Tax: Scots might miss Welsh rarebit
As devolution spreads across the UK, Donald Drysdale finds that some of the changes in tax law are not always easy to spot.
A subtle change
Tax advisers with Scottish clients – even practitioners making serious attempts to keep abreast of developments in Scotland’s devolved tax powers – might be forgiven for overlooking a new statutory instrument made by the UK Parliament at Westminster in July 2018.
The secondary legislation to which I refer will subtly alter the definition of a ‘Scottish taxpayer’ from 6 April 2019 onwards. It may affect relatively few individuals, but could be crucial for some whose circumstances, by accident or design, fall close to the dividing line between Scottish taxpayer and non-Scottish taxpayer.
For many Scots, the idea that the UK Government may chop and change the rules on Scottish devolved taxes will be disconcerting. However, Scottish income tax is not a wholly devolved tax. It remains part of the UK-wide income tax regime, with only limited powers devolved to the Scottish Parliament.
While Holyrood has unconstrained power to set the Scottish income tax rates and thresholds, these determine the tax paid only on non-savings non-dividend income of Scottish taxpayers. Their other income and capital gains are taxed by reference to the UK rates and thresholds set by Westminster.
The definition of a Scottish taxpayer, which relates only to Scottish income tax and not to Scotland’s wholly devolved taxes, is a matter reserved to Westminster. Scotland Act 1998 originally defined a Scottish taxpayer for the purposes of the Scottish variable rate, which was never brought into effect. Scotland Act 2012 amended this definition for the now-superseded Scottish rate of income tax. Scotland Act 2016 left it unaltered for the purposes of the new Scottish income tax which was implemented in April 2017.
The definition has now been changed with effect from 6 April 2019. On that date the partially-devolved Welsh rates of income tax are to be implemented, relying on a new definition of ‘Welsh taxpayer’ enacted in Wales Act 2014. This has created a need for a new, co-ordinated approach in determining how the two devolved income tax regimes should interact.
Impact on Scotland
The close connection test
Where a UK resident individual has two or more homes in different parts of the UK and at least one of them is in Scotland, a statutory test determines whether they have a close connection with Scotland or with another part of the UK, thereby establishing whether or not they are a Scottish taxpayer for the fiscal year. For this purpose, the ‘parts’ of the UK are England, Scotland, Wales and Northern Ireland.
Currently, such an individual has a close connection with any particular part of the UK if their main home is in that part of the UK for at least part of the year, if they live in it for at least part of the year, and if the times in the year when their main home is in that part of the UK comprise (in aggregate) at least as much of the year as the times when their main place of residence is in each other part of the UK (considered separately).
From 6 April 2019 onwards a slightly different close connection test will apply. The individual will not be considered to have a close connection with a part of the UK unless the times in the year when their main home is in that part of the UK comprise (in aggregate) more of the year than the times when their home is in each other part of the UK (considered separately) (Scotland Act 1998, s 80E(3)(c)).
This change has been considered necessary to avoid an impasse, now that Scotland and Wales will both be levying devolved income taxes. While it may seem far-fetched, a taxpayer might conceivably have a main home in each jurisdiction for an equal number of days in the fiscal year.
The day-counting test
Where a UK resident individual has no UK home, or cannot determine in which part of the UK their main home is located, they must use a day-counting test to establish whether or not they are a Scottish taxpayer for the fiscal year.
Under pre-existing rules, if the number of days they are in Scotland at the end of the day equals or exceeds the aggregate number they are in any other parts of the UK at the end of the day, they are a Scottish taxpayer for the year. However, from 6 April 2019 onwards, the number of days they are in Scotland at the end of the day will have to exceed the number of days they are in each of England, Wales and Northern Ireland at the end of the day – otherwise they will not be a Scottish taxpayer for the year (Scotland Act 1998, ss 80D(3), 80F(1)).
At the moment, an individual is a Scottish taxpayer for any fiscal year in which they are a member of Parliament (MP) for a constituency in Scotland, a member of the European Parliament (MEP) for Scotland, or a member of the Scottish Parliament (MSP).
Again to avoid an impasse, new provisions will apply from 6 April 2019 onwards to determine whether, and in what circumstances, a Welsh parliamentarian can be a Scottish taxpayer (Scotland Act 1998, ss 80D(4A)–(4B), 80DA) or a Scottish parliamentarian can be a Welsh taxpayer (Government of Wales Act 2006, ss 116E, 116F).
The new legislation
These changes to the Scottish income tax regime may have been hard for practitioners to spot because they were contained in the Wales Act 2014 as amendments to the Scotland Act 1998 and the Government of Wales Act 2006. They were then brought into effect from 6 April 2019 by The Wales Act 2014 (Commencement No. 2) Order 2018, SI 2018/892, which was made in July 2018.
Devolution is confusing enough already. When Westminster changes Scottish income tax law by an Act of Parliament and secondary legislation which both focus on Wales, this is a recipe for further confusion.
Article supplied by Taxing Words Ltd