Side view of corridor and docks.

The Scotland Bill - a soon to be taxing issue

07 August 2015

The Scotland Bill, is currently making its way through the legislative process and many of its powers will come into force at the start of the next tax year.

It will give the Scottish Parliament considerable new powers over taxation (including income tax) and spending. This is something that all business leaders, GCs included, who have operations in Scotland or who are dependent on suppliers who have operations in Scotland, will need to bear in mind in terms of planning and forward thinking.

Currently the Scottish Parliament has control over local taxes such as council tax and business rates, and has the right to amend the basic rate of tax by up to 3p in the pound. The Scotland Act 2012 devolved further tax powers to the Scottish Parliament, and from April 2015 Scotland has introduced its own taxes on land transactions and on landfill waste disposal, replacing the UK-wide taxes of Stamp Duty Land Tax and Landfill Tax. This Act also gives power to the Scottish Parliament, from April 2016, to reduce or increase the rates of basic (currently 20%, higher (currently 40%) and additional (currently 45%) income tax on income from earnings, profits and pensions (but not income from savings and dividends).

The Smith Commission, which was set up immediately after the Scottish Referendum in September 2014, recommended that the Scottish Parliament have the power to set not only the rates of income tax, but also the thresholds at which each rate of tax applied. It also provided that Air Passenger Duty and Aggregates Levy should be fully devolved to Scotland and that the receipts raised in Scotland by the first 10% of VAT levied in Scotland should be assigned to the Scottish Government's budget. In the Queen's Speech the Conservative Government set out its intention to implement the Smith Commission's proposals, now confirmed by the Scotland Bill.  It's worth noting that it's not currently intended to devolve to the Scottish Parliament any other taxes, such as corporation tax, capital gains tax, VAT or inheritance tax. However the SNP is already hinting that it may seek a further referendum on independence following the Scottish parliamentary elections in May 2016. So, while it might be reasonably safe to assume that these things will not change out of line with England for the next couple of years, it might also be wise not to take the status quo in these areas for granted in your medium- and longer term business planning.

Scottish income tax will apply to those individuals who are UK tax resident and have a close connection to Scotland (by having their single, or main, place of residence in Scotland) or who spend at least as many days in Scotland as elsewhere in the UK. Simply working in Scotland will not itself make an individual a Scottish taxpayer, although it may of course be a factor in determining main residence or the number of days spent in the country.

What does this mean for business?

What impact could the Scottish income tax rates have for businesses? One obvious issue is that if the Scottish Government decides to set the rates of tax too high then this could lead to a rush of Scottish residents fleeing the border to escape the higher rates. This may cause staffing and HR issues for business; and some may be forced to absorb the increased tax rates in order retain suitable staff in Scotland.  GCs will need to factor in any staffing and HR issues, and prepare for the fact that some businesses may be forced to absorb the increased tax rates in order retain suitable staff in Scotland. Alternatively they may seek to pass these costs downstream to their customers – as a supplier from Scotland or as a purchaser from Scotland it would be sensible to understand what you and what your suppliers can do under the contracts that you have in place – both price change and tax change clauses may be worth consideration as well as force majeure and termination provisions.

Of course if the Scottish income tax rates are lowered then the converse may happen, with English employees looking to relocate north and pressure placed on businesses in England- although it is, perhaps, less likely that Gretna Green will become a tax haven as well as a location for runaway weddings!

In all of this, GCs will need to ensure that their tax compliance systems are updated and ready for any changes. They will need to have checks in place to determine firstly if the business's employees are Scottish taxpayers or not, and if they are, then they will need to ensure that the payroll systems are updated to operate PAYE correctly for Scottish taxpayers. For those individuals who have complex affairs, or who travel frequently or reside in various places, it may not be easy to determine their status until after the end of the tax year.

Business will also need to get used to dealing with Revenue Scotland, as the new Scottish tax authority may be a very different beast in terms of both process and user experience.

And then there's the potential issue of double taxation. The UK's double tax treaties will probably need to be updated to reflect the new situation, and ensure that Scottish taxpayers and Scottish income tax are covered, and to avoid double taxation.

All of this still remains theory as the Bill continues to make its way through the legislative process –although there is little reason to believe that it is not going to finish that journey soon and in pretty much the current form – so there's plenty here to be occupying the minds of GCs if, and when, it becomes practice.