3 Reconciliations for Income Tax and Fully Devolved Taxes
3.1 At the time of each budget both revenues and BGAs are forecast. These forecasts are reconciled to the outturn data when that becomes available so that the funding available to the Scottish Government ultimately corresponds to actual revenues and BGAs. This chapter describes the timelines for reconciliations, how they work in practice, and what the impact of reconciliations will be on the Scottish Government’s Budget. It covers income tax, and the fully devolved taxes (Land and Buildings Transaction Tax and Scottish Landfill Tax).
3.2 Because outturn data is available on different timescales for each of the taxes, different processes determine how income tax and the fully devolved taxes are reconciled. For fully devolved taxes and corresponding UK Government taxes, outturn data is available around six months after the end of the financial year.
3.3 For income tax, outturn data is available around fifteen months after the end of the financial year. There is a greater lag for income tax largely because self-assessment income taxpayers have around 10 months after the end of the financial year to pay any income tax due to HMRC.
3.4 Once outturn data is available, a reconciliation needs to be made in the subsequent Budget to account for the difference between forecast and outturn data Block Grant Adjustments – and in the case of income tax for differences between forecast and outturn tax revenues. 
Scottish Income Tax
3.5 A basic principle of income tax devolution under the current Fiscal Framework is that once forecast revenue is assigned and the corresponding BGA is made, there are no changes in the Scottish Government’s funding until outturn data is available. These figures are ‘locked in’ to the Budget.
3.6 In practice, the amount of revenue that the Scottish Fiscal Commission forecasts  as part of each Budget process is added to the Scottish Government’s available funding. This amount is not revisited until outturn data is available for Scottish Government income tax receipts. Likewise, for the Block Grant Adjustments, the initial deduction for income tax is based on the OBR’s forecast of growth of UK Government receipts until outturn data is available for UK Government income tax receipts.
3.7 HMRC is responsible for the collection of Scottish income tax. Outturn data for Scottish income tax and UK Government non-savings, non-dividends receipts are available around 15 months after the end of the financial year. Given this long lag of availability of outturn data, income tax revenue and Block Grant Adjustments are fixed for three years from the time the Budget is set. This means that for 2017-18, income tax revenues were forecast as part of the Budget Bill process in February 2017 and the BGA was forecast at Autumn Statement in November 2016. Outturn figures will not be available until July 2019. The outturn figures for revenues and the BGA will then be compared with forecast and reconciliations calculated, which will be applied in the 2020-21 financial year.
Reconciliation process for Income Tax
1. To determine funding for the Scottish Budget,
forecasts are used for tax revenues and
forecasts are used to inform the
BGA, set by
2. The forecast BGA for income tax is deducted from the Scottish Government’s Block Grant.
3. 3. Forecast tax revenues are added to the Scottish Government’s residual Block Grant. Effectively, the Block Grant includes the expected income tax revenue which is transferred by HMT. Revenues and BGA are fixed until outturn data is available.
4. Reconciliations are made to reflect differences between outturn and forecast figures for revenue and the BGA. When revenues increase more (or decline less) than the BGA compared to the initial forecasts, the Scottish Government has more resources available than anticipated.
5. It is this net effect of the revenue and BGA reconciliations which determines whether the Scottish Government’s Budget is higher or lower than originally forecast and thereby the impact on the Budget at which the reconciliation takes place.
3.8 At this point, only the baseline value of £10,719 million that refers to 2016-17 has been established as outturn data. This represents a downward revision from the original forecast value of £11,525 million from the UK Government’s Autumn Statement 2016.
3.9 The 2020-21 Budget will be the first Budget in which an income tax reconciliation will be made and this will be based on the outturn from the 2017-18 Budget. Outturn data for 2017-18 will be available in summer 2019.
3.10 Although no reconciliation is required for income tax in 2019-20, the potential scale of the reconciliation required in the 2020-21 Budget is indicated in the latest forecasts. Since the 2017-18 Budget, the forecast updates have shown a deterioration in the net budget position, which - if proved correct in the outturn - would lead to a reconciliation requirement in 2020-21 of -£267 million. 
3.11 This forecast is uncertain. It is based on an estimated baseline, and subject to forecast error, a point highlighted in the SFC’s Forecast Evaluation Report  , published on 5 September. The SFC report notes that the current estimate for GDP growth in 2017-18 is 1.3 per cent, whereas it had forecast it to be 0.7 per cent. It goes on to illustrate that – taking this impact in isolation – the under-estimate of economic growth had taken £188 million off its income tax forecast for 2017-18. On this basis, the reduction in revenues would be £203 million rather than the £391 million estimated for Scotland’s Fiscal Outlook shown in the table below – and the estimated reconciliation requirement -£79 million rather than -£267 million. The SFC report notes that this illustrative position does not take into account lower than expected outturn figures for 2016-17 income tax revenues.
3.12 The forecasts that will be available at the time of the Budget will take into account the outturn baseline and provide a more up-to-date guide to the reconciliation that is to be expected. The Scotland Reserve provides a mechanism to anticipate future budget pressures in the 2019-20 Budget.
Table 3.1 – Income Tax Latest ForeCasts compared with 2017-18 Budget forecasts (£ million)
|Revenues||BGA||Net Budget position|
|Forecast as of Budget Act 2017||11,857||11,750||107|
|Latest forecast ( Scotland’s Fiscal Outlook)||11,467||11,626||-159|
|Latest forecast against Budget Act 2017||-391||-124||-267|
*Figures may not sum due to rounding.
3.13 Both Scottish income tax revenue and BGA are lower in the most recent forecasts than in the Budget 2017-18 forecast. As long as Scottish and UK income taxes develop in the same direction, the Fiscal Framework reduces the volatility caused by forecast revisions.
3.14 A timeline outlining the income tax reconciliation process for the 2017-18 Budget – which will become relevant for the 2020-21 Budget - is shown overleaf.
Figure 3.1 - Timeline for Income Tax Reconciliation
Fully Devolved Taxes
3.15 This section focuses on the operation of the fully devolved taxes in the 2017-18 financial year. It sets out forecasts and outturn  for both tax revenues and BGAs, and highlights the reconciliations already made in the 2018-19 Budget and the remaining reconciliation required in the 2019-20 Budget.
Reconciliation process for LBTT AND SLfT
- 1. In advance of the forthcoming financial year, SFC’s forecasts are used for tax revenues and OBR’s forecasts are used to inform the BGA, set by HMT.
- 2. The forecast BGA for each tax is deducted from the Scottish Government’s Block Grant for the forthcoming financial year.
- 3. Revenue Scotland collects revenues over that financial year.
- 4. Block Grant Adjustments are updated twice. The first update is made within that financial year at the UK Budget, on the basis of the most recent OBR forecasts. Once outturn data is available in the following financial year, a final reconciliation is applied to the Scottish Government’s Block Grant for the financial year thereafter (i.e. two years after the year to which the revenues relate).
- 5. Whether the Scottish Budget is in a better position at outturn than as originally forecast depends on both: i) how outturn revenues compare with forecast, and ii) how the outturn BGA compares with forecast. For both fully devolved taxes the net outturn position has improved compared to the 2017-18 budget forecast.
Treatment of Revenues
3.16 For the fully devolved taxes, the Scottish Government manages the impact of any variation in actual receipts against the forecast in year as part of the overall annual Budget management process.
3.17 For the Budget Act 2017, LBTT was forecast to raise £507 million. Outturn revenues as of September 2018 were £557 million, £50 million more than the original forecast.
Table 3.2 – LBTT Outturn revenues for 2017-18 compared with forecasts (£ million)
|Forecast revenues as of Budget Act 2017||507|
|Outturn as of September 2018||557|
3.18 For the Budget Act 2017, SLfT was forecast to raise £149 million. Outturn revenues as of September 2018 were £148 million, £1 million lower than originally forecast.
Table 3.3 – Slft Outturn revenues for 2017-18 compared with forecasts (£ million)
|Forecast revenues as of Budget Act 2017||149|
|Outturn as of September 2018||148|
3.19 The combined surplus for the two taxes compared to original forecasts (50 million for LBTT, -£1 million for SLfT) has been added to the Scotland Reserve.
In-year BGA update and reconciliation figures
3.20 The Block Grant Adjustments are changed twice. The first change takes place during the same financial year at the UK Autumn Budget to reflect latest forecasts of corresponding UK Government tax receipts, and is managed as part of in-year budget management. The second change takes place in the following financial year once outturn data for corresponding UK Government tax revenues is available and a final reconciliation is applied to the Scottish Government’s Block Grant for the financial year two years after the year to which the revenues relate. Where the Block Grant Adjustment is higher than forecast, the Scottish Government’s Budget is reduced, and vice versa. 
3.21 Changing the BGAs in this way means that the Scottish Government is shielded from Budget volatility as long as BGAs move in the same direction as tax revenues during the financial year.
3.22 The section below shows the reconciliations which will be made at the UK Autumn Budget.
3.23 For the Budget Act 2017, the BGA for LBTT was forecast to be £545 million. As of Budget Act 2018, the estimated BGA had risen to £591 million, £46 million above the original forecast. To account for this, £46 million was deducted from the Scottish Government’s Block Grant for 2017-18 in the 2018-19 Budget.
3.24 The outturn BGA is £584 million, £7 million below the forecast BGA as of Budget Act 2018. £7 million will therefore be added to the Scottish Government’s Block Grant for 2019-20.
Table 3.4 – Outturn LBTT BGA for 2017-18 compared with forecasts (£ million)
|Forecast BGA||At Budget Act 2017||545|
|At Budget Act 2018||591|
|Outturn BGA||Calculated using HMRC July 2018 Tax Receipts Publication||584|
|In-year update||Applied to Block Grant for 2017-18||-46|
|Reconciliation||To be applied to Block Grant for 2019-20||+7|
3.25 As of Budget Act 2017, the BGA for SLfT was forecast to be £119 million. As of Budget Act 2018, the estimated BGA had fallen to £104 million, £15 million below the original forecast. To account for this, £15 million was added to the Scottish Government’s Block Grant for 2017-18.
3.26 The outturn BGA is £113 million, £9 million below the forecast BGA as of Budget Act 2018. £9 million will therefore be deducted from the Scottish Government’s Block Grant for 2019-20.
Table 3.5 – SLfT Outturn BGA for 2017-18 compared with forecasts (£ million)
|Forecast BGA||At Budget Act 2017||119|
|At Budget Act 2018||104|
|Outturn BGA||Calculated using HMRC July 2018 Tax Receipts Publication||113|
|In-year update||Applied to Block Grant for 2017-18||15|
|Reconciliation||To be applied to Block Grant for 2019-20||-9|
Reconciliations required for 2019-20 Budget
3.27 Two reconciliations will be applied to the Scottish Government’s forthcoming 2019-20 Budget – one for the 2017-18 LBTT BGA and one for the 2017-18 SLfT BGA. The reconciliations are outlined in the table below, with the basis of these figures set out in Tables 3.4 and 3.5 above.
Table 3.6 – Reconciliation requirement (£ million)
3.28 In total, a reconciliation of -£2 million will be applied to the Scottish Government’s Block Grant for 2019-20. This means that the Scottish Government will have £2 million less available in its 2019-20 Budget. The final reconciliation will be made at the UK Autumn Budget  .
3.29 A timeline outlining the fully devolved tax reconciliation process for 2017‑18 can be found below. This is for LBTT – the process for SLfT is very similar.
Figure 3.2 - Timeline for Devolved Tax Reconciliation
Net Budget Position
3.30 The net Budget position for individual taxes compares devolved revenues with Block Grant deductions. If the net position is positive, the Scottish Government raises more in devolved taxes than it loses in the corresponding Block Grant Adjustment. For this report only the net Budget positions for the fully devolved taxes are shown since there is no net Budget position to report for income tax, only the 2016-17 baseline value which has a zero net Budget impact.
3.31 For the Budget Act 2017, the forecasts suggested that LBTT revenues would be £38 million less than the Block Grant Adjustment. Outturn revenues were £27 million less than the Block Grant Adjustment, an £11 million improvement on the Budget Act 2017 position.
Table 3.7 – LBTT Budget position for 2017-18 compared with forecasts (£ million)
|Revenues||BGA||Net Budget position|
|Forecast as of Budget Act 2017||507||545||-38|
|Outturn against forecast||+50||+39||+11|
3.32 Forecasts suggested that SLfT revenues would be £30 million more than the Block Grant Adjustment for the Budget Act 2017. Outturn revenues were £35 million more than the provisional Block Grant Adjustment, a £5 million improvement on the Budget Act 2017 position.
Table 3.8 – SLfT Budget position for 2017-18 compared with forecasts (£ million)
|Revenues||BGA||Net Budget position|
|Forecast as of Budget Act 2017||149||119||30|
|Outturn against forecast||-1||-6||+5|
3.33 As we can see in the tables above, the net Budget impact of the two devolved taxes at the Budget Act 2017 was -£8 million combined (=£30 million-£38 million). The outturn data shows an improvement. The net Budget position is +£8 million (=£35 million-£27 million) for the two taxes combined – an improvement of +£16 million (=£11 million+£5 million). The Scottish Government raised £49 million more in fully devolved taxes than anticipated but its BGA only increased by £33 million.
3.34 Overall, the net effect of the adjustments in taxes and BGAs is +£16 million. Any extra tax revenue has been collected but so far the BGAs have only been increased by £31 million, leaving another £2 million increase to be reconciled as explained in the previous section.
3.35 The comparison between forecast and outturn numbers shows that for these two taxes the revision in the net outturn position is smaller than either the revision of the total revenue or the total BGA position. The combination of revenue and BGA has reduced budget volatility because Scottish and UK revenue changed in the same direction from forecast to outturn.