Maintaining accurate address records of the 2.6 million Scottish taxpayers remains the biggest risk facing HM Revenue & Customs in ensuring that Scottish income tax is assessed and collected properly, according to a report today by the National Audit Office.
HM Revenue & Customs continues to administer and collect Scottish income tax as part of the UK tax system. The Scottish Government pays the administration costs incurred by HMRC. In 2016-17 these were £6.3 million.
For the 2016-17 tax year, the Scottish Parliament decided to effectively match the income tax rates in Scotland to those in the rest of the UK. HMRC estimates it will collect £4.6 billion attributable to the Scottish rate of income tax for 2016-17. The actual amount collected will not be known until July 2018. While the estimate is fairly stated, it would benefit from the greater use of taxpayer data from its own systems.
The actual amount of Scottish income tax collected in 2016-17 will not affect the Scottish Government’s budget. But from 2020-21 the Scottish Government’s budget will be adjusted to reflect the actual tax receipts collected from Scottish taxpayers from 2017-18. The Scottish Government will receive £11.9 billion in 2017-18 based on its forecast of Scottish income tax revenue. Some areas of the funding cycle are yet to be agreed between the Scottish and UK Governments, including how estimates will be reconciled to forecasts, exactly when this will happen, and the process for resolving any disputes. With actual Scottish taxpayer data now becoming available, HMRC has the opportunity to set out how this can be used to enhance its estimates of how much tax is attributable to Scottish taxpayers each year.
In 2017-18, income tax rules in Scotland differ from the rest of the UK for the first time. Scottish taxpayers pay the higher rate of tax (40%) when they earn £43,000 – as opposed to £45,000 in the rest of the UK. HMRC estimate that 386,000 Scottish taxpayers are now paying the higher rate of tax but does not expect that the difference in the higher rate threshold between Scotland and the rest of the UK will lead to avoidance or evasion. The Scottish Government forecast this will generate additional revenue of £127million in 2017-18. HMRC expects to spend £26.8 million in total by 2019-20 on implementing changes in income tax rules in Scotland. The majority of the spending has been on IT costs, such as the cost of changing systems to account for the Scottish higher rate income tax threshold.
HMRC has now rectified issues that led to it not identifying 420,000 people as potential Scottish taxpayers in 2015. The biggest challenge facing HMRC is maintaining accurate address records of Scottish taxpayers. Neither taxpayers nor employers are legally required to tell HMRC of changes of address. Around 80,000 people in the UK move into or out of Scotland each year. HMRC has carried out an online marketing campaign in Spring 2017 promoting the message that people should inform it if they move house. It also used social media to promote this message. However, it does not know how many people it has reached or what impact it has had on public readiness to update HMRC about changes of address.
“HMRC has made good progress in assuring itself of the accuracy of the Scottish taxpayer population, but could do more with its own data to improve the accuracy of income tax receipt estimates. People are at risk of paying the incorrect amount of tax if they do not provide HMRC with accurate address data, and HMRC do not know whether its interventions to raise awareness of this has been successful.”
Amyas Morse, head of the National Audit Office
Notes for Editors
Estimated number of Scottish income taxpayers in financial year 2016-17
Estimated amount of income tax paid under the Scottish rate of income tax in 2016-17
Difference in rates between Scottish and UK income tax in 2016-17
£6.3 million Administrative cost to HM Revenue & Customs of implementing the Scottish rate of income tax and related projects in 2016-17
386,000 Estimated number of Scottish taxpayers expected to pay the higher rate of income tax in 2017-18
Estimated amount of extra tax that Scottish taxpayers will pay in 2017-18
The Scotland Act 2012 introduced powers for the Scottish Parliament to apply a Scottish Rate of Income Tax (SRIT) to the non-savings, non-dividend income of Scottish taxpayers from 6 April 2016. Section 25 of the Act defines a Scottish taxpayer as someone whose main place of residence in a given tax year is Scotland, or who spends most of that tax year living in Scotland.
As a result of the Scotland Act 2016 from 2017-18, the Scottish Parliament has the power to set the rates and band thresholds (excluding the personal allowance) that apply to all non-savings and non-dividend income tax paid by Scottish taxpayers. HM Revenue & Customs continues to administer and collect Scottish income tax as part of the UK tax system. It pays revenues related to its Scottish tax powers into the UK Consolidated Fund in the same way as it does for all other tax receipts. These revenues will subsequently be transferred to the Scottish Government and the Scottish Government's resource block grant will be reduced accordingly reflecting its revenue raising powers.
Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 785 people. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services. Our work led to audited savings of £734 million in 2016.
An earlier copy of this report was shared under embargo with media outlets on the 13 November for publication on 14 November. Unfortunately that version contained an overestimate of the number of Scottish taxpayers who earn above the higher rate income tax threshold and subsequently the number of people that would pay the basic rate of income tax if they were not Scottish taxpayers. The NAO identified this at a late stage and immediately took the decision to postpone the report’s publication.