Implementation of the Scotland Act 2016: second report

Scottish Government sixth annual report on Part 3 (Financial Provisions) of the Scotland Act 2012 - second report on implementation of the Scotland Act 2016.

Chapter 2 - Scottish Rate of Income Tax and Scottish Income Tax

23. The Scottish Government has continued to work with HMRC and DWP on both the remaining implementation work for the Scottish Rate of Income Tax ( SRIT), and the implementation work to support the devolution of the further income tax powers in the Scotland Act 2016. This includes programme management arrangements and close monitoring of costs.

24. The Scottish Parliament's Finance and Constitution Committee took evidence on HMRC's collection and management of SRIT and implementation of Scottish Income Tax from Jim Harra, HMRC's Director General, Customer Strategy and Tax Design, and Sarah Walker, Deputy Director for Devolution, on 29 November 2017. [6]

25. The National Audit Office ( NAO) published its third report on the administration of SRIT on the 27 November 2017. [7] Audit Scotland reviewed the approach taken by the NAO and endorsed it in its own report [8] published on 27 November 2017. Caroline Gardner, Auditor General for Scotland and Sir Amyas Morse Comptroller and Auditor General gave evidence on their respective reports to the Scottish Parliament's Public Audit and Post-Legislative Scrutiny Committee on 11 January 2018.

26. These reports and evidence sessions have provided additional assurance to the Scottish Government on HMRC's administration of SRIT in 2016-17 and the work undertaken following the introduction of the further powers in April 2017.

Scotland Act 2012

27. HMRC are due to report the outturn figure for Scottish Income tax collected in 2016-17 in July 2018. The Office for Budget Responsibility forecast that SRIT would raise £4.9bn in 2016-17.

28. HMRC has reduced its lifetime cost estimates for the implementation of SRIT to £20m - £23m, which it has split between non -IT costs of £7m, and IT costs of £13m - £16m. In 2016/17 HMRC invoiced the Scottish Government for £4.5m, made up of £3.4m of IT costs and £1.1m of non -IT costs. For the year 2017-18 to Q2 the Scottish Government has been invoiced for £1.4m and forecast a total cost of £3.4m. To date the Scottish Government has paid HMRC £17m of implementation costs.

29. The total running costs recharged to the Scottish Government in 2016-17 are provided in paragraph 35.

30. The DWP SRIT implementation project completed its work and closed in 2016-17. In 2016.17 the total costs recharge to the Scottish Government were £0.3m. The total cost of the project was £1.1m.

Scotland Act 2016

31. From 2017-18, the Scottish Parliament has the power to set the income tax rates and band thresholds (excluding the personal allowance) that apply to the non-savings and non-dividend income of Scottish taxpayers. The Scottish Government forecast that Scottish income tax would raise £11.9bn in 2017-18. This forecast was reviewed by the Scottish Fiscal Commission and was endorsed as reasonable and this is the amount that has flowed from HM Treasury into the Scottish Government's Consolidated Fund during the course of this financial year.

32. The Service Level Agreement agreed between the Scottish Government and HMRC seeks to operationalise the Memorandum of Understanding ensuring that Scottish taxpayers and the employers of Scottish taxpayers receive the same level of service as taxpayers in the rUK. The governance arrangements between Scottish Government and DWP are founded on the Exchange of Letters dated 1 December 2016. [9]

33. The Scottish Government published a discussion paper on income tax policy "The Role of Income Tax in Scotland's Budget" [10] on 2 November 2017. This together with roundtables led by the Cabinet Secretary for Finance and the Constitution informed debate ahead of the publication of the Draft Budget.

34. The Scottish Parliament approved the Scottish Government's Scottish Rate Resolution for 2018-19 on the 20 February 2018. The Scottish Parliament agreed to introduce a 19 per cent Starter Rate of tax on earnings over £11,850 and up to £13,850 and maintain a Basic Rate of 20 per cent on earnings over £13,850 and up to £24,000. The Scottish Parliament further agreed to add an Intermediate Rate of 21 per cent on earnings over £24,000 and up to £43,430 and increase the Higher Rate to 41 per cent on income over £43,430 and up to £150,000. The Scottish Parliament also agreed to increase the Top Rate to 46 per cent on incomes over £150,000. The Scottish Fiscal Commission has estimated that this will raise £12.2bn which will be available to the Scottish Government to draw down from HM Treasury throughout financial year 2018-19.

35. HMRC estimates that the implementation of the further income tax powers will cost £2.8m, split between a total non -IT cost of £1.1m and a total IT cost of £1.7m. For the implementation of the further income tax powers up to Q2 of 2017-18, HMRC has invoiced the Scottish Government for £0.7m, with a further £0.5m forecast for Q3 and Q4. In 2016-17 total running costs were £0.2m. To date HMRC have not charged the SG for any running costs in 2017-18, but are forecasting running costs of £0.5m.

36. The Scottish Government and HMRC have always agreed that a robust process for the identification of Scottish taxpayers is not only critical to the successful implementation of the Scottish income tax powers, but that it will also be a key on-going exercise. Therefore, during 2017-18, the Scottish Government has worked closely with HMRC as it continues to refine and update its processes for identifying Scottish taxpayers, which are now based on live data. HMRC estimates that there are around 2.6m Scottish taxpayers; figures on the actual number of Scottish taxpayers in tax year 2016/17 will be available for the first time in 2018.

37. The Scottish Government has engaged with HMRC on the compliance processes and activity that will take place each year following the agreement of both the Scottish and UK Governments' income tax rates and bands, and which will take account of the degree to which there is any consequent divergence. Overall, the Scottish Government will benefit from the compliance work that HMRC conducts to protect UK income tax yield as well as bespoke activity identified for Scottish income tax. In addition, the Scottish taxpayer identification work which HMRC conducts will also have an input to the enforcement and compliance work.

38. DWP's project to ensure that DWP's systems can deal with the implementation of the further income tax powers in Scotland Act 2016 completed its work and closed in early 2017-18. In total the project cost £0.4m.


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