Scotland as an independent country could have more far reaching effects on payroll and pensions than first thought, says Karen Thomson of the CIPP.
On 18 September 2014 the people of Scotland go to the polls to determine if Scotland is to be an independent country.
There are already significant changes going to happen for the taxation system whether it is “yes” or “no”. The Scotland Act 2012 means the following are already underway:
- Replace Scottish variable rate (SVR) with a Scottish rate of income tax (SRIT)
- Replace stamp duty land and landfill taxes with new land and buildings transaction tax (LBTT) and Scottish landfill tax (SLT)
- Establish Scottish tax tribunals
- Establish Revenue Scotland (RS) to replace many HMRC duties
This article will concentrate on what else may have to happen if the independence vote is “yes” and what payroll and pensions professionals may face as a consequence.
We will cover such things as Scottish taxpayers, employee movements, and possible requirements for documentation, pension tax relief and record keeping.
So what is the Scottish parliament proposing to achieve in its early, independent stages? Some radical plans, already expressed are to:
- withdraw from the proposed 2015 married couples sharing of unused tax allowances
- abolition of the new “shares for rights” rules where employees can have a more generous share allocation from their employer if, in return, they give up some employment rights
- scrapping Universal Credit, and interestingly, this was one of the primary drivers for RTI
- a change in the approach to national minimum wage (NMW)
- provide greater support to small businesses using the national insurance contributions (NIC) system
The Scotland Act 2012 defines a Scottish taxpayer and introduces the term “close connection” with Scotland and this gives rise to the first set of issues we have to consider.
The majority of the new residency cases will be obvious with HMRC and Revenue Scotland (RS) agreeing whether a taxpayer is a Scottish resident and consequently has this “close connection”, even if they are working in England, Wales or Northern Ireland. This may be because their only residence is in Scotland and spend “some time” there in the tax year.
But what is the “tax year” going to be? There is no requirement for the Scottish government to retain the current convention but a variation to the tax year is going to complicate things.
A taxpayer with two residences will be determined to be a Scottish taxpayer if they spend more time at the Scottish residence in the tax year. One with no discernible UK residence at all in the UK will be determined, once again, by the amount of time spent in Scotland.
All MSPs and Scottish MPs will be Scottish taxpayers no matter where they are resident.
There will be no concept of split years for tax purposes so the determination will cover a whole tax year as a Scottish taxpayer, or not at all.
Employers will have to be careful how they second employees to a Scottish base or how they deal with managing long term projects in Scotland.
Since the key requirement is residence, it may be prudent to ensure the arrangement does not create a “residence” for the purposes of SRIT. Much of the detail will have to be worked out.
And what about a change of employment part way through a tax year? Payroll offices will have to deal with new employees who retain their UK or Scottish taxpayer status for the balance of the tax year.
How will “real time” assist in this type of situation? It seems clear that RTI will be critical in dealing with employee movements and changes of employment across the border.
Documentation and forms
There is no reason to suppose that any of the forms we know will change, except maybe in name, and certainly not in the short term.
Employers decide what a payslip’s contents are and what it looks like, subject to the requirements of the Employment Rights Act 1996. HMRC has already decreed that any Scottish income tax has to be itemised separately for the P60, so it follows that RS will determine how their tax must be referred to on the payslip and or end of year reporting return.
RS has no requirement to follow HMRC in respect of P45s and P60s and the new declaration form for new employees. These could be retained in current form, rebranded, replaced completely or disappear, depending on the approach RS takes to RTI.
With automatic enrolment continuing its long and painful process we have to consider what RS’s approach will be.
Scottish politicians have confirmed their commitment to better pension planning in the workforce, but so far they have only shown opposition to the changes in state pension age (SPA), because of the potential detrimental effect on Scotland compared to the UK as a whole. Since life expectancy is lower, the Scottish parliament is likely to at least retain the current SPAs, probably stopping at age 65, although in July the media reported 66 years; this would mean some sweeping changes to the NIC rates and limits, assuming there would still be NICs!
One concern for payroll would be tax relief at source for occupational pensions because this will be especially complex if the employer has a mixed workforce of Scottish and non-Scottish taxpayers.
There is nothing to suggest that record keeping required by RS will be any more or less onerous than that required by HMRC. This means the present three tax years plus current is likely to remain.
Rules will have to allow for either dual access by both tax authorities or an agreement that one will take ownership of the employer on behalf of both. Again the concern would be how this will be managed if RS decides to work to a completely different tax year; however the issues are likely to be no different to payroll covering different countries now.
Most of this will have to wait for the referendum and the outcome of the vote, but if Scotland does become independent payroll and pensions can look forward to another period of change and challenge.
Karen Thomson is an associate director of policy, research, and strategic visibility at the Chartered Institute of Payroll Professionals (CIPP).