Scottish Rate of Income tax threshold: FOI release

FOI reference: FOI/17/01808
Date received: 7 August 2017
Date responded: 18 August 2017

Information requested

You asked for:

In Scotland we have the Scottish Rate of Income tax and recently the threshold at which higher rate tax starts to be charged diverged from the rest of the UK. In Scotland higher rate tax is charged on taxable income over £43,000, whereas in the rest of the UK the threshold is £45,000. In relation to this, I would appreciate if you could please provide me with the following information:

1) I understand that HMRC make a charge to the Scottish Government in respect of the additional costs of administering a system with a different or potentially different tax rate in Scotland. Could you please provide a synopsis of the charge levied by HMRC and in particular, could you please provide details of any charge which relates to the divergence in threshold rather than rate.

2) What increase in costs has the Scottish Government experienced as a consequence of divergence in tax policy in Scotland compared to the rest of the UK?

3) Could you please provide details of any statistics on how much extra revenue Scotland will gather by adopting the lower threshold of £43,000 rather than the £45,000 threshold applied across the rest of the UK.

Response

Taking each of your specific queries in turn:

1) I understand that HMRC make a charge to the Scottish Government in respect of the additional costs of administering a system with a different or potentially different tax rate in Scotland. Could you please provide a synopsis of the charge levied by HMRC and in particular, could you please provide details of any charge which relates to the divergence in threshold rather than rate?

You are correct that, as set out, under paragraph 35 of the Fiscal Framework the Scottish Government is required to reimburse the UK government for net additional costs wholly and necessarily incurred as a result of the implementation and administration of the Scottish Income Tax powers. These costs are based on actual costs incurred and are invoiced quarterly in arrears to the Scottish Government.

HMRC currently estimate the baseline annual administration costs for running Scottish Income Tax are around £1.5m (i.e. costs that will be incurred regardless of any divergence between Scottish and rUK rates and/or thresholds) HMRC's evidence paper to the Scottish Parliament's Public Audit and Post-Legislative Scrutiny Committee, 15 June 2017. These costs fall into 4 broad cost categories.

• Customer contact – including answering telephone and written queries specific to Scottish Income Tax.

• Maintenance of Scottish income tax (systems and processes: non-IT and IT) – including maintenance of the Scottish taxpayer population and specific Scottish IT lines, updating tax tables, and compliance work.

• HMRC outputs to Scottish taxpayers i.e. coding notices.

• Any specific Scottish Government requests.

• Staff costs associated with HMRC's Scottish Government customer relationship manager.

During the implementation of the Scottish Rate of Income Tax, HMRC indicated that a change in that rate could incur additional administration costs of up to £4m (UK Government's, Fourth Annual Report on the Implementation and Operation of Part 3 (Financial Provisions) of the Scotland Act 2012, p. 19, paragraph 38.). In December last year, HMRC's confirmed to the Scottish Parliament's Finance Committee that for Scottish Income Tax a divergence between the Scottish and UK rates and/or thresholds could also incur additional costs of up to £4m (Official Report of Scottish Parliament's Finance Committee, 14 December 2016). In both cases, the additional costs are anticipated to be as a result of increased customer contact and compliance activity and would be entirely dependent on the degree of the divergence.

In general, therefore, it is considered that the greater the divergence in the rates and/or thresholds between Scotland and the rUK, the greater likelihood of increased levels of customer contact and/or a requirement for increased compliance activity. While it will not be possible to identify whether customer contact will be specifically about any divergence, rather than, for example, a query about an individual's Scottish Taxpayer status, spikes in customer contact numbers will be identifiable through monthly Business Intelligence monitoring.

2) What increase in costs has the Scottish Government experienced as a consequence of divergence in tax policy in Scotland compared to the rest of the UK?

The Scottish Government has incurred no additional costs as a consequence of the Scottish Parliament setting a higher rate threshold which diverged from that set by the UK Government.

Any costs associated with the divergence in the higher rate threshold would depend on the actual amount of additional customer contact and compliance work undertaken. Against a forecast of £1.5m for administration costs in 2016/17, HMRC invoiced the Scottish Government for £0.2m. This reflects that HMRC experienced no identifiable increase in customer contact as a result of the Scottish Government's proposal in December to not follow the UK's decision to increase the higher rate threshold.

For 2017/18, HMRC's current forecast for administering Scottish Income Tax remains at the baseline figure of £1.5m. To date, the operation of the divergence in higher rate thresholds has not led to an increase in customer contact. In addition, HMRC considers the small degree of divergence to be such that the likelihood of customers changing behaviour in response to be extremely low, and as such no additional compliance activity is currently costed.

3) Could you please provide details of any statistics on how much extra revenue Scotland will gather by adopting the lower threshold of £43,000 rather than the £45,000 threshold applied across the rest of the UK.

The Scottish Government have forecast that this will raise an additional £107m in 2017/18 over and above the Block Grant Adjustment. The Scottish Fiscal Commission considered the Scottish Government forecasts for the 2017/18 budgets and deemed them to be reasonable.

The Scottish Government's forecast for its initial policy was included within it Draft Budget document in December 2016 (http://www.gov.scot/Resource/0051/00511808.pdf). In particular, please see table 2.07 on page 20 which indicated that the initial policy of increasing the higher rate threshold in line with inflation was forecast to raise an additional £79m.

The Scottish Government also published an updated forecast paper to take account of the subsequent decision to freeze the higher rate threshold: http://www.gov.scot/Resource/0051/00514338.pdf. This shows at table 2 that the revised proposal raises an additional £29m in 2017/18.

Please note that the total of £107m (rather than £108m which would be reached if adding the totals of the two documents together) is due to roundings.

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