Place of residence key as Holyrood prepares to unveil levy on income it will impose north of the Border from April, writes Jeff Salway
HM Revenue & Customs has moved to clear up misconceptions lingering over new income tax rules taking effect in Scotland as Holyrood prepares to unveil the rates it will set from next April.
The UK tax office last week published fresh details of the criteria that will determine Scottish taxpayer status when the Scottish rate of income tax comes into force in six months time.
From April 2016 the income tax rates set by Westminster will be reduced by 10p in the pound for Scotland, leaving Holyrood to set its own rate to generate its own income. The Scottish rate of income tax could be set at 10p, leaving the levy unchanged, but there is no upper limit on the rate and it could also be cut to zero.
The rate will be announced this month, although earnings bands will remain the same across the UK in the 2016-17 tax year and any changes won’t affect personal allowances, national insurance contributions or savings or dividend income.
People living in Scotland will be contacted by HMRC over the coming months to confirm that they will be classed as Scottish taxpayers. The status is dictated by the place of residence and not place of work, and the vast majority of cases will be simple. But there are several grey areas, such as where people are moving into or out of Scotland, have more than one home or don’t have one at all.
HMRC set out guidance last week on what will determine Scottish taxpayer status. It said a UK tax resident will be a Scottish taxpayer for the purpose of Scottish income tax if they meet any of the following three criteria: they are a Scottish Parliamentarian (regardless of where they live); they have a close connection to Scotland (either having a single place of residence in Scotland or having their main place of residence in Scotland); or at least as many days are spent in Scotland as elsewhere in the UK even if there’s no other connection.
But despite HMRC’s efforts to clarify the conditions there are still a significant “number of common misconceptions” about the Scottish rate of income tax, said Hazel Burt, partner at French Duncan.
“More complex cases will require detailed consideration and interpretation of the facts, legislation, case law and guidance,” she said. “With this in mind it is worth seeking advice at an early date to prevent landing on the wrong side of HMRC.”
So what happens if you have homes both in Scotland and south of the Border? Whether you pay the Scottish rate of income tax will depend on which country you spend the most time in, said Brendan Kelly, tax manager at Gillespie Macandrew.
“If this is in the Scottish residence, you will be a Scottish taxpayer. For instance, if you live in Scotland for a period of time and then move to England, your residency will be determined in that year by which property was the main residence for the longer amount of time,” Kelly said.
HMRC has warned against switching residence for tax reasons should there be an advantage in doing so (such as in the event of the Scottish rate being higher).
“If the Scottish rates diverge from the rates which apply elsewhere in the UK, there will be an incentive for taxpayers to claim that they live on one side of the Border, when they live on the other,” according to the latest update from HMRC.
The tax office is trying to identify people living in Scotland but who don’t have a Scottish address on its records. It said it would use external data to highlight changes of address and identify high-risk cases and taxpayers with high incomes.
That means anyone tempted to claim they live elsewhere to avoid the Scottish rate of income tax risks incurring the wrath of the taxman, said Burt. “HMRC uses a sophisticated database to gather data from multiple public and private sources to help identify cases where underpayment of tax may be an issue,” she said. “Information is drawn from various sources such as banks, local councils, legal aid data and even social media.”
There are already certain differences between the tax treatment of people in Scotland and those elsewhere in the UK. Among them are the exclusion of taxpayers north of the Border from new HMRC powers being introduced next April enabling it to recover debts of more than £1,000 from cash and savings accounts. “This is currently a matter for England, Wales and Northern Ireland,” said Kelly. “Scotland already has an equivalent here which allows HMRC to recover debts at a relatively low cost through applying for a warrant and using Sheriff Officers to enforce debts.”
Scotland could get additional income tax powers as early as April 2017, under a Westminster proposal to bring forward by two years the implementation of new powers to set different tax rates to the rest of the UK.
The powers coming into force next April only allow limited alterations of income tax rates. The expanded version would give Holyrood far greater responsibility for income tax and cover other areas such as air passenger duty and housing benefit.
The report stage and third reading of the Scotland Bill is scheduled for 9 November.