The changing face of Scottish taxes
Donald Drysdale CA discusses changes to the taxation system in Scotland and the need of accountants and other practitioners for clear explanation and guidance
Scottish income tax
The Scotland Act 1998 created the income tax Scottish Variable Rate (SVR), often referred to as the ‘tartan tax’. This allowed the Scottish Parliament to vary the basic rate of income tax by up to 3 percentage points either side of the UK basic rate, but the power was never used.
The Scotland Act 2012 replaced the SVR with the Scottish Rate of Income Tax (SRIT). This sliced 10 pence in the pound off the basic, higher and additional rates of UK income tax on non-savings non-dividend income of Scottish taxpayers. It also gave the Scottish Parliament the power to substitute a new rate (the Scottish rate) for that reduction, allowing it to reduce the effective basic, higher and additional rates by up to 10 percentage points, or increase them by any amount without limit.
SRIT was implemented on 6 April 2016 and had a fundamental impact on the funding of the Scottish budget. However, it was barely noticed outside government circles because Holyrood set the rate at 10 pence, thereby keeping income tax rates in Scotland in line with the rest of the UK.
The Scotland Act 2016 replaced SRIT with the new Scottish Income Tax (SIT). This allows the Scottish Parliament to set whatever rate or rates of income tax it may wish to levy on the non-savings non-dividend income of Scottish taxpayers, and (if more than one rate) the income bands at which these are to be charged.
SIT was implemented on 6 April 2017. Compared with SRIT, it has assumed a higher profile among the electorate because income tax now differs north and south of the border. The UK higher rate threshold was increased to £45,000 this year, but the Scottish higher rate threshold was left unchanged at £43,000. Thus Scots with earnings and pensions above £45,000 are now paying £400 a year more tax than their counterparts south of the border.
The wider picture
Before the Scotland Act 2012 and the Scotland Act 2016 took effect, annual tax revenues of some £4bn were raised in Scotland, making up around 10% of public expenditure north of the border.
Structural fiscal changes have taken place and are continuing to take place. Land and Buildings Transaction Tax (LBTT) and Scottish Landfill Tax (SLfT) were introduced in 2015. These were followed by implementation of SRIT and the more visible implementation this year of SIT as a result of Holyrood’s new powers over rates and thresholds.
And that is not all. This year the Scottish Government has acquired increased borrowing and reserve powers. Next year Air Passenger Duty (APD) in Scotland will be replaced by a new devolved tax – Air Departure Tax (ADT). From 2019 a proportion of the estimated VAT raised in Scotland is to be assigned to the Scottish budget. By 2021, eleven social security powers involving £2.8bn of annual spend will have been devolved to Holyrood.
By 2020 an estimated £22bn of annual tax revenue will be raised in Scotland, representing 52% of public expenditure. According to a report published by Audit Scotland in March 2017, the scale of change needed to implement and manage Holyrood’s new financial powers is significant and the Scottish Government may find it hard to recruit enough people with the required skills. Practitioners may face similar challenges.
The needs of practitioners
The Scottish fiscal landscape is continuing to change at a rapid pace, creating new issues for businesses and individuals and putting pressure on all practitioners who advise them. This affects not only accountants, lawyers and other professionals in practice in Scotland, but also those practising elsewhere in the UK or even further afield if they have clients with Scottish interests.
Scottish taxes such as SIT and LBTT are surprisingly similar to the equivalent UK taxes in many ways, but deceptively different in others. Devolution has introduced new complexities, and there are many traps for the unwary.
Everyone working with these taxes needs clear explanation and guidance. Bloomsbury Professional offer this in book form in their Scottish Core Tax Annuals and online through their Scottish Tax Service.
Among the works within the Scottish Tax Service, the latest edition of ‘The Management of Taxes in Scotland’ by Charlotte Barbour MA CA CTA (Fellow), Director of Taxation at ICAS, provides information and analysis of the Revenue Scotland and Tax Powers Act 2014. It offers 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.
Bloomsbury Professional are working with ICAS to give ICAS members and their firms access to exclusive discounts on leading tax titles,specifically tailored to the needs of Scottish practitioners. If you want to find out more simply visit Bloomsbury Professional.
Register for a free trial to Bloomsbury Professional's Scottish Tax Service.
About the author
Donald Drysdale, a former Tax 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 the Scottish Rate of Income Tax to their Income Tax 2016/17 annual, and co-author of their Corporation Tax 2016/17 annual. He has been recognised as Tax Commentator of the Year in Tolley’s Taxation Awards 2017.
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The views expressed are those of the author and not necessarily those of ICAS.