THE Chancellor should use his first Brexit budget to hand new tax powers to Scotland so they can be passed on to councils, a leading think-tank has said.

Reform Scotland said the UK’s exit from the European Union would remove restrictions on VAT, meaning it could be devolved to Scotland.

This could allow the Scottish Parliament to raise 67 per cent of taxes and hand over new revenue raising powers to local government, the right-of-centre think-tank said.

Reform Scotland has long called for an overhaul of local government finance, and recently said Scotland’s 32 councils should be given control over local taxation through alternatives such as land value, sales and other property taxes.

The Smith Commission recommended that more devolved spending should come from tax raised in Scotland, But last year David Gauke, then chief secretary to the Treasury, told MPs that EU VAT law did not allow for differential rates within a member state.

Geoff Mawdsley, Reform Scotland’s director, said the new political and legal landscape could revolutionise the tax-raising powers of local authorities.

He said: “We are calling on the Chancellor to clarify the UK Government’s position at next week’s Autumn Statement.

“If his Government still accepts the argument that VAT would be a useful tax for Scotland to have then it should announce its intention to devolve it to the Scottish Parliament once we have formally left the EU.

“If he decides not to do so, the UK Government should explain this decision during the Autumn Statement, because neither the UK nor Scottish governments have given any reasons why they oppose its devolution in principle.

“With income tax being the only major tax to be devolved under the current proposed settlement, over two-thirds of all tax revenue raised by Holyrood will be from that single source. This over-reliance on income tax means that there is little scope to effect real reform and create a better environment for economic growth.

“The devolution of VAT would enable Holyrood to raise a sum roughly equivalent to that of income tax. Crucially, it would broaden the range of devolved taxes, which would present a better opportunity for tax reform.

“Holyrood could, of course, then pass total power over the future of council tax and business rates to local authorities, making them responsible for the type and rate of local taxes they raise.”

Labour MSP Iain Gray, a member of the Smith Commission, said: “Clearly with the result of the EU referendum there is a debate to be had about where powers coming back from the EU should go and it is a debate Labour is keen to have.”

An SNP spokesman said: “The UK Government must use Brexit as a chance to provide Scotland with further powers to support our economy.”