Scottish government refuses to pay for upgrade to tax IT systems

The move would bring it into line with new HMRC systems - but Scottish ministers argue the UK government is liable to pay for the upgrade

A bitter Anglo-Scottish row has erupted over a demand from HMRC for the Scottish government to pay for new IT to maintain its so far unused power to raise or lower the rate of income tax by 3p north of the border.

The SNP government failed to meet a demand for £7m by 20 August towards the cost of upgrading software to enable the tax authority to maintain its ability to raise or lower tax, should Edinburgh decide to use it.

The refusal is part of a power struggle that began when the Labour government drew up plans that have since been adopted by the Coalition, to increase the tax-varying power to 10p. The plans require the Scottish Parliament to vote on it each year so as to force the Scots to take more responsibility for raising the revenue they spend instead of relying on a block grant fixed under a formula devised a quarter of a century ago, which means the Scots can spend considerably more per head on health, education, housing, local government, justice, transport and industrial development than is spent in England.

The row erupted when Scottish Secretary Michael Moore issued a statement claiming the Scottish government had allowed its tax-raising powers to lapse by failing to agree to pay for the upgrade work despite its policy of demanding greater fiscal autonomy.

It referred to a Treasury Statement of Funding Policy issued in October ensuring that devolved administrations "meet all the operational and capital costs associated with devolution from within their allocated budgets".

Furious First Minister Alex Salmond retorted that a previous Scottish administration had paid £12m for the tax-varying facility and £50,000 annually to keep it available. He said Scotland had already paid and if HMRC chose to replace its own IT then that department was responsible for setting up a system in Scotland that was able to function alongside this.

He also pointed to another section in the funding statement stating that "where decisions of UK departments or agencies lead to additional costs for any of the devolved administrations, where other arrangements do not exist automatically to adjust for such extra costs, the body whose decision leads to the additional cost will meet that cost".

The row threatens to sour Westminster-Edinburgh relations even more than when former Prime Minister Tony Blair attempted to railroad through a deal that would have repatriated Lockerbie mass bomber Al Megrahi to Libya years before he was actually allowed home.

Meanwhile Scottish Finance Minister John Swinney has been accused by Labour and Tory politicians in Scotland of concealing the decision not to pay.

Labour Constitutional Affairs spokeswoman Pauline McNeil called for an investigation into whether he deliberately misled the Scottish Parliament, and Scottish Tory leader Annabel Goldie said his administration had "acted in secret to ride roughshod over democracy". This wrangling is ahead of the Scottish Parliamentary elections, which are due to be held next May.