Synopsis: The referendum for an independent Scotland takes place on 18 September. If Scotland vote in favour of independence, this could have a number of serious tax implications for the UK as a whole. It is difficult at this stage, to assess exactly what these will be. However, we do know some of the current fiscal implications which may arise if there is a “No” vote next week. This bulletin considers some of them.
Date posted: Friday, September 12, 2014
What had not been readily appreciated until recently by many people is that even if the Scottish people vote against independence on 18 September because of the Scotland Act 2012 there are already plans for a number of fiscal powers to be delegated to the Scottish Parliament. We covered some of these changed in an earlier bulletin.
However, following recent opinion polls, the UK Government has promised that there will be even further devolvement of powers on taxation and other areas – even if the vote is against independence. We do not have any information on these further changes at this stage but here are some of these possible changes/implications that are already in the pipeline irrespective of the outcome of the vote.
(1) All employers will need to be able to operate Scottish tax codes irrespective of where in the UK the business is based. This will lead to payroll systems adjustments that will need to reflect the different rates of income tax.
(2) Directors and employees who work across the UK will need to determine where they are tax resident as this will affect their tax liabilities.
(3) Stamp Duty Land Tax (SDLT) will cease to apply in Scotland from 6 April 2015 and a new tax Land and Buildings Transaction Tax (LBTT) will apply to the sale of all residential and commercial properties in Scotland. Although this is similar in scope to SDLT, there are some significant differences.
(4) From April 2016, the Scottish Rate of Income Tax (SRIT) – see below – comes into effect. Under this Scottish taxpayers may well pay a different rate of income tax to those in the rest of the UK. A Scottish taxpayer is defined as someone who is a UK tax resident and who has a ‘close connection’ with Scotland by virtue of having their only or ‘main place of residence’ in Scotland for all or the majority of the tax year.
For most it will be fairly easy to determine if they are Scottish resident and so Scottish taxpayers. However, there will inevitably be questions for employees and employers who work in both countries and who, perhaps have houses in both countries. Those who occupy more than one property and/or who travel extensively within the UK may well not have considered these changes.
Scottish Rate of Income Tax (SRIT)
SRIT gives the Scottish Parliament power to set the rate of income tax payable annually by Scottish taxpayers.
The basic, higher and additional rates of income tax levied by the UK Government will be reduced by 10p in the pound for those defined as ‘Scottish taxpayers’. The Scottish Parliament will then set a single SRIT which will apply to each of the tax bandings to replace the ‘missing’ 10p. For example, if the SRIT is 9%, a Scottish basic rate taxpayer will pay 10% tax on their income to the UK Government and a further 9% on their income to the Scottish Government, giving a total tax of 19% compared to the UK basic rate of 20%.
SRIT will be the same for basic, higher and additional rate taxpayers as these cannot be varied separately.
The definition of taxable income will continue to be set by the UK Government for all taxpayers and the tax will be administered and collected by HMRC.
SRIT will NOT apply to income from savings and investments which will continue to be taxed at UK rates.
It is expected that the rate of Scottish income tax will be confirmed by November 2015.
Divergence between the income tax regimes in Scotland and the UK will inevitably have implications for businesses and individuals – especially if the rates of tax vary by a large degree.
Self-employed individuals will need to determine if they are Scottish taxpayers or not and use the appropriate rates and bands in their returns. Employers will need to provide information to HMRC on both Scottish and UK tax payers. Where individuals make pension contributions directly to a pension scheme, HMRC will (between 2016 and 2018) make an adjustment to their PAYE code to reflect the difference between the income tax reclaimed by the pension scheme and that paid by the individual. After 2018, the pension provider will need to use the correct rate and hence will need to identify which of their plan holders are UK or Scottish taxpayers.
Whilst the UK Government is now proposing that further fiscal powers may be devolved to the Scottish powers, such devolution may be limited either by EU law, by practical considerations, or by issues relating to potential avoidance/evasion. For example
• Under EU law the rate of VAT cannot vary across a territory so there is currently no scope to introduce a different rate in Scotland (or any other part of the UK).
• The broad conclusion of the reports to date is that it would not be appropriate to devolve National Insurance whilst core welfare spending remains at the UK level.
• There has been little comment on the devolution of corporation tax (possibly because of concerns over avoidance, volatility and tax competition).
• There has been a mixed approach to the devolution of other personal taxes such as inheritance tax and capital gains tax. One issue here is the relatively small size of revenues compared to administrative burden, and the relatively small number of people affected by these taxes.
Local taxes such as business rates and council tax are already devolved to Scotland.
Summary of Main Proposals
The main proposals on devolution of fiscal powers that we already know about mainly relate to income tax.
There has been no proposal for full devolution of powers over income tax to Scotland so far (although politicians now seem to be considering this).
There would seem to be general acceptance amongst the UK Government that
– Tax on savings and investment income will continue to be set at the English level. This would enable the UK to maintain a single market for financial products.
– HMRC will continue to collect income tax for all taxpayers.
– Personal allowances to be set at the English level.
– The definition of taxable income to be set at the English level.
We will have to wait and see what further concessions are announced in order for more to be encouraged to join the ‘no’ vote. In this respect, in the paper for Mr Gordon Brown’s recent speech it says that the Scottish Parliament would have power “to raise around £2bn more in revenues beyond the recent Scotland Act, and ensure that the majority of basic rate income tax (around three quarters) and variations in top rate income taxes in Scotland will be under the control of the Scottish Parliament”.
Whatever happens this week, there will be changes in the taxation system.
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