of

population. This is on the basis that defence is for the benefit of all members

of the population equally.

VAT exempt businesses

4.20 No VAT is charged on VAT exempt goods and services but the suppliers of

goods and services cannot recover the VAT incurred on their purchases from

HMRC. As such, expenditure incurred by businesses who supply exempt

goods and services is considered for the VAT assignment model.

4.21 Businesses or other organisations can recover the VAT paid on purchases

which relate to taxable supplies (standard, reduced or zero rated) but not on

those purchases which relate to exempt supplies. If a business supplies both

taxable and exempt goods and services, it must apportion any VAT that they

incur on its purchases in proportion to how those purchases are used in

making taxable or exempt supplies. The VAT which cannot be recovered is

known as irrecoverable VAT and is the amount of VAT which is paid by the

business and not recovered from HMRC.

4.22 The amount of VAT due in relation to these businesses is therefore based on

the proportion of their consumption which is standard rated as well as the

proportion of their outputs which is exempt. These proportions are

estimated at the UK level using confidential HMRC survey data and HMRC

tax rates.

4.23 The UK VAT exempt sector is mainly made up of the following significant

partially exempt industries:

• Postal and Courier Services

• Financial Services

• Education

• Human Health Activities

• Residential and Social Care

• Activities of Membership Organisations

Annexe A

12

• Other personal services

4.24 The model calculates the VAT incurred in each of these sectors by using

intermediate consumption figures. The Scottish share of VAT in the UK VAT

exempt sector is calculated using labour market data, as described above.

Housing

4.25 The housing sector considers elements of housing construction and repairs

that are not included in household expenditure. This includes purchases of

dwellings (including transfer costs) and major improvements to dwellings

(e.g. conversions and extensions but not painting walls), which are standard

rated. New builds do not attract VAT and certain other elements of house

building and improvements are zero rated. Additionally, the reduced rate of

VAT is applied (instead of the standard rate) on improvements to buildings

(a change made originally as part of the Urban Regeneration Scheme).

4.26 The VAT incurred in this expenditure component is calculated using

construction industry data from the ONS. The Scottish share of VAT incurred

in this sector is calculated using sub-national breakdowns for the public and

private sectors using construction statistics and data from the UK House

Price index.

Corrections

4.27 Once the theoretical VAT liability has been calculated in each expenditure

component of the model, corrections are required to take into account areas

of expenditure where special rules or VAT reliefs are relevant.

4.28 Corrections arise from government schemes and reliefs which allow

organisations or individuals to reclaim VAT. If these corrections are not

adjusted for, then VAT on consumption in the sectors outlined above would

be overestimated. There are bespoke methodologies in place for each of the

corrections as outlined below.

Retail Export Scheme

4.29 The Retail Export Scheme allows non-European Union visitors to claim a

refund of VAT on goods they buy and take home from the European Union

in their personal luggage. The refunds are deducted from the model as the

expenditure is otherwise included in the household expenditure component

of the model but the VAT that has been included is not due to HMRC as it

has been reclaimed by the visitor. The Scottish share of VAT relating to the

Retail Export Scheme is based on International Passenger Survey data.

Do-It-Yourself Builders

4.30 A VAT refund is available under the “DIY Builders and Converters Refund

Scheme” on building materials and services used for:

• Building a new home

• Converting a property into a home

• Building a non-profit communal residence e.g. a hospice

• Building a property for charity

Annexe A

13

4.31 The scheme involves single claims of VAT refunds on completion of projects

by unregistered, non-taxable persons. These refunds must be corrected for as

the VAT would otherwise be included in the Housing expenditure

component of the model. HMRC internal data on the DIY Builders and

Converters Refund Scheme is used to produce a sub-national breakdown in

order to calculate the Scottish share.

Museums and Galleries

4.32 Under UK VAT rules, museums and galleries that offer free admission to the

public can recover VAT that they incur on their purchases related to free

admission. As such, there is no VAT incurred on this activity.

4.33 A correction is required to the model to take account of the VATable

expenditure of museums and galleries that has been included in the charities

component of the model. Hence, adjustment needs to be made for the VAT

refunds provided to museums and galleries, and therefore is included in the

VAT assignment calculations.

4.34 HMRC internal data is used to calculate the VAT refunded to museums and

galleries in the UK and Scotland to calculate the Scottish share.

Domestic Tourism

4.35 Expenditure related to domestic tourism is included in the household

component of the model in each of the relevant expenditure categories.

However, in the Living Costs and Food Survey the expenditure will be

included in the usual residential country/region of the purchaser rather than

the country/region in which the expenditure occurred.

4.36 According to 2014 tourism figures English and Welsh visitors spend

approximately £1.7bn in Scotland and Scottish visitors spend about £1.2bn

in England and Wales. This would produce an extra £500m of expenditure in

Scotland that has been accounted for in England and Wales. In order to take

account of this there is an adjustment made to take into account the

additional expenditure that occurs in Scotland on domestic tourism.

4.37 The model uses expenditure data from the Great Britain Tourism Survey

(GBTS) and the Great Britain Day Visits Survey (GBDVS) is combined to give

an estimate of Scottish share of domestic tourism expenditure in Great

Britain.

Foreign Tourism

4.38 There are estimates of the expenditure by foreign tourists included in many

sectors of the household component of the model with the majority of this

expenditure being included in the accommodation and catering sector.

4.39 For VAT Assignment, foreign tourism expenditure is removed from

household expenditure component of the model and then distributed

according to where tourists visit according to the international passenger

survey.

Annexe A

14

Unregistered traders

4.40 In the UK, traders below the VAT threshold do not have to register for VAT.

If a trader is below the registration threshold, then they do not charge VAT

on the goods and services that they sell. However, the sales of unregistered

traders will be recorded as expenditure in other parts of the model, where

the goods and services sold to consumers in those expenditure components

(e.g. private individuals purchasing cleaning services from businesses below

the VAT registration threshold. Therefore, the model will have overestimated

the amount of VAT due.

4.41 As a result of this, an adjustment must be made to household expenditure,

as no VAT will be paid by households on sales from these unregistered

traders, and a positive adjustment made to the intermediate current

expenditure to capture the amount of VAT that is paid on the inputs of these

traders and is unable to be reclaimed.

4.42 Information on the number of businesses from the Department for Business,

Energy and Industrial Strategy (BEIS), VAT registration information and Self-

Assessment information is used to construct the Scottish proportion.

Place of Supply

4.43 The place of supply is the place where a supply of goods or services is made

and where VAT may be charged and paid. The Place of Supply adjustment

concerns a change in treatment of electronic services and only applies to pre-

2015 VAT assignment periods. From 1 January 2015 Place of Supply changes

for business to consumer telecoms, broadcasting and electronic services

means that these digital services are taxed in the EU Member State where

the customer is located, not the location of the business supplying the

service.

4.44 Prior to these reforms in 2015 HMRC would have not received any VAT from

these specific digital services which are now taxed at the full standard rate.

Therefore, any VAT accounted for in the model from digital services must be

removed to reflect this difference.

4.45 As noted above, place of supply adjustments will not be used for VAT

assignment in future years but are included to understand the Scottish share

of VAT receipts for historic periods prior to 2015.

Bias impacts

4.46 Some budget measures and the results of litigation are often very specific

and impact a small number of traders. The impact of these particular

measures are estimated at a national level and would impact on the VAT

liability of specific sets of traders.

4.47 In these cases, it is assumed that the VAT liability is proportionally distributed

across all countries/regions and therefore are not specifically taken into

account for the purposes of the model.

Annexe A

15

Annex A

VAT assignment and the Scottish Government Budget A.1 The UK Government and Scottish Government agreed in the Scottish

Government’s Fiscal Framework that VAT assignment would be implemented

in 2019-20 and that there would be a transitional period during which VAT

assignment would be forecast and calculated but with no impact for the

Scottish Government.

A.2 Both Governments have subsequently agreed that 2019-20 will be treated as

a transitional period during which Scottish VAT will be forecast and

calculated, but with no impact on the Scottish budget. From 2020-21 the

Scottish Government will be assigned receipts from the first 10p of the

standard rate of VAT and the first 2.5p of the reduced rate of VAT in

Scotland. At the same time the UK Government will reduce the Scottish

Government’s block grant to reflect the VAT receipts foregone in Scotland –

this is known as a block grant adjustment.

Block Grant Adjustments

A.3 As agreed in the fiscal framework, the Scottish Government’s block grant

will be reduced to reflect the fact that more of the Scottish Government’s

spending power will be determined through assigned VAT.

A.4 Arrangements for calculating the block grant adjustment are set out in the

Scottish Government’s fiscal framework. The block grant adjustment for VAT

assignment will work in broadly the same way as the adjustments applied for

Scottish Income Tax.

Forecasting

A.5 The VAT receipts assigned to the Scottish Government’s budget and the

corresponding block grant adjustments will both initially be based on

forecasts, and then reconciled to outturn data once available. The Scottish

Fiscal Commission will be responsible for forecasting the receipts assigned to

the Scottish Government’s budget, with the Office for Budget Responsibility

in charge of producing forecasts of VAT for the UK as a whole, as well as

forecasting comparable receipts in the rest of the UK to be used in

calculations for the block grant adjustment.

A.6 As set out in this document, the UK and Scottish Governments have jointly

developed the methodology for VAT assignment outturn data, with the

independent forecasters determining their own forecasting methodologies.

Annexe A

16

Reconciliation to outturn

A.7 The assigned VAT receipts and block grant adjustments will both be

reconciled to outturn data once available. This outturn will be determined

using the agreed VAT assignment methodology, as above.

Annexe A

HM Treasury contacts

This document can be downloaded from www.gov.uk

If you require this information in an alternative format or have

general enquiries about HM Treasury and its work, contact:

Correspondence Team

HM Treasury

1 Horse Guards Road London SW1A 2HQ

Tel: 020 7270 5000

Email: public.enquiries@hmtreasury.gov.uk

Annexe A

Annexe B

Scottish VAT Assignment: questions arising from the paper ‘Summary of Assignment Model’ – David Eiser, Adviser

Introduction Following the recommendations of the Smith Commission, the first ten percentage points of the standard rate of VAT and the first 2.5 percentage points of the reduced rate of VAT will be assigned to the Scottish Government’s budget. The Scottish Government will have no powers to vary VAT rates or exemptions, but the Scottish budget will be influenced by the growth rates of the assigned Scottish VAT revenues relative to the equivalent rUK revenues. The 2019/20 Budget will for the first time include a forecast of Scottish VAT. However, 2019/20 will be a transitional year in which, although VAT forecasts appear in the budget, these will have no effect on the budget. From 2020/21, assigned VAT will affect the budget to the extent that the Scottish share of VAT could grow relatively more quickly or slowly than the equivalent rUK revenues. The major challenge with assigning VAT is that, unlike with other taxes, there will never be any outturn data for Scottish VAT. As a result, assigned Scottish VAT will need to be estimated. The extent to which it might make sense to partly base the Scottish budget on an estimate of a revenue depends on how reliably the revenue can be estimated (as well as the extent to which that revenue can be estimated transparently). UK and Scottish Government officials have been working together over the past two years to develop an agreed methodology to estimate Scottish VAT. The paper published in November summarises the results of this work4. The VAT Assignment methodology In broad terms, the model works by applying the VAT rates to estimates of expenditure in Scotland. This gives an estimate of the VAT Total Theoretical Liability (VTTL) which is then adjusted to account for, for example, the fact that some expenditure by Scottish households takes place in other parts of the UK (and some expenditure by English or Welsh residents takes place in Scotland). It is also adjusted to account for the fact that some expenditure is on businesses who may be below the VAT threshold. Expenditure is largely estimated from a wide range of publicly available survey data, but also from some data held internally to HMRC (including VAT registration information and self-assessment data). The strength of the Paper is that is explains what is a very complex process relatively simply. But the disadvantages are that it leaves unanswered questions about the likely level of accuracy of the method proposed, and it is sometimes unclear why a particular approach over others has been selected. Limited assessment of robustness: The main element of relevant expenditure is by the household sector (household

4 Scottish VAT Assignment: Summary of Assignment Model. HM Treasury (2018) https://www.gov.uk/government/publications/scottish-vat-assignment-summary-of-vat-assignment-model

Annexe B

purchases account for around 70% of VAT receipts). The Scottish share of UK household expenditure is derived from various surveys, but most importantly the Living Costs and Food Survey. The Paper states that HMRC and the Scottish Government have jointly sponsored a boost to the LCFS sample size, but it does not say what the sample size will be following this boost, nor does it make any assessment of the adequacy of the sample size. The paper also makes no attempt to assess the robustness of other data sources, such as the use of various tourism and visitor surveys (the International Passenger Survey, the GB Day Visits Survey and the GB Tourism Survey).

• Limited justification for approach: The Scottish share of centralgovernment expenditure (some of which is not VAT recoverable) is calculatedusing labour market data – but it is not clear why this approach is used ratherthan drawing on public spending data.

• Lack of detail on data used: In some cases, only partial information isprovided on data sources. For example, expenditure on house building iscalculated on the basis of ‘construction industry data from the ONS’ –although it is not particularly clear what this is. ‘HMRC internal data’ is used tocalculate VAT refunded to museums and various other elements of the model.

• VAT exempt businesses: The lack of detail is particularly apparent in relationto VAT exempt businesses, an important element of the calculation of VATreceipts (accounting for 16% of the tax base). (Sales of VAT exempt servicesare not subject to VAT, but the suppliers of these services cannot reclaim theVAT paid on its inputs, unlike the case of zero-rated goods). The UK VATexempt sector includes financial services, as well as various other services inhealth, social care, education and postal and courier services. The Paperstates that the model calculates the VAT incurred in each of these sectors atUK level by using ‘confidential HMRC data’ and ‘intermediate consumptionfigures’ but gives no further information on this, and then says that the‘Scottish share of VAT in the UK exempt sector is calculated using labourmarket data’. No assessment is given of the appropriateness of this approach,nor on how sectors identified in the labour market data are mapped onto theVAT exempt sectors. How much certainty can we have in the consequentestimate of, for example, irrecoverable Scottish VAT associated with thefinancial services sector?

The main limitation of the Paper is that it does not provide any assessment of the confidence intervals likely to be associated with the VAT estimate made using the proposed methodology. For context, the GERS methodology paper states that the 95% confidence interval associated with the GERS estimate of Scottish VAT is +/- £223 million. But is the proposed methodology associated with a larger or smaller confidence interval? A confidence interval of +/- £200 million would imply that we should expect the Scottish budget to fluctuate by several million pounds each year purely as a result of sampling variability. How much of such variability would be acceptable?

FCC/S5/19/6/2

1

Finance and Constitution Committee

6th Meeting, 2018 (Session 5), Wednesday 13 March 2019

The Budget (Scotland) Act 2018 Amendment Regulations 2019 Introduction 1. The purpose of this paper is to set out background and procedural information for the Committee’s scrutiny of the Budget (Scotland) Act 2018 Amendment Regulations 2019 (“the Regulations”). Copies of the Regulations and the accompanying Spring Budget Revision (SBR) document are available via the following links—

• The Budget (Scotland) Act 2018 Amendment Regulations 2019

• Spring Budget Revision Supporting Document

2. A briefing on the Regulations and SBR has been prepared by the Financial Scrutiny Unit in SPICe and a brief guide to the Spring Budget Revision has been prepared by the Scottish Government. These briefings are attached as Annexes A and B.

Purpose of the Regulations and the scrutiny procedure 3. The Regulations were laid on 7 February and relaid on 21 February following the withdrawal of the earlier Regulations due to a minor technical error. They amend the Budget Scotland Act 2017 which authorised the Scottish Government’s spending plans for the current financial year. The SBR provides supporting information on the revised spending plans for which the Scottish Government is seeking Parliamentary approval.

4. The Regulations are subject to the affirmative procedure under Rule 10.6 of Standing Orders. Under this procedure, the Parliament has a 40 day period in which to consider the Regulations, including consideration by a lead committee and the Delegated Powers and Law Reform Committee (DPLRC). The DPLRC considered the Regulations at its meeting on 26 February and had no issues to report.

5. As lead committee for the Regulations, the Committee will be invited to consider the following motion from the Cabinet Secretary for Finance and the Constitution—

• Motion S5M-16046: That the Finance and Constitution Committee recommends that the Budget (Scotland) Act 2018 Amendment Regulations 2019 [draft] be approved.

6. During formal consideration of the motion, Standing Orders provide that only the Minister and Members may participate in the debate. In order to inform the Committee’s consideration of the motion, there will therefore be an opportunity to take evidence on the Regulations from the Minister and his official before moving to formal consideration of the motion.

7. The deadline by which the Finance and Constitution Committee must report on the Regulations is 27 March 2019.

FCC/S5/19/6/2

2

Scotland Reserve 8. In its budget scrutiny this year and in previous years, the Committee considered the lack of transparency around the balance of the Reserve. In this year’s budget scrutiny, the Committee considered the Scotland Reserve balance and attempted to track the balance from the Autumn Budget Revision 2018/19 across to the Budget 2019-20 document.

9. The Committee asked the Scottish Government to explain the apparent difference between the figures for the Scotland Reserve in the Autumn Budget Revision and in the 2019-20 Budget.

10. The Scottish Government responded1—

The 2019-20 Scottish Budget does not explicitly set out a reserve position, only that spending plans anticipate £313m in drawdown from the Reserve. This commitment reflects additional knowledge gained since the publication of the Autumn Budget Revision. Specifically, this includes additional consequential funding for 2018-19 provided by HM Treasury at UK Autumn Budget and a developing understanding of in-year underspends that are starting to emerge. This knowledge, on top of the running in year balance of £198m shown in the Autumn Budget Revision, allowed the Scottish Government to commit to funding the additional £313m of commitments shown in the document. The running balance on the Reserve will be updated at Spring Budget Revision but, as indicated in response to question 187, precise details of the end-of-year balance will not be known until provisional outturn information is available in June. I will update Parliament at that time.

11. Table 1.7a in this year’s Spring Budget supporting document provides details of the current balance of the Reserve—

12. The Scottish Government’s brief guide to the Spring Budget Revision, accompanying the supporting document, includes a mid year report on Underspend and Reserve at Annexe C. This report does not directly read across to the table above.

1https://www.parliament.scot/S5_Finance/General%20Documents/ScotGov_response_Budget_report.pdf

FCC/S5/19/6/2

3

Table 1.7a shows a forecast closing balance in the Reserve of £454.2 million whereas Annexe C of the brief guide shows a forecast closing balance of £499.7 million. This is discussed further in the SPICe briefing.

Decision 13. The Committee will consider whether to approve the Regulations at agenda item 3.

Committee Clerks,

March 2019

FCC/S5/19/6/2

4

ANNEXE A: SPICe BRIEFING: SPRING BUDGET REVISION 2018-19

Introduction

The 2018-19 Spring Budget Revision (SBR) amends the Budget (Scotland) Act 2018 which authorises the Scottish Government’s spending plans for the financial year 2018-19. Details of the proposed changes are set out in the 2018-19 Spring Budget Revision to the Budget (Scotland) Act for the year ending 31 March 2019 published on 7 February 2019. The Scottish Government has also produced a Brief Guide to the 2018-19 Spring Budget Revision.

The proposed changes detailed in the SBR result in an increase in the approved Budget for 2018-19 of £3,576.2 million from £40,505.9 million to £44,082.1 million. The SBR seeks parliamentary approval for these changes.

The SBR also presents the Reserve balance in table 1.7a (discussed below).

The main changes to the Scottish Government’s spending plans arise from:

• Funding changes allocated over a number of budget lines of -£3.3 million • Net Whitehall and HM Treasury transfers to/from the Scottish Government of

£275.7 million. • Net technical adjustments of £3,308.8 million, the bulk of which are additional

non-cash and Annually Managed Expenditure funded by the UK Government • Transfers of resources between Scottish Government portfolios which have

no net overall effect on the budget.

A summary of the proposed changes by portfolio is presented in table 1.2 of the SBR and in Annex B of the Brief Guide to the Spring Budget Revision. This is reproduced below for convenience.

FCC/S5/19/6/2

5

Table 1: Spring Budget Revision changes by type

2018-19 Budget Approved at the Autumn Budget Revision 40,505.9

FUNDING CHANGES

Miscellaneous portfolio movements (See Annex A) -3.3

-3.3

WHITEHALL TRANSFERS

Portfolio Description Amount Type

£m

H&S Transfer from HM Treasury for Agenda for Change staff Pay Award

78.0 Res

H&S Transfer from HM Treasury for the impact of changes to the Discount Rate applied In calculating Personal Injury Claims

22.0 Res

H&S Allocation from HM Treasury in respect of the Air Ambulance

1.0 Cap

H&S Transfer from Health and Social Care in respect of HIV funding

0.8 Res

H&S Transfer from the Home Office for the Migrant Surcharge 0.5 Res

H&S Transfer from DWP for the Fit for Work programme 0.2 Res

H&S Transfer from DWP for a GP IT project 0.1 Res

H&S Allocation from HM Treasury in respect of funding for free pregnancy terminations for women from N. Ireland

0.1 Res

FEFW Transfer from UK Money Advice Service 1.5 Res

FEFW Transfer from Cabinet Office for Cyber Security 1.1 Res

FEFW Transfer from DWP for Single Gateway Project Funding

0.5

Res

E&S Transfer from Business, Energy and Industrial Strategy for research and development

1.6 Res

E&S Transfer from Cabinet Office for Cyber Security 0.5 Res

Justice Transfer from HM Treasury for the US Presidential Visit 3.2 Res

FCC/S5/19/6/2

6

Justice Transfer from Cabinet Office for Cyber Security 1.4 Res

Justice Allocation from HM Treasury in respect of LIBOR funding for Scottish Mountain Rescue

0.7 Res

TIC Transfer from Business, Energy and Industrial Strategy for public sector energy efficiency

3.6 Cap

SSOP Transfer from DWP for Carers Allowance 157.3 Res

SSOP Allocation of budget from HM Treasury to provide grants to women’s organisations (Tampon Tax)

1.0 Res

SSOP Transfer from DWP for the Sure Start Maternity Grant 0.6 Res

TOTAL 275.7

TECHNICAL CHANGES

Various Additional budget cover for provisions, impairments, fair value adjustment, pension liabilities and Depreciation of donated assets (AME)

178.6 Res

H&S Health and Sport portfolio non-cash adjustment for NHS Boards write downs and accelerated depreciation

63.0 Res

E&S Education and Skills portfolio non-cash adjustments due to impact on the carrying value of loan book (non-cash)

668.8 Res

Justice Grant-in-Aid to Scottish Police Association to support working capital requirements

15.0 Res

TIC Repayment of a pre-paid funding for the sleeper service -27.9 Res

ECCLR Adjustment to Scottish Water net loans -3.7 Cap

Teachers and NHS Pensions

Appeal court ruling –adjustments to cover potential future costs of remedy from NHS and Scottish Teachers’ Pension Scheme (AME)

2,329.5 Res

Teachers and NHS Pensions

Increase to NHS and Teachers pensions due to equalisation and indexation

53.9 Res

Various Technical adjustments to align budgets with accounting requirements (ODEL)

24.8

Various Various other DEL non-cash adjustments 1.8

TOTAL 3,303.8

Proposed Budget following Spring Revisions 44,082.1

FCC/S5/19/6/2

7

The remainder of this briefing raises some areas for discussion with the Minister.

The Reserve balance

Table 1.7a reports on the Scotland Reserve. The Reserve balance brought forward from 2017-18 is shown as £430.3 million.

The table then lists the Barnett consequentials which have arisen from UK fiscal events, as well as carry forwards or underspends from 2017-18.

Incomings and outgoings in the Reserve from the various factors listed in table 1.7a mean that according to the SBR the Scottish Government is forecasting a Reserve balance at the end of the current financial year of £454.2 million.

However, as the Minister and Cabinet Secretary has told Committee in the past, the Reserve position moves throughout the year. The Brief Guide to the Budget Revision Annex C provides the latest overall Reserve position which presents a later analysis than that which is reflected in the SBR. For example, it includes the expenditure commitments made for 2019-20 during the Budget Bill process at stage 2 (£94 million), as well as the Spring Supplementary consequentials (£148 million) used to fund the Stage 2 amendments, as well as Queens and Lord Treasurer’s Remembrancer (QLTR) receipts2 deferred from 2018-19.

This all leaves a forecast closing balance in the Reserve of £499.7 million (as opposed to £454.2 million reported in the SBR).

One apparent anomaly between the two tables is the opening balance, which in the SBR appears to be £430.3 million, but in Annex C is shown as £538 million. This is due to timing differences – the SBR shows an opening balance as at SBR last year whereas the opening balance for 2018-19 shown in the brief guide starts after the inclusion of the additional carry forward from 2017-18 (£96.7m and 10.9m).

Members may wish to discuss the reserve balance with the Minister. Whilst recognising that the Reserve is a constantly moving picture, the different numbers presented in the SBR and in the Brief Guide potentially confuse the picture.

It is also not clear why the SBR for 2018-19 contains a different opening balance to what was actually the case once the additional carry forward was included.

2 Queens and Lord Treasurer’s Remembrancer receipts relate to ownerless goods and the revenues raised from them which have been surrendered to the Scottish Consolidated Fund since Devolution. Following legal advice it was agreed that these funds could be used by Scottish Ministers as a funding source. The original plan was to use them in 2018-19 but they will now be used in 2019-20.

FCC/S5/19/6/2

8

Additionally, given the SBR was published on 7 February 2019 and the Stage 1 budget deal was agreed on 1 February, it is not clear why the Reserve position presented in the SBR does not include the additional Barnett consequentials and spending commitments agreed between the Scottish Government and Green Party.

The final picture for 2018-19 provisional outturn (and underspends) will be presented to the Scottish Parliament in June.

Funding Changes

Funding changes included in the SBR amount to a net reduction of £3.3 million. The main reason for this net reduction figure is due to the repayment of £175 million (capital) of farmers’ loans in the Rural Economy portfolio, which offsets the additional funding. It is not clear whether or how this £175 million reduction (which is Financial Transaction capital) is being used to fund day-to-day resource expenditure.

A full breakdown of the funding changes is provided in the Scottish Government’s Brief Guide and is reproduced in Annex 1 of this paper.

Members may wish additional information on some of the other funding changes identified in annex 1. There are a number of changes, some of which are reasonably substantial. For example:

• there is £95 million (resource) added to Justice for Police and Fire pension pressures;

• £40 million (resource) for an acceleration of the Waiting Times Improvement Plan;

• £34 million (resource) for the Carer’s Allowance Supplement (it is not clear whether this reflects an increase in demand for this recently devolved benefit);

• £20 million (capital) for the GP Premises loan scheme; • A reduction of £43 million (capital) in ‘projected’ housing supply receipts • A £56 million reduction (resource and capital, but split not identified) in

Enterprise • £10.7 million (capital) for the Scottish Qualifications Authority

Whitehall Transfers/Allocations from HM Treasury

There are 13 Whitehall transfers in the SBR and seven additional allocations from HM Treasury. These have a net positive impact on the Scottish Budget of £275.7 million. These are presented in table 1 above.

The most significant in budgetary terms are the £157.3 million from the DWP for the transfer of responsibility for the Carer’s Allowance; £78 million from HM Treasury for the Agenda for Change staff Health Pay award; and £22 million for funding the impact of changes to the Discount Rate applied in calculating Personal Injury claims. HM Treasury also transferred £3.2 million to fund the costs of the US Presidential visit.

FCC/S5/19/6/2

9

Members may wish further information on some of these transfers.

Technical Transfers

The SBR records a significant level of Technical transfers (£3,308 million or 7.5% or the proposed budget in the SBR). There is a detailed explanation for the changes in the Supporting document and in the Brief Guide. Rather than reproduce that explanation in full, this note suggests possible areas members may wish to explore with the Minister.

The most significant change relates to the increase to the Annually Managed Expenditure (AME) provision for future NHS and Teachers pension costs. This follows the outcome of the appeal court rulings on the Judicial Pension Scheme and Firefighters Pension Scheme discrimination on age related protections. The SBR, therefore adjusts the budget by £2,329.5 million to reflect the level of resource that may be required by the NHS Pension Scheme (Scotland) and the Scottish Teachers’ Pension Scheme to remedy any future implications. Adjustments are not made in the SBR for other unfunded schemes that might be impacted (Police, Fire and Civil Service) as these are not shown in the Scottish Government Consolidated accounts.

Members may wish to explore further details from the Minister on the decision and its implications. For example:

• The implications for Scottish public sector workers from this decision; • The knock on implications for other public sector workers pension schemes; • The extent to which (either directly or indirectly) this decision might impact on

the discretionary spending power of the Scottish budget now and in the future.

The Brief Guide states that “the UK Government is expected to seek to appeal this case further and the final position is not likely to be resolved for some time. The adjustment is made on the basis of legal opinion on the probability of a successful appeal.” Possible areas for members to explore are as follows:

• The extent to which the Scottish Government is involved (or not) with the UK Government’s appealing of this case;

• Whether the Scottish Government agrees with the appeal; • Likely timeframe for any appeal decision; • On the basis of whose legal opinion the adjustment was made (ie Scottish or

UK Government lawyers?); • Whether, by making the adjustment in the SBR, the view is that the appeal is

unlikely to be successful; • If appeal unlikely to be successful, the reasons for it being made.

Other significant technical adjustments are made to the non-cash budget for the impairment of Student Loans (in the Education and Skills portfolio) of £668.8 million. Members may wish to explore the impact of this further. It relates to the

FCC/S5/19/6/2

10

announcement in June that the Scottish Government would match the UK repayment threshold of £25,000 and reduce the repayment period before any loan is written off to 30 years. Although the increase in the repayment threshold to £25,000 won’t come into force until April 2021, it impacts existing loans. Increasing the repayment threshold and reducing the write off period to 30 years has the effect of increasing the proportion of loan funding that is expected to be written off over the lifetime of the loans – hence the need for this adjustment in the SBR.

Other technical adjustments are summarised in the Supporting document as follows:

• The Health and Sport portfolio has increased its non-cash budget by £63 million to cover non-cash costs to NHS Boards of write downs and accelerated depreciation. Members may wish additional information on what this means in practice.

• There is an increase of £53.9 million to the NHS and teachers pensions budget due to indexation and equalisation;

• an increase in Grant-in-Aid for the Scottish Police Association (£15 million) which has been allocated to support working capital requirements;

• an adjustment to budgets in respect of repayment of a pre-paid funding for the sleeper service -£27.9 million;

• an adjustment to Scottish Water net loans -£3.7 million; and a number of other small miscellaneous technical adjustments.

• There are also additional allocations of AME budget, as agreed and funded by HM Treasury, to cover provisions, impairments, fair value adjustments and pension liabilities (£178.6 million) as well as a small number of changes (£24.8 million) to align budgets with accounting requirements under the Government Financial Reporting Manual (the FReM).

Further details on these are provided in the Brief Guide, and members may wish further information from the Minister.

Some of these technical adjustments are made to provide ‘AME cover’ in case they are needed. If they are not needed, members may wish to enquire how they will be accounted for in the future. Is there a likelihood that future iterations of Budget revisions will require negative technical adjustments?

Internal transfers

Although not impacting on the overall aggregate Scottish Budget, there are a number of planned internal transfers between portfolios. The most financially significant of these transfers identified by the Scottish Government (presented on p3 of the supporting document) are as follows:

• Transfer of £71.0 million from Finance, Economy and Fair Work portfolio to Social Security and Older People portfolio for Social Security Implementation and Administration (split £56 million Resource and £15 million Capital).

• Transfer of £25.0 million from Finance, Economy and Fair Work portfolio to Communities and Local Government portfolio for the Building Scotland Fund.

FCC/S5/19/6/2

11

• Transfer of £7.0 million from Transport, Infrastructure & Connectivity portfolio to Rural, Economy portfolio for Wave Energy.

• Transfer of £6.7 million from Health and Sport portfolio to Education and Skills portfolio in relation to clinical academics and senior academic GPs.

• Transfer of £5.3 million from Rural Economy portfolio to Education & Skills portfolio in relation to the South of Scotland Enterprise Project.

Notable transfers and points of interest contained in the SBR are presented by portfolio below. Finance, Economy and Fair Work

As can be seen in Annex 1 of this paper and p28 of the SBR, there is a ‘release of emerging underspend to support priorities’ in the Enterprise budget of £56 million, comprising £29 million in resource and £27million in capital. This is a sizable proportion of the Enterprise budget. It is not clear where these resources are being directed or why the underspends have emerged.

Education and Skills

Page 2 of the SBR reports the £668.8 million technical adjustment regarding student loans. Schedule 3.4 on p37 reports this as £669.5 million.

The Scottish Funding Council budget (p38) shows a ‘return of funds to Scottish Government in relation to reprofile of Capital project’ of £7.1 million. Members may wish additional information on how that will be spent and why it is shown in Operating budget when it relates to Capital.

Justice

There is a £5.3 million ‘adjustment to the Prisons PPP/PFI budget’ on p50 (split -£0.2m Operating and £5.5m Capital). Members may wish further information on this – PPP unitary payments usually come out of Operating/Resource budgets, rather than scoring as Capital.

There is a £29.6 million transfer into the Scottish Police Authority (SPA) budget for the implementation of Policing 2026 (p52).

Environment, Climate Change and Land Reform

There is a ‘transfer of responsibility for Private Water to Scottish Water’ in the Environmental Services budget of £1.7 million (p69, 71).

Rural Economy

As well as the £9.8 million transfer in EU Support and Related Services for the CAP payments IT system, there is a transfer out to Rural Services of £7.5 million to ‘support payment of farmers loans and the bovine ScotEID project.’ (p73).

Government Business and Constitutional Relations

FCC/S5/19/6/2

12

There are transfers from other Scottish Government portfolios into the Govt Business and Constitutional Relations budget of £6.6 million for “social advertising and public information in 2018-19”.(p86).

Ross Burnside, Financial Scrutiny Unit, March 2018

Annex 1: List of Funding Changes

Portfolio Description Amount Type

£m

H&S Acceleration of Funding from 2019-20 Budget for Waiting Times Improvement Plan

40.0 Res

H&S Support for the GP Premises loan scheme 20.0 Cap

H&S Additional indirect capital for health research 14.3 Res

H&S Net capital to indirect capital transfers for NHS Scotland Health Boards

9.9 Res

C&LG Projected Housing Supply receipts -43.0 Cap

C&LG Release of emerging/planned underspend to support priorities

-15.0 Cap

C&LG Release of emerging/planning underspend to support priorities

-9.7 Res

C&LG Repayments in relation to SPRUCE -7.7 Cap

C&LG Reclassification of expenditure -1.2 Res

FEFW Miscellaneous Minor Transfers 2.2

FEFW Release of emerging/planned underspend from Enterprise

-56.0

Res

Cap

FEFW Release of emerging/planned underspend from other finance

-6.0 Res

E&S Release of emerging/planned underspend to Scottish Qualifications Authority

10.7

Res

Cap

E&S Additional funding for Child Abuse Enquiry 9.2 Res

E&S Additional funding for Raising Attainment 6.9 Res

FCC/S5/19/6/2

13

E&S Student support review 3.5 Res

E&S Additional funding for SQA 2.7 Res

E&S Additional funding for SDS 2.5 Res

E&S Additional funding for Child Abuse Enquiry 2.3 Res

E&S Additional funding for Education Scotland 1.6 Res

E&S Additional funding for Gaelic 1.0 Res

E&S Additional funding for ITE Students 1.0 Res

E&S Miscellaneous Minor Transfers -0.5 Res

Justice Reprioritisation of resources to meet additional costs 95.0 Res

Justice Additional funding to support police workforce 10.9 Res

TIC Deployment of emerging/planned underspend 18.4 Cap

TIC Release of emerging/planned underspend to support priorities

-2.5 Res

ECCLR Additional funding for Peatlands Restoration 4.4 Res

RE Additional funding for CAP payments IT system 9.8 Cap

RE Additional funding for Croft House Grant 0.8 Res

RE Net repayment of farmers loans -175.0 Cap

CTEA Deployment for emerging/planned underspends to the Glasgow 2018 European Championships

5.0 Res

CTEA Transfer to Visit Scotland for Rural Tourism Infrastructure Fund

1.0 Res

SSOP Deployment of emerging/planned underspend to fund Carer’s Allowance Supplement and Best Start Grant

35.0 Res

SSOP Transfer from Finance, Economy and Fair Work for Social Security Policy and programme costs

15.0 Cap

SSOP Miscellaneous minor transfers -0.6 Res

GBCR Miscellaneous minor transfers 0.5 Res

COPFS Additional funding to cover increased caseload 2.3 Res

FCC/S5/19/6/2

14

NRS Release of emerging/planned underspend to support priorities

-0.8 Res

NRS Release of emerging/planned underspend to support priorities

-0.2 Cap

RS Miscellaneous minor transfers 0.3 Res

RS Release of emerging/planned underspend to support priorities

-2.7 Cap

Total -3.3

FCC/S5/19/6/2

15

ANNEXE B: SCOTTISH GOVERNMENT BRIEF GUIDE TO THE 2018-19 SPRING BUDGET REVISION (SBR)

Background

1. The Spring Budget Revision is part of the annual Budget process. The Budget process for 2018-19 commenced with the publication of the Draft Budget and the subsequent consultation process. This was followed by the annual Budget Bill and Parliamentary approval of the Scottish Government’s spending plans.

2. Once the Budget Act has been approved by the Scottish Parliament, there are usually two opportunities to amend the budget as the year progresses - the Autumn Budget Revision in October and a Spring Budget Revision in February. The Spring Budget Revision provides the final budget figures, against which outturn is reported in the Scottish Government’s annual accounts.

Spring Budget Revision

3. The Spring Budget Revision is routine Parliamentary business that proposes amendments to better align the Government’s budget with its planned spending profile.

4. The aim of the Brief Guide to the Spring Budget Revision is to explain the main changes to the Budget since the publication of the Autumn Budget Revision and give some further background on why the changes have been made.

5. The changes proposed in the Spring Budget Revision result in an increase in the approved budget of £3,576.2 million from £40,505.9 million to £44,082.1 million.

The changes to the Budget are traditionally broken down in to four main areas:

• Funding changes which have arisen since changes to the Autumn Budget Revision (-£3.3million).

• Whitehall Transfers and HM Treasury allocations (£275.7 million). • Technical Changes (£3,303.8 million). • Transfers between Portfolios.

6. The main changes included under each heading are summarised below.

FCC/S5/19/6/2

16

Funding Changes

7. Funding changes represent adjustments to the budget available to the Scottish Government that provide spending power within portfolios and programmes.

8. The funding changes are allocated over a number of lines. As in past years, as part of the internal robust monitoring process and in line with good practice, we have also taken the opportunity at the Spring Budget Revision to ensure that we maximise the budget available in 2018-19 through the redeployment of emerging/planned underspend alongside the remaining unallocated resources held centrally. This strategy is reflected in the portfolio schedules and Annex A shows the detail of the funding changes. The main reason for the net reduction is due to the net repayment of £175m of farmers’ loans in the Rural Economy portfolio.

Whitehall Transfers / Allocation from HM Treasury

9. There are thirteen Whitehall transfers recognised at the Spring Budget Revision together with six additional allocations from HM Treasury. The net positive impact on the Scottish Budget is £275.7 million and a full breakdown is given at Annex B.

10. In respect of Whitehall transfers, there are transfers of responsibility from the Department for Work and Pensions for Carers Allowance (£157.3m) and Sure Start Maternity Grant (£0.6m), along with a £0.5m transfer for Single Gateway Project funding, £0.2m for the Fit for Work programme and £0.1m for a GP IT project. There are three transfers of £1.4m, £1.1m and £0.5m respectively from the Cabinet Office for Cyber Security, two transfers from the Department of Business, Energy and Industrial Strategy for public sector energy efficiency (£3.6m) and Research & Development (£1.6m), and transfers of £1.5m from the UK Money Advice Service, £0.5m from the Home Office for Migrant Surcharge and £0.8m from the Department for Health and Social Care in respect of HIV funding.

11. From HM Treasury there are allocations of £78.0 million in respect of Agenda for Change staff Health Pay Award, £22.0m for funding the impact of changes to the Discount Rate applied in calculating Personal Injury claims, £3.2m to fund the policing costs associated with the US Presidential visit, a £1.0m allocation to provide grants to women’s organisations (from the Tampon Tax), and allocations of £1.0m in respect of the Air Ambulance service, £0.7m in respect of LIBOR funding for Scottish Mountain Rescue and £0.1m in respect of funding for free pregnancy terminations for women from N. Ireland.

Technical Adjustments

12. In line with past years, the Spring Budget Revision recognises a number of technical changes which are essentially budget neutral and do not provide additional

FCC/S5/19/6/2

17

spending power for, or detriment to, the Scottish Government. These changes are substantial in this year’s Spring Budget Revision with total net technical changes of £3,303.8 million described in paragraphs 13 to 20 below.

13. The largest technical change is the increase to the provision for future NHS and Teachers pension costs (which is a change to the Annually Managed Expenditure (AME) budget). This flows from the outcome of appeal court rulings on the Judicial Pension Scheme and Firefighters Pension Scheme discrimination claims. The ruling relates to protections afforded to some scheme members on the transition that was made from final salary to the current career average revalue earnings (CARE) scheme arrangements. This ruling has potentially significant implications for the future costs of these unfunded public sector pensions schemes (the Teachers, NHS, Police, Fire and Civil Service pensions schemes). The budget has therefore been adjusted to reflect the level of resource that may be required by the NHS Pension Scheme (Scotland) and the Scottish Teachers’ Pension Scheme to meet the potential future costs of remedy. This is a £2,329.5 million adjustment to non-cash AME budgets. The change is consistent with adjustments that will be made to other UK departments following discussion with HMT on the implications of the decision. The UK Government is expected to seek to appeal this case further and the final position is not likely to be resolved for some time. The adjustment is made on the basis of legal opinion on the probability of a successful appeal. Adjustments are not required in the SBR for Police, Fire and Civil Service pensions as the future liabilities for these schemes are not shown within the Scottish Government consolidated accounts.

14. There is also a significant adjustment to the non-cash budget for the impairment of Student Loans within the Education and Skills portfolio of £668.8 million. This is largely driven by the changes to the terms and condition associated with Student Loans announced in June, which increase the repayment threshold to £25,000 and reduce the repayment period before any loan is written off to 30 years. Although the increase in the repayment threshold to £25,000 is not due to come into force until April 2021 it impacts on all existing loans. Together these changes increase the proportion of loan funding that is expected to be written off over the lifetime of the loans.

15. There has been a change to the way that public bodies need to account for loans and receivables (other than Student Loans) following the introduction of a new International Financial Reporting Standard – IFRS9. This introduces an “expected loss” model that focuses on assessing and quantifying the risk that a loan may default rather than recording any financial impact only when a loss has already been incurred. As expected credit losses represent possible outcomes, these amounts are not necessarily “expected” nor actual “losses”, as those terms are generally understood, they represent measures of an asset’s credit risk. £140m of additional non-cash AME budget has been added to allow for the impact of any expected credit losses. Work is still on-going in implementing IFRS9 and this sum does not represent the actual assessment of expected credit losses, but rather a prudent level of AME cover, requested as part of the UKG supplementary estimates process, within which these adjustments can be accommodated.

FCC/S5/19/6/2

18

16. In addition, the Spring Budget Revision reflects net technical adjustments of £24.8 million, to align the IFRS based budgets with the year-end accounting requirements for the Scottish Budget for revenue financed infrastructure projects under the Government Financial Reporting Manual (the FReM).

17. The Spring Budget Revision records other increased AME, as agreed with HM Treasury to cover provisions, impairments, fair value adjustments and pension liabilities (£38.6 million).

18. There has also been an increase of £53.9 million to the NHS and teachers pensions budget due to indexation and equalisation carried out by HM Treasury.

19. As well as the adjustment for the Student Loans impairment referred to above there are also a number of other technical adjustments to the Expenditure Limit (EL) budget, relating to non-cash budgets totalling £63.1 million. This is primarily a Health and Sport portfolio increase in its’ non-cash budget of £63 million to cover costs of NHS Boards in respect of write downs and accelerated depreciation. Small adjustments to non-cash budgets were also made to the Finance, Economy & Fair Work and Justice portfolios.

20. Other technical adjustments to the Expenditure Limit budget include £15 million to support working capital requirements for the Scottish Police Association, -£27.9 million in respect of repayment of prepaid funding for the sleeper service and -£3.7m to Scottish Water net loans.

Internal Transfers

21. There are a number of internal transfers within the Scottish Block as part of the Spring Budget Revision process. Virement between and within portfolios are ‘zero-sum’.

The significant budget internal transfers between portfolios include:

• Transfer of £71.0 million from Finance, Economy and Fair Work portfolio to Social Security and Older People portfolio for Social Security Implementation and Administration.

• Transfer of £25.0 million from Finance, Economy and Fair Work portfolio to Communities and Local Government portfolio for the Building Scotland Fund.

• Transfer of £7.0 million from Transport, Infrastructure & Connectivity portfolio to Rural, Economy portfolio for Wave Energy.

• Transfer of £6.7 million from Health and Sport portfolio to Education and Skills portfolio in relation to clinical academics and senior academic GPs.

• Transfer of £5.3 million from Rural Economy portfolio to Education & Skills

FCC/S5/19/6/2

19

portfolio in relation to the South of Scotland Enterprise Project.

22. The Spring Budget Revision records a small number of internal portfolio transfers which have no effect on the portfolio totals, but play a role in ensuring effective internal budget management.

23. Annex B provides a summary of all the changes from the Autumn Budget Revision.

Transparency

24. Tables 1.7 (a) and (b) of the Spring Budget Revision supporting document provide details of the sources of funding that support the changes applied and the movement on available resources.

25. Annex C sets out a mid-year report on revenue and spending up to the end of January (the latest available), to aid scrutiny by the Finance Committee of the Amendment Regulations. Budget figures in the January report are updated to include additional funding allocations formalised within the Spring Budget Revision and show the late HMT additional funding allocation at UK Supplementary estimate. The overall funding position shown reflects a later analysis than that which underpinned the changes reflected in the SBR.

26. Table 1.8 on page 12 of the supporting document provides a complete picture of capital spending. As the Finance and Constitution Committee is aware, in respect of the Scottish Budget, the definition of capital applies to only spending that scores as capital in the Scottish Government’s consolidated accounts or the accounts of Directly Funded Bodies.

Scottish Government

Finance Directorate

Corporate Reporting Division

February 2019

FCC/S5/19/6/2

20

Annex A - Breakdown of Funding Changes

Portfolio Description Amount Type

£m

H&S Acceleration of Funding from 2019-20 Budget for Waiting Times Improvement Plan

40.0 Res

H&S Support for the GP Premises loan scheme 20.0 Cap

H&S Additional indirect capital for health research 14.3 Res

H&S Net capital to indirect capital transfers for NHS Scotland Health Boards

9.9 Res

C&LG Projected Housing Supply receipts -43.0 Cap

C&LG Release of emerging/planned underspend to support priorities

-15.0 Cap

C&LG Release of emerging/planning underspend to support priorities

-9.7 Res

C&LG Repayments in relation to SPRUCE -7.7 Cap

C&LG Reclassification of expenditure -1.2 Res

FEFW Miscellaneous Minor Transfers 2.2

FEFW Release of emerging/planned underspend from Enterprise

-56.0

Res

Cap

FEFW Release of emerging/planned underspend from other finance

-6.0 Res

E&S Release of emerging/planned underspend to Scottish Qualifications Authority

10.7

Res

Cap

E&S Additional funding for Child Abuse Enquiry 9.2 Res

E&S Additional funding for Raising Attainment 6.9 Res

E&S Student support review 3.5 Res

E&S Additional funding for SQA 2.7 Res

E&S Additional funding for SDS 2.5 Res

FCC/S5/19/6/2

21

E&S Additional funding for Child Abuse Enquiry 2.3 Res

E&S Additional funding for Education Scotland 1.6 Res

E&S Additional funding for Gaelic 1.0 Res

E&S Additional funding for ITE Students 1.0 Res

E&S Miscellaneous Minor Transfers -0.5 Res

Justice Reprioritisation of resources to meet additional costs 95.0 Res

Justice Additional funding to support police workforce 10.9 Res

TIC Deployment of emerging/planned underspend 18.4 Cap

TIC Release of emerging/planned underspend to support priorities

-2.5 Res

ECCLR Additional funding for Peatlands Restoration 4.4 Res

RE Additional funding for CAP payments IT system 9.8 Cap

RE Additional funding for Croft House Grant 0.8 Res

RE Net repayment of farmers loans -175.0 Cap

CTEA Deployment for emerging/planned underspends to the Glasgow 2018 European Championships

5.0 Res

CTEA Transfer to Visit Scotland for Rural Tourism Infrastructure Fund

1.0 Res

SSOP

Deployment of emerging/planned underspend to fund Carer’s Allowance Supplement and Best Start Grant

35.0 Res

SSOP Transfer from Finance, Economy and Fair Work for Social Security Policy and programme costs

15.0 Cap

SSOP Miscellaneous minor transfers -0.6 Res

GBCR Miscellaneous minor transfers 0.5 Res

COPFS Additional funding to cover increased caseload 2.3 Res

NRS Release of emerging/planned underspend to support priorities

-0.8 Res

FCC/S5/19/6/2

22

NRS Release of emerging/planned underspend to support priorities

-0.2 Cap

RS Miscellaneous minor transfers 0.3 Res

RS Release of emerging/planned underspend to support priorities

-2.7 Cap

Total -3.3

FCC/S5/19/6/2

23

Annex B – Summary of Changes from Autumn Budget Revision

2018-19 Budget Approved at the Autumn Budget Revision 40,505.9

FUNDING CHANGES

Miscellaneous portfolio movements (See Annex A) -3.3

-3.3

WHITEHALL TRANSFERS

Portfolio Description Amount Type

£m

H&S Transfer from HM Treasury for Agenda for Change staff Pay Award

78.0 Res

H&S Transfer from HM Treasury for the impact of changes to the Discount Rate applied In calculating Personal Injury Claims

22.0 Res

H&S Allocation from HM Treasury in respect of the Air Ambulance

1.0 Cap

H&S Transfer from Health and Social Care in respect of HIV funding

0.8 Res

H&S Transfer from the Home Office for the Migrant Surcharge

0.5 Res

H&S Transfer from DWP for the Fit for Work programme 0.2 Res

H&S Transfer from DWP for a GP IT project 0.1 Res

H&S Allocation from HM Treasury in respect of funding for free pregnancy terminations for women from N. Ireland

0.1 Res

FEFW Transfer from UK Money Advice Service 1.5 Res

FEFW Transfer from Cabinet Office for Cyber Security 1.1 Res

FEFW Transfer from DWP for Single Gateway Project Funding

0.5

Res

E&S Transfer from Business, Energy and Industrial Strategy for research and development

1.6 Res

FCC/S5/19/6/2

24

E&S Transfer from Cabinet Office for Cyber Security 0.5 Res

Justice Transfer from HM Treasury for the US Presidential Visit

3.2 Res

Justice Transfer from Cabinet Office for Cyber Security 1.4 Res

Justice Allocation from HM Treasury in respect of LIBOR funding for Scottish Mountain Rescue

0.7 Res

TIC Transfer from Business, Energy and Industrial Strategy for public sector energy efficiency

3.6 Cap

SSOP Transfer from DWP for Carers Allowance 157.3 Res

SSOP Allocation of budget from HM Treasury to provide grants to women’s organisations (Tampon Tax)

1.0 Res

SSOP Transfer from DWP for the Sure Start Maternity Grant

0.6 Res

TOTAL 275.7

TECHNICAL CHANGES

Various Additional budget cover for provisions, impairments, fair value adjustment, pension liabilities and Depreciation of donated assets (AME)

178.6 Res

H&S Health and Sport portfolio non-cash adjustment for NHS Boards write downs and accelerated depreciation

63.0 Res

E&S Education and Skills portfolio non-cash adjustments due to impact on the carrying value of loan book (non-cash)

668.8 Res

Justice Grant-in-Aid to Scottish Police Association to support working capital requirements

15.0 Res

TIC Repayment of a pre-paid funding for the sleeper service

-27.9 Res

ECCLR Adjustment to Scottish Water net loans -3.7 Cap

Teachers and NHS Pensions

Appeal court ruling –adjustments to cover potential future costs of remedy from NHS and Scottish Teachers’ Pension Scheme (AME)

2,329.5 Res

Teachers and NHS Pensions

Increase to NHS and Teachers pensions due to equalisation and indexation

53.9 Res

FCC/S5/19/6/2

25

Various Technical adjustments to align budgets with accounting requirements (ODEL)

24.8

Various Various other DEL non-cash adjustments 1.8

TOTAL 3,303.8

Proposed Budget following Spring Revisions 44,082.1

FCC/S5/19/6/2

26

Annex C – Mid Year report on Underspend and Reserve

2018-19 Forecast Outturn at 31 January 2019 HM Treasury

Fiscal £million

Scottish Budget

£million

Budget (32,666.1) (44,081.9)

Forecast Outturn 32,306.4 43,820.9

Forecast Underspend (359.7) (261.0)

Less: Late budget consequentials carried forward through HMT Reserve 148.0

Forecast underspend to be carried forward through the Scotland Reserve (211.7)

2018-19 Scotland Reserve Forecast at 31 January 2019 HM Treasury

Fiscal £million

HM Treasury

Fiscal £million

2018-19 Opening Balance (538.0)

2018-19 Forecast Movements

In-year Reserve Drawdown 250.0

Forecast Underspends (211.7)

38.3

2018-19 Forecast Closing Balance (499.7)

2019-20 Expenditure Commitments

Budget Bill 313.5

Budget Bill - Stage 2 94.0

407.5

Less: Additional 2019-20 Funding

FCC/S5/19/6/2

27

Late budget consequentials carried forward through HMT Reserve (148.0)

QLTR Receipts deferred from 2018-19 (60.0)

(208.0)

2019-20 Planned Reserve Drawdown 199.5

2019-20 Forecast Residual Balance (300.2)

Of Which

Devolved Taxes Income 136.2

Financial Transactions 78.5

Balance set aside to fund spending commitments 85.5

300.2

Notes:

• The position shown for the Reserve reflects Budget Bill amendments • HMT control total for 2018-19 includes £148m in late consequentials added at UK

Supplementary Estimate. By agreement with HM Treasury these amounts are subject to separate carry forward arrangements.

• Funding for Stage 2 amendments flows from these late consequentials. • Current forecast allows deferral of the drawdown of QLTR funding into 2019-20. This

maintains flexibility within Reserve drawdown limits. • The 2018-19 forecast figures are drawn from a wide range of income and expenditure

activities, including a number of demand-led budgets where forecasts are difficult to estimate exactly, and the forecast will be updated regularly through to year-end.

• The Cabinet Secretary for Finance, Economy and Fair Work will provide the Scottish Parliament with a full breakdown of the 2018-19 provisional outturn figures by portfolio, in June as is normal practice.

FCC/S5/19/6/3

1

Finance and Constitution Committee

6th Meeting, 2019 (Session 5), Wednesday 13 March 2019

Subordinate Legislation: Scottish Landfill Tax Introduction

1. The purpose of this paper is to highlight background and procedural information for the Committee’s consideration of the following statutory instrument (“the Order”) relating to the Landfill Tax (Scotland) Act 2014—

• The Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2019: SSI 2019/58

2. The Order is accompanied by a Policy Note (Annexe A).

3. In advance of formal consideration of the Order, the Committee will take evidence from the Minister for Public Finance and Digital Economy before moving motion S5M-16045—

“That the Finance and Constitution Committee recommends that the Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2019 be approved.”

The Order

4. The current rates for the Scottish Landfill Tax are—

• The standard rate is £88.95 per tonne; and

• The lower rate is £2.80 per tonne for less polluting materials.

5. The Scottish Government’s Budget 2019-20 proposes the following rates apply on or after 1 April 2019—

• The standard rate is £91.35 per tonne; and

• The lower rate is £2.90 per tonne.

6. The Budget states that the proposed increase is “in line with RPI inflation” and ensures “consistency with Landfill Tax charges in the rest of the UK.” This follows the approach of previous years and intends to address “waste tourism”, should one part of the UK have a lower tax charge than another; and provide for investment in alternative waste treatments.

7. The Budget also proposes that the credit rate for the Scottish Landfill Communities Fund for 2019-20 will remain at a maximum of 5.6 per cent of an operator’s tax liability.

8. The Order seeks to implement the proposed increased rates on or after 1 April 2019.

FCC/S5/19/6/3

2

Scrutiny Procedure

9. The Order was laid on 20 February 2019 and is subject to the provisional affirmative procedure. Section 41(3)b of the Landfill Tax (Scotland) Act 2014 states that such an order—

“ceases to have effect at the expiry of the period of 28 days beginning with the date on which it was made unless, before the expiry of that period, the order has been approved by resolution of the Parliament.”

10. The Delegated Powers and Law Reform Committee considered the Order on 26 February 2019 and determined that it did not need to draw the attention of the Parliament to the instrument.

11. During formal consideration of the Minister’s motion, Standing Orders provide that only the Minister and members may participate in the debate. To inform the Committee’s consideration of the motion, there will therefore be an opportunity to take evidence on the Order from the Minister and officials before moving to formal consideration of the motion.

12. The date on which the 28-day period expires is 18 March 2019. Once the Committee has considered and reported on the Order, the Parliament will be invited to consider a further Scottish Government motion seeking its approval of the Order.

Decision 13. The Committee will consider whether to approve the Regulations at agenda item 5.

Committee Clerks, March 2019

FCC/S5/19/6/3 Annexe A

3

POLICY NOTE

SCOTTISH LANDFILL TAX (STANDARD RATE AND LOWER RATE) ORDER 2019

SSI No: 2019/58

The instrument above was made in exercise of the powers conferred by section 13(2) and (5) of the Landfill Tax (Scotland) Act 2014 (LT(S)A 2014). The making of this order is subject to the provisional affirmative procedure.

Policy Objectives

The LT(S)A 2014 provides for a Scottish Landfill Tax (SLfT) which took effect on 1 April 2015. Sections 13(2) and (5) of the LT(S)A 2014 provide a power allowing the rates of tax to be set.

Scottish landfill tax is chargeable by weight and the two rates will be uprated from 1 April 2019:

• the standard rate is £91.35 per tonne; and

• the lower rate is per £2.90 tonne.

A list of material qualifying for the lower rate and conditions that have to be met are provided for in the Scottish Landfill Tax (Qualifying Materials) Order 2016.

The Scottish Government considers that these rates will provide appropriate financial incentives to support delivery of its waste policies, namely reducing the amount of material being sent to landfill, especially non-qualifying material which is particularly harmful from an environmental point of view.

Consultation

There is no statutory requirement to consult on this Order. The Scottish Government’s proposed SLfT rates from 1 April 2019 were published in the Scottish Budget 2019-20 in December 20181.

Impact Assessments

A Business and Regulatory Impact Assessment (“BRIA”)2 was published looking at different rates and bands associated with the LT(S)A 2014. An Equality Impact Assessment (“EQIA”)

1 https://www.gov.scot/budget/ 2 ‘Scottish Landfill Tax Final Business and Regulatory Impact Assessment’, published 14 December 2014, available at: http://www.scotland.gov.uk/Publications/2014/12/6274

FCC/S5/19/6/3 Annexe A

4

on landfill tax was also published1 previously in December 2014 and landfill tax rates and bands orders will have no negative impact on equality issues.

A strategic environmental screening exercise was also conducted and LT(S)A 2014 Scottish Statutory instruments raising landfill tax rates will have no negative impact on the environment2.

Financial Implications

The Scottish Government estimates that Scottish Landfill Tax will generate revenue of around £104 million in 2019-20. This is a full-year estimate. This forecast has been independently produced by the Scottish Fiscal Commission3.

Scottish Government

Tax Directorate

Scottish Exchequer

1 ‘Scottish Landfill Tax – Equality Impact Assessment Results’, published 17 December 2014, available at: http://www.scotland.gov.uk/Publications/2014/12/7976 2‘Scottish Environmental Screening Exercise results available at: http://www.scotland.gov.uk/Topics/Environment/environmental-assessment/sea/SEAG 3 ‘Report on The on Draft Budget 2018/19, published December 2018, available at: http://www.fiscalcommission.scot/media/1435/scotlands-economic-and-fiscal-forecasts-december-2018-full-report.pdf