A RISE in income tax in Scotland may not be very effective because of the ease with which people can avoid paying, MSPs have been told.
Professor Richard Murphy, director of Tax Research UK, said it was "ridiculous" that so many people were able to dodge tax by registering a company and therefore tax avoidance would continue.
He called for a Scottish companies registry that would help ensure that companies met their obligations.
The Scottish Government has recently launched a cross-party discussion on income tax policy in Scotland, prompting speculation that a rise may be on the horizon.
Prof Murphy told Holyrood's Economy Committee: "The question on income tax in Scotland is one of how effective is a rate rise going to be, more than anything else.
"And the answer is it may well not be very effective because it is so easy for people to incorporate what otherwise looks like an employment, turn it into a company, it will have an employee – I expect it won't have no employees, it will probably have one who will be paid a tiny salary – will then be paid a dividend to cover the rest of the remuneration and that will be subject to UK-wide income tax rates, not Scottish income tax rates, and so tax avoidance will go on.
"It is as simple and straightforward as that. Scotland cannot enforce its own will with regard to its own income tax rate when it is so easy for income to leave the Scottish tax system.
"The question I was asked was will there be massive capital flight out of Scotland to avoid a Scottish tax rate and my answer was straightforwardly no, there doesn't need to be because you can turn it into capital within Scotland and not pay tax on it.
"So it doesn't need to fly anywhere, the tax system lets that happen domestically and at that point this debate becomes not meaningless of course, there are loads of employees in Scotland, but there is going to be a lot of tension as a result of that."
He told the committee that more information is needed on Scottish businesses, arguing that UK company registration "receives information but it does not check its quality".
"There are apparently four people reviewing the accounts of nearly four million companies to make sure that they have some truth and accuracy," he said.
"Bluntly, we are living in the wild west, or the wild north if you like, when it comes to company registration and data from Companies House.
"If you want to have a point to start, have a Scottish companies registry that actually enforces beneficial ownership rules which requires that full accounts be put on public record which reduces the risk and actually says that you'll meaningfully prosecute people when they don't fulfil their obligations to either file accounts or pay their tax.
"At the moment so many people get round their obligations by registering a company it's ridiculous, it's just licence fraud."
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