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Scottish Parliament

How will devolved Scottish income tax work?

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24th Jan 2014
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With only eight months to go until the referendum on Scottish independence, tax is becoming one of the main issues in the campaigns for both sides.

But regardless of whether the Scots vote to remain in or outside the UK, Scotland’s tax system is set for some significant changes, including devolving power over setting income-tax rates. Some tax experts are predicting the changes will cause even more complications for UK businesses and tax officials on both sides of the border.

From April 2016, under the Scotland Act the Scottish government will be able to set income tax rates higher or lower than the UK rate. The three main rates of income tax (20%, 40% and 45%) have to be changed by the same amount.

Last November, the UK government claimed that taxes in Scotland could rise by £1,000 per person per year if it leaves the UK – although the Scottish government dismissed the figure.

A paper by the Institute for Fiscal Studies said that an independent Scotland would need to raise taxes, cut spending or both by more than plans already announced by the UK government to create a sustainable economy.

Earlier this week, Sarah Walker, deputy director and head of devolution team at HMRC told the Scottish parliament’s public audit committee that the new Scottish tax rates would feed into the PAYE and self-assessment systems. The working relationship between HMRC and the Scottish government was good on this issue, HMRC permanent secretary Edward Troup said.

Sarah Walker explained that the mechanics of setting up the system in 2015 were fairly straightforward. The Scottish parliament would set the income tax rates in its autumn Budget, and with this done by 1 December, HMRC would be able to incorporate it into tax codes issued around Christmas.

But devolved income tax could create some unintended consequences.

“Clearly if there’s a different rate in Scotland compared with the rest of the UK then the risk it faces for compliance will also have to take into account that there is now an incentive for people potentially to want to be classified on one side or the other side of the border,” Walker said at the hearing.

A tax exodus is unlikely but a relatively small number of wealthy individuals who work on the oil industry and financial services, who live near the border and spend similar amounts of time working in Scotland and England could try and switch tax residences if the two countries’ tax rates diverge.

Walker said that HMRC’s current risk assessment systems would alert the department if a flood of people changed their addresses. “There will be issues there, and our compliance approach will have to include how we deal with that,” she told the MSPs.

If income-tax rates in Scotland become higher than the rest of the UK, employees of UK businesses who are asked to work in Scotland may ask for higher salaries to compensate for higher tax rates, Elspeth Orcharton, director of taxation at the Institute of Chartered Accountants of Scotland, told Accounting WEB.

“This is not a new concept. Workers will take a country’s tax rate into account when deciding where to work. It’s almost like [its part of] the rate of pay.”

Different income tax rates in the UK and Scotland may also cause extra work for some payroll departments who are currently getting to grips with a new requirement to report deductions from employees’ wages in real time.

UK businesses will need to keep a note of which employees are Scottish taxpayers from 2016, says Moira Kelly, chair of the Scottish technical committee of the Chartered Institute of Taxation.

The income tax will be collected by a new tax agency, Revenue Scotland, which will be brought into life by the Revenue Scotland and Tax Powers Bill currently making its way through Holyrood. The Scottish government’s new tax-raising activities will have to scrutinised, too. This is currently done by the National Audit Office but under a devolved income tax system, Audit Scotland could take over. 

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By dialm4accounts
24th Jan 2014 16:10

Yet another thicket of complexity

I simply can't believe that the government wants to introduce yet another level of complication into the UK's tax system.  It's a huge quagmire as it is.

They should focus on simplification and unification, not on different rules.

Have they actually spoken to people who are on the ground preparing tax returns and calculating tax?

Give me strength.

M

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By taylorag
27th Jan 2014 08:50

It's not the Government....

.... it's the shortbread senate at Holyrood.

And yes, they have consulted. Just like they consulted over EU issues, the poundzone, etc, etc!

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By Myshkin
27th Jan 2014 14:25

West Lothian

If Scotland can set its own tax rates without any input from English MP's why are Scottish MPs going to be allowed to vote on English tax rates?

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Replying to Tosie:
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By dstickl
27th Jan 2014 15:32

@Myshkin: The next UK General Election should be on Ind Day 2016

Myshkin wrote:

... why are Scottish MPs going to be allowed to vote on English tax rates?

A very good point, to which my answer has to be: IF Scotland votes for Independence in 2014, THEN the next UK General Election - due to be held in May 2015 - should be slipped by a mere year until the Scottish (Labour etc) MPs have to leave the House of Commons, on Independence Day in 2016.

Equally, any Scottish passport holding Peers currently "sitting" in the House of Lords should be barred, with effect from Independence Day in 2016, thus saving UK taxpayers some money to reduce the UK deficit and the UK debt. 

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