UK: New Scotland Bill – Tax Implications

Last Updated: 23 July 2015
Article by Elmer Doonan, Jay Doraisamy, Andrew Patten and Paul Lawrence

The UK Government has published draft legislation on devolving certain tax matters to Scotland (the Bill). It intends that the draft legislation should implement the terms of the devolution agreement made in November 2014 between the Westminster and Holyrood governments. Having looked over the Bill, it appears that the Scottish National Party disagrees.

The Revenue Scotland and Tax Powers Act 2014 established Revenue Scotland as the tax collecting authority for Scotland and provided the Scottish Government with some limited tax raising powers.

The Bill will devolve further tax powers to the Scottish Government, which, when taken together, will give it responsibility for raising approximately 40 per cent of Scotland's taxes. These include power to set thresholds and rates of income tax on Scottish earnings.

Given the tax privileged nature of pensions (which remain a UK Government responsibility), this could create some practical issues for the pensions industry.

Of course it is questionable whether the Bill will pass through its Parliamentary procedures in its current form. As noted the Scottish National Party in the UK Parliament is strongly putting forward the view that the Bill as drafted does not implement all the promises made in November 2014.

However, the guidance associated with the Bill (see below) anticipates that the new tax regime will be in operation by April 2016.

Scottish taxation rules

On 11 June HMRC published technical guidance on the tests that will apply to decide whether an individual is eligible to pay Scottish income tax rates once they come into force.

In summary, a person will be a Scottish taxpayer if they are a UK taxpayer and also meet one of the following criteria:

  • they are a member of the Scottish Parliament, or represent a Scottish constituency in the UK or EU Parliaments;
  • they have a 'close connection' to Scotland, through either:

    • having only a single 'place of residence', which is in Scotland; or
    • if they have more than one 'place of residence', their 'main place of residence' is in Scotland for at least as much of the tax year as it has been in another part of the UK; or
  • where no 'close connection' to Scotland (or any other part of the UK) exists you then turn to day counting - if the individual spends at least as many days in Scotland as elsewhere in the UK then they will be a Scottish taxpayer.

Allowing for the concept that a representative of the Scottish people should be taxed in Scotland the main question is relatively simple. You will be a Scottish taxpayer if you live in Scotland or reside in Scotland for more of the tax year than in any other part of the UK. Simply working in Scotland will not in itself be enough to make you a Scottish taxpayer, although it will be a relevant factor when considering the 'close connection' or 'day counting tests'.

Once a Scottish taxpayer, always a Scottish taxpayer, at least for the relevant tax year!

When looking at the main place of residence test the guidance suggests that (amongst other things) the following points will be relevant:

  • Where does the individual's close family spend its time?
  • Where do the individual's children (if any) go to school?
  • Where is the individual registered to vote?
  • Where the individual has more than one residence, which is furnished as a main home?
  • Where is the majority of the individual's property kept?
  • Which address is used for correspondence for banks and building societies, credit cards, HMRC and utility bills?
  • Where is the individual registered with a doctor/dentist?
  • Where is the individual's car registered and insured?
  • Which address is the main residence for council tax?

Failure to establish a main place of residence then pushes the individual to the granular day counting method. The guidance states that where an individual has spent a day is decided by where they are at the end of the day, i.e. at midnight – except when they are in transit, and there is a very granular explanation in the guidance of what that means.

Dentons comment

Of course the one thing that is missing in all of this is whether it will actually matter. That will depend on the eventual tax rates set by the Scottish Government and that in turn will depend on its political programme and funding requirements. If the rates of tax set are too high then the question of eligibility for Scottish tax will become a big issue and there could be a rush of Scottish residents moving just across the border into England to escape these increased tax charges (and, of course, vice versa if the tax rates are low).

The guidance on how to classify a 'Scottish taxpayer' appears sensible. The guidance does appear to go into a little too much detail giving the unfortunate impression that tax inspectors will be sneaking into people's houses and counting chaise longues and toilet roll stocks to spot their main place of residence. This may well be necessary and, on the upside, for most people this should produce a clear result and help with the smooth split between the two tax systems.

One potential criticism of the guidance is that it leaves a lot of unanswered questions. International taxation treaties will need to be updated to reflect the new UK situation. This could be a difficult issue for the Government of the day and could lead to the odd situation that (for example) a UK England/Wales tax payer with US citizenship could avoid being double taxed by the US on much of their income, whereas a UK Scotland taxpayer could find themselves taxed on their full income twice (in theory).

Another issue that the pension industry will have to address is dealing with Revenue Scotland itself. The industry has a lot of experience in dealing with HMRC, and the new Scottish tax authority could well be a very different beast in both process and user experience.

However, these are early days and issues such as this will undoubtedly be hammered out at a later point in discussions.

For pension schemes the new tax regime in Scotland will raise some practical issues. As noted above Scottish taxpayer status applies for each full tax year so schemes will need to ensure that records on members' tax status are updated appropriately.

Tax-free cash calculations and projected pension statements will need to apply the correct tax regime to individual members to ensure they are being provided with accurate information. Record-keeping is already a high priority for the Pensions Regulator at the moment so schemes and trustees must bear this in mind and keep on top of tax changes within their membership.

Of course if the Government decides to switch from having pension contributions paid in tax free to taxed contributions in, untaxed benefits out as per its recent post Budget consultation, we will probably have bigger things to consider than Scottish tax rates!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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