Fiscal framework outturn report: 2022

3. Income Tax

21. For Scottish Income Tax, outturn data is normally available around 16 months after the end of the financial year and a single reconciliation is applied to the following Budget, three years after the original Budget was set. For example, the reconciliation relating to Income Tax in the 2018-19 financial year was applied to the 2021-22 Budget.

22. Final outturn data for 2020-21 Income Tax was published by HMRC on 7 July 2022. This data has been used to calculate the final reconciliations to the Scottish Government’s Block Grant, which will be applied to the 2023-24 Budget. Table 2 shows the data, together with the net effect on the Budget.

Note 1: Table 2 does not reflect the £375 million transfer made by the UK Government to the Scottish Government to settle the historic element of the Personal Allowance (PA) Spillover Dispute. The amount is a negotiated figure that both governments agree has resolved the dispute up to and including 2021-22. We have agreed that treatment of the spillover effect from 2022-23 onwards will be considered as part of the forthcoming Fiscal Framework Review.^[5]

* The BGA has been revised downward – this has a positive effect on net revenues.

23. This translates into a £50.4 million positive reconciliation requirement that will be applied to the 2023-24 Budget (see section 8 for a full breakdown of reconciliations for the 2023-24 Budget). This is the first year since the devolution of powers over Scottish Income Tax that there will be a positive reconciliation for the Scottish Budget.

24. The combined 2020-21 Income Tax revenues and the corresponding BGA were forecast to have a positive net effect on the Scottish Government’s finances at the time of setting the 2020-21 Budget, with revenues forecast to exceed the BGA by £46.1 million. The outturn data details that revenues did exceed the BGA, but by £96.4 million. This translates into a £50.4 million positive reconciliation, in order to correct for the forecast error within the 2020-21 Budget. This is a normal part of the Fiscal Framework and the application of reconciliations to correct for forecast error should not be interpreted as a reflection of the underlying performance of the Scottish or equivalent UK tax base.

25. The outturn data for Income Tax 2021-22 and 2022-23 will be available in summer 2023 and 2024 respectively, with reconciliations then being applied in turn to the 2024-25 and 2025-26 Budgets. Table 3 and Table 4 show the latest indicative 2021-22 and 2022-23 Income Tax reconciliations using the latest SFC and OBR forecasts, which do not yet account for the latest outturn data. Were these forecasts to be 100% accurate, they would show the implied future reconciliation to be applied to the 2024-25 and 2025-26 Budgets. Historically, indicative reconciliations have varied considerably between forecasting rounds. Even small asymmetries between the SFC’s and OBR’s relative forecast error can substantially change the size of any future reconciliations. Hence, a strong degree of caution should be used when interpreting these numbers – they are indicative only and not outturn data.

Corrections to historical Income Tax outturn data

26. In 2021, an error in the classification of some taxpayers was discovered by HMRC, following the National Audit Office’s annual audit of HMRC’s collection of Scottish income tax.^[6] These taxpayers had Scottish residency flags in HMRC’s records and were thus identified as Scottish taxpayers for the purpose of the outturn data. However, they have subsequently been identified as non-resident for tax purposes so are not classified as Scottish taxpayers. No taxpayers have paid the incorrect tax. The process of producing the outturn figures has been corrected for the 2020-21 outturn. The figures from the previous outturn years (2016-17 to 2019-20) have been corrected in HMRC’s 2020-21 statistical release.

27. This inconsistency had funding implications for the Scottish Government, whereby the Scottish Government had to manage a larger negative reconciliation in each of the years 2020-21 to 2022-23 (relating to outturn for 2017-18 to 2019-20 respectively). Use of the corrected outturn statistics would have reduced the negative reconciliation applied to the Scottish Budget by about £7m in each year. Both governments are in ongoing discussions on addressing the historic implications of this issue.

28. Table 5 illustrates the funding implications:

29. The NAO and Audit Scotland consider the system for administering Scottish Income Tax to be functioning effectively and as intended^[7]. We continue to scrutinise the administration of the system through our Service Level Agreement^[8], working collaboratively with HMRC to ensure the efficient identification of Scottish taxpayers and compliance activity.

Indicative In-Year Scottish Income Tax Data for 2021-22

30. As part of the Outturn statistics^[9], HMRC has also published new data on Pay as You Earn (PAYE) revenues up to and including 2021-22 from HMRC’s Real Time Information (RTI) system. This shows that Scottish PAYE revenues continued to grow slower than in the rest of the UK between 2020-21 and 2021-22 (11.6 per cent vs. 14.6 per cent). These growth rates are high by historic standards, which is partly due to suppressed tax receipts during the pandemic.

31. While the RTI data source is a useful guide to how well PAYE receipts might have fared prior to the publication of the official Outturn statistics, the data needs to be interpreted with caution. Firstly, it does not tell us the full story as it does not cover receipts paid through Self-Assessment (SA), which account for around 12% of total Scottish Non-Savings Non-Dividend (NSND) receipts. For example, in 2020-21 flat growth in the PAYE element of Income Tax was more than offset by very strong performance of SA receipts. Currently, no in-year data on SA receipts is available. Secondly, the RTI data source records gross Income Tax receipts, before certain deductions, including reserved ones, such as the High Income Child Benefit Tax Charge.