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A Fairer Local Tax for Scotland

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Section 4 - How will a Local Income Tax Pay for Local Authority Services?

41. Unlike general UK income tax, the local income tax will only be used to pay for local authority services. This section considers issues relating to the financial implications of abolishing the council tax and introducing the local income tax.

Sharing Local Income Tax revenue across councils

42. As indicated earlier, our preference is for HMRC to collect the new local income tax. There are different ways in which HMRC might provide the money so collected for local authorities. One way would be for local income tax revenue for the whole of Scotland to be distributed to councils according to their relative need, as part of the existing arrangements for funding local government. Or it could be distributed according to the population in each area. A third way would be to distribute it according to how much local income tax is paid by those who live in their areas.

Funding of council services when we are moving from council tax to Local Income Tax

43. Council tax is paid over the year, giving local authorities a steady stream of money. However under the income tax system, self-employed people do not always pay throughout the year, and instead often pay a lump sum after the tax year has ended.

44. We will discuss with the UK Government ways to make sure that councils get their local income tax money as quickly as possible. We will also take steps to adjust grant payments to local authorities, as appropriate, so that they receive a steady flow of income over the year.

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Council Tax Benefit

45. Council Tax Benefit provides help with paying council tax for people on low incomes. Council Tax Benefit, as with all benefits, is controlled by the UK Government. It is administered by councils, but paid for by the Department for Work and Pensions ( DWP), which gives the money straight to councils.

46. The latest figures (May 2007) from DWP indicate that 533,300 households in Scotland were receiving Council Tax Benefit (either full or partial). Under existing arrangements, over £1.1 billion will be due to be paid in the next three years by DWP to Scottish Councils. We will negotiate with the UK Government as to the future of this Council Tax Benefit money on three grounds.

47. The first is that, according to the current Statement of Funding Policy for the devolved administrations (published by HM Treasury in October 2007), Council Tax Benefit is listed as a component of the Scottish Block, post devolution.

48. The second is as regards a mechanism to reimburse the Scottish Government with an amount equal to the saving in reduced Council Tax Benefit which is described in the Statement of Funding Policy. The UK Government has not operated this mechanism fully for some years and funding was suspended after settlement of the 2003-04 claims. As a result, a significant level of funding, worth several hundred million pounds in total, that would have been due to the Scottish Government from the UK Government has never been paid. The Scottish Government will seek to reverse this decision by the UK Government.

49. The third is as regards a matter of principle. We believe that Scotland should continue to receive from the UK Government the level of funding currently paid as Council Tax Benefit once the council tax is abolished. The Scottish Government is clear that moving from a council tax to a Local Income Tax will not place any greater burden on the UK Exchequer and that, as a result, the UK Government should continue to make available an equivalent sum to Scotland after the abolition of council tax. Council Tax Benefit is paid to Scottish councils to provide financial support for the delivery of local services. The introduction of a local income tax does not change that requirement and that is why Scottish councils should continue to receive this flow of revenue under a new system.

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