Will the Scottish rate of income tax affect your clients?
Recap: What is it?
The Scottish rate of income tax (SRIT), allowed by the Scotland Act 2012 (see Follow up ) will replace 10% of the basic, higher and additional rates of income tax on non-savings and non-dividend income for Scottish taxpayers. The effective tax rate will be HMRC tax rate - 10% + SRIT. If SRIT is 10%, it would therefore simply be an administrative issue for HMRC. In view of the politics and costs involved, this seems unlikely.
A higher, or lower, rate of SRIT means an income tax gradient across the UK. A SRIT at 11%, means Scottish taxpayers would pay 21% basic rate, 41% higher rate and 46% additional rate.
SRIT is not a devolved tax. It will be raised and collected under HMRC rules.
Scottish taxpayers
There will be three categories of Scottish taxpayer:
- Scottish Parliamentarians - MSPs; MPs, MEPs for Scottish constituencies
- individuals with “close connection” to Scotland, i.e. having only or main residence in Scotland (the main residence test)
- those with no main residence in the UK, who are resident in UK under the statutory residence test (SRT) and spend as many days in Scotland as elsewhere in UK (the day counting test).
An individual must be UK resident under the SRT before SRIT can apply. Once it is determined to be applicable, SRIT applies for a full tax year. Clients becoming Scottish taxpayers during the year, e.g. if they move house, pay SRIT on all earnings of that tax year - there is no split year concession.
What’s new?
HMRC has recently published guidance on how it intends to apply the legislation (see Follow up ). This raises further questions, particularly about split years and interaction with the SRT.
Update on timescale. The Scottish Parliament will decide on the SRIT to apply from April 2016 in autumn 2015. HMRC will issue Scottish taxpayers with revised PAYE codes using an “S” prefix.
Pro advice 1. Be aware of clients’ connections with Scotland, or income tax calculations may be inaccurate.
Pro advice 2. Make clients aware of the options if they fall within SRIT net - some clients with Scottish work or home connections might be able to influence the outcome by changing their lifestyle.
On the alert
For most people, status will be straightforward. Clients will either have their main residence in Scotland and be Scottish taxpayers, or a main residence elsewhere in the UK and not be Scottish taxpayers.
You must now be alert to clients with any cross-border contact, particularly where there is job-related accommodation or no main residence, or where clients move home.
Pro advice. Watch out for clients moving during the year. As SRIT applies for complete tax years, they could face additional (or reduced) tax on income earned before, as well as after, the move.
Number of days?
Day counts only come in where clients have no main place of residence. Here, count the days clients spend in Scotland and elsewhere in the UK - based on their location at the day’s end. If there are at least as many days spent in Scotland as elsewhere in the UK, the client is a Scottish taxpayer. Days spent in transit are ignored, and there is no extension for illness or emergency exceptional circumstances.
Pro advice. Some clients will need to keep diaries to enable day counting. It is unclear what level of proof will be required.
Employers
HMRC’s June 2015 Employer Bulletin notes that there is no legislation compelling employees to notify a change in address (see Follow up) , but that as it could affect SRIT status and tax code, it would help if they do. It also requests employers to emphasise this to employees.
When advising clients employing Scottish taxpayers, be aware of the practicalities as the scheme rolls out. Employer clients are not expected to assess Scottish taxpayer status. HMRC will do so. It will then give the green light to use the Scottish PAYE code.
Guidance on how SRIT applies to Ministry of Defence employees has been promised.
Borderline cases
In many cases, the position may not be immediately clear. Read through our case study examples which will assist you to understand the application (see Follow up ).
Scotland Act 2012
HMRC guidance
June 2015 Employer Bulletin
Case study examples
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