Explainers

Value Added Tax

Value Added Tax (VAT) is an indirect tax levied on the purchase of many goods and services. It is reflected in the price paid when items are bought. VAT can either be charged at 20 per cent (standard rate), 5 per cent (reduced rate) or zero per cent (zero rated).

The Scotland Act 2016 states that receipts from the first 10p of standard rate of VAT and the first 2.5p of reduced rate of VAT in Scotland will be assigned to the Scottish Government’s budget. VAT will be the second largest source of tax revenue for the Scottish Government, after income tax. The Scottish Government has agreed with HM Treasury to delay implementation of VAT assignment until the fiscal framework review.

VAT being assigned rather than devolved means the Scottish Government will not have any direct policy control over VAT. VAT will continue to be collected by HMRC at a UK level, and the amount of tax assigned to Scotland will be estimated using a model developed by HMRC, HM Treasury and the Scottish Government.

The Commission forecasts the VAT assigned to Scotland from the last available outturn year (from the assignment outturn model) up to the present year, and for five years into the future. More details on our approach to forecasting assigned VAT can be found in our Value Added Tax (VAT) Approach to Forecasting – September 2018.