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Scottish fiscal autonomy: Payroll is already preparing

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21st May 2015
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Kate Upcraft considers how the devolved income tax will affect payroll in Scotland.

Now that the political map has gone yellow north of the border, sadly for the Liberal Democrats not the shade Nick Clegg hoped for, there is talk of another referendum or full fiscal autonomy as an alternative.

But elements of automony are already in train as result of the Scotland Act 2012, which should see the Scottish rate of income tax (SRIT) come into force from April 2016.     

The first stage in this journey has seen HMRC change its policy on the collection of taxpayer addresses from the start of the 2015/16 tax year. Until 6 April 2015 HMRC only updated taxpayer addresses for those records identified as new starters within the Full Payment Submission (FPS).

Now any addresses that are supplied in the FPS are used to update the taxpayer’s address. As there are a number of HMRC address fields and numerous systems that hold addresses it has been difficult to establish quite what this change will mean, particularly for taxpayers who do not want the address they have supplied to their employer to be used as their HMRC correspondence address.

This scenario often affects students who have jobs in term time near their university and nearer to home in the holidays. If they wish to ‘anchor’ their correspondence address to home for example they will have to complete the online change of circumstance form (or telephone HMRC to do the same) and ensure the field marked ‘nominated correspondence address’ is completed.

By the autumn of this year HMRC plans to have identified Scottish taxpayers based on complex residency rules and, at around the time that the Scottish Parliament announces the SRIT, the tax department plans to write to Scottish taxpayers. This will leave a few months for debates to ensue with HMRC, no doubt informed by what the rate is for 2015/16.

The Scotland Act 2012 requires that the rest of the UK rates of tax will be reduced by 10% allowing a full or half percentage SRIT to be added. So for example if the SRIT were 9% then the Scottish rates would be 19%, 39% and 44%.

With all residency debates resolved - a tall order - employers will be provided with S prefix tax codes in next year’s annual coding run. The format of codes will be: S1234L or SK12.

From the start of 2016/17 a separate gross to net process will be in place for the Scottish taxpayers identified within payroll. Even if the SRIT is set at 10%, so that the rates are the same across the UK, this will still be classed as a separate tax regime so must be identified independently.

Remittances each month will still be paid as one bulk amount to HMRC who will the apportion part of the tax receipts to Revenue Scotland. At the end of 2016/17 employers will need to show both types of tax on employee P60s.

New starter processes won’t change as employers will assume everyone is a “rest of UK” taxpayer and wait to receive an S code to move the employee to the Scottish regime.

PAYE settlement agreements, though, will be more complex as employers will have to perform calculations for the two different groups in preparing the payment to HMRC. Pension tax relief will be interesting too; employers using the net pay arrangement will be able to operate the correct tax relief as contributions are taken from gross pay pre-tax, but relief at source schemes for Scottish taxpayers that require the pension provider to apply to HMRC for tax relief will have until 2018 to distinguish between Scottish and rest of UK taxpayers. For these cases, HMRC will have to operate coding adjustments to provide the additional relief.        

Whilst the proposals from the Smith commission that were accepted at the Autumn Statement are now being questioned by the SNP, they did at that time provide reassurance that national insurance, national minimum wage and statutory payments will continue to update UK-wide as will the construction industry scheme. The Scottish Parliament was, however, promised the authority to amend tax bands as well as setting the SRIT, although the Westminster government reserves the right to set personal allowances.

So regardless of what direction negotiations with the SNP go over the next few months, payroll software suppliers are already expecting a busy year getting ready for April 2016. If there are to any significant changes to what has already been announced, let’s hope we know quickly so the necessary processed can be put in place by both HMRC and employers.    

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By Myshkin
26th May 2015 17:35

Madness

What a shambles this is going to be and it is only the start.  How is Scotland's VAT income going to be calculated without a great deal of work on our part?  Article please.

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