The “no” vote in the September 2014 Scottish referendum brought widespread, immediate speculation as to the implications across the UK. Both sides promised change, to varying degrees, as part of the campaign process. But what does this actually mean, in a material sense, for those living and working in Scotland, as well as those based in other parts of the UK? What’s next?
Right away – the impact on devolution
Whilst Scotland may have voted to stay as part of the UK, the issue of devolution of powers from Westminster to Holyrood remains a political ‘hot potato’.
Toward the end of the campaign, the three main “Better Together” parties signed a pledge to devolve more powers to Scotland, should the country vote “no”. This included not only promises of “extensive new powers” but a timetable (see below), a promise to “share resources equitably” and a pledge that Scotland would have their own, final say on funding the NHS within the country. You can read more information about this here.
Once the vote had been announced Prime Minister David Cameron appointed Lord Smith of Kelvin to oversee the process, in particular focusing on devolution of tax, spending and welfare; but not limited to these areas. The UK Government also confirmed the timetable for this process.
Whilst this promises a draft Act by Burns Night (25th January 2015) ready for a House of Commons vote, it is important to note that, with a UK general election due in May 2015 this legislation would not actually be passed until the new Parliament has begun. This could have widespread implications for how effective this change process will actually be. Of course, the pledge for devolution was signed by all three main UK-wide political parties, suggesting that this promise would be honoured whatever the outcome. The details, however, may well be up for a long and protracted debate, as we head towards election season.
Understanding the impact on funding in Scotland
Whilst the debate on devolution is likely to run for some time yet, with the SNP continuing to push for a ‘devo-max’ approach, the short-term impact of a “no” vote needs to be understood. This is most clear, for businesses and individuals, when we consider how the Scottish Parliament is funded and what that means for its taxation powers.
The Scottish Parliament is currently funded, from Westminster, in the form of a grant. This follows the Barnett Formula, which essentially sets the value based on population and devolved policy areas. As we move forward, however, one of the most significant areas for debate lies in relation to Scotland’s control over its funding and, in particular, income tax charging.
In initial submissions the Conservatives proposed devolving all control on income tax rates and bands to Holyrood. However, in return, the Scottish Parliament would also be accountable for 40% of the money it spends. Labour proposed allowing Holyrood to vary income tax by 15p in the pound but not to cut the top rate of tax on its own. The Liberal Democrats proposed giving Holyrood complete power over income, inheritance and capital gains taxes. The SNP is seeking full fiscal control.
In more recent submissions, however, Labour stated that they wanted Scotland to raise 40% of its own budget (through increasing the top rate of tax as well as controlling housing benefit and attendance allowance – although VAT would stay with Westminster). The Conservatives stuck to their proposal and the Liberal Democrats clarified their requirements that Scotland should raise most of the money it spends but welfare and defence should remain with Westminster.
Whilst this is by no means the only area for debate, in terms of funding changes impacting on those living and working in the country, this does illustrate the continuing uncertainty resulting from the referendum. As the draft proposals are worked out and published we will get a clearer view of any implications.
What’s happening south of the border?
A “no” vote does not only mean change in Scotland. There are two significant areas for debate as part of the devolution debate and proposal.
The first relates to whether Scottish MPs at Westminster should retain the right to vote on issues affecting England. It seems likely that there is popular support for removing this right,
The second relates to whether the use of the Barnett Formula is the fairest way of working. The Barnett Formula was never intended by its creator to be a long-term solution, and has been controversial since it was implemented. The Labour party has pledged to address the issue if the party wins the 2015 UK election.
What’s next ?
There is evidently much ground to cover before we have a clear picture of the impact this process will have on businesses and individuals either working in or with Scotland, and indeed for the further devolution of powers from Westminster for the rest of the UK. We continue to keep abreast of developments and are happy to discuss with clients how they can tailor their strategies and risk management plans to take account of the different potential outcomes.This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.