Devolution of income tax in Scotland
22 April 2014
HMRC has provided an informal update on the latest position regarding the legislation required to give effect to some changes outlined in the HMRC Technical Note Clarifying the Scope of the Scottish rate of Income Tax (issued May 2012), and some other matters.
Scottish rate of income tax – transparency
The impact assessment published alongside the Scotland Bill 2010 set out that the decision on how Scottish taxpayers should be made aware of the amount of Scottish rate income tax they have paid would be made by the Scottish Government. HMRC consulted the income tax technical group on options for taking this forward, and it was clear from this that employers and pension payers were likely to find it easier to accommodate a requirement to show the Scottish rate amount separately on an annual statement than to show it on regular payslips. In the light of this the Scottish Government has asked for the Scottish rate to be shown separately in HMRC’s Tax Calculator, annual Tax Summary and the annual statement of income tax liability (P60), which is issued to individuals by employers after the end of the tax year showing deductions of tax and National Insurance Contributions, HMRC will consult on the specific changes required to the P60.
During earlier consultation the CIPP recommended that as long as employees are made aware of the different rates of income tax then the S prefix tax code could be shown on the payslip and this would be sufficient for transparency. It would seem from this update that the Scottish government are looking for employers to provide more detail. The Policy team will be looking at this consultation in detail as the information for the P60 will surely have to be generated from payroll software.
Scottish rate of income tax – consequential changes
The Technical Note set out how HMRC intended to manage a number of consequential issues arising as a result of the Scottish rate, including the rate of relief for charitable giving and treatment of income from trusts. In preparing to legislate for these proposals, it has become clear that the Scottish rate of income tax provisions in ITA, as amended by the 2012 Act, will be complex to apply for the purposes of the measures in the Technical Note. A measure has therefore been included in Finance Bill 2014 (clause 289 and Schedule 34) which makes changes to the structure of the income tax legislation so that subsequent secondary legislation can be made to apply the proposals in the Note in a more straightforward manner. This is described in more detail in a Tax Information and Impact Note. HMRC will consult on the secondary legislation later this year.
Scottish rate of income tax – tax relief for pension contributions
The Technical Note left open the position with regard to the changes needed to apply the Scottish rate to the Relief at Source process for pensions. As you may have seen, a news item was published by HMRC within their stakeholder update 49 and on their ‘What’s New’ pages in December 2013 setting out the intended way forward. Legislation to put this in place will be included in the wider secondary legislation referred to above.
The Wales Bill (published 20 March 2014) will implement key proposals from the Commission on Devolution in Wales (Silk Commission, 1st report). These include the full devolution of Stamp Duty Land Tax and Landfill Tax to Wales and, subject to a referendum, the introduction of a Welsh rate of income tax, structured along the same lines as the Scottish rate. The Wales Bill also includes some changes to the definition of a Scottish taxpayer to ensure that an individual cannot be a Welsh and Scottish taxpayer in the same year. These changes would only come into effect if and when the Welsh rate is introduced.
Similar changes to those set out in the Scottish rate Technical Note will need to be made when and if the Welsh rate is introduced - HMRC will consult on these issues at that time but, for simplicity, would anticipate taking the same approach as for Scotland unless there is a strong case for doing something different.
The CIPP will be publishing an article on 25 April on the Scottish Referendum and the impact an independent Scotland could have on employers.