Identifying Scottish and Welsh taxpayers
HMRC is responsible for deciding who is a Scottish or Welsh taxpayer (and by default, who is a ‘rest of UK’ taxpayer). How certain can the Scottish Government and the Welsh Assembly be that the partially devolved income tax revenues raised from non-savings, non-dividend income will indeed reach Scotland or Wales? Justine Riccomini of ICAS discusses some concerns from the tax community.
Income tax is not fully devolved to Scotland and Wales, but partially devolved. Scottish and Welsh taxpayers’ income is now ‘cleft in twain’, the two parts being non-savings/non-dividend income (NSND ie income from employment, pensions, profits from a trade, rental income, and taxable state benefits), which is charged at rates and within bands of income set by the Scottish government, or at rates set by the Welsh government, and gets paid in full to Scotland and in part to Wales by the UK government.
Savings and dividend income (ie investment income) is liable to rest of UK rates of income tax and the tax is retained by Westminster. All income tax – both on NSND and S&D – is fully administered and collected by HMRC.
The tax base (ie what counts as income for income tax purposes), as well as the UK personal allowance currently set at £12,500 per annum for 2019/20, are both reserved matters ie controlled by the UK government, not the devolved ones.
Who qualifies as a Scottish and Welsh taxpayer?
In broad terms, Scottish and Welsh taxpayers are categorised by where they live, by virtue of the definitions at s.80D Scotland Act 1998 as amended by the Scotland Act 2012 and in Wales, at s.116E Government of Wales Act 2006 as inserted by the Wales Act 2014
Who classifies Scottish and Welsh taxpayers?
The Scottish experience has shown that HMRC’s attempts to classify Scottish taxpayers has not been a walk in the park. The numbers were around half a million short in the first year of the project. Also, around 80,000 individuals are expected to move either north or south of the Scottish border each year – they need to be caught up with.
In spite of HMRC’s best efforts, there are still tranches of Scottish taxpayers who have not been classified, or wrongly classified, even though they are taxed under PAYE and their addresses are correct under the RTI system (some informal estimates put this at around 5%). Even some Scottish MSPs have reported they haven't received ‘S’ codes – which is rather worrying, as they are Scottish taxpayers by default.
Employers need to wait until the PAYE coding notices arrive before acting. S codes denote Scottish taxpayers whilst C (for Cymru) codes denote Welsh taxpayers. Without a coding notice, the employee should be on the default ‘rest of UK’ payroll. HMRC wrote to Welsh taxpayers in November 2018 to inform them that PAYE codes would be prefixed by a “C” code and that the 2019/20 self assessment return would contain a pre-populated box.
Problems have arisen for some self assessment (SA) taxpayers who have been incorrectly re-classified and their tax computations re-worked by HMRC. This was originally thought to be a glitch in the SA system, but it now appears that in some cases HMRC has overridden the SA return due to a conflict with information it holds. In such cases, the key appears to be in checking the taxpayer’s address is correct (and not, for instance, using the agent’s address by mistake).
Every day counts
If all else fails, each of the definitions relies on day counting. For those who stay in different parts of the UK, a crucial change took effect in Scottish day counting rules from 6 April 2019. This change, which could cause some confusion, is that until 6 April 2019, the Scottish taxpayer definition required day counting to be done on a “days in Scotland v days in rest of UK” basis. However, the Scottish legislation has been amended so that the Scottish and Welsh day counting definitions are the same after the Welsh legislation came into force on 6 April 2019.
Thereafter, they will both require day counting to be done on a “days in Scotland/Wales v days spent in each individual jurisdiction” basis. So, from 6 April, if Johnny the salesman spends 120 days in Scotland, and spends 90 days travelling in England, 55 days in NI and 100 days travelling in Wales, he is still a Scottish taxpayer even though he has spent more time outside of Scotland than in it. In 2018/19 he would not have been classified as a Scottish taxpayer, precisely because he had collectively spent more days outside Scotland than in it.
Clearly, for those likely to be affected, it is vital that they are able to demonstrate where they were on any particular day, to establish in which jurisdiction they are a taxpayer. Record-keeping by both employer and employee has never been so important, especially for people who regularly stay away overnight, as illustrated by Johnny the salesman, above.
In order to make the devolution of income tax work properly, it is crucial that taxpayers’ residence is correctly identified so that they pay income tax in the right jurisdiction. And at a macro level, each jurisdiction will expect to receive their tax revenues in full. This may not appear to be so important in Wales at present where the tax rates are consistent with the rest of UK rates, but in Scotland, with divergence in rates and bands, it is crucial that taxpayers are correctly identified. To do this, there needs to be correct records of taxpayers addresses. Guidance can be found here for Scotland (although it should be noted that the day counting rules in this guidance have yet to be updated), and here for Wales.
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Justine is head of taxation (Scottish taxes, employment and ICAS tax community) at ICAS. She joined the ICAS tax department in November 2016 and is secretary to the Scottish taxes committee and the employment taxes working group. Prior to this, Justine has specialised in employment taxation and HR management, with the last five years spent...