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Scottish tax – a brave new world
In the midst of political bun fights about fiscal powers for Scotland, April 2015 saw Scotland introduce its first devolved taxes in 300 years, a constitutionally significant event that went largely unnoticed by the man on the street.
Revenue Scotland was specially formed for this task and is now administering the Scottish replacement to Stamp Duty Land Tax (SDLT); Land and Buildings Transaction Tax (LBTT). Initially this is largely the same as its predecessor, although the bands are more incremental and the underlying legislation may diverge over time. A key development was the progressive weighting of tax on higher-end properties however, No 11 managed to steal much of the Scottish Government’s ‘progressive’ thunder by pushing through similar rate changes to SDLT shortly before the LBTT regime commenced.
Landfill Tax has also been devolved to Scotland, the Scottish Government creatively utilising the resources of SEPA to administer this.
Despite the focus on LBTT, arguably the most important change to our taxation is the Scottish Rate of Income Tax (SRIT) and the Scottish General Anti Avoidance Rule (GAAR). Importantly, the Scottish GAAR is rather different to its UK acronym namesake and has been widely dubbed the ‘MacGAAR’. The key differentiator is that the UK GAAR is the ‘General Anti Abuse Rule’, while the Scottish equivalent is the ‘General Anti Avoidance Rule’ and only applies to devolved Scottish taxes. While this difference may seem mere semantics, the implications are arguably quite different. Under the UK regime, HMRC’s understanding of ‘abuse’ is guided by an independent panel of experts on a case-by-case basis.
The Scottish regime is far more rules based and aims to pick up any arrangement that is ‘artificial’ and reasonably seen as being for the purpose of avoiding tax. Due to Revenue Scotland’s resource constraints, there are no current plans for the review panel structure, which is reason for potential concern. As such, it is quite possible that a structure could be perfectly acceptable for an English SDLT taxpayer but not a Scottish LBTT one, even though the detail of the underlying legislation is currently parallel.
The Scottish Rate of Income Tax (SRIT) is scheduled to come into force from April 2016 and throws up further cross-border anomalies. SRIT is not a discrete tax in its own right but provides a reduction in UK income tax rates to Scottish taxpayers of 10p in the pound, with the Scottish Government having the power to set a rate for the remaining element. A Scottish rate of 10p would therefore mean the Scottish taxpayer is on a par with their UK neighbours; however this could be set higher or lower. With both Labour and the SNP’s stated intent of reinstating the 50p rate of tax, a betting man might assume the new tax powers would be used to raise rates. However, an important restriction is that the Scottish rate is a flat rate across all tax bands, so a Scottish Government would have to choose to penalise all tax payers and not just target higher or additional rate payers.
Importantly, SRIT is applied based on the jurisdictional residence of the taxpayer, not the jurisdiction in which the taxable income originates. As such, it raises a series of questions about where the taxpayer is actually resident for income tax purposes. This is defined as where your main residence is or, in the case of a taxpayer splitting their time between two residencies, defined as the main place of residence.
Where there is more than one main residence, the basic rule is based on where the majority of time is spent however this may prove too simplistic in many cases. In the common example of the Scottish ‘based’ professional who works in London for most of the week, it may require more nuanced tests of residency and has led to one commentator proposing ‘where does one keep one’s dog’ as a good litmus test for establishing residency.
As stated, SRIT only applies to non savings income, which means some key winners and losers. Property receipts are not considered savings income and will fall within SRIT however, including receipts from Real Estate Investment Trusts (REITs). Salary from a Scottish owner-managed business could be subject to SRIT although the same value extracted as dividend would not be. The Scottish Government’s response to how it would curb this is, at best, muddled.”The Scottish Rate of Income Tax (SRIT) is scheduled to come into force from April 2016 and throws up further cross-border anomalies”
There has also been some confusion over the treatment of SRIT and trusts and it is proposed that SRIT will apply to relevant non savings income where the tax treatment is required to look through the trust structure. As such, non savings income emanating from ‘Bare’ or ‘Liferent’ trusts will be subject to SRIT but not non savings income from these trusts. The exception is Discretionary trusts where distributions will be treated as earned income for SRIT purposes, regardless of the underlying source of the income.
The current timescale is for SRIT to be implemented in April 2016 however there are considerable complications and anomalies created by splitting a well established tax system. Consequently, issues relating to the administration of various forms of tax deducted at source, pension contributions and gift aid have required addressing. There will be obvious winners and losers with the only guaranteed winners likely being the lawyers and accountants.
Published on 28th June 2015