Publication - Research and analysis

Scottish Income Tax: 2018-19 policy evaluation

A policy evaluation of Scottish Income Tax in 2018-19

Scottish Income Tax: 2018-19 policy evaluation
Annex B: Focus Group Notes

Annex B: Focus Group Notes

In July 2021, the Scottish Government arranged a focus group comprised of tax and payroll professionals, facilitated by an independent moderator, to gain a deeper understanding and perspective of the issues that had been raised. Once the focus group concluded, officials consolidated notes taken during the discussion and presented this information by drawing out key themes that arose during the conversation. This qualitative data was then cleaned and coded by topic, resulting in four clear themes being presented for each question asked during the session.

Question 1: What was the impact - both financial and administratively - on businesses and payroll software providers? Were there any extra complications or adaptations to the processes?

Theme 1: "S" code prefix:

  • The payroll profession's biggest challenge was the change to PAYE codes to include the S prefix to identify Scottish taxpayers. However, it was pointed out that this was an expected part of the transition.
  • When payroll operators had to update their systems to recognise the S code prefix there was a lag - some attendees believed this led to some Scottish taxpayers not being correctly identified as a Scottish taxpayer, and therefore were not paying the correct amount of tax. Similarly, there were concerns that even now not all Scottish taxpayers are being captured correctly through the S code mechanism and therefore there is not full confidence that the correct tax is being allocated to the Scottish Government[41]. An example was given of a Highland business whose employees do not all have an S code.
  • Issues still emerge in the identification of Scottish taxpayers, particularly around Scotland/England border (an example was given of North Berwick not being classed as in Scotland for residency due to issues with postcodes[42]).
  • The S code prefix is determined by where you live rather than where you work, which added confusion at the beginning. Furthermore it is the responsibility of individuals to have the right PAYE code which leaves further room for error. There was general consensus that communication on what was driving the change to S code prefixes was a big issue at the time of the change.
  • Any confusion around the communication of who should have an S code was short lived and has now bedded in successfully.
  • The Group did not raise any administrative impact of changing over to S code prefix when considering Scottish Income Tax's implications for reserved taxes, such as National Insurance Contributions.

Theme 2: Move to 5-band structure:

  • The change to the 5 band structure meant that tax calculations and computations took longer to process. That challenge was biggest in the transition year however since then the impact has largely tapered off.
  • The change itself was described as "frustrating" – in the sense of its operational impacts - however the general consensus amongst the group was that software and technology significantly lessened any operational impacts.
  • It would be more complicated if there were frequent changes in bands & rates.
  • Nothing at the time would have made the change to the five band structure any more straightforward, the main issue was around coding and timing rather than the change to the tax system in itself.
  • There was some additional work for payroll operators who had to manually check that the software was calculating the new Scottish Income Tax rates and bands correctly, in other words it added more length to the existing tax computation. This is expected in any transitional year; it was complicated at the time but not as burdensome now.

Theme 3: Administration and Cost

  • There were some initial teething problems with payroll providers sometimes getting staff payroll details wrong, which caused dissatisfaction amongst employees who raised the matter and made sure it was addressed.
  • Payroll providers had to upgrade their software due to the 2018-19 policy change. Statutory upgrades are released annually and can be fairly easy to do, and the costs of the annual changes tend to be built-in. More complexity might lead to higher costs. One attendee noted that the computer coding can be completed quickly.
  • There was a potential administrative burden in identifying people manually before software was made available to recognise this automatically.
  • There was a direct cost to cross-border businesses in terms of the PAYE Settlement Agreement (PSA)[43] – there are now three separate calculations to be done for those businesses but this (relatively small) cost is generally passed on to the taxpayer.
  • A lot of businesses outsource their payroll anyway so there was little additional time/monetary cost to them compared to had there been no change.

Theme 4: Timing

  • Any further changes to the rates, bands and thresholds of Scottish Income Tax now should not be an issue, so long as tax and payroll professions are given reasonable notice.
  • Bigger businesses sometimes use their own in-house software and also need time to implement any changes.
  • Software requires a good period of time to change and test, but less time required for simple changes, e.g. change in Personal Allowance.
  • One attendee suggested that the SG should not announce a change in March and expect it to be implemented in April.
  • One attendee said that hypothetically if the Scottish Parliament was to approve a new 7-band structure they would like 18 months' notice to be sure they could upgrade all their systems in time.
  • There was a time cost that could be attributed to businesses not getting enough notice before needing to update their processes, however the attendee who raised this point also noted that tax and payroll professionals are aware that the Scottish Government works to fairly rigid budget cycles.

Question 2: Have the changes made the tax system more complicated? If so, why and for who?

Theme 1: Taxpayers

  • The tax and payroll profession can cope with changes such as those made in 2018-19 as they are professionals and have dealt with changes in the past. However, it is difficult and more complicated for unrepresented individuals and micro businesses - particularly those who operate cross-border.
  • The tax system in general is significantly more complicated now with taxpayers' understanding poor at the same time - how can individuals be responsible for their tax position if they do not fully understand?
  • Some individuals have income from a variety of sources from all over the world, which makes understanding tax calculations "indecipherable" for taxpayers.
  • There were initial difficulties with Self-Assessment filing for those who had a combination of earnings and other income at higher rates – these customers needed to be excepted from the online process due to HMRC's online tax computation not taking these different rates into account. However, this was largely resolved after a couple of years, and there are reasons as to why someone would be excepted from submitting an online tax declaration aside from being a Scottish taxpayer.
  • People need to be consistently reminded of tax changes as it is easy to forget when running a business, in amongst the various other legal and regulatory measures businesses must comply with.
  • There can be issues for employers when explaining why similar employees were receiving different amounts - an example was given of the Ministry of Defence and the need to 'tax equalise' armed forces personnel stationed at Scottish bases to ensure that their take home pay did not decrease. However, this was to be expected with devolution and is not an overly frequent or complicated issue.
  • The feedback from attendees on the Citizens' Assembly was positive, with attendees being interested in learning more about tax. More engagement of this sort would be useful.

Theme 2: Communication

  • A lot of the consideration of whether the change makes the tax system more complicated for businesses and individuals is down to communication, and some in the Group felt that not enough communication is being offered to support understanding, particularly amongst individual taxpayers.
  • More communication on the process of identifying Scottish taxpayers is vital. The rules are simple and straightforward for the majority so more joint communications with HMRC would help to improve understanding in this area.
  • There was a suggestion to identify groups that will be have more complicated affairs and target communication towards them.
  • Need to make sure a communications programme is in place. Attendees felt that there is too much reliance on HMRC to do the communication, with some in the Group feeling that HMRC do not view this as their responsibility.
  • The general consensus was that the SG and HMRC should do more joint communications to identify Scottish taxpayers.
  • If making a policy decision identify who it affects and SG to get communications out to them. Do not expect HMRC to do this.
  • There is an "economic necessity for complexity in the tax system" but this needs to be balanced with access to good information.

Theme 3: Divergence

  • It was pointed out that there were some issues with Scottish higher rate threshold being lower than England + NICs – some attendees also pointed out that NICs was very close to being aligned with Income Tax but now further away than ever before.
  • There was some discussion around the behavioural change side of things – particular the 53% marginal rate. One attendee mentioned they had heard anecdotally that some taxpayers had changed their behaviour to avoid falling into this tax category.
  • Pension tax relief issues – people not aware that they can claim extra relief if paying tax at 21%. While is on HMRC website, there is not much in the way of communication to Scottish taxpayers. A similar issue exists with gift aid.
  • Issue with interaction between Scottish Income Tax changes with devolved benefits and this gap could get worse. For example, someone being on the threshold for being eligible for Universal Credit – they could lose eligibility due to divergence once net pay taken into account.
  • Inevitable that gradual or partial devolution would lead to divergence and therefore more complication - one solution would be to have all income taxed at the same rate and that can work both ways (i.e. full devolution, or aligning Scottish rates with rUK).

Theme 4: Technology

  • Some software failed to extend the tax band for basic rate taxpayers.
  • Ideally, from a technology perspective, higher rates would be aligned across the UK as HMRC had a lot of exception reports to deal with early on as systems were not ready for changes, but less of an issue now.
  • Some in the group felt that payroll operators are relying on software to be able to cope. HMRC initially could not build their own software in time to cope with the changes. In the first year some taxpayers had to amend and file paper returns. Most of the exceptions have gone now but there was not enough time for the initial implementation - still a few instances where errors occur, although not exclusively in relation to Scottish Income Tax
  • Needs to be a greater focus on the fact that HMRC need to code correctly to allow the process change to run smoothly.
  • HMRC saw getting things right as 'grit in the system' and did not put much focus on getting quirks addressed, e.g. with PSAs, employer compliance reviews, etc.
  • One attendee noted that there is a need to ensure yield, penalties & interest from enquiries is attributed to Scotland.
  • One attendee noted that HMRC considered that they were getting it right even if 5% of Scottish taxpayers were coded incorrectly. While for SG this was a big issues as even 5% of receipts not being correctly attributed to the Scottish Government would have a significant impact on its budget. Similarly, there was a point raised about PSAs and whether HMRC was passing the Income Tax received under these settlements for amounts assessed at the Scottish rates.