Fiscal framework outturn report: 2021

3. Income Tax

3.1 For Scottish Income Tax, outturn data is normally available around 16 months after the end of the financial year and a single reconciliation is applied to the following Budget, three years after the original Budget was set. For example, the reconciliation relating to Income Tax in the 2018-19 financial year was applied to the 2021-22 Budget.

3.2 Provisional outturn data for 2019-20 Income Tax was published by HMRC on 22 July 2021. Although these statistics meet the usual standard of Official Statistics, they will not be formally signed off until the National Audit Office has completed their annual audit of the HMRC Trust Statement. This is expected to be completed in October 2021, which is when the final reconciliations to the Scottish Government's Block Grant will be confirmed. The reconciliation will be applied to the 2022-23 Budget. Table 2 shows the provisional data, together with the indicative net effect on the Budget.

* The BGA has been revised upward – this has a negative effect on net revenues.

3.3 This translates into a provisional £34.5 million negative reconciliation requirement that will be applied to the 2022-23 Budget (see section 8 for a full breakdown of provisional reconciliations for the 2022-23 Budget).

3.4 2019-20 Income Tax was forecast to have a positive net effect on Scotland's finances at the time of setting the 2019-20 Budget, with revenues forecast to exceed the BGA by £182.5 million. The provisional outturn data indicates that revenues did exceed the BGA, but by £148.0 million. This translates into a £34.5 million negative reconciliation, in order to correct for the forecast error within the 2019-20 Budget. This is a normal part of the Fiscal Framework and the application of reconciliations to correct for forecast error should not be interpreted as a reflection of the underlying performance of the Scottish or equivalent UK tax base.

3.5 There have been no updated OBR forecasts since the UK Budget in March 2021. Due to this timing mismatch between the SFC and OBR forecasts, the latest available BGAs do not yet reflect the significant improvement in the UK economic and fiscal outlook since March 2021. The SFC explain this issue in more detail in their publication Scotland's Economic and Fiscal Forecasts, published on 26 August^[5].

3.6 The outturn data for Income Tax 2020-21 should be available in summer 2022, with a reconciliation then being applied to the 2023-24 Budget. Table 3 shows the latest forecast 2020-21 Income Tax reconciliation. The SFC commented that this reconciliation is likely to be less affected by the forecasting timing mismatch because the SFC's and OBR's latest 2020-21 forecasts are based on partial outturn data. Nevertheless, uncertainty remains as "they are driven by two sets of forecast errors" and the BGAs for 2020-21 do not yet reflect the latest 2019-20 outturn data and are therefore likely to be revised upwards.^[6]

3.7 Outturn data for 2021-22 will be available in summer 2023, with a reconciliation being applied to the 2024-25 Budget. Table 4 shows the latest forecast 2021-22 Income Tax reconciliation.

3.8 Due to the lack of updated OBR forecasts since the UK Budget in March 2021 and the resultant timing mismatch between the SFC and OBR forecasts, the latest available BGAs do not yet reflect the significant improvement in the UK economic and fiscal outlook since March 2021 meaning the forecast reconciliation shown in Table 4 is "likely to be revised significantly downwards once updated OBR forecasts are available"^[7], which the SFC explain in more detail in their publication Scotland's Economic and Fiscal Forecasts, published on 26 August.