scottish rate of income tax an update to prepare employers for implementation scottish rate of...
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Scottish Rate of Income Tax
An update to prepare employers for implementation
www.pwc.co.uk
Scottish Rate of Income Tax – what’s new?
July 2015
Scottish Rate of Income Tax – What’s new?2PwC
Background
June 2015
The introduction of the Scottish Rate of Income Tax (SRIT) in 9 months’ time will have a major impact on employers and employees, not just in Scotland but throughout the UK.
Last month HM Revenue & Customs provided further clarity on certain terms used in the Scotland Act 2012, including the definition of a Scottish taxpayer.
In addition, The Scottish Government have decided that employers will not be obliged to show SRIT separately on forms P60.
The Westminster Parliament is currently reviewing the Scotland Bill 2015 which, when enacted, will implement further relevant legislation in relation to the fiscal powers, based on the Smith Commission Agreement.As Scotland continues on its devolution journey,
businesses, the media and the people of Scotland continue to ask ‘What does this mean for me?’.
The information contained in this document is the third in a series of updates aimed at answering some of the questions you, as an employer, may have.
This document is the third in a series of updates that provides questions that employers, the media and people across the UK are asking.
In particular, we look in details at the complexities in answering “Who is a Scottish taxpayer?” and “What do employers need to do now?”.
Scottish Rate of Income Tax – What’s new?3PwC
What you need to knowA recap – Key facts at a glance
June 2015
Scotland Bill 2015Scotland Act 2012 – Scottish Rate of IncomeTax (‘SRIT’)
• Operationally, SRIT sets the foundation for the further devolved powers over income tax to be given to the Scottish Parliament, as recommended by the Smith Commission and adopted into draft legislation (Scotland Bill 2015).
• Scotland Bill 2015 introduced to House of Commons on 28 May 2015 following the UK General Election. Currently being considered and debated by MPs.
• Under existing proposals the Scottish Parliament is to be given unrestricted powers over the rates of income tax and income tax bands.
• UK Government to continue to set Personal Allowance.
• UK Government to continue to administer National Insurance Contributions, Capital Gains Tax and Inheritance Tax.
• Additional powers over welfare devolved to the Scottish Parliament.
• Date of implementation unknown, but expected to be 2018 at the earliest.
• The Scotland Act 2012 introduces the SRIT from 6 April 2016 for individuals identified as Scottish taxpayers.
• Scottish taxpayer status applies for a full tax year (it is not possible to ‘split’ the tax year).
• SRIT will apply to non-savings and non-dividend income of Scottish taxpayers.
• Income tax is not fully devolved, and as such HMRC will continue to administer and collect SRIT.
• Matters reserved to the UK Government:
- Income tax bands and Personal Allowances;
- National Insurance Contributions (‘NIC’); and
- National Minimum Wage (‘NMW’).
• HMRC will identify Scottish taxpayers – Not employers or pension providers.
• SRIT will operate by reducing the UK basic, higher and additional rates of income tax by 10p and the Scottish Parliament will then set a single rate of income tax which will apply uniformly across each of the bands for Scottish taxpayers.
• The changes introduced will impact all employers in the UK whether based in Scotland or the rest of the UK, referred to as ‘rUK’.
Scottish Rate of Income Tax – What’s new?4PwC
What you need to knowWho is a Scottish taxpayer?
June 2015
Which of my employees will become Scottish taxpayers on 6 April 2016?
An individual will become a Scottish taxpayer from April 2016 if they are resident in the UK for income tax purposes and meet one of the conditions below:
• They have a close connection with Scotland based on the location of their sole or main ‘place of residence’.
• They spend more days in Scotland than in any other part of the UK.
Therefore, if an employee has only one place of residence, and that place of residence is in Scotland, they will be a Scottish taxpayer. MSP’s, MP’s representing a Scottish Constituency, and MEP’s representing Scotland will automatically be treated as Scottish taxpayers.
To the extent that an employee is identified as a Scottish taxpayer, this status will apply for the whole of a tax year.
How will HMRC determine if an employee is a Scottish taxpayer?
HMRC’s approach and timetable will involve writing to individuals who appear to be Scottish taxpayers for tax year 2016/17 based on the residential address registered on its systems from the Autumn of this year. Individuals will then have the opportunity to appeal HMRC’s decision on Scottish taxpayer status if they believe this to be incorrect.
What is a place of residence?
A ‘place of residence’ is not defined in the legislation and so it takes on its ordinary meaning, i.e. the dwelling in which a person habitually lives – His or her home.
For most employees with only one home, their place of residence will be simple to identify. However, not all employees have simple living arrangements. In considering what constitutes a place of residence for Scottish taxpayer purposes, it is being proposed by HMRC that a number of factors will be taken into account. Broadly, the factors are likely to include whether the individual has actually lived in the place in question, and differentiating between occupation and residence(a degree of permanence will be required).
Also, ownership is not necessary for a place to be considered as a place of residence (i.e. work provided accommodation can be considered to be a place of residence). Mobile homes, boats, caravans, lorries or any form of transport can constitute a place of residence if it is the place where an individual lives.
What is a main place of residence?
If an employee has more than one place of residence in the UK, e.g. one in Scotland and one in England, it will be necessary for the employee to determine which is their main place of residence.
The latest draft guidance from HMRC suggests that a main place of residence will not necessarily be the place where the employee spends most time, but the place where the employee has the greatest degree of connection. In order to establish this, again a number of factors will be considered. This will be very subjective and include some or all of the following factors: where the employee’s spouse/family live, place where they are registered to vote, where the material possessions are kept, place used for correspondence (utilities, broadband etc.), registration for car, doctor, dentist etc.
You can very quickly appreciate the complexities that will be involved in determining a main place of residence for employees with multiple homes across the UK, including Scotland.
How will I know if my employees areScottish taxpayers?
HMRC anticipates that new tax codes will be issued to all employers in the UK with Scottish taxpayers in January or February 2016, and the identifier on the code will be an ‘S’ prefix. Employers will deduct and account for the SRIT through the PAYE system, under Real Time Information (RTI) reporting requirements.
What about changes to an employee’s sole or main place of residence which occur during a tax year?
As it stands at the moment, HMRC will require employees to directly notify HMRC of any changes to their sole or main place of residence as it impacts their Scottish residence status. Clarification is expected from HMRC in the coming months on the extent to which the RTI reporting process used by employers may be used to notify changes of addressto HMRC.
Will SRIT need to be shown separately on the form P60 for employees identified as Scottish taxpayers?
It was initially proposed by the Scottish Government that the SRIT should be shown separately on the annual statement of income tax liability (P60). Following a period of consultation, it has been announced that this will no longer be required. HMRC will instead include the proportion of Scottish taxes paid by Scottish taxpayers separately on the Annual Tax Summary from 2016/17 onwards.
Scottish Rate of Income Tax – What’s new?5PwC
What you need to knowPractical application of the rules for Scottish taxpayers
June 2015
What will this mean in practice?
The following examples serve to illustrate how the legislation and HMRC’s proposed interpretation of ‘place of residence’ and ‘main place of residence’ might impact a cross-border workforce:
‘Employee A is single, lives in Edinburgh but works in Newcastle’.
If an employee’s sole place of residence for a particular tax year is in Scotland, they will be treated as having a close connection with Scotland and they will be a Scottish taxpayer, irrespective of where in the UK they spend their time. Similarly, in the reverse scenario, an employee whose sole place of residence is in Newcastle but works in Edinburgh, will not be a Scottish taxpayer.
‘Employee B has a house in London where he lives with his family, and a serviced apartment provided by his employer in Edinburgh. He works partly in Edinburgh and partly in London’.
As the employee has two places of residence in the UK (both in Scotland and England), it will be necessary to determine whether the employee has a closer connection with Scotland based on the location of the employee’s main place of residence.
Employee B’s main place of residence is in London as that is the location of his family home. Employee B has a close connection with England and he will not therefore be a Scottish taxpayer.
‘Employee C is single, has a house in Norwich and in May she moves to a flat in Aberdeen to take up a new job. She sells her house in Norwich’.
Employee C has two main places of residence in the tax year but her main place of residence was in Scotland for more of that year than it was in England. A close connection with Scotland exists, so Sally is a Scottish taxpayer for the whole of that tax year.
How will SRIT impact on my PAYE Settlement Agreement (‘PSA’)?
HMRC is expected to clarify in the coming months how, in practice, it expects employers to administer and manage the capture of data and the calculation of tax for both Scottish and the rest of the UK taxpayers.
PwC
What is uncertain and what do you need to consider now?
Scottish Rate of Income Tax – What’s new?6
June 2015
How can we help?Our Pay, Performance and Risk team advises on PAYE, NIC, benefits in kind and workforce related issues in a practical way that facilitates compliance with legislative requirements and enables employers to manage and mitigate costs.Our experienced team can work collaboratively with you in a way that works best for your business, including support in the following areas: • Assistance with employee communications
and engagement, including drafting or reviewing FAQ documents for your key talent, cross-border workers and/or wider workforce.
• Advice on potentially complex cases and discussing various policy and communication approaches for managing cross-border employment tax issues and addressing talent management.
• Payroll effectiveness reviews, both in a general sense and focusing on the ability of your payroll function to deliver what is required from April 2016, including modified PAYE arrangements for tax equalised individuals.
• Compliance support and advice on how the changes will impact on PAYE Settlement Agreements, P11D and Taxed Award Scheme reporting.
• Advice on wider systems and processes covering all aspects of employment taxes.
• Assessing potential impacts on pensions and salary sacrifice arrangements and assistance with the drafting of employee communications.
SRIT
Scottish Rate of Income Tax – What’s new?7PwC
Recommended actions
June 2015
The changes being introduced under the Scotland Act 2012 and the draft legislation adopting the Smith Commission proposals contained in the Scotland Bill 2015 are significant and will have a major impact on employers and their employee populations.
As a starting point, we recommend that consideration is given to the following key points:
You will then need to consider the steps it will be necessary for you to take to address these key points and whether you have the time and/or resource necessary to test your systems and make any appropriate adjustments in time for April 2016.
An anticipated timeline of the changes that we are aware of, with key stages in the coming months (including when we recommend that you start to consider the steps you will need to take to become compliant from April 2016) is provided below.
• Employee communications – Would generic and/or bespoke communications with your workforce in Scotland and the rest of the UK, help to educate your employees and key talent on the changes and business impact.
1 • Demographics – Identify any employees (or employee populations) where it may be more difficult to determine Scottish taxpayer status due to the complexity of their work patterns. For example, those who occupy more than one property and who travel extensively within the UK. Also, any inbound assignees to the UK where modified PAYE schemes are being operated.
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• Payroll readiness and effectiveness –Is your current payroll system set up (or capable of being set up) to pay employees who are Scottish taxpayers, and is it fully equipped to manage the application of both UK and Scottish tax withholding and compliance requirements. Will you need support on data capture and tax calculations under your PAYE Settlement Agreement?
3
• Pensions – Impact of changes on pensions to determine the likely impact on your workforce and how will you monitor, track and administer these?
5
• Reward policies –How robust are your current domestic travel, relocation and home working policies and how will you approach net pay differentials across the UK for the same grade/role if tax rates diverge? If Scottish and UK income tax rates greatly diverge, what impact could this have on migration of your workforce and management of key talent within the business?
4
8PwC
Timeline
Scottish Rate of Income Tax – What’s new?
June 2015
Jun – Oct 2015
Post-election media campaign and SRIT guidance from HMRC
HMRC contact individuals they have identified as Scottish taxpayers
Scottish income tax rates and UK bands expected
Issue of Scottish tax codes by HMRC
Royal assent for Scotland Act 2015
Scottish Parliament Elections
XXXScottish income tax rates– Go Live
From Nov 2015
Nov/Dec 2015
Feb2016
Apr2016
May2016
XXX2018
Further information
Shona Blair
T: +44 (0) 131 260 4059
Gwyneth Scholefield
T: +44 (0) 131 260 4134
Karen Melville
T: +44 (0) 131 260 4640
Scottish Rate of Income Tax – What’s new?
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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