Scottish taxes are far from simple
Donald Drysdale observes that devolving taxes creates complexities for taxpayers and challenges for their advisers.
Striving for simplicity
Professional bodies such as ICAS have long campaigned for taxes to be simplified. But while taxpayers in Scotland pay a wide variety of disparate taxes, simplification is a concept that means different things to different audiences.
Some taxes – such as inheritance tax, capital gains tax and (if you call them a tax) national insurance contributions – are imposed by the UK Government and reserved to Westminster.
Others are devolved to the Scottish Parliament at Holyrood, but even these come in different shapes and sizes. Those that are wholly devolved are currently land and buildings transaction tax (LBTT) and Scottish landfill tax, with air departure tax and a Scottish replacement for aggregates levy likely to follow.
By contrast, Scottish income tax – Scotland’s highest-yielding direct tax – is only partly devolved. Westminster is responsible for the tax base, allowances and reliefs, and administration; Holyrood sets the tax rates and the income bands within which each rate applies.
VAT remains a UK tax, based on EU rules, but from April 2019 part of the VAT raised in Scotland (the first 10 percentage points of standard rate VAT and the first 2.5 percentage points of reduced rate VAT) will be assigned to the Scottish Government’s budget.
Aiming for accountability
In 2009 the Calman Commission on Scottish Devolution recommended that a big enough part of the Scottish Parliament’s budget should come from devolved tax to make it genuinely accountable to the people of Scotland. Likewise in 2014 the Smith Commission on Further Devolution advocated the transfer of additional tax powers from Westminster to Holyrood to increase the Scottish Parliament’s accountability.
It is arguable that Scotland’s devolved powers make taxes more complicated for, and therefore less understandable to, individuals based in Scotland and businesses operating there. This seems scarcely compatible with the accountability that was sought.
Devolution has also created challenges for HMRC. For Scottish income tax for example, Scottish taxpayers must be identified by HMRC – a particularly difficult task because there is no legal requirement for PAYE taxpayers to inform HMRC immediately of a change of address. Where a Scottish taxpayer is not correctly identified as such for PAYE, tax revenues which rightly belong to Holyrood will go to Westminster instead.
Charting recent changes
Just as UK tax laws change frequently, so do Scottish tax laws – and several significant changes have occurred within the past few months.
In April the new fiscal year began with Scottish income tax rates and bands for non-savings non-dividend income (but not for other income or capital gains) diverging more than ever from those in the rest of the UK.
Also in April, Revenue Scotland updated its Scottish Electronic Tax System (SETS) and published new guidance to help tenants and their agents submit the periodic LBTT tax returns now required for leases – a requirement that differs markedly from the rules for stamp duty land tax (SDLT).
In May, LBTT relief from the additional dwelling supplement (ADS), for couples who jointly bought a home to replace a home owned by only one of them, was extended retrospectively to cover all such transactions entered into on or after 28 January 2016 for which the effective date was on or after 1 April 2016 – i.e. since the introduction of ADS.
A new LBTT first-time buyer relief can be claimed by any first-time buyer who acquires a dwelling which they intend to occupy as their only or main residence, where the contract is entered into on or after 9 February 2018 and the effective date of the transaction is on or after 30 June.
From 1 July, LBTT group relief can be claimed where there is a transaction within a group and security has been granted to a lender over shares in the relevant group company, or there is an equivalent arrangement in place, i.e. shares are used as collateral against a loan. The Scottish Government has plans to extend this provision retrospectively but has not yet done so.
Following the recent increase in Bank of England base rate to 0.75%, Revenue Scotland amended its interest rates from 8 August – to 3.25% per annum on tax or penalties paid late and 0.75% per annum to any repayment of tax, penalties or interest.
Coping with complexity
Whether or not any significant steps can be made towards simplifying taxes, changes in tax law and practice will continue to take place both north and south of the border, creating new traps for taxpayers and challenges for their advisers.
Everyone working with these taxes needs clear explanation and guidance, and Bloomsbury Professional, the Scottish Law and Tax Publisher, is offering ICAS members a 20% discount on their Scottish Tax Service. Further details can be found here.
Included in the Scottish Tax Service is the latest edition of The Management of Taxes in Scotland by Charlotte Barbour, MA, CA, CTA (Fellow), Director of Taxation at ICAS, offering a succinct and readable guide to the powers, duties and responsibilities of Revenue Scotland and the ways in which devolved taxes in Scotland are administered.
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About the author
Donald Drysdale, a former tax and technology partner at KPMG and later assistant director of tax at ICAS, is a freelance author and frequent contributor to ICAS.com. He is series editor of Bloomsbury Professional's Scottish tax list, contributor of a chapter on Scottish income tax to their Income Tax 2018/19 annual, and a co-author of their Corporation Tax 2018/19 annual. He was Tolley’s Tax Commentator of the Year in 2017.
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The views expressed are those of the author and not necessarily those of ICAS.