The Scottish Government’s White Paper, Scotland’s Future – Your guide to an independent Scotland, was published on 26 November 2013 setting out in detail its vision for an independent Scotland. Shepherd and Wedderburn has been closely monitoring developments in relation to Scotland’s future and is committed to providing its clients with insightful advice on the legal and regulatory implications of constitutional change.
Key legal issues which we expect will most affect our business and individual clients are highlighted in this briefing. It should be noted that many of the proposals set out in the White Paper are predicated on the agreement of the rUK Government, the EU and other international organisations and there can, of course, be no guarantee that such consent would be forthcoming or without conditions.
Our experts are fully briefed on the Scottish Government’s proposals. Now is the time to speak with your Shepherd and Wedderburn advisers on the implications.
Competition, regulation and consumer protection
The White Paper builds on earlier consultations on competition, economic regulation and consumer protection. It envisages the bringing together of the competition and regulatory functions currently split across a number of UK, GB and Scottish agencies (such as the OFT, Competition Commission, Ofgem, ORR and Ofcom). It also envisages a single consumer protection body with a separate consumer ombudsman.
One thing not made clear in the White Paper is whether consumer protection functions would be added to the functions of a combined competition and regulatory agency or whether there would in fact be two bodies, one covering economic regulation and the other covering competition and consumer protection functions.
Construction and infrastructure
Many of the key issues relating to the prospect of independence, such as currency, taxation and continued EU membership would inevitably impact on the construction industry in the event of a “yes” vote next year.
The Scottish Government has, in the White Paper, stated an on-going commitment to infrastructure investment and specifically mentions investment in high speed rail within Scotland, an on-going move to a low carbon economy with continued support for renewable energy and an appropriate financial framework and joined up system to enable strategic decisions to be made to support investment in housing supply.
The Paper confirms that existing laws, whether passed in Westminster or in the Scottish Parliament, such as the Housing Grants Construction and Regeneration Act 1996 (as amended) and the Health and Safety at Work etc. Act 1974 (and CDM Regulations) would continue to apply after independence.
Corporate finance
Focussing on what are described as Scotland’s “range of economic strengths and advantages”, including substantial natural resources and “world-leading industries” including food and drink, life sciences, energy, financial services and wealth management, the White Paper states that, in an independent Scotland, a more supportive, competitive and dynamic business environment could be created by, for example, focussing on giving support to Scottish small and medium sized enterprises (including by strengthening the role of the Scottish Investment Bank), improving incentives for inward investment, expanding Scotland’s manufacturing base and helping to support the transition to a low carbon economy.
Corporation tax
The White Paper proposes that Scottish corporation tax could be charged at up to 3% below the UK rate, giving a Scottish rate as low as 17% if the UK rate falls to 20% as currently envisaged. A 50% cut in Air Passenger Duty is also proposed. However the White Paper does not address the key issue of how a company carrying on business both within Scotland and outside it would apportion its taxable profits between the different jurisdictions. This could create a significant administrative burden for companies with cross-border operations – though it may also provide some tax planning opportunities. The White Paper does propose simplifying the tax system, which would be welcomed by smaller businesses in particular, although some tax reliefs are likely to be abolished and therefore the impact may be spread unevenly across different business sectors.
Court system
The White Paper confirms that the UK Supreme Court would no longer have jurisdiction in Scotland, although any current Scottish matters before the UK Supreme Court would remain before the UK Supreme Court until they were finalised. Thereafter the highest courts in Scotland would be the Inner House of the Court of Session and the High Court of the Justiciary (sitting as the Court of Criminal Appeal), with these being jointly known as the Supreme Court of Scotland. Although the UK Supreme Court would no longer have jurisdiction in an independent Scotland, the European Court of Justice in Luxembourg and the European Court of Human Rights in Strasbourg would continue to have the same jurisdiction in Scotland.
Employee Share Schemes
At present, certain employee share schemes benefit from tax advantaged status which means that gains for employees are assessed under the more beneficial capital gains regime rather than as income – the bottom line is that the tax on gains under such plans can be charged in some circumstances at a rate as low as 10% (or even not at all), rather than the normal 20%, 40% or 45%.
The White Paper confirms that the Shares for Rights Scheme would be abolished in an independent Scotland. No further details are provided as to whether these preferential tax treatments would continue in an independent Scotland. This would depend on the outcome of the wider tax simplification exercise.
Employment
The White Paper confirms that current employment law would remain in place immediately upon independence.
The Paper focuses on achieving a more “collaborative approach” to employment law and policy, encouraging greater participation of trade unions through the establishment of a National Convention on Employment and Labour Relations, encouraging greater employee representation on company boards and adopting measures to increase female representation on boards. A Fair Work Commission would be established to advise on employment policy and to, amongst other things, monitor the minimum wage and ensure it rises in line with inflation each year.
Some change would likely be made over time, and in particular it is the current Scottish Government’s intention to reverse some of the recent changes the UK Government has introduced to employment law, such as collective redundancy consultation periods.
Energy
Downstream
The Paper confirms that the single GB wide electricity and gas market trading and transmission arrangements would continue, provided that they meet Scottish requirements for security of supply.
At present a significant proportion of the costs of various GB energy investments, (e.g. new wind and nuclear generation), is recovered on a GB wide basis. The White Paper proposes that costs of existing and new renewable generation would continue to be shared. Cost allocation for nuclear is likely to be more difficult: the White Paper refers to a need to ensure that “investment in Scottish generation is not compromised by the Westminster Government’s proposals to… enter into expensive, long-term contracts for new nuclear generation.”
Whilst on “day one” the regulatory framework may be consistent across GB, differences would arise. These could become material in the longer term.
The White Paper notes that the allocation of GB’s target for renewable generation under EU law would have to be resolved. This is a potentially very important point. Irrespective of the target, under EU law rUK could procure renewable generation from non-Scottish sources, e.g. the Republic of Ireland or in the North Sea in non-Scottish waters.
Oil and gas
The Paper recognises the importance of the fiscal and regulatory regime affecting the oil and gas industry in maximising investment and production. Following on from its paper, Maximising the return from Oil and Gas in an Independent Scotland, the Scottish Government has established an Independent Expert Commission to consider the regime that should be put in place. The Commission is due to publish its report in Spring 2014. The Scottish Government agrees with Sir Ian Wood's recommendation in his recent interim UKCS Maximising Recovery Review that there should be an independent and properly resourced regulator. There is also a statement that the current licensing and regulatory regimes would continue in operation following independence, although this is presumably subject to any recommendations which are made by the Expert Commission.
Importantly, the Paper confirms that the Scottish Government does not intend to increase the overall tax burden on the oil and gas industry and that decommissioning relief would be provided in the manner and at the rate currently provided.
Scottish Energy Fund
A Scottish Energy Fund would be established with two components: a short term stabilisation fund, the purpose of which would be to manage year on year changes to oil and gas tax revenues, and a long-term savings fund to provide funding for future investment. The stabilisation fund would be set up immediately following independence. Investments into the long-term fund would be started once Scotland's overall budget deficit fell below the level of long run economic growth and when national debt was on a downward trajectory.
Finance, funds and financial services
The White Paper states the following:
- Currency: The White Paper states that an independent Scotland would retain the pound sterling as its currency in a formal currency union (the Sterling Area) with rUKMonetary Policy: Monetary Policy would be set according to economic conditions across the whole of the Sterling Area with ownership and governance of the Bank of England on a shareholder basis between an independent Scotland and the rUK.
- Financial Stability: It is anticipated this would be co-ordinated consistently across the Sterling Area with the Bank of England’s Financial Policy Committee setting monetary policy and identifying potential systemic risk. The White Paper proposes alternative options for the prudential regulation of deposit takers, insurance companies or investment firms either by means of shared Sterling Area regulators (presumably the existing Prudential Regulation Authority) or by a new Scottish regulator, the Scottish Monetary Institute.
- Lender of Last Resort: The Bank of England, accountable to both countries, would continue to fulfil this role and in dealing with financial institutions which pose a systemic risk.
- Financial Regulation: The regulation and monitoring of the conduct and behaviour of financial institutions/investment firms and the protection of consumers would be the responsibility of a new Scottish regulator, operating on a harmonised basis with the rUK regulators, including application of single rulebooks and supervisory handbooks, reflecting the development of the European Single Market. Under that regulatory framework, firms would be able to continue to provide financial products and services no matter where they are based - and the market for financial products between Scotland and the rest of the UK would largely continue and would be consistent with the development of the European Single Market on financial services.
- Consumer Protection: Compensation schemes equivalent to current UK protection and in line with European Union requirements would continue, for example, the guarantee of bank deposits up to £85,000 (Euro 100,000). Certain specific consumer protection measures would be brought in, for example, a cap on short-term interest rates for pay day lenders.
- Interest Rates: The Bank of England would set a common interest rate for the whole of the Sterling Area.
- Banknotes: Scottish banknotes would continue to be issued as at present by the three authorised commercial banks in Scotland (Bank of Scotland, Clydesdale Bank and Royal Bank of Scotland). These banknotes are backed by ring-fenced assets held at the Bank of England and this arrangement would continue.
Food and drink
Promoting food and drink overseas would be a priority, and the Scottish Government notes that it would take advantage of the global publicity that independence generates to increase such promotion. It would give priority to export certification, to help to open new markets to Scottish produce, and use income from food sectors to promote produce and enable research in co-operation with rUK.
Insolvency
The White Paper also states that an independent Scotland would have control over business regulation.
At the moment we have a (broadly) unified UK corporate insolvency regime but the extent to which an independent Scotland and rUK would diverge on how they viewed insolvency and the rescue culture and therefore how they legislated would be a concern for both enforcing banks and for the IP community. Uncertainty in the future enforcement regime might also have an impact on front line lending decisions. The Paper suggests that no major changes would be introduced immediately on independence however.
This might also be exacerbated by the creation of a separate Scottish Supreme Court. There is a risk of divergence between how the Supreme Courts in London and Edinburgh might deal with critical matters relating to insolvency and how it interacts with other policy considerations. In the insolvency sphere there are a couple of high profile cases that are potentially going to the Supreme Court and which the insolvency community are hoping will provide UK wide certainty on aspects of corporate insolvency. To date Scotland has tended to benefit from the higher volume of litigation progressing in England dealing with UK wide issues providing precedent which is either highly persuasive where the legislation in question is the same in both jurisdictions or binding in the case of the Supreme Court.
Any significant divergence in legislation and precedent would result in that benefit being lost.
IP and Data Protection/Freedom of Information
The White Paper states that an independent Scotland would ensure continuity of protection for intellectual property rights, continue as an EU member state to protect intellectual property rights and comply with European and international regulations and protections and offer a “simpler and cheaper” model on intellectual property protection and would consider alternatives such as the German model which protects technical innovations. The Scottish Government would examine how best to develop and target tax based incentives aimed at encouraging investment in innovation activities.
It also confirms the functions of the Scottish Information Commissioner would be extended into areas currently dealt with by the UK Information Commissioner, including data protection.
Pensions
For companies and private businesses, the future of pensions in an independent Scotland has been dominated by the questions on defined benefit scheme funding.
Cross border occupational schemes under EU requirements are subject to stringent funding requirements and existing schemes with members in Scotland and elsewhere in the UK would be caught on independence under the current regime. Steps would need to be taken to pay down deficits unless the requirements were relaxed or an exemption granted.
Commitments by the Scottish Government on state pensions and their proposals on wider pensions regulation were first detailed in their Pensions in an independent Scotland paper issued in September. The White Paper broadly confirms the content of that paper.
Private client
Critical issues for those taking private client advice in Scotland are the rules of succession and prevailing personal taxation. Scotland has always operated separate succession rules to those applying in rUK. Independence would, however, see control over personal taxation (i.e. Income Tax, Capital Gains Tax and Inheritance Tax) shift wholly to Scotland. The White Paper states that an independent Scotland would not necessarily involve higher taxation north of the border and would focus on operating a simplified taxation system in Scotland. The White Paper includes reference to some taxation “priorities” for the Scottish Government including increasing personal tax allowances and tax credits by inflation. Critically, detailed policy on tax is not proposed until we see manifestos for the 2016 election.
Property
Housing
The Paper states that independence would bring greater investment in housing supply and integration of housing supply and housing benefit support, more innovative ways to invest in housing, especially affordable housing and the abolition of the "bedroom tax" within the first year.
Rural Scotland
The Paper states that rural, crofting and coastal communities that support agriculture, aquaculture and fisheries would benefit from having a direct voice in Europe, allowing for:
- direct negotiations concerning agriculture and rural development funding by way of the Common Agricultural Policy;
- using livestock levies to promote Scottish agriculture and produce; and
- negotiating a reduction in EU livestock regulations, based on Scotland's record on animal health and control of disease.
Priority would be given to the Scottish fishing industry and aquaculture, to protect and safeguard Scotland's fishing rights and quotas, promote Scottish seafood and support the industry.
Land and communities
The Scottish Government already has a track record of, and ongoing proposals for, land reform and community empowerment. Changes to taxation would assist new tenant farmers and wider land reform issues.
Island communities would be supported, with an Islands Act in prospect to consider opportunities and issues arising from independence. The management of the Crown Estate in Scotland would be reviewed with a view to stepping up local control of assets, include greater self-governance for islands and ownership of local harbours and the foreshore, and benefits to communities from offshore renewables, including revenues that flow from leasing the sea bed.
Public sector
The Paper suggests that the public sector landscape would remain largely unchanged in the short term after independence - the structure of the local government would be unchanged, with local authorities continuing in the delivery of the services they offer today. Post-independence, the Scottish Government would retain a single unified structure rather than fragmented departments. Local authority elections planned for 2017 would go ahead, and local authorities would continue to be democratically accountable to their local electorates, not to the Scottish Government. There would be a seamless continuation of public services, with the paper explicitly stating that policy decisions would not be taken until the elections in May 2016. Current management of NHS Scotland would also remain, and services would be accessed in the same way as under the devolution settlement.
With regards to defence, the budget would be set at £2.5 billion – there would, however, be the use of defence infrastructure in Scotland by UK forces and vice versa at least for a transitional period. Scotland would seek to apply to join NATO. Arrangements would be made to remove nuclear weapons from Scotland, preferably within the first term of the Scottish Parliament following independence.