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A Scottish round-up

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Scottish income tax for 2017/18 is now operational and we have, for the first time since PAYE began, a different threshold in Scotland to that of the rest of the UK for Scottish higher rate taxpayers: £43,000 as opposed to £45,000 in the rest of the UK. In total, this is likely to raise around £80m in additional revenues for Scotland. For each affected individual, it will be a maximum differential of £400 in 2017/18, and the Scottish Government has indicated that the differential will widen by 2020.
The ‘S’ code, which is the designatory code for a Scottish taxpayer, seems to be running into problems insofar as modified payrolls are concerned – many of these only have the employer’s address registered and not the private addresses of the employees. There is no mandate for employers to provide employees’ addresses to HMRC, because HMRC has undertaken to determine Scottish taxpayer status. Therefore, it could be that potential Scottish taxpayers paid through modified payrolls are not being properly identified, and so Scotland may not be receiving this revenue share from HMRC. At any rate, HMRC is relying on the goodwill of employers to encourage employees to provide their correct addresses to HMRC – whether in a modified payroll or not. 
A Scottish taxpayer is principally defined by his close connection with Scotland (see Scotland Act 1998 ss 80D-80F), though helpful HMRC guidance illustrates cases that could be contentious. Under the definition, the individual must be UK resident and must also meet any one of three more rigorous tests:
  • They are a Scottish parliamentarian. 
  • They have a single ‘place of residence’ (or home), which is in Scotland; or they have more than one ‘place of residence’, having their ‘main place of residence’ in Scotland for at least as much of the tax year as it is in any one other part of the UK.
  • They have a close connection with Scotland (or do not have a close connection with any other part of the UK and spend more time in Scotland than in any other part of the UK). 
In addition, it seems the universal credit definition of a ‘Scottish claimant’ is not consistent with the HMRC definition of a ‘Scottish taxpayer’ according to the draft Universal Credit (Claims and Payments) (Scotland) Regulations 2017, whereby a claimant merely has to ‘live in Scotland’ to qualify.  Surely consistency across the board here would make for a more robust system all round?  
The change to the higher rate threshold is throwing up quirks. Employers are having difficulty deciding when an item comes under Scottish rules or ‘rest of UK’ rules. An easy way to distinguish between these is to remind ourselves that Scottish rates of income tax only apply to non-savings, non-dividend income, (i.e. SIT = NSND). Rest of UK rates are expressly provided for in relation to savings and dividend taxation, likewise with CGT.
However, it is less clear when working with ‘mainstream income’. For example, HMRC recently issued a note that the basic earnings assessment (used for those with childcare vouchers) is calculated using the UK higher rate threshold, whereas the marriage allowance is to be calculated using the Scottish higher rate threshold. Gift aid is UK based and pensions tax relief is Scottish, but with transitional UK rates until 2018.  
Turning to other matters, on 23 March 2017 Audit Scotland published its report on how effectively Scotland is managing its new financial powers (see This stated that Scotland will be raising over half of its own revenues by 2020, and that it is generally well prepared for this eventuality. However, Audit Scotland did recommend that a more strategic approach is taken to forecasting revenues and to ensure that adequate resources are in place to handle the increased workload. 
We are unlikely to see any immediate changes in Scotland’s Budget process if the current devolved method remains in place. However, with Brexit, a general election and indy ref 2 lurking in the background, who knows what we can realistically expect? 
Scotland’s Finance and Constitution Committee recently requested written and oral evidence on the ‘Scottish approach to taxation’. During the session, it became clear that a key area of interest was tax avoidance around (Scottish) income tax and (UK) dividend tax for those who run their own businesses. Perhaps this is an area to watch out for in future Scottish legislative processes.  
Finally, a reminder that the Scottish tribunals have moved to their new jurisdiction, effective from 24 April 2017, and Anne Scott has now been appointed Chamber president. 
Justine Riccomini, head of taxation, ICAS (
Issue: 1352
Categories: In brief