UK: Scotland – Tax Changes In The Pipeline?

Last Updated: 6 August 2014
Article by Tina Riches

As we go to press, the vote on Scottish independence is imminent. The result of the vote will have profound implications for the Scottish tax system, particularly if there is a 'yes' vote. However, as taxes are gradually being devolved to Scotland, quite a few tax changes are already in the pipeline, and that is before agreement over petroleum revenue tax. These changes will start to bite from April 2015, with the impact of at least some of the changes affecting not just Scotland, but also the rest of the UK, often referred to now as 'rUK'.

Property related taxes

The first two known changes relate to two property related taxes, due to come into force in April 2015. The new land and buildings transaction tax (LBTT) will replace stamp duty land tax (SDLT) on property transactions in Scotland. Whereas SDLT is a slab tax with the whole price taxed at one rate, LBBT will be a progressive tax. Like income tax, if the taxed amount is £1 over a threshold it is only the excess that will be taxed at the next rate, not the whole value.

The exact LBTT rates are due to be announced in the Autumn 2014. It will be interesting to see if the changes help oil the wheels of the property machine, rather than cause a blockage at each rate rise threshold. There are fewer reliefs than under SDLT, but others are already being looked at, such as a sub-sales relief.

The other new property related tax is the new Scottish landfill tax. Also due to start in 2015, this tax will be administered by the new tax authority, Revenue Scotland, with the operational support of the Scottish Environment Protection Agency. For LBTT the support comes from the Registers of Scotland, who already compile and maintain various registers.

Scottish rate of income tax

The other tax already on the statute book, although strictly not a devolved tax, is the Scottish rate of income tax (SRIT), due to take effect from 2016 on non-savings income of Scottish residents. It will need to be operated by employers, pension or annuity providers operating PAYE. It will work by taking a 10% slice off UK income tax and instead adding on the SRIT set by the Scottish Parliament, which may be at a slightly different rate.

There will be a number of implications, not least for employers or pension providers in rUK, who will also need to know which side of the border their employees or pensioners are resident. Much of this headache will be operated by HMRC issuing Scottish or rUK coding notices but systems will need to be in place to cope with this. Relief around pension contributions is proving difficult and there will be transitional rules until 2018.

Gift Aid for charities will continue to apply at the UK basic rate, regardless of the tax position of the donor, due to the administrative burden that any other system would have on charities. The UK Government will keep this issue under review.

Tax administration

As a precursor to the collection of tax, Revenue Scotland, is looking at its administration. While collection is by HMRC and other entities, Revenue Scotland needs overarching powers over the taxes it administers and has consulted on tax management. Not only is a regime of penalties expected, but also a general anti avoidance rule (GAAR). While a GAAR may help keep other legislation shorter, it does bring uncertainties and demands for a clearance system. Consultation has had a good start, but will need to be formalised. Guidance on Revenue Scotland's interpretation of the law is also needed.

The vote

So, we are already part way down the pipeline towards Scotland having its own tax system, irrespective of the result of the independence vote. If that vote is no, taxes will continue to be devolved to Scotland. If that vote is yes we will be entering a whole new world - well two new worlds of Scotland and rUK with cross border transactions between them, double tax treaties to be made and issues of EU membership and VAT to be resolved. Solutions to a host of issues will need to be found quite swiftly - let's hope it is not in the form of snake oil.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014.

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Tina Riches
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