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London Finance Commission Working Paper
Options for tax assignment and devolution
1. Introduction and decisions
1.1. This paper is a summary of taxes the Commission may consider in its
recommendations for devolution or assignment of taxes to London, drawing mainly
on the existing research conducted for the Lyons Inquiry and the Calman and
Holtham Commissions.
1.2. The following three categories of tax devolution/fiscal freedom are considered in
this paper:
 the power to vary existing taxes;
 tax assignment; and
 the power to set and collect new taxes.
1.3. The Commission is asked to:
 comment on and discuss the content of the paper
 consider findings in its recommendations to the Mayor
2. Background
2.1. The GLA was established in the same devolutionary movement as the Scottish and
Welsh governments, although with different outcomes in terms of the extent of
devolution. The current devolved settlement reflects London’s difference from the
rest of England, both in economic and political terms. London’s status as one of
the world’s leading cities puts it on a par with New York, Paris and Tokyo (all of
which have considerably greater fiscal autonomy).
2.2. The current arrangements for taxation and control of resources in London are
different from those of the Scottish and Welsh administrations and remain very
centralised. As such, they are perceived by many to be inadequate to meet needs in
London’s unique circumstances.
2.3. In recognition of this, the Mayor has requested that the Commission examine ways
to improve tax and public spending arrangements in London.
3. Overview
3.1. In setting out the advantages and disadvantages of the different options for tax
devolution and assignment, this scoping exercise suggests that one of the
following would offer London the greatest flexibility (within the bounds of
feasibility dictated by the current political context):
 the power to vary taxes that are currently controlled at a national level, with
property stamp duty or income tax as the most natural candidates and air
passenger duty, landfill tax, council tax and business rates as possible options
 local fixed rate assignment of some, part or all of the above taxes as well as
VAT, vehicle excise duty and fuel duty.
3.2. In taking the assessment of these further, the Commission would need to consider
the following in relation to devolved or assigned taxes:
 What benefits would this bring about (greater flexibility, higher revenues, etc)?
 What would this fund in London?
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How practical would this be to implement?
What checks and balances would need to be introduced?
4. Tax assignment
4.1. At present most taxes collected nationally are paid to central government and
spent and redistributed according to its priorities.
4.2. Tax assignment is where a tax (or a proportion of a tax) is dedicated to a particular
purpose (or geographical area), removing some discretion from central government
as to how funds will be allocated.
4.3. Initial assessments suggest that broadly speaking all taxes that would be suitable
for devolution would also be suitable for assignment (see section 4). It may also be
possible to assign additional taxes that would not be suitable for devolution such as
VAT and fuel duty.
4.4. Tax assignment does not introduce economic distortions because central
government still controls tax rates. Because of this, it does not increase the fiscal
accountability of sub-national governments, as they do not determine the tax rates
from which they are assigned a share.
4.5. The system can be inflexible. Sub-national government has to accept falls in tax
receipts but has no power to affect these. Indeed, even in the event of windfalls,
the sub-national government may not have the power to pass benefits on to local
taxpayers by lowering tax rates (though with regard to business rates, the current
reforms of local government finance come on top of a recent power granted to
local authorities to offer business rate discounts).
4.6. Benefits of assignment are that it is more transparent (it is more obvious how
particular revenue streams are spent), it can afford sub-national governments a
source of revenue free of the restraints of central government decisions, thus
alleviating dependence on grant settlements, and it can be a buoyant form of
revenue.
4.7. Taxes can be assigned either at the national level, so that a proportion of an overall
national tax is allocated to support local services, or at the local level, where a
proportion of a national tax collected in a local area is assigned to the relevant local
authority, in place of some or all of its grant.
4.8. Locally assigned taxes can have an incentive effect, eg if income tax is assigned
there is an incentive to create local jobs. The Department for Communities and
Local Government (CLG) estimate that over seven years, its business rate reforms
may add between £2 and £20 billion to GDP as a result of the incentives
introduced by its reforms, although many local authorities are unconvinced that
they will benefit as much from business rate growth.
4.9. Given London’s relatively strong economy and historical position as a tax exporter,
local assignment would seem the most natural option.
4.10. Taxes can be assigned at a fixed rate, which leaves central government with less
flexibility and control but transfers some risks associated with economic cycles to
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sub-national governments, or at a variable rate, which does not offer sub-national
governments buoyant revenues (but still increases transparency).
4.11. In his 2007 report, Lyons recommends that government should consider
introducing a form of tax assignment but raises questions of how implementation
would be approached.
4.12. In Calman’s later report (2009), this option is not recommended for Scotland
because of the lack of predictability inherent in uncertain economic circumstances.
5. Devolving/varying existing taxes
5.1. Tax devolution, which allows sub-national governments to raise some (or all) of
their own tax revenue, delivers more accountability and removes dependence on
grant.
5.2. Additional borrowing capacity (in line with prudential borrowing principles) on the
part of the GLA and local authorities would be required alongside such powers to
make up for fluctuations in tax revenues, to complement existing freedoms to build
up reserves.
5.3. Taxes with an immobile base that do not cause distortions are usually considered
most suitable for devolution.
5.4. The Holtham Commission points out that the potential for economic distortions
and tax avoidance as a result of tax devolution is of greater concern in the case of
Wales than Scotland because its economy is much more closely bound into the
economy of England than is the Scottish economy.
5.5. While London’s economy is even more bound to that of the rest of England
(particularly to the wider South East region) than that of Wales is, London is in a
stronger position than Wales because of its much greater size and economic
strength.
5.6. The remainder of this section briefly examines and at a high level the
potential suitability of a number of taxes for devolution and assignment. It
is important to stress that the Commission’s views are sought on whether
or not further work should be undertaken with organisations like the IFS,
HM Treasury and HMRC to examine the case for devolution and
assignment in more detail. It is also important to stress that this paper
does not advocate the assignment or devolution of any specific tax but
merely sets out the potential feasibility of different options.
Income tax (a tax on most forms of income)
5.7. Income tax could be devolved in a number of ways. Powers over the basic rate or
overall rates could be devolved, the tax could be devolved entirely or still partly
shared with the UK government and powers over thresholds, allowances and other
structural aspects could also be devolved.
5.8. Rates of income tax are politically sensitive and this tax is particularly well known to
taxpayers.
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5.9. An increased rate could result in out migration to avoid rises. However,
international evidence summarised by Holtham presents conflicting conclusions and
does not demonstrate a strong migration effect.
5.10. The Holtham Commission recommended that income tax raising powers should
be devolved to the Welsh Assembly Government, as even small rises have the
potential to increase its budget significantly.
5.11. The Scotland Act 2012 (based on Calman’s recommendations) augmented the
Scottish Government’s powers such that the rate paid by Scottish taxpayers is now
calculated by reducing the basic, higher and additional rates of income tax levied
by the UK Government by 10 pence in the pound and adding a new Scottish rate
set by the Scottish Parliament.
5.12. Even before the Scotland Act was passed in 2012, the Scottish Parliament already
had the power to vary the basic rate of income tax on earned income in Scotland by
up to 3 pence in the pound (in either direction), which was called the Scottish
Variable Rate (SVR).
5.13. It is worth nothing, however, that the SVR power was never used. The Calman
Commission suggests this is because the revenue that could have been raised was
not substantial enough to justify the start-up costs of administering the system and
because this was a ‘passive power’ (in that doing nothing did not decrease the
Parliament’s budget).
5.14. Income tax could be a candidate for devolution or full or partial assignment to
London, particularly in light of the precedent set by Scotland.
5.15. However, Lyons warns of the complexity of devolving this kind of tax (to local
government in England) and estimates that the process of design and
implementation would take six to seven years.
Air Passenger Duty (charged on the carriage, from a UK airport, of chargeable
passengers on chargeable aircraft and paid by the aircraft operator)
5.16. This tax could be devolved but some elements of EU law would first require
clarification.
5.17. Devolving this tax to London may raise questions of the capital’s relationship
with the wider South East (only Heathrow and City Airports fall within the Greater
London boundary) and have policy implications.
Landfill Tax (charged on disposal of waste at licensed landfill sites, and paid by
the site operators)
5.18. As this tax has an immobile base it could be a suitable candidate for devolution or
assignment.
5.19. Consideration of levels of landfill in the London context and revenue raised
compared to associated administrative costs would be necessary.
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Stamp Duty Land Tax (payable on the purchase or transfer of property or land
where the sum paid exceeds a certain threshold)
5.20. As this tax has an immobile base it could be devolved or assigned.
5.21. Revenues from this tax may be valuable in London because of the high value of
land in the capital compared to other parts of the UK, which may suggest it as a
promising candidate.
Stamp duty on securities and shares (payable on the purchase or transfer of
shares)
5.22. Devolving this tax would lead to distortions and economic inefficiencies. Similarly,
assignment is unlikely to be practical or perceived to be fair.
VAT (a tax on most goods and services)
5.23. EU law requires all member states to apply a common rate of VAT within their
jurisdictions, which means this tax could not be devolved. It could be feasible to
assign, but the practical challenges of doing so are likely to be immense.
Fuel duty (levied on manufacturers and importers of oil products)
5.24. A European Directive requires fuel duty rates to be set nationally, with a single
duty rate for each fuel type across the whole of each member state. This tax is
therefore unsuitable for devolution. It could be feasible to assign.
National Insurance Contributions (a tax on income from employment, levied on
employers, employees and the self-employed)
5.25. As this is a payroll tax, regional differences may create economic distortions if
companies chose locations based on differing tax burdens.
5.26. Its close link with the social security system, which is likely to remain at the UK
level, also renders it unsuitable for devolution or assignment.
Corporation tax (a tax on the profits of limited companies and other
organisations)
5.27. Devolved and therefore differing corporation tax rates could cause harmful tax
competition, as firms may react to tax considerations rather than commercial
factors. Assignment would neither be practical nor fair.
Capital gains tax (a tax on the gain or profit from selling or otherwise
disposing of a possession, such as shares or property)
5.28. Devolving or assigning this tax would be prohibitively complex and allow scope
for tax avoidance.
Vehicle Excise Duty (VED) (payable by either the registered or actual keepers
of vehicles)
5.29. This tax (referred to by many as road tax) is not a suitable candidate for
devolution or assignment because of administrative complexity (the legal owner of
a vehicle may not be the registered keeper) and because it could cause distortions.
Alcohol and tobacco excise duties (levied on alcohol and tobacco products
before release to the UK market)
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5.30. Given the mobility of such goods, the scope for tax avoidance would be so great
as to cause distortions. There would also be practical challenges in assigning the
tax.
Betting, gaming duties (duty charged on net stake receipts and gross gaming
yields)
5.31. These duties would be easily avoidable because of internet and telephone
transactions, making assignment and devolution difficult in practice.
Climate change levy (chargeable on the industrial and commercial supply of
taxable commodities for lighting, heating and power by business consumers)
5.32. This is unsuitable for devolution as it would cause distortions and is closely
aligned with energy policy, which is unlikely to become a devolved function.
Inheritance tax (paid on the estate of deceased persons and on some trusts or
gifts made by individuals during their lifetime)
5.33. This tax is already subject to tax avoidance attempts and regional differentiation
may only facilitate this further. Assignment might be feasible, but would likely
involve significant administrative complexity.
Insurance premium tax (a tax on general insurance premiums, paid by
companies and intermediaries)
5.34. As this tax is paid by companies and intermediaries, its devolution or assignment
would be administratively complex and could incentivise significant avoidance and
create economic distortions.
Greater discretion over council tax (a tax based on property values to part
fund local services)
5.35. Although Lyons describes council tax as a pragmatic compromise between a
property tax and a service charge, his final recommendation is to retain it as it is
easy to collect and difficult to evade.
5.36. Devolving responsibility for council tax could result in the creation of more
council tax bands or more frequent revaluations of property, which could
significantly increase revenues in London where property prices are much higher
than in the rest of the UK.
5.37. It is important to note that Lyons’ research shows significant public opposition to
the idea that tax bills should reflect property values.
5.38. Lyons also suggests that a local income tax could supplement or replace council
tax.
Business rates (a property tax on non-domestic land or property paid by the
occupier or owner)
5.39. The current reforms of business rates introduce an element of devolution,
although with a nationally set system of ‘tariffs’ and ‘top-ups’ sustain a form of
equalisation. . There could be scope to increase the share of business rates retained
by local authorities (the Government proposes that its central share is 50% which is
higher than originally anticipated by local government.). There may also be scope
for further devolution, such as having a London business rate, but business groups
generally oppose this. There could be scope for more local discretion on where
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business rates should apply, eg on empty property relief and derelict property and
brownfield land. London NDR payers are already contributing an additional levy
towards the cost of Crossrail, an interesting precedent.
6. Setting and collecting new taxes
6.1. The Commission may wish to consider new taxes that could be levied at the
London level on goods or activities that are currently untaxed in the UK. Some
options are outlined below.
Visitor tax
6.2. Accommodation taxes have been deployed in a number of places around the
world such as New York, Vienna, Amsterdam and Vancouver.
6.3. Research carried out by the London Development Agency in November 2008
suggested that a flat rate bed tax could generate up to £109.86m per annum in
London.
6.4. Unsurprisingly, the idea of a bed tax has been strongly opposed by the hospitality
industry. Budget hotel chains have argued that it would be costly to administer
and would put off people visiting areas subject to the tax. Small businesses have
also opposed it. Hypothecation of the revenue to particular purposes might make
it more palatable to the industry.
Sales tax
6.5. The idea of a local sales tax (additional to VAT) has not been well documented in
previous reviews.
6.6. It may be an option but questions exist around compatibility with EU regulations
(which state that VAT must be set at a national rate).
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ANNEX - SUMMARY OF INITIAL FEASIBILITY ASSESSMENT
Tax
Potentially
Advantages
feasible for
devolution
Income tax
Yes
Precedent set by Scotland’s devolved
powers over income tax rates.
Disadvantages
Potentially feasible for assignment
Potentially lengthy design and implementation.
This is a well known tax so perceived rises may be unpopular.
Yes
Stamp Duty
Land Tax
Yes
Valuable in light of London’s high
property prices.
Immobile base.
Air Passenger
Duty
Yes
London has a high number or air
passengers.
Questions around ‘London’s’ air passengers compared to Greater London
boundary.
Potential problems with EU regulations.
Yes
Landfill tax
Yes
Immobile base.
Not necessarily a big source of revenue in London.
Yes
Greater
discretion over
council tax
Yes
Potentially high revenues in light of
high property values in London.
Likely to be strong public opinion against.
No - already assigned
Business rates
Yes
Modest devolution underway.
Yes
Stamp duty on
securities and
shares
VAT
Fuel duty
National
Insurance
Contributions
No
Business opposed to local setting of rates, although a London rate may be
more acceptable than individual local authority rates.
Causes distortions and economic inefficiencies.
No
No
No
Against EU law.
Against EU law.
Causes regional distortions.
Already ‘hypothecated’ for nationally administered services.
Unlikely - probably too complex
Unlikely - probably too complex
No
Corporation tax
Capital gains
tax
Vehicle Excise
Duty
Alcohol and
tobacco excise
duties
No
No
No
No
No
Causes harmful distortions.
Too complex.
Wide scope for tax avoidance.
Too complex.
Wide scope for tax avoidance.
Wide scope for tax avoidance.
Betting, gaming
duties
Climate change
levy
No
Wide scope for tax avoidance.
No - not geographically limited
No
Causes distortions.
Closely linked to nationally administered spending.
No
Inheritance tax
Insurance
premium tax
No
No
Wide scope for tax avoidance.
Too complex.
Wide scope for tax avoidance.
Causes distortions.
Unlikely
Unlikely
No
Yes
Unlikely
Unlikely - not always a strong relationship between
taxpayer and vehicle owner and user
Unlikely - probably too complex
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