HOLYROOD should be given the ability to vary the rate of VAT north of the Border once the UK leaves the EU, a leading think tank has suggested.

Reform Scotland, an independent policy group, said that there was a clear link between control of sales taxes and economic performance.

Devolving VAT, value added tax, to Scotland would give the Scottish Parliament responsibility for raising 60 per cent of what it spends and afford politicians more flexibility in how they raise revenue in Scotland.

Although devolution of VAT is banned under EU rules, that will not apply after Brexit.

VAT raises about £10.2 billion in Scotland every year, the third largest revenue from tax after income tax (£12.bn) and national insurance (£10.4bn).

The main standard rate of VAT in Britain is 20 per cent. It was increased from 17.5 per cent in 2011. The rate in Ireland is 23 per cent while in Hungary it is 27 per cent. Australia has a sales tax rate of only 10 per cent. Campaigners for the devolution of VAT have argued that lowering the rate could encourage more businesses to set up in Scotland, stimulating sales and leading to bigger tax revenues.

However, EU rules mean the UK has to have a universal rate.

While the UK Government can assign VAT revenues to Scotland, Holyrood is not able to set a different sales tax rate. After Brexit, however, there will be no legal barrier to Westminster devolving VAT to Scotland in full. Both the Calman and Smith Commissions, which have considered extending devolution over the past decade, looked into handing power over sales taxes to Scotland but both concluded doing so would be illegal under EU law.

After the Smith Commission made its views known, half of all VAT revenues were assigned to Scotland, allowing it to benefit if revenues from the sales tax went up.

Alan McFarlane, chairman of Reform Scotland, said it had supported the principle of the devolution of income tax but worried about government powers being so reliant on it. He said: “The devolution of VAT, adding a consumption tax to an income tax, would help address this problem.

“Politicians acknowledged the benefits of devolving the tax but it was never previously possible due to EU law.”

A spokesman for Finance Secretary Derek Mackay said: “We will always support additional powers coming to the Scottish parliament and set out in Scotland’s Place in Europe the importance of powers in areas such as employment law, migration and social protections coming to the Scottish Parliament to protect Scotland from the negative impact of Brexit.”

The Scottish Conservatives called for VAT to be devolved in their submission to the Smith Commission.

Their finance spokesman, Murdo Fraser, said: “The Scottish Conservatives believe there is a case for devolving VAT once we leave the EU, but any such move would have to be widely consulted on .... Countries such as Canada ...devolved sales taxes down to even local level.”