Scotland Acts 2012 and 2016 implementation: annual reports

3. Scottish Income Tax and VAT Assignment

Since 6 April 2017, the Scottish Parliament has had the power to set the income tax rates and limits applicable to Scottish taxpayers on their non-savings and non-dividend income. The rates and limits will be set each year in its Scottish Rate Resolution.

Key Developments

• Income tax outturn data for 2017-18 were published by Her Majesty's Revenue and Customs (HMRC) in July 2019. This was the first outturn that encompassed the Scottish rates and bands of income tax, and provided the first reconciliation of Scottish income tax revenue to forecasts.
• HMRC published a new experimental statistical document containing comparisons of Scottish income tax with the rest of the UK, with data tables for liabilities, non-savings non-dividend (NSND) income and by method of collection.
• A National Audit Office (NAO) report confirmed that HMRC has implemented adequate processes for the administration of Scottish income tax and that the outturn of income tax for 2017-18 was fairly stated. Audit Scotland endorsed this approach in a report published in January 2020.^[4]

Costs

£m	2017-2018	2018-2019	2019-2020 (forecast)
HMRC Operating Costs	0.4	0.8	1.0
HMRC Implementation Costs	4.5	2.0	0.6

3.1.1 The Scottish Government has continued to work with HMRC on the final elements of the implementation work to support the devolution of the further income tax powers in the Scotland Act 2016 and the ongoing operation of Scottish income tax. This includes programme management arrangements and close monitoring of costs.

3.1.2 For the financial year 2019-20 to Quarter 3, the Scottish Government has been invoiced implementation and running costs of £1 million for Scottish income tax. HMRC has forecast a total 2019-20 cost of £1.6 million.

3.1.3 HMRC has estimated the lifetime cost for the implementation of Scottish income tax as £24.3 million.

Assurance

3.1.4 The NAO published its fourth report on the implementation of Scottish income tax on 8 January 2020.^[5] It reported that "we are satisfied that HMRC has adequate rules and procedures to ensure the proper assessment and collection of Scottish income tax and that they are being complied with". Audit Scotland reviewed the approach taken by the NAO and endorsed it in its own report published in January 2020.

Scottish Taxpayer Identification

3.1.5 The Scottish Government and HMRC have always agreed that a robust process for the identification of Scottish taxpayers is not only critical to the successful implementation of the Scottish income tax powers, but that it will also be a key on-going exercise. Therefore, during 2019-20, the Scottish Government has worked closely with HMRC as it continues to refine and update its processes for identifying Scottish taxpayers, which are based on live data. HMRC estimates that there are around 2.5 million Scottish taxpayers.

Outturn

3.1.6 HMRC published experimental statistics on Scottish Income Tax in July 2019, showing that the receipts from Scottish income tax were £10.9 billion in 2017-18.^[6]

Rates

3.1.7 Scottish income tax rates and bands for 2019-2020 are as follows:

Table 3.1 Scottish income tax rates and bands for 2019-2020

Income in Range	Name	Rate
Over £12,500* - £14,549	Starter Rate	19%
Over £14,549 - £24,944	Scottish Basic Rate	20%
Over £24,944 - £43,430	Intermediate Rate	21%
Over £43,430 - £150,000**	Higher Rate	41%
Above £150,000**	Top rate	46%

*Assumes individuals are in receipt of the Standard UK Personal Allowance.

**Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

3.1.8 The Scottish Government's proposed income tax rates and bands for 2020-2021 are summarised below. They were approved through the Scottish Government's Scottish Rate Resolution for 2020-2021 on 4 March 2020.

Table 3.2 Scottish income tax rates and bands for 2020-2021

Income in Range	Name	Rate
Over £12,500* - £14,585	Starter Rate	19%
Over £14,585 - £25,158	Scottish Basic Rate	20%
Over £25,158 - £43,430	Intermediate Rate	21%
Over £43,430 - £150,000**	Higher Rate	41%
Above £150,000**	Top rate	46%

*Assumes individuals are in receipt of the Standard UK Personal Allowance.

**Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

3.2 VAT Assignment

Key Developments

• UK and Scottish Governments have agreed to extend the transitional period for VAT assignment. An implementation date will be agreed once both Governments are assured that the assignment methodology is working effectively.
• Progress continues to be made on finalising the model for assigned VAT.
• Data on Scottish VAT assignment, up to 2017, was published by HMRC on 26 Feb 2020.^[7]

Costs

3.2.1 As part of the Fiscal Framework Agreement, the Scottish and UK Governments agreed to share equally all costs incurred as a result of the implementation and administration of VAT assignment. In 2018-19 total costs incurred by HMRC and the Scottish Government were £0.4m, and in 2019-20, up to Q3, totalled £0.5m. These costs were split equally between HMRC and Scottish Government.

Implementation

3.2.2 In 2019-20, the Scottish and UK governments have worked together to progress the draft VAT assignment methodology to deliver the best model with currently available data. The survey data that underpins elements of the methodology has been boosted to increase the reliability and stability of survey data.

Finalising the model will be discussed at the Joint Exchequer Committee. Once both Governments are assured that the assignment methodology is working effectively, the Scottish Government's Budget will be determined by forecast and final estimated VAT receipts in Scotland and a corresponding block grant adjustment.

Scottish VAT Assignment Forecasts

3.2.3 The Scottish Fiscal Commission (SFC) has responsibility for producing forecasts of the VAT that will be assigned to Scotland. Their latest forecast of VAT revenue assigned to Scotland was published in February 2020.^[8] This forecast has no impact on the Scottish Government's budget as this is a transitional period, where VAT assignment will be forecast and calculated, but with no impact on the Scottish Government's Budget.