The devolution revolution

01 April 2019

This article was featured in the April 2019 issue of the magazine.

Justine Riccomini, head of taxation (Scottish Taxes, Employment and ICAS Tax Community), for ICAS, examines the current state of tax devolution in the UK and explains what the main implications are for employers and payroll professionals to consider

As we all know, the UK currently comprises four countries: England, Scotland, Wales, and Northern Ireland (NI). Although characterised by distinct nationalities, and languages in some areas, the tax legislation governing the jurisdictions has largely been applied UK-wide since the 1920s.

Since partition of Ireland in 1920 and the renaming of the jurisdiction now known as the United Kingdom of Great Britain and Northern Ireland in 1927, one tax system has prevailed throughout the UK for the last few generations. It has evolved rapidly since the second world war and the UK’s membership of the European Economic Community in 1973, which became the European Community twenty years later. However, following referenda – in Scotland and Wales in 1997, and in Northern Ireland in 1998 – devolved governments and administrations were established which became known as the Scottish parliament, National Assembly for Wales (NAW), and the Northern Ireland Assembly (NIA).

 

The devolved administrations

The NIA was suspended in January 2017 and the devolution of taxes has also therefore ground to a halt until such time as an agreement can be reached and the suspension lifted. The Corporation Tax (Northern Ireland) Act 2015 was passed to facilitate the devolution of powers to the NIA to set a rate of corporation tax on certain trading income, but the commencement regulations have not yet been passed. The devolution of corporation tax was supposed to commence in April 2018. No other devolved or partially devolved taxes have been introduced.

In Scotland, however, the Scotland Acts 2012 and 2016 have provided for a framework agreement between the UK and Scottish governments, which has led to the Scottish parliament enacting a land and buildings transaction tax and a landfill tax – which are the equivalents of stamp duty land tax (SDLT) and landfill tax (LT) – from April 2015. These are small revenue-yielding taxes for which Revenue Scotland is responsible for administering and collecting. Further devolved taxes are in the pipeline.

Income tax is not fully devolved to Scotland, but partially devolved, which has resulted in the Scottish taxpayer’s income tax computation being divided into two:

  • non-savings/non-dividend income (NSNDI) (i.e. income from employment, pensions, profits from a trade and taxable state benefits) which gets paid straight to Scotland by the UK government, and

  • savings and dividend income (SDI) (i.e. investment income) which is reserved to the UK and the tax retained by Westminster. 

Both NSNDI and SDI are fully administered and collected by HMRC.

The tax base (i.e. what counts as income for income tax purposes) as well as the UK personal allowance (UKPA), currently set at £12,500 per annum for 2019–20, are both reserved matters (i.e. controlled by the UK government, not Scotland). The Scottish government is only allowed to change the rates and bands of Scottish income tax (SIT) for Scottish taxpayers. 

In Wales, the UK government devolved some tax-raising powers to the NAW, following the Wales Act 2014. As a result, SDLT and LT are now land transaction tax and landfill disposals tax respectively, operational from May 2017 and April 2018 respectively. Both these fully devolved taxes are administered and collected by the Welsh Revenue Authority. Further devolved taxes are in the pipeline.

As far as Welsh income tax goes, a combination of the Wales Acts 2014 and 2017 results in Wales having something similar to what Scotland had under the Scotland Act 2012 provisions. In other words, the UK government reduces each of the three income tax bands by ten percentage points and the NAW determines what it will charge. This partial devolution of NSNDI income tax is being introduced from April 2019. Wales, like Scotland, has no power over the UKPA and is permitted only to decide the rates (not the bands) of tax at present. The NAW has decided that for 2019–20, the rates of income tax payable by Welsh taxpayers will be the same as those payable in England and NI. 

Welsh income tax will come directly to Wales and is also administered and collected by HMRC. 

To illustrate what is happening across the four countries from 2019–20, please see the table opposite, which assumes the taxpayer is entitled to a full UKPA of £12,500.

 

... tax base as well as the UK personal allowance are both reserved

 

Who qualifies as a Scottish and Welsh taxpayer?

The key thing to remember is that Scottish and Welsh taxpayers are categorised by where they live (and, thus, so are English and NI taxpayers – who are referred to as ‘rest of UK’). In Scotland, the definition can be found at section 80D of the Scotland Act 2012; and in Wales, at sections 116E–116H of the Government of Wales Act 2006. 

For the statutory definition of a Scottish taxpayer see the panel ‘Section 80D taxpayer definition’ above. (The definition of a Welsh taxpayer is essentially the same, but in a Welsh context.)

 

HMRC is responsible for categorising taxpayers, and so it is not up to the employer to write to HMRC and tell them – this is between HMRC and each individual taxpayer. However, employers should do their utmost to ensure that all employees’ addresses are up to date in the software and that they are assisting in the process in that way. The right taxes must end up in the right country – which is essential for public funding purposes. 

 

Income tax rates England, Wales, NI Scotland
Starter rate n/a 19% £12,500 - £14,549
Basic rate 20% Up to £37,000 20% £14,549 - £24,944
Intermeidate rate n/a 21% £24,944 - £43,430
Higher rate 40% £37,501-£150,000 41% £43,430 - £150,000
Additional rate (called 'top' in Scotland) 45% Over £150,000 46% Over £150,000

 

Every day counts

Each of the definitions places ultimate reliance on day counting if all else fails. A crucial change will take place 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 comes into force, from 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. 

Employers need to be aware of this crucial distinction when planning work, keeping records and handling queries from employees. It is vital that employees are able to demonstrate where they were on any particular day, to establish which jurisdiction they are a taxpayer of. For some people, this will change on a year by year basis and, depending on the tax rates, could mean they pay more, or less, income tax. It may be that the employee will need to rely on employer records such as expense claims to establish his taxpayer status.

 

What about NICs?

National Insurance contributions (NICs) are reserved to the Westminster government and not affected by devolution. However, there is an NIC-shaped elephant in the room. The UK higher rate threshold for income tax has gone up to £50,000, but the UK NIC upper threshold mirrors the UK income tax threshold – such that those who are employed will pay 12% NICs on earnings within the basic rate band from 6 April next year.

The UK basic rate band may have widened by £3,000, but the NICs’ 12% band, which applies across the whole UK including Scotland, has widened by £3,442. Only on earnings above £50,000 does the primary NICs rate payable by employees now drop to 2%.

In addition to this, due to the Scottish Budget announcements, the gap between the higher rate thresholds has widened between Scotland and the rest of the UK in 2019–20, by £6,569. As such, there will be Scottish taxpayers paying an effective rate of tax of 53% on earnings between £43,430 and £50,000 in 2019–20.

 

...crucial distinction when planning work, keeping records and handling queries from employees

 

Running payrolls across jurisdictions

  • Pay policies – Strategically speaking, employers need to understand that there are potentially going to be differences in the take-home pay of employees who earn the same gross salary in each jurisdiction. In Scotland, there are now five rates and bands of SIT, and currently the Welsh Assembly is sticking to the same rates as those applied in England and NI, although this may change. This could cause issues, especially where the employments are covered by a collective agreement. Employers may need to consider their remuneration, recruitment and retention policies. A collaboration between payroll, pensions, finance and human resources is inevitable. 

  • Dealing with employee queries – Queries from employees in Scotland should be expected and employers should know where to direct these queries. Pensions tax relief, marriage allowance and gift aid may be relevant, and HMRC has provided useful links to each of these anomalies on gov.uk. Something that Scottish taxpayers need to do where they pay tax at the intermediate rate of 21% is to claim the additional 1% of tax relief on any pension contributions they make into a relief at source scheme. (Note tax relief will continue to be given at 20%.) Payroll managers could assist employees by communicating this to them on the payslip because it is likely most of them will not know they need to do this themselves. Unfortunately, it is also likely many will not bother, which seems rather unfair.

  • Prefix S and C codes – The main issue with multi-jurisdictional payroll is the additional knowledge, software and admin required to cater for Scottish, English and Welsh payrolls. Allocation of employees to the correct payroll is not discretionary – employers need to wait until the coding notices arrive with prefix ‘S’ codes denoting Scottish taxpayers and prefix ‘C’ (for Cymru) codes denoting Welsh ones. Without a coding notice, all employees should be on the default rest of UK payroll.

  • PAYE settlement agreements – Separate PAYE settlement agreements (PSAs) will need to be set out where the tax rates and bands differ – currently only for Scotland, but perhaps in future Welsh rates and bands will diverge, too. This might be difficult because PSAs do not require individual employees to be detailed, yet because benefits provided to Scottish employees need to be grossed up using Scottish rates and bands, this distinction needs to be made at the time the benefit is provided at risk of it being forgotten downstream. 

 

What happens if rates aren’t voted in by 5 April each year?

Ever wondered what happens if Scotland/Wales fail to reach a consensus on the draft Budget proposals each year? Income tax remains an annual tax which the UK government introduces by way of an annual Finance Act. Scotland and Wales must also vote through an annual income tax rate, but if this was to not happen for some reason (e.g. because cross-party consensus cannot be agreed on the draft Budget proposals), the legislation is set out to revert to UK rates and bands of income tax. Crucially, however, Scotland and Wales would receive none of this income, as their rates would default to 0%. 

As income tax is the biggest source of revenue, it is imperative that this income is received each year. In Scotland, this principally comes from section 80 of the Scotland Act 1998 but it also ties in to the Income Taxes Act 2007 and the Scotland Acts 2012 and 2016 in a very circular way. The timing of the UK Budget in autumn does not leave the Scottish and Welsh administrations much time to prepare their own budget proposals and vote them through by April. This is frustrating for payroll software houses as they also need adequate lead-in time to configure updates. n

 

... frustrating for payroll software houses as they also need adequate lead-in time to configure updates

 

Conclusion

Devolution was never going to be easy and has complicated the personal tax computation of individuals, making tax even more opaque and thus more difficult for the public to understand. ICAS has produced The ICAS Guide to Scottish Taxes (https://bit.ly/2EkKcCl) which explains what is happening in Scotland. 

Finally, please note that the CIPP has produced a handy article-finder on any policy issues which relate to devolution (https://bit.ly/2T22ySM). 


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