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Tax Experts Concerned By More Scottish Tax Divergence

by Jason Gorringe,, London

18 December 2017

The Association of Taxation Technicians (ATT) has expressed concern at new measures introduced in the draft Scottish Budget for 2018-19, warning lawmakers that it could introduce further complexity to already challenging income tax computations for Scottish taxpayers.

The Scottish Government published its draft Scottish Budget for 2018-19 on December 14, 2017, after releasing a discussion paper on The Role of Income Tax in Scotland's Budget in November.

The Scotland Act 2012 gave the Scottish Parliament the power to set a Scottish Rate of Income Tax from April 2016. In the case of Scotland, the UK Government deducts GBP0.10 in the pound from the three UK rates of income tax. The Scottish Parliament is able to levy a Scottish rate that applies equally across the bands. The Scottish Parliament has up to now kept the SRIT at 10 percent, resulting in equal tax rates with the UK.

The Budget proposes an increase in the number of income tax bands that will apply to non-savings, non-dividend income. Income in this category, which includes employment income, pensions, and rental income, will now be subject to a range of five different rates from 19 per cent to 46 per cent, the ATT noted. Previously the main difference to the rest of the UK had been the point at which higher rates of tax applied.

Yvette Nunn, Co-chair of ATT's Technical Steering Group, said: "Now that rates of income tax are going to diverge more significantly north and south of the border, it is crucial that HM Revenue and Customs [which administers to the Scottish income tax] are able to identify who is a Scottish taxpayer. This is something that the National Audit Office raised as a concern in its latest report published in November. It is also an area of concern that the ATT has raised in the past for specific groups of taxpayers."

"Scottish taxpayers with savings and dividend income will still be using UK-wide rates for these sources of income. The new rates for non-savings and non-dividend income will introduce further complexity in the computations that HMRC software developers need to program. In 2016-17 HMRC struggled to get their software specifications correct. This meant a number of self-assessment returns for this year have had to be submitted on paper, rather than electronically as HMRC's software was not producing the correct tax liability for those cases. We would not want to see a repeat of this problem when calculations are made yet more complex for Scottish taxpayers."

"Scottish taxpayers with multiple employments and/or pensions will also need reassurance that their overall tax figure is correct when these new rates come into force. If a lower rate is applied incorrectly to more than one of their sources there could be some nasty surprises when their tax is reconciled at the end of the year."

Meanwhile, the Chartered Institute of Taxation (CIOT) said the proposals could see some middle-income earners paying a higher marginal rate of tax and National Insurance (NI) than those on higher incomes because of the misalignment between income tax and the Upper Earnings Limit (UEL) of National Insurance contributions. The CIOT said that the decision to introduce a new "starter" rate of tax could pose complications for some people in receipt of benefits, while noting that the creation of an "intermediate" rate could have implications for people in receipt of Marriage Allowance.

Moira Kelly, chair of the CIOT Scottish Technical Committee, said: "Complexity is the price Scots will pay for exercising our devolved powers over income tax. Today's announcement underlines the increasingly diverging nature of income tax between Scotland and the rest of the UK."

"But even if a political agreement can be reached by Scotland's political parties on the way forward, introducing new rates and bands of income tax cannot be considered in isolation from the wider UK regime."

"We are concerned that today's proposals have the potential to increase both the costs and complexity of administering Scottish income tax as well as throwing into the mix some interesting anomalies. The nature of our tax system already makes it very difficult to educate the public over what they pay and when they pay it without introducing additional complexities. Moving forward, this debate needs to be more than just what Scottish income tax we will pay and when, but also how this interacts with the wider UK tax regime."

TAGS: Finance | Insurance | tax | business | interest | insurance | budget | United Kingdom | tax rates | individual income tax | Tax | Scotland

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