Living next to a Tax Haven?


A tax haven is a country or jurisdiction where tax rates are markedly lower than is the norm. Many are in far flung parts of the world such as the Caribbean but some such as Malta or Cyprus are even in the EU.
Some countries which are not traditionally thought of as tax havens also have low rates of tax in some areas which prove to be a nuisance to their neighbours. Ireland is a case in point here with a Corporation Tax rate of only 12.5% as opposed to international norms of twice that level. Indeed this is proving to be such a problem for Northern Ireland that active consideration is being given to have a special local rate similar to that in the south.
Here in Cumbria we are about to see significant tax changes north of our local border in Scotland which could impact on us in a similar way.
The Scotland Bill is currently going through Parliament and is certain to reach the statute book in broadly the same form that it is in now. That is because it is supported by the Labour opposition as well as the governing Conservatives and Liberal Democrats. Any opposition is from the nationalists on the basis that it does not go far enough.
The Bill provides for a new Scottish rate of Income Tax to be introduced. The normal tax rate payable to the UK Government would be reduced by 10% for Scots - so the current 20% basic rate would go down to 10%; the Scottish Parliament would then have the power to impose its own rate on top. The working assumption is that the Scottish rate of tax would end up being lower than that for English taxpayers.
Apart from a few people who might be able to plan their affairs so that they came under the new Scottish rules, there are more general implications. After tax income for employees on the same wage from the same employer could be higher for those living in say Gretna for those living just over the border in Carlisle or further south. The implications are uncertain but it will have some effect if the difference is significant.
At present the Bill only provides for devolution of tax powers for Income Tax and Stamp Duty Land Tax. There is, however, a power to extend this to other taxes if it is thought to be useful. Here the changes could be much more dramatic.
The Scottish Government is on record as wanting the same powers over Corporation Tax. The rate of 12.5% is being openly discussed by ministers from both Holyrood and Westminster in the Scottish press. If that happened in Scotland then Cumbria would have the same competitive pressures currently being felt in Northern Ireland.
We will have to see how this debate develops (and what protections might be put in place) but it is a mistake to think that Scottish developments have no implications for those of us living just south of the border.