RICS Scotland: The Implications of Independence and Further Devolution for Land, Property and Construction in Scotland - July 2014
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Policy
July 2014
RICS Scotland: The Implications
of Independence and Further
Devolution for Land, Property
and Construction in Scotland
rics.org/policyRICS Scotland: The Implications of Independence and Further Devolution for Land, Property and Construction in Scotland
Introduction
On 18 September 2014, Scottish residents will go to their polling stations to
decide whether Scotland should remain part of the UK.
The independence debate has seen the formation of two campaign groups – YesScotland
and Better Together. As anticipated, both camps have been issuing statements and
research papers advocating their respective sides of the debate, and it has become
apparent that whilst the referendum debate has brought key issues to the fore, there are
still many unanswered questions.
A global organisation, the Royal Institution of Chartered Surveyors (RICS) is the principal
body representing professionals employed in the land, property and construction sectors.
In Scotland, the Institution represents over 11,800 members comprising chartered
surveyors (MRICS or FRICS), Associate surveyors (AssocRICS), trainees and students.
Our members practise in sixteen land, property and construction markets – all of which
will be impacted by independence. Accordingly, RICS has produced this paper to outline
the potential implications and impact that the referendum debate and further devolution
of powers or independence may have on these sectors.
At this stage, it is important to note that RICS is an organisation with a Royal Charter
and, therefore, a duty to protect the interests of the public. We are committed to ensuring
that our members play a positive and active role in shaping the land, property and
construction sectors.
As a consequence of its Royal Charter, RICS Scotland is in a unique position to provide
a balanced, apolitical perspective on issues of importance to the land, property and
construction sectors.
In writing this paper, RICS Scotland realises that whilst our members work in the
land, property and construction sectors, there areas and issues that lie out with their
working remit that may have an effect on their working practices; an example of which is
employment law. This is currently a reserved matter for Westminster, and even in the event
of no vote, this could be transferred to Holyrood, through post-no vote negotiations, that
will form part of a ‘devo plus’ scenario.
Keeping with this example, the transfer of employment law will undoubtedly have
implications on the working practices of RICS members in Scotland. Unfortunately,
this issue lies out with RICS Scotland’s remit, and will therefore not provide comment.
There are, of course, other issues, like employment law, that will affect chartered surveyors
that fall beyond RICS Scotland’s expertise radar.
Accordingly, within this paper, RICS took the decision to focus solely on issues that we
have expertise on, and are best placed to provide comment.
3rics.org/policy
A Changed Scotland
There has been a lot of commentary in the media that Scotland will be different following
the vote. Whether the poll returns a ‘yes’ or ‘no’ vote, Scotland will certainly be different
within a political-financial framework. This is due to the agreed transferal of currently
reserved powers from Westminster, to Holyrood, as a result of the Scotland Act 2012.
With the passing of this Act, the current Scottish Government administration has already
made headway into devising appropriate systems and conditions to accommodate the new
powers: Income Tax, Stamp Duty Land Tax, Landfill Tax, and further borrowing powers.
The transferal of these powers will provide Holyrood with a greater level of responsibility.
Interestingly, under the original devolution settlement, Holyrood already has the ability
to vary income tax by up to 3 pence in the pound, but these powers have never been
exercised by any administration since 1999.
Income Tax:
At present, from April 2016, the Scottish Parliament will have jurisdiction over setting income
tax for people working in Scotland. It has been agreed that a proportion of the income tax
paid by all Scottish taxpayers will go to fund spending by the Scottish Government.
As mentioned previously, Holyrood can already alter income tax, but this power will be
succeeded by the new powers introduced by the finance provision within the Scotland
Act 2012.
In the new regime, Holyrood will have the ability to vary a Scottish Rate of Income Tax
(SRIT) by 10 pence in the pound. Furthermore, Holyrood will keep half of the monies
raised via the SRIT; the other half will go to the UK Treasury.
However, any changes to the SRIT will have an effect on the Scottish budget. As an
example, if Holyrood lowers the basic the rate of income tax from 20% to, say, 19%,
Scotland will get 9% and the UK will get 10% of the revenue raised. The Scottish
Government, therefore, would have the equivalent value of 1% income tax revenue
less to spend.
As a professional body, our primary concern would be that should the elected
administration, at the time of the SRIT implementation, decide to cut income tax, monies
would need to be raised from elsewhere to ensure current spending is matched.
Whilst income tax plays a role on the working practices of members and member firms,
RICS Scotland is not in the position to provide comment on the impact that SRIT may
have on the land, property and construction sectors – it is impossible to say at this time.
Of course, if the Scottish electorate votes for independence, Holyrood would have
complete jurisdiction over Scottish income tax affairs.
Land and Building Transaction Tax (LBTT):
This tax will replace the current Stamp Duty land Tax (SDLT), and the Scottish
Government has already consulted extensively with external stakeholders how this new
tax will work.
The LBTT makes provision for a new, progressive structure of taxation, which differs from
the current structure of SDLT, that will work like the current income tax system – where a
percentage is paid on incomes in bands.
It is hoped that the proposed, innovative LBTT structure will be fairer than the current
SDLT system.
4RICS Scotland: The Implications of Independence and Further Devolution for Land, Property and Construction in Scotland
LBTT will have an impact on the rural, residential and commercial sectors in Scotland
no matter what the outcome of the debate. However, the Cabinet Secretary for
Finance, Employment and Sustainable Growth – John Swinney MSP – has intimated
that a statement on the bands and thresholds of the LBTT will not be issued until
September 2014.
RICS Scotland is encouraged that the current administration is utilising this opportunity
to potentially create a fairer tax system that could iron-out house price peaks currently
witnessed at band thresholds of the SDLT.
However, we also forewarned the Scottish Government that they should err of the side of
caution when considering a higher tax band for properties over £2m (as has been suggested).
Additionally, from a residential perspective, the Scottish Government should ensure that
a balance in struck between setting rates and thresholds that gets first time buyers
onto the market, whilst not discouraging investment at the higher end of the market and
second-steppers.
Landfill Tax:
From April 2015, the Scottish Landfill Tax will be collected by Revenue Scotland – a new
body created to take responsibility for the administration of Scotland’s new devolved taxes
(LBTT, Scottish Landfill Tax and SRIT).
At present, the UK Landfill Tax, which is collected by HMRC, is designed to encourage
a lower level of waste production. It is viewed as a useful mechanism in changing
environmental attitudes and the diversion of waste to landfill. It is likely that the Scottish
Landfill Tax will continue with this aim and will tie in with the Scottish Government’s Zero
Waste Plan.
At present, we are still unclear how different the Scottish Landfill Tax will be in comparison
to the current UK-wide arrangement. However, there will be role to play for Revenue
Scotland and the Scottish Environment Protection Agency (SEPA) in the administration
of this tax.
There could be potential implications on rural and, to a degree, urban Scotland; which,
subsequently, could have an impact of on the work of our members. It is likely, however,
that post-referendum (regardless of the outcome) environmental policies, such as changes
to the Government’s Zero Waste Plan, will have the greatest impact on this tax.
5rics.org/policy
Impact by Sector
Residential Property
The Scottish Parliament already has a significant level of legislative and policy levers over
the property sector; such as housing, economic development, and local Government.
Successive Scottish Governments have made significant changes to Scottish housing
through a plethora of policies and legislative mechanisms; for example, the introduction of
mandatory Home Reports for houses on the market; the Housing (Scotland) Bill – ending
the right-to-buy and introducing regulation of letting agents (amongst many other policies);
and the Scottish Government’s Sustainable Housing Strategy is well underway.
Indeed, following the publication of the Scottish White Paper ‘Scotland’s Future’ we
contacted the Scottish Government and asked “How important is housing to the Scottish
economy and society as a whole; and will there be any significant changes made to, or
within, the sector in the event of independence?”
We received a reply from the Scottish Government stating that it recognises that
“investment in housing brings wide ranging benefits to the economy, communities and
the health and well-being of individuals.” The reply also made reference to an independent
Scottish Government providing more affordable housing, to meet housing needs, and
tackling fuel poverty a priority.
We agree that affordable housing and tackling fuel poverty should be priorities of any
Government administration. However, given the current status of housing in Scotland, and
the relatively high level of devolved measures that have an effect on housing, we believe
that it is non-property related matters, such as immigration and welfare, which will have
the greatest effect on housing. Monies spent on these areas, as examples, will inevitably
have a knock-on effect on the overall housing budget.
In regard to mortgages, at this stage, it is hard to ascertain how they will be affected. The
debate has seen both campaign teams insisting that each outcome would lead to better
mortgage rates and regimes for customers. However, in the end, it may simply come
down to Scotland’s future currency. At the moment, an independent Scotland’s future
currency is not clear.
Commercial Property
In the commercial context, there is a view that the referendum debate has caused some
uncertainty in this area. In the event of a ‘Yes’ vote, there will be an 18 month transition
period (from 19 September 2014 to until 24 March 2016) during which time the Scottish
and UK Governments are scheduled to negotiate the “Independence Package”. It is
unlikely that any uncertainty will be alleviated during this period.
However, is it hard to ascertain the level of investor interest in Scottish commercial
properties over the last few years – we have heard mixed opinions on this matter.
Additionally, if it has been lower, it is even harder to determine whether this decrease has
been caused by the recent recession or the referendum debate. What should be noted
is that the commercial market in Scotland has not been stagnant, with a decent amount
of investor and occupier appetites being evident. We also need to consider that a ‘new’
investment arena – that of an independent Scotland – could entice a certain type of investor.
6RICS Scotland: The Implications of Independence and Further Devolution for Land, Property and Construction in Scotland
Commercial – Financial
We have already mentioned the potential role and impact of the forthcoming Land and
Building Transaction Tax (a replacement for SDLT). As stated previously, we will not know
the bands and thresholds until September 2014.
Other financial aspects that affect commercial units in Scotland are empty property rates
and business supporting incentives. These are already devolved and RICS Scotland
regularly advises Government administrations on the advantages, and disadvantages,
of the proposed, and existing, regimes in Scotland.
Construction
At the Scottish National Party (SNP) Conference in October 2012, Nicola Sturgeon MSP
– Deputy First Minister and Cabinet Secretary for Infrastructure, Capital Investment and
Cities – stated that “We must build our way out of recession”. RICS Scotland concurs.
It is beyond doubt that the construction industry is vital to the Scottish economy. Recent
Scottish Government figures show that not only does the sector employ over 170000
people – equivalent to over 10% of the total work force in the country – but it also
supports 31000 businesses and provides £21.6bn of the country’s total GDP. Additionally,
a recent multiplier suggested that for every £1 spent on construction output, a further
£2.94 is generated in the economy.1
It is imperative that the construction, and infrastructure, sectors – through creating the
right conditions for investment – are developed in a way that provides ideal conditions for
construction to thrive, and the current administration fully recognises this.
As with the property and commercial aspects already mentioned in this paper, Holyrood
already has a significant level of influencing measures for these sectors. Successive
National Planning Frameworks, the Scottish Planning Policy, and the Infrastructure
Investment Plan (IIP) are just some of the Government-led initiatives that showcase the
capacity of Scottish Government administrations to take an objective and self-supporting
path from our UK counterparts.
There is regularly widespread discussion and deliberation over the effect that independence
could have on all aspects of Scotland i.e. markets, business, social and natural
environments etc., which can all impact on the construction and infrastructure sectors.
For vibrant and healthy construction and infrastructure sectors to continue in Scotland,
they need confidence.
Unfortunately, we are no clearer on the fiscal risks and opportunities of this debate –
certainly from the construction side – than we were 18 months ago.
That said, the Scottish Government track record on construction and infrastructure is
commendable, which is one of the reasons why the Scottish construction sector continues
to be an attractive arena for investment – for both internal and external investors.
It is important to realise that local construction firms, and those based abroad, will adapt
to cater for any outcome; because they have to.
1 Statistics taken from the ‘Building for The Future: The Scottish Construction Industry’s Strategy 2013-2016’
report by Construction Scotland
7rics.org/policy
Infrastructure
Infrastructure involves a plethora of entities – and a significant number of these are
already devolved, for example: transport, planning, electrical grids etc. Additionally, under
the provisions of the Scotland Act (2012), the Scottish Parliament will have additional
borrowing powers from 2015.
With Scotland already having a coherent, commendable, and forward-moving
Infrastructure Investment Plan (IIP), could Scotland maintain infrastructure spending levels
following a loss of the Barnett block grant and increased expenditure? On this latter point,
we have already predicted immigration and welfare having an effect on housing – would
another infrastructure-related factor, such as renewables subsidies, affect the IIP and
other future infrastructure projects and programmes?
It is easy to predict what the referendum campaign teams will answer to this question,
but what might not be so clear is whether Scottish independence would have a knock on
effect on potential cross-border projects, such as any future upgrades to the cross-border
A(M)1 or the High Speed 2 railway (HS2).
In the event of independence, and the provision of complete jurisdiction over borrowing,
an independent Scotland’s ability to borrow will depend on a diverse array of factors, such
as: domestic savings, interest rates, prospects for economic growth, confidence and
security and inflation.
Should the Scottish electorate say Yes, many of the aforementioned factors will depend
on the post-independence administrations creating and maintaining the right conditions
for investment and building investor confidence.
Indeed, as we intimated before, confidence is key to sector success. The UK coalition
Government and opposition parties have intimated that currency sharing is not an option.
The Yes campaign has rejected this notion. However, this dispute and uncertainty over
currency is not building confidence nor buoyancy – quite the opposite.
Land
Rural legislation and policy are already significantly devolved to the Scottish Parliament
and have undergone notable amendments and reforms since Scottish devolution in 1999.
Two particularly large rural issues affected by the independence debate which are still
unclear include: CAP reforms and energy policy.
Scotland’s position in the UK, and Europe, will have a sizable effect on CAP allocations, as
well as access to current markets. The recent European Parliamentary elections saw the
UK Independence Party (UKIP) receive the greatest number of votes, and seats, including
one in Scotland. Other political parties, of a similar political persuasion, returned a high
number of seats. This result could have an impact on future European legislation, and the
role and input of Scotland and the UK.
In terms of electricity generation, the Scottish Government administrations, past and
present, have set high renewable energy targets, and this is commendable. However, like
infrastructure, it remains to be seen whether an independent Scotland could maintain the
current levels of investment and subsidy to meet targets and demand.
8RICS Scotland: The Implications of Independence and Further Devolution for Land, Property and Construction in Scotland
Europe Union
Scotland’s membership of the European Union, in the event of independence, has been
debated at length, not just by the two opposition campaign teams, but within the UK and
across many European member states.
It is not within RICS Scotland’s remit to comment on Scotland’s prospects of European
Union membership. However, there are a number of issues – within the European
membership context – that could have effect on the land, property and construction
sectors in an independent, or ‘devo plus’, Scotland.
First of all, EU membership offers huge benefits to the land, property and construction in
the UK, as it would do in an independent or ‘devo plus’ Scotland. The EU offers a massive
market, providing unparalleled access to international trading partners and huge financial
returns in the form of exports.
Additionally, an independent Scotland, as an EU member, could give Scottish delegates
a greater level of autonomy and sovereignty ‘at the table’ when it comes to negotiating
deals for major Scottish industries and sectors, such as CAP and fishing rights.
If Scotland cannot, or does not, join the European Union in the event of independence,
there are other options available. Scotland could, for example, sign up to bilateral
agreements to join the EU internal market and the Schengen Area (much like Iceland’s
current situation) – providing access to the EU market and encouraging conditions for the
free movement of goods, information, money and people. This arrangement works well
for Iceland, and we cannot see how this arrangement would not work, and be of benefit
to land, property and construction in Scotland.
Full membership, or a negotiated settlement to allow access to EU markets, will assist
Scotland in maintaining levels of investment from abroad.
9rics.org/policy
Further Taxes within the Devo Max
Setting – A ‘What If’ Scenario
As mentioned at the start of this paper, political parties, across the spectrum, are coming
forward with notions for further devolution of various powers, including further taxation
responsibilities.
In considering the approach taken by the Scottish Government toward LBTT, SRIT and
the landfill tax, and the formation of the new Revenue Scotland tax-collecting body, it is
beyond doubt that any future devolved tax powers will be legislated very much with the
Scottish economy, living conditions and Scots law in mind. In other words, they will be
‘Made in Scotland’.
In the case of a no-vote, any further devolution of tax powers to the Scottish Parliament
would, as is presently the case, require the agreement of the UK Government. Any covenant
between Westminster and Holyrood would, inevitably, need to take into account a diverse
array of influencing factors, coupled with pressures from the Scottish Government (at the
time) and, quite likely, the assessments of Scottish (and to an extent English, Welsh and
North Irish) Parliamentarians in Westminster.
A prominent point to remember is the compatibility with EU rules that could figure in any
legislative changes; Scottish and UK membership of the EU will have implications on the
key sectors, depending on the referendum outcome, in this instance.
Two key taxes that have an impact on land, property and construction are value added
tax (VAT) and corporation tax.
10RICS Scotland: The Implications of Independence and Further Devolution for Land, Property and Construction in Scotland
VAT
RICS, as well as other like-minded organisations, has called for a reduction in VAT from
the UK Government on many occasions to boost the construction sector.
Whilst it is a statue of the EU that any member state must impose VAT, the possible
devolution of further tax powers to Scotland has led the construction sector across
the country to “sit up” in anticipation of a possible VAT cut – either through ‘devo plus’
measures, or through a split from the UK, or potentially, the EU.
In addition, and more importantly in relation to this issue, EU legislation prohibits the
charging of different VAT levels within a member state – this includes the UK, which
is considered one state.
Assuming that the UK remains part of the EU, this ultimately means that VAT cannot be
devolved to Scotland so long as it remains part of the UK – even within a ‘devo plus’ context.
The Calman Commission, whose report made recommendations that were implemented
as part of the Scotland Act 2012, rejected the notion that part of the UK VAT revenues
should be allocated to the Scottish Parliament.
VAT has a huge impact on land, property and construction, and RICS Scotland would
support the devolution of VAT to Scotland, on the proviso that guarantees were made
that VAT would be lowered, as this would, as we have always suggested, aid local SMEs
and the wider economy in Scotland. Indeed, a VAT cut to 5% would have created 2,103
additional jobs in the Scottish construction sector in 2012, with this figure rising to 3,625
by 2020.
11rics.org/policy
Corporation Tax
EU legislation also plays a prominent role in this issue. A recent ruling by the Court of
Justice of the European Union implied that member states are allowed to differentiate
business tax rates within its regions, on the proviso that certain requirements of
constitutional, procedural and financial autonomy are met. This could have implications on
the key sectors in the event of a no vote and the subsequent devolution of further powers.
Experts are of the opinion that the former two tests – constitutional and procedural –
could be met more easily than the financial tests within the current UK setting, although
this would require the devolution of further powers to the Scottish Parliament. These
additional powers would need to establish the Scottish Parliament’s ability to set the rate
of tax without any interference from the UK Government i.e. Westminster.
However, the fiscal consequences are a little trickier. In order to be compatible with EU
legislation, any reduction in the rate must not be offset by assistance or subsidies from
central government; in the current case, Westminster. Therefore, it would need to be
made abundantly clear that the block grant that Holyrood receives from Westminster
– as part of the Barnett Formula – was reduced.
Like all devolutionary notions, the UK Government has to agree and pass in legislation
to allow Scotland to either set its own rate of corporation tax or completely devolve the
corporate tax procedure.
The Scottish Government has already suggested that an independent Scotland would
have a corporation tax that would gradually reach 3 points lower than the UK. It is unclear
whether this policy would be taken forward as an increased devolution measure.
RICS Scotland agrees that lower corporation tax could provide a necessary boost to the
local SMEs across all Scottish markets and the wider economy, but revenue lost through
this cut would need to be found from elsewhere.
There could also be implications for areas in close proximity to Scotland, such as
Cumbria, Northumberland and Northern Ireland.
Indeed, this notion has been made apparent in Northern Ireland, whereby the Republic
of Ireland lowered its corporation to 12.5%, thus making Northern Ireland uncompetitive
by comparison.
12RICS Scotland: The Implications of Independence and Further Devolution for Land, Property and Construction in Scotland
Closing Statement
As part of its Royal Charter, RICS has an obligation to bear in mind the public interest,
as well as the interests of its members, when developing policy and engaging with
stakeholders. This puts RICS in a unique position to provide a balanced and apolitical
perspective on issues of importance to sectors relating to its remit and portfolio.
RICS is apolitical and will remain neutral on the independence debate.
Political parties have come forward with announcements on further ‘devolution settlement
packages’ in the event of a no-vote. RICS Scotland hopes that there is a consensus
during the ‘devo plus’ negotiations to assist in (re)building confidence in Scotland quickly
and effectively.
Regardless of the outcome, RICS Scotland will continue to advise the Scottish Government
on issues relating to land, property and construction with the public interest at the heart of
any recommendations.
13rics.org/policy
14Confidence through professional standards RICS promotes and enforces the highest professional We believe that standards underpin effective markets. With qualifications and standards in the development and up to seventy per cent of the world’s wealth bound up in land management of land, real estate, construction and and real estate, our sector is vital to economic development, infrastructure. Our name promises the consistent helping to underpin stable, sustainable investment and delivery of standards – bringing confidence to the growth around the globe. markets we serve. With offices covering the major political and financial centres We accredit 118,000 professionals and any individual or of the world, our market presence means we are ideally firm registered with RICS is subject to our quality assurance. placed to influence policy and embed standards at a national Their expertise covers property valuation and management; level. We also work at a cross-governmental level, delivering the costing and leadership of construction projects; the a single, international standard that will support a safe and development of infrastructure; and the management of vibrant marketplace in land, real estate, construction and natural resources, such as mining, farms and woodland. infrastructure, for the benefit of all. From environmental assessments and building controls We are proud of our reputation and we guard it fiercely, so to negotiating land rights in an emerging economy; if our clients who work with an RICS professional can have confidence members are involved the same professional standards in the quality and ethics of the services they receive. and ethics apply. United Kingdom RICS HQ Ireland Europe Middle East Parliament Square, London 38 Merrion Square, Dublin 2, (excluding UK and Ireland) Office G14, Block 3, SW1P 3AD United Kingdom Ireland Rue Ducale 67, Knowledge Village, t +44 (0)24 7686 8555 t +353 1 644 5500 1000 Brussels, Dubai, United Arab Emirates f +44 (0)20 7334 3811 f +353 1 661 1797 Belgium t +971 4 446 2808 contactrics@rics.org ricsireland@rics.org t +32 2 733 10 19 f +971 4 427 2498 Media enquiries f +32 2 742 97 48 ricsmenea@rics.org pressoffice@rics.org ricseurope@rics.org Africa Americas South America Oceania PO Box 3400, One Grand Central Place, Rua Maranhão, 584 – cj 104, Suite 1, Level 9, Witkoppen 2068, 60 East 42nd Street, Suite 2810, São Paulo – SP, Brasil 1 Castlereagh Street, South Africa New York 10165 – 2811, USA t +55 11 2925 0068 Sydney NSW 2000. Australia t +27 11 467 2857 t +1 212 847 7400 ricsbrasil@rics.org t +61 2 9216 2333 f +27 86 514 0655 f +1 212 847 7401 f +61 2 9232 5591 ricsafrica@rics.org ricsamericas@rics.org info@rics.org North Asia ASEAN Japan South Asia 3707 Hopewell Centre, Suite 10, 25th Floor, Level 14 Hibiya Central Building, 48 & 49 Centrum Plaza, 183 Queen’s Road East Samsung Hub, 3 Church Street, 1-2-9 Nishi Shimbashi Minato-Ku, Sector Road, Sector 53, Wanchai, Hong Kong Singapore 049483 Tokyo 105-0003, Japan Gurgaon – 122002, India t +852 2537 7117 t +65 6692 9169 t +81 3 5532 8813 t +91 124 459 5400 f +852 2537 2756 f +65 6692 9293 f +81 3 5532 8814 f +91 124 459 5402 ricsasia@rics.org ricssingapore@rics.org ricsjapan@rics.org ricsindia@rics.org UKBOILERPLATE/JULY 2014/DML/19688/RICS SCOTLAND INDEPENDENCE IMPLICATIONS rics.org
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