Avoiding inequalities in taxation: differences between Scottish and English law
Susan Cattell considers an important principle for Scottish taxpayers – and asks whether HMRC may be changing its approach.
Tax law applicable to the whole of the UK
The Scottish government is now wholly responsible for certain taxes in Scotland: Land and Buildings Transaction Tax and Scottish Landfill tax are fully devolved. The Scottish government also determines the rates and bands for Scottish Income Tax (SIT) on non-savings, non-dividend income – but not other aspects of income tax. Scottish taxpayers continue to be liable to other UK taxes, such as CGT and IHT.
A significant body of tax law continues to apply across the whole of the UK. From a Scottish perspective this gives rise to numerous complications. The most obvious of these relate to the interaction between SIT rates and bands on non-savings, non-dividend income (set by Holyrood) and the treatment of other income, NICs and capital gains (determined by Westminster).
A slightly less obvious complication arises where Scottish and English non-tax law differ. How should tax statutes applicable to the whole of the UK then be applied? This is not a new question - it featured in cases in the nineteenth century - but it remains an important one for Scottish taxpayers.
Lord Saltoun v Her Majesty’s Advocate-General for Scotland
This 1860 case related to the amount of succession duty payable under a Victorian tax statute. The courts had to determine whether duty was payable at 3% or 1% - which hinged on whether the ‘predecessor’ (for the purposes of the tax statute) was Lord Saltoun’s uncle (also Lord Saltoun) or his grandmother, the Dowager Lady Saltoun. Relying on Scottish law relating to succession to determine the ‘predecessor’, the Advocate-General argued that duty at 3% was due - but the House of Lords finally determined that the 1% rate applied.
The judgments emphasised that the legislature would have intended that an act applicable to the whole of the UK should tax the subjects of each kingdom equally in the same circumstances, in spite of differences between Scottish and English law.
The Lord Chancellor: “My Lords, in construing the statute on which this case depends, we must bear in mind that it applies to the whole of the United Kingdom, and that the intention of the Legislature must be understood to be, that the like interests in property taken by succession should be subjected to the like duties wheresoever the property may be situated. The technicalities of the laws of England and of Scotland, where they differ, must be disregarded, and the language of the Legislature must be taken in its popular sense.”
Lord Cranworth: “What we have to determine is the true construction of an Act of Parliament imposing a tax on the succession to property in every part of the United Kingdom, and it may safely be assumed that the intention of the Legislature was to make its operation equal wherever it was to be put into force; and if, therefore, we can come to a satisfactory conclusion as to what would have been the duty payable in England or Ireland on a succession arising on a settlement as nearly as possible the same as that now before us, we shall arrive at a solution of the difficulty we have to deal with.”
Lord Wensleydale: “I think it plain that as only one rule is given in the Succession Duty Act, the Legislature has intended that the same rule is to govern the taxation of succession to property in every part of the United Kingdom, notwithstanding the differences of the law which regulates the transmission of real estate in one of them, and technical distinctions which really make no substantial difference must be overlooked, and all the subjects of each kingdom must have been meant to be taxed equally in the same circumstances.”
ICAS members have experience of HMRC accepting that the principle set out in Saltoun applies, so that the position of a Scottish taxpayer under tax legislation applying to the whole of the UK is not prejudiced solely because of a difference between Scottish and English law.
In the context of partnerships, HMRC specifically notes in its Business Income Manual at BIM82035:
“Unlike its English, Welsh or Northern Irish counterpart, a Scottish partnership is a legal person. This has very few consequences for tax purposes. Where the differing legal systems would produce different results as between Scotland and the rest of the United Kingdom, specific legislation has been enacted to preserve equality of treatment; for example assessment of partnership profits (see BIM82205) and capital gains (see CG27000). Where the tax legislation itself would produce different results, the courts have directed that:
‘…it is desirable to adopt a construction of statutory words which avoids differences of interpretation of a technical character such as are calculated to produce inequalities in taxation as between citizens of the two countries.’
(Viscount Simons at page 244 in Rex v General Commissioners of Income Tax for The City of London (ex parte Gibbs and Others)  24TC221).”
In his judgment in the Gibbs case Viscount Simons went on to refer to the Saltoun case outlined above.
Recent experience – has HMRC changed its approach?
In a recent case reported to ICAS, involving a partnership and the availability of a relief provided for in TCGA 1992, HMRC appeared to suggest that a Scottish partnership should be treated differently (and less favourably) than an English one.
In the light of this, ICAS has asked HMRC to confirm that it continues to accept the principle derived from Saltoun, that the position of a Scottish taxpayer under tax legislation applying to the whole of the UK should not be prejudiced solely because of a difference between Scottish and English law.
If you have come across any similar examples of HMRC apparently not following this principle and treating Scottish taxpayers less favourably, please let us know.