Scottish Income Tax operation by HMRC: service level agreement

Annex B: operation of Scottish Income Tax - Rechargeable Costs Framework

Background and purpose

1. HMRC is responsible for the operation of SIT as part of the UK Income Tax system. Under the Fiscal Framework Agreement between the UK and Scottish Government, the Scottish Government will reimburse the HMRC for net additional costs wholly and necessarily incurred as a result of the implementation and administration of the Income Tax powers^[2].

2. Under HMRC’s Tax Devolution Programme and Projects, HMRC has made changes to its systems and processes to ensure the effective and efficient collection and management of SIT Associated with these changes are new and ongoing administrative costs to operate SIT processes and systems.

3. The Memorandum of Understanding between HMRC and the Scottish Government sets out, at paras 4.1 to 4.3, which costs should be borne by HMRC and which costs should be borne by the Scottish Government. This framework sets out the principles that HMRC will apply when identifying the administrative costs associated with the operation of SIT that will be recharged to the Scottish Government. HMRC will charge its services at full business cost, in line with HM Treasury policy (managing public money). Where costs are incurred under contract by third parties, including HMRC’s IT supplier, these will be charged at-cost^[3].

4. It is a living document which will be kept up to date to reflect all known and anticipated administrative costs and should be read in conjunction with the Memorandum of Understanding and Service Level Agreement between HMRC and the Scottish Government.

Principle of net additional costs

5. HMRC will use the same process for identifying the net additional costs of operating the SIT powers devolved in the Scotland Act 2016 as applied to identifying the marginal costs for the Scottish Rate of Income Tax. HMRC will, therefore, look to recharge the costs of elements that relate specifically to the administration of the SIT powers and not every cost related to the administration of the Income Tax system for Scottish taxpayers. In applying this principle, the rechargeable costs are, therefore, not replacing another cost relating to that taxpayer. This means these are additional costs and there is no saving to HMRC to net against.

Examples of the net additional cost principle

Customer contact: HMRC get a wide range of calls from Scottish taxpayers, however, the vast majority of these would not be recharged to the Scottish Government. HMRC will recharge for calls from someone asking about their Scottish taxpayer status, but not the Scottish taxpayer customer who is calling to change their name.

Customer outputs: HMRC issue P2 coding notices throughout each year to Scottish taxpayers. However, HMRC will only recharge the Scottish Government for the print and post costs where the P2 notice has been issued a result of the customer’s change in status to or from a Scottish taxpayer, or as a consequence of an additional Scottish specific coding exercise. Therefore, the issue of annual codes or daily codes (other than because of the change of status) to Scottish taxpayers would not be recharged, as this is part of HMRC usual operating routines to support the tax system across the UK.

Recharging net additional costs

6. HMRC will identify all products and work carried out to administer Scottish Income Tax and determine whether they meet the net additional costs principle prior to recharging any associated costs to the Scottish Government. Change Control Boards (CCBs) will be held to approve products and work for which the cost exceeds £50k. At these CCBs, HMRC will set out the rationale for the costs, and the Scottish Government will have the opportunity to challenge HMRC on the proposed expenditure.

7. HMRC will identify costs arising from any work to incorporate external factors that impact the delivery of analytical products linked to SIT and ensure these are notified to Scottish Government in advance of them being recharged to the Scottish Government.

8. HMRC will collate and be able to provide the relevant supporting data to assure the accuracy of the charges being levied and, where appropriate, set out how these costs relate to the requirements in the SLA. The Scottish Government has the right to request and query the supporting data. Monthly updates will be provided to review the costs of the previous month and compare them to the forecast, and the SIT Board will approve the quarterly finance reports before an invoice is raised for the administration costs.

9. HMRC will provide a forecast of the annual administrative costs to the Scottish Government at the end of Q3, for the following financial year to assist the Scottish Government with their budget-setting processes. This will be an indication only as it will not include any bespoke requests, subsequent tasks identified or cessation of existing tasks during the course of the following year. Changes that will affect future years will be reflected in the next annual forecast.

10. Throughout any one financial year there will be routine activities which happen once, as well as activity which will carry on throughout the year. In addition to this there may be requests from the Scottish Government which result in additional, bespoke activity.

11. Operational Business Areas tasks can result in peaks of work or a small additional resource on an ongoing basis. HMRC will assess the number of annualised full time equivalent (FTE), (or part of an FTE) that is required to perform these tasks and the most cost effective way HMRC resource can be allocated– eg HMRC can ‘flex’ staff in to deal with specific peaks of work or identify part of an existing FTE resource for a few hours per week across the full year.

All HMRC staff resource working on SIT tasks that have been identified as attracting net additional costs, however, will be required to record the time taken on these tasks and it is this that will be used to calculate the cost recharged to the Scottish Government. This is in line with the charging mechanism for staffing resource that HMRC has in place with other government departments.

12. Some net additional costs will be governed by existing commercial contracts that HMRC has with external IT suppliers, eg IT Service Lines, print & post costs, IT change requests. HMRC, however, are committed to ensuring value for money and price competitiveness by awarding short term contracts and putting out to tender as and when current contracts come to a close. HMRC will provide the Scottish Government with documentation to support these costs while protecting the commercial confidentiality of any third party eg a redacted copy of the IT Supplier documentation.

Instances where net additional cost may not be recharged

13. HMRC will recharge the Scottish Government for net additional costs that it can identify and validate in line with the terms of the SLA. However, HMRC will take a pragmatic approach to collecting data required to identify rechargeable costs to ensure that any charging mechanism is in itself not too costly to maintain.

14. There may also be instances where HMRC can identify costs but due to the low level of volumes it will be more onerous and costly to collect the evidence. HMRC would not be seeking recharge in these circumstances as it would fall below a ‘de minimis’ level.

Example of where a net additional cost may not be recharged

Customer contact

HMRC collect information on call types via tagging within the automated telephony system (an interactive voice recognition system that incoming calls are channelled through based on what the caller states their query is concerning). In this way, direct queries relating to status can easily be uniquely identified and attract a cost to the Scottish Government. However, some calls relating to Scottish Income Tax status will come through under a different tag or as part of a wider call eg Self Assessment.

For these types of calls, the telephony system would not identify them as a Scottish Income Tax call, nor would it be possible to manually identify the amount of time incurred on the element of the call relating to SIT. Therefore, HMRC would not be seeking to recharge in these cases.

Cost drivers and charging mechanisms

15. Below is a table of identified categories of work associated with costs for administering SIT and the agreed types of charging mechanisms which will be used to validate and calculate the costs. The range of mechanisms reflects the diversity of the tasks, including HMRC staff resource recording time on task, as well as bespoke IT Change Requests being raised and impacted by HMRC IT Suppliers. A more detailed list will be maintained which identifies each administrative task undertaken by HMRC, including an agreed assessment of which charging mechanism will be applied.

16. Both the types of charging mechanisms and the list of individual tasks being charged against will be subject to change where new tasks are identified or a change in the charging mechanism emerges.

17. HMRC and the Scottish Government will work together to ensure that the table below (and the separate associated detailed list of tasks) is kept up to date and agreed.

Customer contact

Additional cost driver

Telephone contact

HMRC Validation and Evidence of costs incurred

HMRC resource - call time average: HMRC’s interactive telephony service captures number of calls with tagged words (eg Scottish taxpayer status); the number of calls is multiplied by the average call time to provide the overall amount of time used; calculated time will be multiplied by full business costs and charged on that basis.

Additional cost driver

SIT correspondence, including complaint handling

HMRC Validation and Evidence of costs incurred

HMRC resource time recording: HMRC record the number of contacts/complaints received concerning Scottish taxpayer status using either an IT Work Management Item, if created, or a manual record; staff time taken to deal with each item will be recorded and notified to the finance team; C-Charging will be based on the full business costs and time taken.

Additional cost driver

Compliance case handling

HMRC Validation and Evidence of costs incurred

HMRC resource time recording: HMRC records the number and type of compliance cases concerning SIT using either an IT Work Management Item, if created, or a manual record; the number of cases of each type will be multiplied by its average case handling time to provide the overall amount of time used; charging will be based on the full business costs and time taken.

Maintenance of Scottish Income Tax (systems and processes)

Annual non-IT supplier activities

IT supplier impacts - service lines

HMRC resource time recording: annual maintenance will cover a variety of activities designed to maintain the integrity of the Income Tax system; these costs may cover activities such as updating specific guidance, postcode maintenance, changes to tax tables, data analysis and compliance work. Staff time taken will be recorded and provided to Finance Team. Charging will be based on the full business costs and time taken. Charges will only be raised for those activities relating solely to SIT with description of output/outcome provided.

IT Supplier Contractor Invoices: HMRC challenge all IT supplier costs to ensure they are in line with agreed contracts; SO2 Service lines - Costs relating to Business Applications, Support and Maintenance; initial 5-year estimate provided during Final Supplier Proposals discussions; identification of specific Scottish Income Tax lines (currently 11); HMRC will receive the actual costs incurred from the IT Supplier against these lines and recharge these costs.

Annual non-IT supplier activities

IT supplier impacts - change requests

HMRC resource time recording: annual maintenance will cover a variety of activities designed to maintain the integrity of the Income Tax system; these costs may cover activities such as updating specific guidance, postcode maintenance, changes to tax tables, data analysis and compliance work. Staff time taken will be recorded and provided to Finance Team. Charging will be based on the full business costs and time taken. Charges will only be raised for those activities relating solely to SIT with description of output/outcome provided.

IT Supplier Contracts Invoices: HMRC challenge all IT supplier costs to ensure they are in line with agreed contracts; any annual maintenance activity or bespoke requests that require an IT changes will go through the Change Request process; an IT impact will be raised, and the formal impact information and estimate costs will be shared with the Scottish Government to reach agreement on whether to proceed with the change; HMRC will receive invoices on actual costs incurred from the IT Supplier against the Change Request deliverables and recharge these costs.

HMRC Scottish taxpayer outputs

P2 and P9 coding notices

Print and Post costs: HMRC will record numbers of coding notices generated as the result of a change of Scottish taxpayer status; detail of the actual print and post costs relating to these numbers will be provided by the PAYE process team to the Finance team; charging will be based on these actual costs in line with existing HMRC contract for these services/ HMRC will receive invoices on actual costs incurred from the third-party provider and the Scottish Government will be recharged.

Other administrative costs not included in the full business costs

Other administrative costs, such as, travel and subsistence and training

HMRC Administrative Costs not included in full business costs: HMRC will record relevant travel and subsistence expenses and recharge the costs to the Scottish Government; HMRC will record relevant training costs and will recharge to the Scottish Government.

Scottish Government requests

Scottish Government request

By agreement: HMRC will consider the costs of any request by the Scottish Government for HMRC to undertake additional, bespoke activity (eg additional compliance work allowed for under the MoU); HMRC will undertake an impact assessment which will cover staff resource and/or IT costs, as appropriate; the impact information and estimated costs will be shared with the Scottish Government to reach agreement on whether to proceed with the activity; an appropriate charging mechanism will be agreed for the activity; a workplan will be produced summarising the agreed activity and estimated costs, which will be presented to the SIT Board ahead of the start of the tax year for their approval.

Relationship management

HMRC Customer Relations Manager (CRM) work on Scottish Income Tax, and with the Scottish Government

HMRC resource time recording: this is a new role created to support the ongoing relationship between the Scottish Government and HMRC; staff time taken will be recorded and provided to Finance Team, alongside a quarterly summary of activities undertaken; charging will be based on the full business costs and time taken.

Non-chargeable time

Unable to quantify

HMRC will not charge for SIT activities which cannot be separately quantified eg because they are part of a much broader query/activity.

Below a ‘de minimis’

HMRC may not charge for SIT activities which although quantifiable, the process to quantification will cost more to determine than the actual cost incurred.

1. These measures relate solely to enquiries on Scottish taxpayer status. Numbers of SIT specific enquiries (ie those regarding taxpayer status) are likely to be significantly lower than general income tax enquiries (ie those issues that potentially affect Scottish and rUK taxpayers equally), and therefore the potential for higher volatility in the Scottish specific figures is higher than for whole of UK Income Tax enquiries. HMRC’s quarterly UK performance reports include any contact made by Scottish taxpayers on any other issues including any contact made via i-forms. These are published on GOV.UK. ↩

2. For the purpose of this document ‘Scottish Income Tax’ includes the Scottish rate of income tax power devolved to the Scottish Parliament in the Scotland Act 2012 which operated in the tax year 2016 to 2017, and the further SIT powers devolved in the Scotland Act 2016 which have been in operation from 2017 to 2018. You can read the Fiscal Framework Agreement. ↩

3. For more information see Managing Public Money. ↩

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