There has been much discussion about the Scottish independence referendum, due to be held in 2014, the relative merits of ‘Devo Max’ and ‘Devo Plus’, both of which would devolve greater powers to the Scottish Government, and the implications of a lower corporation tax rate north of the border, should the Scottish Government be given further tax powers. However, amid the sometimes heated debate – in Scotland, at least – over the potential consequences of Scottish independence or the ceding of greater powers to Holyrood, little attention has been paid to the significant tax changes that have already taken place in Scotland and the fact that the Scottish Government is currently in the process of setting up a Scottish tax system.
THE SCOTLAND ACT 2012 TAX CHANGES
The Scotland Act 2012 introduced changes recommended by the Calman Commission, the body set up in 2007 to review Scottish devolution ten years on. Under the Act:
- Stamp Duty Land Tax (SDLT) and Landfill Tax will be devolved to the Scottish parliament from 2015
- from 2016 the Scottish parliament will be obliged to set a Scottish Rate of Income Tax (SRIT); and
- the Scottish parliament has the power to introduce new taxes.
One-off reductions in the block grant that the Scottish Government receives from Westminster will be made to reflect the devolution of SDLT and Landfill Tax and there are still discussions to be had about the appropriate figure given the downturn in the property market in recent years. There is a more complex adjustment process in relation to the SRIT.
THE LAND AND BUILDINGS TRANSACTION TAX (SCOTTISH SDLT)
From April 2015, UK SDLT will cease to apply to transactions involving land in Scotland and will be replaced by the Scottish Land and Buildings Transactions Tax (LBTT).
In its consultation paper, ‘Taking Forward a Land and Buildings Transaction Tax for Scotland’, issued on 7 June 2012 (http://www.scotland. gov.uk/Resource/0039/00394544.pdf), the Scottish Government proposes, at least in the first instance, to model the LBTT on SDLT, but to take into account Scots law and conveyancing practice (which SDLT fails to do in many respects) and to simplify the tax, where possible.
The consultation document proposes:
- a progressive rate, rather than the ‘slab’ system of SDLT;
- no LBTT on residential leases;
- administration not by HMRC but by a new Scottish tax authority, Revenue Scotland, working closely with Registers of Scotland (ROS);
- a General Anti-Avoidance (or Anti-Abuse) Rule (GAAR); and
- a different regime for commercial leases, partnerships and trusts.
The tax base, rates and administrative aspects of LBTT will therefore differ from SDLT, and this needs to be borne in mind in planning commercial transactions.
REACTION TO THE LBTT CONSULTATION
The LBTT consultation period ended on 30 August, and the Scottish Government is now considering the submissions. A number of common threads can be identified:
- The need for certainty: lack of clarity about the likely rates of LBTT could deter inward investment.
- Administrative issues: comprehensive and easily understood guidance as well as helplines staffed by specialist advisers will be essential for the successful introduction of LBTT.
- The progressive rate: though widely welcomed for residential transactions, there is a feeling that rates of LBTT for commercial property should not be higher than those of the UK SDLT.
- Commercial leases: the SDLT lease code should not be replicated as it is far too complex and administratively cumbersome. A different regime is required.
- Partnerships: as with leases, the LBTT treatment of partnerships also needs a rethink.
- A GAAR: this would be welcome, provided it was accompanied by simpler legislation, though the best approach to limiting avoidance would be simple and clear legislation and an effective enquiry system, all of which have been sadly lacking in relation to SDLT.
- The transitional rules: the Scotland Act 2012 transitional rules mean that some purchases after 2015 may be subject to SDLT rather than LBTT, for example if a contract has been entered into before 1 May 2012. This would be undesirable and administratively burdensome, and more of a clean break is probably appropriate where a tax is devolved from one country to another.
One of the most welcome aspects of the consultation meetings and events has been the presence not only of the LBTT Bill team but also of lawyers from the Scottish Government Legal Directorate, as well as members of the ROS project team, who are designing the LBTT online system and LBTT returns. Many of the difficulties of the SDLT system could have been avoided if a similar approach had been adopted by HMRC prior to the introduction of SDLT.
THE LBTT BILL
The LBTT Bill is to be introduced to the Scottish parliament in November 2012 and will be considered by the Finance Committee, which will examine not only the Scottish tax bills but their implementation and operation. This remit is wider than that of the Westminster Finance Bill Committee, which may help to ensure the successful introduction of the new tax.
There is ample further opportunity for interested parties to help shape LBTT. During Stage 1 of consideration of the LBTT Bill, the Finance Committee will welcome written submissions from interested parties and will also invite some stakeholders to give oral evidence.
THE SCOTTISH APPROACH TO TAXATION
Whether a country has two taxes or 22, they cannot be operated in isolation but only as part of a tax system and with a tax authority taking overall responsibility. So what do we know so far about the Scottish approach to taxation?
John Swinney, the cabinet secretary for finance, employment and sustainable growth in the Scottish Government, set out his vision for tax in Scotland in a statement to the Scottish parliament on 7 June 2012 when he introduced the LBTT consultation. Mr Swinney explained that the approach to tax would be fit for the 21st century but based on the four maxims set out by Adam Smith inThe Wealth of Nations, namely:
- the burden should be proportionate to the ability to pay;
- certainty for the taxpayer;
- convenience/ease of payment; and
- efficiency of collection.
The Scottish taxes are to be collected in Scotland by a new Scottish tax authority, Revenue Scotland, working with the ROS in relation to LBTT and with the Scottish Environmental Protection Agency (SEPA) in relation to the Scottish Landfill Tax. Using HMRC would not provide sufficient flexibility; the lack of flexibility in relation to the SDLT online system is well known, with many suggestions for improvements being countered by the explanation that changing the online system would be too expensive.
Mr Swinney also indicated that the Scottish Government would be able to establish Revenue Scotland and administer and collect both the replacement taxes for less than HMRC would have charged Scotland for administering a ‘like for like’ system for SDLT. The Scottish Government estimates that in the period to 2020, the operational costs will be 25% lower than if HMRC was to deliver the status quo.
Arrangements to set up the new Scottish tax authority are now underway, and on 30 August 2012, the Scottish Government announced that the chief executive of the Scottish Court Service, Eleanor Emberson, had been appointed as the new head of Revenue Scotland from 1 October 2012.
THE SCOTTISH TAXES MANAGEMENT ACT
The overarching arrangements for the Scottish tax system will be set out in a Scottish Taxes Management Act (TMA), which is to be introduced to the Scottish parliament in 2013 following a period of consultation. The Scottish Government is considering the inclusion of a GAAR in the Scottish TMA. The UK government is currently consulting on a UK GAAR; no doubt the Scottish GAAR will be informed by these discussions as well as the very well received report by Graham Aaronson QC, which was issued last year.
The Scottish Government will have the significant advantage of starting with a clean sheet and so the quid pro quo of a GAAR, simpler and clearer tax legislation, might be much easier for it to deliver. Also, government policy has to be set out in a policy memorandum that will accompany the LBTT Bill, making it easier to determine whether transactions are abusive.
SCOTTISH LANDFILL TAX
At the time of writing, the consultation paper for the Scottish Landfill Tax has yet to be published, however Mr Swinney has stated:
‘My key consideration is that the Landfill Tax must effectively and implicitly support the good progress that is being made on encouraging the improvement in recycling in Scotland as we move towards the zero waste objective. We must establish that link and, ideally, find ways of incentivising further improvements in that practice.’1
THE SCOTTISH RATE OF INCOME TAX
From 6 April 2016, Scottish taxpayers may pay a different rate of income tax than taxpayers in the rest of the UK (RUK taxpayers).
Under s26 of the Scotland Act, the income tax rates applying to Scottish taxpayers will be reduced by 10p, and the Scottish parliament will set a SRIT, which will be added to the reduced UK rate. The table below illustrates the result for a range of different SRITs.
The Scottish parliament only has responsibility for setting the SRIT, and so the tax is not a fully devolved tax. HMRC will administer and collect the SRIT.
WHO IS A SCOTTISH TAXPAYER?
A Scottish taxpayer must be UK resident for tax purposes. The individual’s sole or main residence must be in Scotland, and individuals with more than one residence in the UK will be Scottish taxpayers if they are resident for the longest period of time in Scotland. If necessary, the individual will need to count the number of days (on an end-of-day basis) spent in Scotland and elsewhere in the UK, in order to determine if they are a Scottish taxpayer. There are exceptions for those transiting through the country and for Scottish MPs and MEPs.
PAYE ‘S’ CODES
HMRC will issue Scottish taxpayers with a tax code prefixed by an ‘S’, and payroll systems are expected to be able to apply the different rates of tax for Scottish and RUK taxpayers (although this has yet to be tested).
The SRIT will apply to Scottish taxpayers regardless of where their employer is based, so all UK and, indeed, overseas employers will need to be aware of the SRIT, even if they employ only a handful of Scottish taxpayers. Some Scottish taxpayers will also need to submit self assessment tax returns.
SRIT PRACTICAL ISSUES
The SRIT will apply only to ‘non-savings income’ (including employment, pension and rental income) and savings and dividend income will remain liable to the UK rates. Many practical issues may complicate the application of the SRIT:
- whether a person is a Scottish taxpayer may not be readily apparent, particularly for the those who live in Scotland and work in London, long-distance lorry drivers, oil rig workers and others;
- relief for pension contributions for Scottish taxpayers will apply at the Scottish rate and HMRC is working to ensure that this can be achieved without increasing the administrative burden for pension providers;
- Scottish taxpayers who are Construction Industry Scheme (CIS) registered subcontractors will continue to be paid under deduction at a rate of 20% and will have to submit self assessment tax returns to pay the SRIT via self assessment;
- computation of PAYE settlement agreements (PSAs), which enable employers to account to HMRC for the tax on benefits in kind and other minor payments will be complicated by the need to take the SRIT into account;
- although property income is subject to the SRIT, Real Estates Investment Trusts (REITs) and Property Authorised Investment Funds (PAIFs) will continue to deduct the UK basic rate of tax from payments made to investors due to the inability to identify those who are Scottish taxpayers, and this income will not be liable to the SRIT.
COSTS OF ADMINISTERING THE SRIT
The costs of administering the SRIT, anticipated by HMRC to be a set up cost of £45m and an annual cost of £4.2m, will be borne by the Scottish Government (and therefore by the Scottish taxpayer). Given the difficulties in identifying a Scottish taxpayer; the variety of rates, both Scottish and UK, which apply to different types of income as well as the likelihood that the Scottish Government may set a rate comparable with the UK rate, this does beg the question of whether the SRIT is a sensible development.
An interesting issue is going to be the impact of these changes on tax appeals. With the creation of Revenue Scotland, there will be two tax authorities with relevance to Scotland whose decisions potentially will be challengeable.
This dovetails in interesting ways with how it is anticipated Scotland’s tribunal system is likely to develop over the next few years. The Scottish Government is looking at reforming the tribunals system and has already set up a new Scottish Tribunal Service (STS) to administer Scottish tribunals. While the Tax Tribunal is not yet part of STS it may become so in time. In 2011, the Ministry of Justice decided to merge the administration of courts and tribunals into one integrated body known as HM Courts Service & Tribunals (HMCST). One complication with this new system is that, while HMCST only administers the Courts in England and Wales, it administers tribunals across the whole of the UK. It has already been suggested that it may now be appropriate to remove Scottish tribunals from HMCST. That will, however, require Westminster legislation.
While the issue of tribunal structure has arisen as a result of administrative changes by the Ministry of Justice, the timing may be seen as serendipitous given what is happening to Scottish taxes. Certainly, things are going to change in the Tax Tribunal in Scotland. In particular, the Scottish tribunal judges will have a further layer of tax law to deal with compared to their colleagues in other parts of the UK and the burden of clarifying the meaning of the new statutory rules will fall solely on them. Is it inevitable that we will begin to see the Tax Tribunal north and south of the border evolving differently? Or will it be felt necessary for a second tribunal to be created to deal with the purely Scottish taxes that will have a separate remit from the UK Tax Tribunal? Only time will tell.
Whatever the outcome of the independence referendum, it seems clear that the LBTT and the Scottish Landfill Tax are here to stay. The desire of the Scottish Government for a lower rate of corporation tax is well known, however the UK government seems not to be prepared to consider this further at this stage, though there may be further developments in the run up to the independence referendum. The Scottish Government has given assurances that any new taxes would only be introduced after consultation with stakeholders, and no new taxes have, been suggested so far.