Flower of Scotland
- Scotland Act 1998 provided the power to vary the basic rate of income tax.
- Revenue Scotland and the Scottish tax tribunals were established by the RSTPA 2014.
- Only Scottish landfill tax and land and buildings transaction tax are fully devolved.
- Unlike in the rest of the UK, in Scotland the higher rate income tax threshold will be restricted to £43,000.
- Effect of devolving some taxes to Wales and Northern Ireland.
Until now Scotland’s tax rates have remained consistent with those in the UK. But in his draft Budget on 15 December 2016, Scottish finance secretary Derek Mackay signalled that this may change when he proposed a reduced higher rate threshold for Scottish income taxpayers.
This announcement, in what was otherwise a relatively bland affair, was seized on by the media in the rest of Britain. However, the proposal is not a fait accompli: two votes have to be held to approve the Budget in Scotland’s parliament – one on the Budget generally and one on the tax proposals.
This is the first time that Scotland has been inclined to move away from the UK’s rate of income tax since the Scotland Act 1998 established the Holyrood parliament and devolved some powers to it. However, no taxing powers were included in this devolution, apart from for local taxation and to vary the basic rate of income tax – the Scottish variable rate.
Scotland never exercised its power to vary the basic rate and questions remained unanswered as to how Scottish taxpayers could be identified. In 2009, the Calman Commission recommended that a few UK taxes should be wholly devolved to Scotland to make its government more accountable for its spending. These taxes were stamp duty land tax, landfill tax, the aggregates levy and air passenger duty.
The Scotland Act 2012 provided for two to be wholly devolved, and this has been in place since 1 April 2015, namely land and buildings transaction tax (LBTT) and Scottish landfill tax (SLfT). It also provided for the Scottish rate of income tax (SRIT) to replace the Scottish variable rate and become operational by 6 April 2016.
After the independence referendum in September 2014, the Smith Commission was set up to review the possibility of extending further devolved powers. In November 2014, it recommended that the UK and Scottish parliaments’ shared control of income tax should remain but that Holyrood should be able to set rates and bands. It also recommended that all income tax levied from Scottish taxpayers (on non-savings and non-dividend income) should be received by Scotland.
The proposals also made it clear that the UK would continue to define the base of income tax, impose the charge to income tax, set the personal allowance and tax non-savings and non-dividend income. The block grant would be adjusted accordingly.
HMRC continues to administer income tax, working in effect for two jurisdictions, receiving payment from the Scottish parliament in return for this service. The National Audit Office’s December 2016 report, The Administration of the Scottish Rate of Income Tax, reveals that Holyrood paid implementation costs of £8.4m on the Scottish rate of income tax in 2015-16.
The Scotland Act 2012 provided a definition of a ‘Scottish taxpayer’. This is a UK taxpayer who, in broad terms, has their main place of residence in Scotland.
Among the key findings of the NAO report are two important issues. First, further divergences between the Scottish and the UK rates and bands of income tax may create a risk of non-compliance and potential avoidance or evasion. Second, HMRC’s ability to account for and deliver income to the Scottish parliament is potentially undermined by one factor – people failing to inform the department of their change of address.
The Smith Commission led to the Scotland Act 2016 which paved the way for air passenger duty and the aggregates levy to be devolved. It also suggested that VAT be partly assigned to Scotland: the first 10% of the standard rate of VAT should be the assigned amount with a corresponding reduction in block grant.
Air passenger duty’s Scottish equivalent is expected to go live from April 2018 under the name air departure tax. The Scottish rate of income tax would be extended by the 2016 Act to the devolution of all rates and bands for non-savings, non-dividend income.
The wholly devolved taxes needed a body to administer as well as collect them. Revenue Scotland came into being as a result of the Revenue Scotland and Tax Powers Act (RSTPA) 2014. Revenue Scotland works with two other bodies – Registers of Scotland for the LBTT and the Scottish Environment Protection Agency for the SLfT. It is likely to have to work with the latter on the air departure tax given the environmental impact assessments required before the Air Departure Bill can be passed.
The powers bestowed on Revenue Scotland are broadly equivalent to those held by HMRC but there are differences. The devolved taxes will be subject to UK as well as other English-speaking jurisprudence. There are some key differences such as the Scottish general anti-avoidance rule (SGAAR) and the LBTT which has been modelled on Scots conveyancing laws.
Note that the SGAAR is an anti-avoidance measure, rather than the UK version of anti-abuse, and is intended to be wider. There is no provision for a ‘double reasonableness’ test at Revenue Scotland; HMRC must show that the arrangements entered into ‘cannot reasonably be regarded as a reasonable course of action’. There is also no advisory panel to approve Revenue Scotland guidance and offer opinions on cases.
RSTPA 2014 contains the conception of Revenue Scotland and the Scottish tax tribunals, general anti-avoidance provisions at Pt 5 and general collection and management provisions, including investigatory powers, penalties and interest, enforcement and appeals. Revenue Scotland is not anticipating much non-compliance with the devolved taxes since compliance with the UK equivalents has historically been good, according to HMRC.
The Scottish tax tribunals handle disputes and are set up independently under RSTPA 2014 but, from this April, come under the remit of the Scottish tribunals system and the Tribunals (Scotland) Act 2014.
In summary three scenarios represent Scottish Taxes:
- fully devolved taxes – SLfT and LBTT, and, from April 2018, air departure tax, with the timing for the aggregates levy still to be decided;
partly devolved taxes – Scottish rate of income tax in
2016-17 and thereafter ‘Scottish income tax’ rates and bands; and
- assignment of taxes – although VAT remains a UK tax, it has been agreed that part of the amount collected can be assigned to Scotland.
It is important to note that none of the fully devolved taxes is significant in amount.
Scottish landfill tax
Royal assent was granted to the Landfill Tax (Scotland) Act (LT(S)A) 2014 on 21 January 2014. This enabled the creation of a new law which replaced the UK legislation from 1 April 2015. Its base is the same as for UK landfill tax, and it is thought unlikely that this will change as to do so could encourage unscrupulous waste dumping or fly tipping.
Revenue Scotland states that permit or authorisation holders for all Scottish landfill sites, including in-house sites where producers of waste dispose of it themselves, are liable to pay SLfT on ‘taxable disposals’.
A charge to tax is made on all taxable disposals of waste to landfill sites, with numerous exemptions in terms of the type of material disposed of and the activity carried out. Revenue Scotland is supported by the Scottish Environmental Protection Agency and has the additional power to levy a tax charge for an illegal dumping site, unlike HMRC.
Revenue Scotland’s website www.Revenue.scot contains useful guidance notes at SLfT1001 onwards, but the definition of taxable activities for SLfT purposes is contained in LT(S)A 2014, s 21(1). In essence, a taxable activity is carried out if a person makes, or permits another person to make, a taxable disposal on which he is liable to pay tax, whether that disposal is made with or without his knowledge.
The current rates of SLfT as set out in The Scottish Landfill Tax (Standard Rate and Lower Rate) Order 2016 apply from 1 April 2016:
- the lower rate of £2.65 a tonne, (this applies to less polluting wastes as prescribed in The Scottish Landfill Tax (Qualifying Material) Order 2016; and
- the standard rate of £84.40 a tonne (this applies to all other taxable waste).
Tax must be accounted for under the Scottish Landfill Tax (Administration) Regulations 2015 (SSI2015/3) and refer to accounting periods. The Revenue Scotland guidance has a useful summary of how to register, account for and pay the tax.
Land and buildings transaction tax
The Land and Buildings Transaction Tax (Scotland) Act (LBTT(S)A) 2013 received royal assent on 31 July 2013, with additional subordinate legislation setting out various reliefs and administrative points. It largely mirrors stamp duty land tax but with some differences.
A tax charge arises when there is a chargeable transaction on residential or non-residential property, which is defined as a real right or other interest in or over land in Scotland. Examples are the purchase of a house or rights over the obligation, restriction or condition that affects the beneficial interest. Exemptions are listed at LBTT(S)A 2013, Sch 1 and reliefs are available – see s 27 and Schs 3 to 16.
No LBTT is payable on a domestic property worth less than £145,000 or a commercial property worth less than £150,000 since these fall into the nil-rate band, but all transactions above £40,000 are reportable to Revenue Scotland unless exempt. The additional dwelling supplement of 3% applies to all domestic properties acquired for a secondary purpose, such as buy-to-let or second homes under Sch 2A part 3. The definition of a chargeable consideration is in Sch 2. Under s 43, the return and payment of LBTT is required before the title is registered by Registers of Scotland.
Chargeable leases – generally commercial property, but domestic chargeable leases are set out in the Revenue Scotland guidance notes at LBTT3005 – are charged on the net present value of rents payable under the lease agreement. The nil-rate band for these is £150,000.
Air departure tax
UK air passenger duty is expected to be replaced with air departure tax from 1 April 2018. As the name suggests, the base for the tax is constructed from a charge on any aircraft operator or qualifying private jet that departs from any Scottish airport, with some exemptions. Scotland will assume responsibility for policy and legislation as well as the rates and bands. It is not thought likely that these rates and bands will be available until the Air Departure Tax (Scotland) Bill has been through its second stage and an environmental impact assessment undertaken.
As with other devolved taxes, Revenue Scotland will be responsible for its collection and management. The Air Departure Tax (Scotland) Bill has been introduced to the Scottish parliament to undergo legislative scrutiny and consideration for approval, and meetings with stakeholders have been held as part of this process. A call for evidence has been issued by the Finance and Constitution Committee.
The Scottish government has pledged to halve the tax payable by airlines by the end of the parliament although no details have been formulated on how this will play out. It also said that ‘when finances allow’ it might abolish the tax – although the likelihood is that the rates will be changed to nil and the legislation left in place. The Office for Budget Responsibility (OBR) has stated that this may cause behavioural effects as passengers choose to use different airports and flight routes; one consequence of devolving tax powers is that their exercise may lead to tax competition between the devolved jurisdictions and the rest of the UK.
The timing of this remains uncertain and, according to the OBR’s November forecasts, is ‘subject to the conclusion of certain legal challenges’. It has nevertheless estimated that aggregates levy receipts for Scotland will be £50m in 2017-18.
Scottish rate of income tax
Enacted through the Scotland Act 2012, this partly devolved tax is probably the most interesting due to the number of taxpayers affected by it. From 2017-18 all rates and bands that are chargeable on non-savings, non-dividend income will be set by the Scottish government. According to the draft Budget, the higher rate of income tax threshold will increase by a maximum of inflation in all future years of the current parliament.
The Scottish income tax rates and bands are:
- Basic rate 20%: £11,500 – £43,000
- Higher rate 40%: £43,000 – £150,000
- Additional rate 45%: £150,000 and above
As with the rest of the UK, the personal allowance of people whose earnings exceed £100,000 will be reduced by £1 for every £2 earned above £100,000.
The restriction of the higher rate threshold to £43,000 is expected to raise £108m. The threshold will be increased to £45,000 in the rest of the UK. Software providers consider that this restriction does not present an additional burden for employers, but it has incurred extra work for programmers who need to ensure that, if a person has been allocated an S code, the software carries out a separate calculation.
It should nevertheless be borne in mind that businesses may receive queries about differing take-home pay levels. If two colleagues work at the same grade for the same salary but receive different take-home pay because one lives in Gretna and the other lives in Carlisle.
It is also estimated that around 40,000 people will enter or exit Scottish taxpayer status each year. HMRC is responsible for identifying who is an ‘S’ taxpayer and the payroll department has to change that tax code when HMRC notifies it.
National Insurance rates and bands remain the same throughout the UK. Note though that the restricted higher rate threshold in Scotland will no longer be aligned with the National Insurance contributions upper earnings threshold.
Another area of potential difficulty, highlighted in the December 2016 NAO report, concerns pensions tax relief at source. This could be compromised if HMRC fails to identify the correct relief due, depending on where someone lives, and whether a suitable IT solution is adopted. HMRC prepared three technical notes on this, in May 2012, December 2014 and November 2016.
Some VAT is due to be assigned to Scotland from 2019-20. The first 10% of standard-rate VAT and the first 2.5% of the reduced rate of VAT – 50% of current Scottish receipts – will be assigned. But the mechanics of what are ‘Scottish’ VAT receipts are still to be decided.
Devolution of tax powers was never going to make tax more straightforward and this is borne out by the mixed bag of devolved, partly devolved and assigned taxes in Scotland. Further taxes may be devolved and let’s not forget the power in the Scotland Act 2016 to levy new taxes.
Wales and Northern Ireland are also developing devolved systems and the Corporation Tax (Northern Ireland) Act 2015 received royal assent in March 2015. The Northern Ireland Executive had stated its intention to set its corporation tax rate at 12.5%, to match that in the Republic of Ireland – significantly below the UK rate for 2018-19, currently set at 19%. Final agreement is yet to be reached on this amid fears of sparking a behavioural change in business, together with the impact of Brexit negotiations.
Undoubtedly, the ever-changing landscape of UK taxation will continue to enthral us all and have a huge impact on business.