Media Briefing Note: The Legal Impact of the Scotland Act

The UK Government has published new draft legislation, which transfers new powers over tax and spending to Scotland.

This draft legislation is based on the recommendations of the Smith Commission, set up following last year's independence referendum to reach political consensus on further devolution to Scotland.

This draft legislation will not progress further during this Parliament. The UK's three main political parties have each pledged to introduce the new Scotland Bill in the Queen's Speech after the General Election in May. As such, the devolution of powers looks set to become law, irrespective of who wins that election.  Some material details of the devolution settlement remain to be determined though and the Government has stated that the draft legislation will require "further preparation" before its introduction in a Scotland Bill.

A significant further shift of powers to Scotland raises important considerations for businesses and for UK plc as a whole, and this is therefore a debate in which business leaders and their trusted advisors should engage.

Headline issues for business include:

Fiscal stability
Under the proposed settlement, Scotland will control approximately 60 per cent of Government spending in Scotland and will retain about 40 per cent of tax raised there, with some other costs remaining shared across the UK. The settlement proposals envisage a process of financial adjustment between Scotland and the rest of the UK to reconcile any adverse impact or savings arising from their differing tax and fiscal policies.

Business and economic growth rely on the delicate balance between tax raising, Government spending, monetary policy and the general health of the economy being set at a level that secures sufficient market confidence and liquidity for businesses to execute their commercial objectives. The markets are sensitive to changes in the balance and they punish perceived weakness and reward perceived strength.  Getting the balance right will be all the more difficult across the UK with greater devolution unless the mechanisms are effective. 

Tax shopping
There are three taxes where the power to set rates is to be devolved to Scotland: Income tax (except that paid on non-savings and non-dividend income), Air Passenger Duty, and Aggregates Levy. The right to set the rate of Corporation Tax is also to be devolved to Northern Ireland meaning that certain incorporated businesses will be able to 'rate shop' around the UK for the 'best' Corporation Tax rate.

If Scotland materially changes its rates of Income Tax it may make employment in one part of the UK more or less attractive in terms of tax cost than another.

Businesses involved in onshore oil and gas extraction and the renewables sector will be most affected. Onshore licensing for oil and gas extraction will be licensed by Scotland and there will be a formal consultation role for the Scottish Government and Parliament in designing renewables incentives, to which OFGEM must pay due regard. OFGEM will have to lay its annual report and accounts before the Scottish Parliament and submit reports to, and appear before, committees of the Scottish Parliament. Offshore oil and gas extraction will not be affected.

Regulatory and administrative devolution
Businesses will also view the prospect of regulatory and administrative devolution, in areas such as rail franchising and energy, as potentially both a risk and an opportunity. More localised decision-making can deliver commercial opportunities, but there will be concerns about the risk of increased complexity and divergence.
Wider devolution agenda

Similarly, proposals for devolution across the UK raise issues for business, including:

Regional devolution
Further decentralisation of power from central Government to local communities will have implications for businesses in their dealings with the public sector.  Current proposals include more elected mayors in English cities, decentralisation of public services, local commissioning of infrastructure projects and "devolution on demand" – all of which could present both opportunities and risks for businesses.

Fiscal devolution and economic stability
To what extent should the UK balance risk-sharing across the whole of the UK versus autonomy of devolved administrations?  Is there a risk that too much devolution could lead to a 'Euro-problem', whereby the ability of the UK Government to maintain fiscal coherence and economic stability is undermined?

Global perspective
To what extent will on-going debate and potential discord (before and after implementation) affect the UK's international reputation for political, legal and economic stability? How will a 'UK position' on international matters be delivered if devolved administrations differ in their views, for example on implementing sanctions or agreeing bilateral treaty amendments?

For a full copy of the draft legislation, as it presently stands, please click here.

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