Scotland Act 2012 and 2016: annual implementation report 2021

Scottish Income Tax and VAT assignment

Scottish Income Tax

Since 6 April 2017, the Scottish Parliament has had the power to set the Income Tax rates and bands applicable to Scottish taxpayers on their non-savings and non-dividend income. The rates and bands will be set each year by a Scottish Rate Resolution.

The Scottish Block Grant will be adjusted to reflect the change in funding stream, in the manner set out in the Fiscal Framework agreement^[10] between the UK and Scottish Governments on February 2016.

Key developments

36. Income tax outturn data for 2018-19 were published by Her Majesty's Revenue and Customs (HMRC) in September 2020^[11]. This was the first outturn that included the new five band Scottish Income Tax System.

37. A National Audit Office (NAO) report published on 22 January 2021^[12] confirmed that HMRC have appropriate rules and processes in place to collect and operate Scottish Income Tax. Audit Scotland endorsed this approach in their recent report published on 22 January 2021^[13].

38. In 2019-20, HMRC undertook an exercise to match their Scottish taxpayer records to a third party data source (known as a 'data clash'). The aim of this was to test whether HMRC's identification of Scottish taxpayers was corroborated by other sources. Evidence from this exercise aligns with HMRC's analysis that they are correctly identifying 98-99 per cent of Scottish taxpayers.

Costs

Table 3

£m	2018-2019	2019-2020	2020-2021 forecast
Implementation	2.0	0.6	0
Administration/Operation	0.8	0.9	0.8

Move to normal running costs

39. HMRC completed the implementation work to deliver Scottish Income Tax during 2020-21, and the costs for this year reflect the move to business as usual of Scottish Income Tax.

40. HMRC estimates that the overall cost of implementing Scottish Income Tax powers, from the Scotland Act 2012 and Scotland Act 2016, to be £24.3 million. This excludes any extra costs that may arise, and will be recharged to the Scottish Government, from work required to accommodate any future changes to rates and thresholds.

41. Final figures for 2020-21 are not available. For the financial year 2020-21 to quarter three, Scottish Government has been invoiced running costs of £500,000 for Scottish Income Tax. HMRC has forecast a total cost for 2020-2021 of £0.8 million.

Assurance from NAO

42. The NAO published its fifth report into the administration of Scottish Income Tax on 22 January 2021. The NAO reported that "HMRC has adequate rules and procedures in place to ensure the proper assessment and collection of Scottish income tax and that those rules are being complied with". Audit Scotland reviewed this approach taken by the NAO, and endorsed its findings in their own report published January 2021.

Scottish taxpayer identification

43. HMRC estimate that there are around 2.5 million Scottish taxpayers. Scottish Government and HMRC agree on the importance of the correct identification of Scottish taxpayers to enable successful implementation of the Scottish Income Tax powers. HMRC undertake regular assurance activity on its live customer data to ensure that its identification of the Scottish taxpayer population is as accurate as possible.

Outturn

44. HMRC published the 'Scottish Income Tax Outturn Statistics: 2018 to 2019'^[14] in September 2020, showing that receipts from Scottish Income Tax were £11.6 billion in 2018-19.

Rates

45. Scottish Income Tax rates and bands for 2020-21 are as follows^[15]:

Table 4 Scottish Income Tax rates and bands for 2020-21

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.

46. The Scottish Government's proposed Income Tax rates and bands for 2021-22 are summarised below. They were approved through the Scottish Government's Scottish Rate Resolution for 2021-2022 on 25 February 2021.

Table 5 Scottish Income Tax rates and bands for 2021-2022

Income in Range	Name	Rate
Over £12,570* – £14,667	Starter Rate	19%
Over £14,667 - £25,296	Scottish Basic Rate	20%
Over £25,296 - £43,662	Intermediate Rate	21%
Over £43,662 - £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.

VAT assignment

Plans for Value Added Tax (VAT) assignment were enacted in section 16 of the Scotland Act 2016, which allows for receipts from the first 10 percentage points of the revenue attributable to Scotland from the standard rate of VAT and the first 2.5 percentage points of the reduced rate of VAT to be assigned to the Scottish Government, with a corresponding adjustment made to the Block Grant received from the UK Government. VAT rates will continue to be set at a UK-wide level.

Key developments

47. Due to the current economic climate, the Scottish Government and HMT have agreed to delay the implementation of VAT assignment and review it as part of the Fiscal Framework Review, due to take place in 2022.

48. Work continued throughout 2020 on finalising the model and implementation process

49. Data on Scottish VAT assignment, up to 2018, was published by HMRC on 26 November 2020^[16].

Costs

50. 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 2019-20 total costs incurred by HMRC and the Scottish Government were £0.5 million, and in 2020-21, up to quarter two (Q2) of the financial year, totalled £0.1 million. These costs were split equally between HMRC and the Scottish Government.

Table 6

£m	2018-2019	2019-2020	2020-2021(up to Q2)
Implementation	0.4	0.5	0.1

Implementation

51. VAT assignment had been expected to commence from April 2021, with full fiscal impact in the Scottish Budget 2021-22. Due to the uncertainty of the impact of COVID-19 and EU Exit on VAT receipts, however, the Scottish and UK Governments have agreed to delay implementation of VAT assignment and review as part of the Fiscal Framework Review.

52. In 2020-21, the Scottish and UK Governments worked together to progress the draft VAT assignment methodology with the aim of delivering the best model and implementation process.

53. Work carried out throughout 2020 was reviewed and noted in December 2020 by senior officials in the Scottish and UK Governments. This will be included as part of the review of the Fiscal Framework.

Scottish VAT assignment forecasts

54. 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 January 2021^[17]. 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 not applied to the budget.