Implementation of the Scotland Act 2016: third report

3. Chapter Three – Scottish Income Tax

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

• A new five band Scottish income tax system was implemented in 2018-19 with the introduction of two new bands (a Starter Rate and an Intermediate Rate).
• A National Audit Office (NAO) report confirmed that Her Majesty's Revenue and Customs (HMRC) has implemented adequate processes for the administration of Scottish income tax and that the outturn of income tax for 2016-17 was fairly stated.
• Income tax outturn data for Scotland for 2016-17 was published by HMRC in July 2018 and the baseline value for the income tax Block Grant Adjustment (BGA) was adjusted accordingly.

Costs

3.1.1 The Scottish Government has continued to work with HMRC on both the remaining implementation work for the Scottish Rate of Income Tax (SRIT), and the implementation work to support the devolution of the further income tax powers in the Scotland Act 2016. This includes programme management arrangements and close monitoring of costs.

3.1.2 For the financial year 2018-19 to Quarter 3, the Scottish Government has been invoiced implementation and running costs of £1.3 million for Scottish income tax, and HMRC has forecast a total 2018-19 cost of £2.8 million, split between a total non-IT cost of £0.9 million and a total IT cost of £1.9 million.

3.1.3 HMRC has estimated the lifetime cost for the implementation of Scottish income tax as £24.0 million.

3.1.4 The DWP SRIT implementation project completed its work and closed in 2016-17, and costs recharged to the Scottish Government in that year were £0.3m. To ensure that DWP's systems can deal with the implementation of the further income tax powers in Scotland Act 2016, costs recharged to Scottish Government in that year were £0.4m. This project was completed in early 2017-18.

Assurance

3.1.5 The Scottish Parliament's Finance and Constitution Committee took evidence on HMRC's delivery of changes and implementation of Scottish Income Tax from Jim Harra, HMRC's Tax Assurance Commissioner and Deputy Chief Executive and Second Permanent Secretary, on 3 October 2018.^[3]

3.1.6 The National Audit Office (NAO) published its fourth report on the implementation of Scottish income tax on 30 November 2018^[4]. It reported that "we are satisfied that HMRC has adequate rules and procedures to ensure the proper assessment and collection of Scottish income tax." Audit Scotland reviewed the approach taken by the NAO and endorsed it in its own report published in November 2018.^[5]

Scottish Taxpayer Identification

3.1.7 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 2018-19, the Scottish Government has worked closely with HMRC as it continues to refine and update its processes for identifying Scottish taxpayers, which are now based on live data. HMRC estimates that there are around 2.5 million Scottish taxpayers.

Outturn

3.1.8 HMRC Accounts reported in a technical annex that receipts from the Scottish Rate of Income Tax were £4.35 billion in 2016-17.

3.1.9 The technical annex also calculated what the 2016-17 outturn would have been had the current (Scotland Act 2016) powers been in place with all Scottish non-savings and non-dividend income tax flowing to the Scottish Government. This figure is £10.7 billion.

3.1.10 This figure will be used from now on as the baseline value for the Scottish Government's income tax Block Grant Adjustment. For further information on this, please see chapter five.

Rates

3.1.11 Scottish income tax rates and bands for 2018-19 are as follows:

Table 3.1 Scottish Income Tax Rates and Bands 2018-19

*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.

3.1.12 The Scottish Government's proposed income tax rates and bands for 2019-20 are summarised below. They were approved through the Scottish Government's Scottish Rate Resolution for 2019-20 on 19 February 2019.

Table 3.2 Scottish Income Tax Rates and Bands 2019-20

*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.