Corporate Tax Advisory

Further tax powers for Scotland are high on the political agenda following the unexpected General Election results. There appears to be a fair bit of confusion, though, about what is already in place  and already on offer, so it is worth summarising the current position.

Already here – LBTT and Scottish Landfill Tax

The first two devolved taxes, the Land and Buildings Transaction Tax (LBTT) and the Scottish Landfill Tax, were successfully introduced in Scotland on 1 April 2015. These taxes are fully devolved with the Scottish Parliament having control over the tax base as well as the rates, and both taxes are being collected not by HMRC but by Scotland’s new tax authority, Revenue Scotland.

Coming in April 2016 – The Scottish Rate of Income Tax (SRIT)

The SRIT is expected to be introduced in April 2016. The legislation is already in the Scotland Act 2012. The way the SRIT works is that the basic, higher and additional rate of income tax of Scottish taxpayers will be reduced by 10p and the Scottish Parliament has to set a rate to replace the 10p. If the Scottish Parliament sets a higher rate, say 11p, Scottish taxpayers will pay more than income tax than taxpayers in the rest of the UK and if a lower rate is set Scottish taxpayers will pay less. The SRIT only applies to income from employment, self employment, pensions, some trusts and property rental but not to dividends and interest.

The SRIT is not a devolved tax – the UK government still has control over the tax base, and the SRIT will be collected by HMRC. All the Scottish Parliament does is to set the Scottish rate.

Who is a Scottish taxpayer?

The ‘Scottish taxpayer’ test is based on where you live, not where you work. For many this is simple, but there are rules to determine the status of people with more complex circumstances (apparently, if you have two or more houses, the best ‘rule of thumb’ is that your main residence is where your dog lives).

What is the Scottish rate?

John Swinney, the Cabinet Secretary for Finance in the Scottish Government is expected to set the SRIT this autumn when he introduces the draft Scottish Budget.

Introducing the SRIT

Work on introducing the SRIT is well underway and HMRC are planning to write to those they believe to be Scottish taxpayers later this year, probably once the Scottish rate has been introduced, either stating that they are believed to be Scottish taxpayers or asking for a questionnaire to be completed in more complicated cases. Next year HMRC will issue special ‘S’ tax codes to Scottish taxpayers, which employers or more accurately their payroll systems will use to operate PAYE, so as to collect tax at the Scottish rates (if they are different from the rates in the rest of the UK). Employers throughout the UK will be affected, even if they have only a few Scottish employees.

Is the SRIT a good thing?

I have never been a fan of the SRIT; it has a number of flaws:-

  • The Scottish rate has to be the same across all the bands, so it is very inflexible – the Scottish Parliament cannot set a lower rate for taxpayers with lower incomes and a higher rate for those at the upper end of the scale. There is general agreement that the SRIT lockstep is not a good idea.
  • The SRIT is likely to involve a lot of cost for very little practical effect. HMRC’s costs for introducing the SRIT have to come out of the Scottish budget, which effectively means that Scottish taxpayers will have to pay for the costs of implementing the SRIT.
  • We will have to go through the whole SRIT process even if the Scottish Government sets the SRIT rate at 10%, so that Scottish taxpayers are paying exactly the same rates as taxpayers in the rest of the UK. It is quite likely that the Scottish rate will be set at 10%, because it is hard to see that imposing a higher rate of tax on basic rate taxpayers in Scotland would be at all popular, and the SRIT is fixed across all the tax bands. There is thus the possibility that absolutely nothing will change, but there will just be a great deal of cost.
  • The SRIT applies only non-savings, non-investment income, i.e., employment, pensions and rental income – Scottish taxpayers will pay the normal UK rates on savings and dividend income. This is complicated and confusing for many, especially given that pensions are often described as saving for retirement.

The SRIT really is not a very sensible development, and I have yet to meet anyone in Scotland who is enthusiastic about it. Thankfully the SRIT has been completely overtaken by the Smith Commission Agreement.

The Smith Commission Agreement

The Smith Commission Agreement was arrived at by all the political parties last year following the “vow” made in the run up to the referendum on Scottish Independence that more fiscal powers would be devolved to Scotland. The Smith Commission Agreement proposed to give the Scottish Parliament:-

  • complete control over the income tax rates and bands for Scottish taxpayers to be devolved to the Scottish Parliament (as with the SRIT this is non-savings, non-dividend income only)
  • Devolution of air passenger duty and aggregates levy to the Scottish Parliament (i.e., the Scottish Parliament will have control over the tax base and the rates)
  • Assignment of half of the current 20% VAT rate to the Scottish Parliament

The Smith Commission income tax proposals have been widely welcomed in Scotland, and make a lot more sense than the SRIT because they give the Scottish Government control over a much greater share of tax revenues as well as the flexibility to set more progressive rates should it decide to do so (ie to reduce the basic rate but increase the higher rates).

Does it make sense to introduce the SRIT, given the Smith proposals?

Why introduce the SRIT when we know that the wider Smith proposals are coming? This is a very good question to which there is no obvious answer. Clearly it made sense for HMRC to continue planning for the SRIT in the run up to the General Election, but now that the election is over, would it not make sense to reconsider the position, and go straight to the Smith proposals?

For the time being, it seems as though the SRIT is coming in April 2016 so preparations for it must continue, but this is certainly something that will be discussed in the coming months.

Isobel d'Inverno

Isobel d'Inverno

Director of Corporate Tax at Brodies LLP
Isobel is the Director of Corporate Tax. She advises on the corporate tax aspects of company acquisitions, disposals and reconstructions, and complex commercial property transactions. Her experience includes vendor tax planning, structuring property joint ventures, LBTT and SDLT planning, the Construction Industry Scheme and employment related tax issues.
Isobel d'Inverno

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