Keeping abreast of Scottish taxes
Recent events have shown how Scotland’s well-planned budgetary procedures can be thrown into confusion, as Donald Drysdale explains.
Unforeseen circumstances
The path to Scotland’s Budget for 2020/21 was far from smooth.
Hitherto, it had been established practice for the UK Budget in mid-autumn to be followed by the Scottish Budget before Christmas, allowing time for MSPs at Holyrood to scrutinise the proposals from Scotland’s Finance Secretary before passing them into law.
Not so this year. Few could have predicted that last autumn’s UK Budget would have been postponed until mid-March, that Scotland and Wales would have finalised their devolved Budgets before then, or that coronavirus would have cast dark new clouds over the nation’s finances and the global economy.
Added surprises were the humiliating departure of Scottish Finance Secretary Derek Mackay only hours before his Budget, and the equally unexpected resignation of Chancellor of the Exchequer Sajid Javid on a point of principle scarcely four weeks ahead of his.
In Edinburgh, Mackay was swiftly and ably replaced at short notice by the new Finance Minister, chartered accountant Kate Forbes, who presented her Budget on 6 February without knowing what the UK Budget would contain.
At Westminster, the new Chancellor Rishi Sunak then delivered an expansive UK Budget on 11 March, and has been announcing new spending measures ever since in his attempts to protect the economy from the worst ravages of the coronavirus lockdown.
Tax divergence
Income tax
Scottish income tax – payable by Scottish taxpayers on their non-savings, non-dividend income (i.e. broadly, their earnings, pensions and property income) – is currently the key fiscal tool devolved to Holyrood.
The current minority SNP administration at Holyrood has adopted a clear strategy, implementing more progressive income tax rates and thresholds than those set for the UK as a whole – meaning that middle and high earners pay more tax in Scotland than they would in other parts of the UK.
The Scottish Budget for 2020/21 charted a relatively prudent course, at a time when the direction of travel of the UK Budget was unknown, by proposing no increase in divergence. However, differences between the two tax regimes are already significant and cause anomalies.
National insurance
A key concern in Scotland is the very high (53%) combined marginal rate of income tax and national insurance contributions (NICs) on Scottish earnings currently falling between the Scottish higher rate threshold of £43,430 and the UK higher rate threshold of £50,000.
The Scottish Government would like to see this marginal rate reduced. That might be achieved, for example, by aligning NIC rates and thresholds with those for Scottish income tax. This seems unlikely to happen any time soon because NICs are a matter reserved to Westminster.
Land transactions
Another key feature of Scottish taxes is that land and buildings transaction tax (LBTT) applies north of the border instead of stamp duty land tax (SDLT). There are notable differences between these two taxes.
In the past couple of years, amendments to LBTT law have included changes to the additional dwelling supplement (ADS) rules on family units and replacing main residences, and a new LBTT relief for first-time buyers.
Already around 70% of tax queries put to Revenue Scotland relate to ADS, and further changes may be afoot. Holyrood’s Finance and Constitution Committee has recognised that ADS is complex to administer and hard for people to understand, and has suggested that certain anomalies should be reviewed.
Rules on group relief for LBTT purposes were also modified to prevent the relief from being denied in certain circumstances – for example, where a parent company transferred property to a subsidiary and the parent company granted security to a lender over the shares in the subsidiary.
Taxpayers and their advisers need to keep abreast of new developments in Scottish taxes, and thus practitioners require appropriate reference materials for this purpose.
Many amendments to Scottish taxes are currently made by secondary legislation, but a project in which ICAS is participating is examining the legislative process for devolved taxes. It may, however, be put on hold until the current coronavirus emergency is over.
The impacts of coronavirus
With no advance warning, practitioners and clients worldwide have had to move to new ways of working in accordance with government guidance on social distancing, with remote working becoming the new norm.
I would echo words which Glyn Fullelove, CIOT President, has written recently to his members: “It is likely that the environment for tax professionals will be very different after the pandemic has cleared, as the economic effects will be profound.”
At this relatively early stage, it is impossible to guess the ultimate economic cost and fiscal implications of the vast increases in public spending being incurred to help individuals, families and businesses cope with the extraordinary circumstances which now apply.
There will come a time when these exceptional levels of support will have to be constrained, and when taxes will be hiked to pay for them. Stark political choices may emerge as to how that should be done, and it is unclear whether Scottish taxpayers will, or will not, want to continue paying higher levels of tax than elsewhere in the UK.
Coping with devolution
While we must hope that the annual budgetary processes may not always be so melodramatic as they were this time around, devolution brings inevitable complications. Differing changes in tax law and practice will continue to take place north and south of the border, creating new traps for taxpayers and fresh challenges for their advisers.
Practitioners advising Scottish taxpayers and other clients with Scottish interests need clear explanations and guidance, and Bloomsbury Professional, the Scottish Law and Tax Publisher, is offering ICAS members a 20% discount on their Scottish Tax Service.
About the author
Donald Drysdale, a former tax and technology partner at KPMG and later assistant director of tax at ICAS, has written on tax topics for over 40 years and has been a prolific contributor to ICAS.com. He is series editor of Bloomsbury Professional's Scottish tax list, and was Tolley’s Tax Commentator of the Year in 2017.