Scottish Rate ofIncome Tax

An update to prepareemployers forimplementation

www.pwc.co.uk

Scottish Rateof Income Tax– what’s new?

July 2015

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Background

Scottish Rate of Income Tax – What’s new?2

July 2015

The introduction of the Scottish Rate of Income Tax (SRIT)in 9 months’ time will have a major impact on employers andemployees, not just in Scotland but throughout the UK.

Last month HM Revenue & Customs provided further clarityon certain terms used in the Scotland Act 2012, including thedefinition of a Scottish taxpayer.

In addition, The Scottish Government have decided thatemployers will not be obliged to show SRIT separately onforms P60.

The Westminster Parliament is currently reviewing theScotland Bill 2015 which, when enacted, will implementfurther relevant legislation in relation to the fiscal powers,based on the Smith Commission Agreement.

As Scotland continues on its devolution journey,

businesses, the media and the people of Scotland

continue to ask ‘What does this mean for me?’.

The information contained in this document is the third

in a series of updates aimed at answering some of the

questions you, as an employer, may have.

This document is the third in a series of updates thatprovides questions that employers, the media and peopleacross the UK are asking.

In particular, we look in details at the complexities inanswering “Who is a Scottish taxpayer?” and “What doemployers need to do now?”.

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What you need to knowA recap – Key facts at a glance

Scottish Rate of Income Tax – What’s new?3

July 2015

Scotland Bill 2015Scotland Act 2012 – Scottish Rate of IncomeTax (‘SRIT’)

• Operationally, SRIT sets the foundation for thefurther devolved powers over income tax to be givento the Scottish Parliament, as recommended by theSmith Commission and adopted into draftlegislation (Scotland Bill 2015).

• Scotland Bill 2015 introduced to House of Commonson 28 May 2015 following the UK General Election.Currently being considered and debated by MPs.

• Under existing proposals the Scottish Parliament isto be given unrestricted powers over the rates ofincome tax and income tax bands.

• UK Government to continue to set PersonalAllowance.

• UK Government to continue to administer NationalInsurance Contributions, Capital Gains Tax andInheritance Tax.

• Additional powers over welfare devolved to theScottish Parliament.

• Date of implementation unknown, but expected tobe 2018 at the earliest.

• The Scotland Act 2012 introduces the SRIT from 6April 2016 for individuals identified as Scottishtaxpayers.

• Scottish taxpayer status applies for a full tax year (itis not possible to ‘split’ the tax year).

• SRIT will apply to non-savings and non-dividendincome of Scottish taxpayers.

• Income tax is not fully devolved, and as such HMRCwill continue to administer and collect SRIT.

• Matters reserved to the UK Government:

- Income tax bands and Personal Allowances;

- National Insurance Contributions (‘NIC’); and

- National Minimum Wage (‘NMW’).

• HMRC will identify Scottish taxpayers – Notemployers or pension providers.

• SRIT will operate by reducing the UK basic, higherand additional rates of income tax by 10p and theScottish Parliament will then set a single rate ofincome tax which will apply uniformly across eachof the bands for Scottish taxpayers.

• The changes introduced will impact all employersin the UK whether based in Scotland or the rest ofthe UK, referred to as ‘rUK’.

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What you need to knowWho is a Scottish taxpayer?

Scottish Rate of Income Tax – What’s new?4

July 2015

Which of my employees will become Scottishtaxpayers on 6 April 2016?

An individual will become a Scottish taxpayer fromApril 2016 if they are resident in the UK for income taxpurposes and meet one of the conditions below:

• They have a close connection with Scotland based onthe location of their sole or main ‘place of residence’.

• They spend more days in Scotland than in any otherpart of the UK.

Therefore, if an employee has only one place of residence,and that place of residence is in Scotland, they will be aScottish taxpayer. MSP’s, MP’s representing a ScottishConstituency, and MEP’s representing Scotland willautomatically be treated as Scottish taxpayers.

To the extent that an employee is identified as a Scottishtaxpayer, this status will apply for the whole of a tax year.

How will HMRC determine if an employee is aScottish taxpayer?

HMRC’s approach and timetable will involve writing toindividuals who appear to be Scottish taxpayers for taxyear 2016/17 based on the residential address registeredon its systems from the Autumn of this year. Individualswill then have the opportunity to appeal HMRC’s decisionon Scottish taxpayer status if they believe this tobe incorrect.

What is a place of residence?

A ‘place of residence’ is not defined in the legislation andso it takes on its ordinary meaning, i.e. the dwelling inwhich a person habitually lives – His or her home.

For most employees with only one home, their place ofresidence will be simple to identify. However, not allemployees have simple living arrangements. Inconsidering what constitutes a place of residence forScottish taxpayer purposes, it is being proposed by HMRCthat a number of factors will be taken into account.Broadly, the factors are likely to include whether theindividual has actually lived in the place in question, anddifferentiating between occupation and residence(a degree of permanence will be required).

Also, ownership is not necessary for a place to beconsidered as a place of residence (i.e. work providedaccommodation can be considered to be a place ofresidence). Mobile homes, boats, caravans, lorries or anyform of transport can constitute a place of residence if it isthe place where an individual lives.

What is a main place of residence?

If an employee has more than one place of residence in theUK, e.g. one in Scotland and one in England, it will benecessary for the employee to determine which is theirmain place of residence.

The latest draft guidance from HMRC suggests that a mainplace of residence will not necessarily be the place where theemployee spends most time, but the place where theemployee has the greatest degree of connection. In order toestablish this, again a number of factors will be considered.This will be very subjective and include some or all of thefollowing factors: where the employee’s spouse/family live,place where they are registered to vote, where the materialpossessions are kept, place used for correspondence (utilities,broadband etc.), registration for car, doctor, dentist etc.

You can very quickly appreciate the complexities that will beinvolved in determining a main place of residence foremployees with multiple homes across the UK,including Scotland.

How will I know if my employees areScottish taxpayers?

HMRC anticipates that new tax codes will be issued to allemployers in the UK with Scottish taxpayers in January orFebruary 2016, and the identifier on the code will be an‘S’ prefix. Employers will deduct and account for the SRITthrough the PAYE system, under Real Time Information(RTI) reporting requirements.

What about changes to an employee’s sole or mainplace of residence which occur during a tax year?

As it stands at the moment, HMRC will require employees todirectly notify HMRC of any changes to their sole or mainplace of residence as it impacts their Scottish residence status.Clarification is expected from HMRC in the coming monthson the extent to which the RTI reporting process used byemployers may be used to notify changes of addressto HMRC.

Will SRIT need to be shown separately on the formP60 for employees identified as Scottish taxpayers?

It was initially proposed by the Scottish Government that theSRIT should be shown separately on the annual statement ofincome tax liability (P60). Following a period ofconsultation, it has been announced that this will no longerbe required. HMRC will instead include the proportion ofScottish taxes paid by Scottish taxpayers separately on theAnnual Tax Summary from 2016/17 onwards.

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What you need to knowPractical application of the rules for Scottish taxpayers

Scottish Rate of Income Tax – What’s new?

What will this mean in practice?

The following examples serve to illustrate how thelegislation and HMRC’s proposed interpretation of ‘placeof residence’ and ‘main place of residence’ might impact across-border workforce:

‘Employee A is single, lives in Edinburgh butworks in Newcastle’.

If an employee’s sole place of residence for a particular taxyear is in Scotland, they will be treated as having a closeconnection with Scotland and they will be a Scottishtaxpayer, irrespective of where in the UK they spend theirtime. Similarly, in the reverse scenario, an employee whosesole place of residence is in Newcastle but works inEdinburgh, will not be a Scottish taxpayer.

‘Employee B has a house in London where he liveswith his family, and a serviced apartmentprovided by his employer in Edinburgh. Heworks partly in Edinburgh and partly in London’.

As the employee has two places of residence in the UK(both in Scotland and England), it will be necessary todetermine whether the employee has a closer connectionwith Scotland based on the location of the employee’s mainplace of residence.

Employee B’s main place of residence is in London as thatis the location of his family home. Employee B has a closeconnection with England and he will not therefore be aScottish taxpayer.

‘Employee C is single, has a house in Norwich andin May she moves to a flat in Aberdeen to take upa new job. She sells her house in Norwich’.

Employee C has two main places of residence in the taxyear but her main place of residence was in Scotland formore of that year than it was in England. A closeconnection with Scotland exists, so Sally is a Scottishtaxpayer for the whole of that tax year.

How will SRIT impact on my PAYE SettlementAgreement (‘PSA’)?

HMRC is expected to clarify in the coming months how, inpractice, it expects employers to administer and managethe capture of data and the calculation of tax for bothScottish and the rest of the UK taxpayers.

July 20155

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What is uncertain and what do you need toconsider now?

Scottish Rate of Income Tax – What’s new?6

July 2015

How can we help?

Our Pay, Performance and Risk team advises on PAYE,NIC, benefits in kind and workforce related issues in apractical way that facilitates compliance with legislativerequirements and enables employers to manage andmitigate costs.

Our experienced team can work collaboratively with youin a way that works best for your business, includingsupport in the following areas:

• Assistance with employee communications andengagement, including drafting or reviewing FAQdocuments for your key talent, cross-border workersand/or wider workforce.

• Advice on potentially complex cases anddiscussing various policy and communicationapproaches for managing cross-border employment taxissues and addressing talent management.

• Payroll effectiveness reviews, both in a generalsense and focusing on the ability of your payrollfunction to deliver what is required from April 2016,including modified PAYE arrangements for taxequalised individuals.

• Compliance support and advice on how thechanges will impact on PAYE Settlement Agreements,P11D and Taxed Award Scheme reporting.

• Advice on wider systems and processes coveringall aspects of employment taxes.

• Assessing potential impacts on pensions and salarysacrifice arrangements and assistance with the draftingof employee communications.

SRIT

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Recommended actions

Scottish Rate of Income Tax – What’s new?7

July 2015

The changes being introduced under the Scotland Act 2012 and the draft legislation adopting the Smith Commissionproposals contained in the Scotland Bill 2015 are significant and will have a major impact on employers and theiremployee populations.

As a starting point, we recommend that consideration is given to the following key points:

You will then need to consider the steps it will be necessary for you to take to address these key points and whether youhave the time and/or resource necessary to test your systems and make any appropriate adjustments in time forApril 2016.

An anticipated timeline of the changes that we are aware of, with key stages in the coming months is provided on thenext page.

• Employee communications – Would genericand/or bespoke communications with yourworkforce in Scotland and the rest of the UK,help to educate your employees and key talent onthe changes and business impact.

1 • Demographics – Identify any employees (oremployee populations) where it may be moredifficult to determine Scottish taxpayer statusdue to the complexity of their work patterns. Forexample, those who occupy more than oneproperty and who travel extensively within theUK. Also, any inbound assignees to the UK wheremodified PAYE schemes are being operated.

2

• Payroll readiness and effectiveness –Is your current payroll system set up (or capableof being set up) to pay employees who areScottish taxpayers, and is it fully equipped tomanage the application of both UK and Scottishtax withholding and compliance requirements.Will you need support on data capture and taxcalculations under your PAYESettlement Agreement?

3

• Pensions – Impact of changes on pensions todetermine the likely impact on your workforceand how will you monitor, track andadminister these?

5

• Reward policies –How robust are your currentdomestic travel, relocation and home workingpolicies and how will you approach net paydifferentials across the UK for the samegrade/role if tax rates diverge? If Scottish and UKincome tax rates greatly diverge, what impactcould this have on migration of your workforceand management of key talent withinthe business?

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Timeline

Scottish Rate of Income Tax – What’s new?

Jun – Oct2015

Post-electionmediacampaignand SRITguidancefrom HMRC

HMRCcontactindividualsthey haveidentified asScottishtaxpayers

Scottishincome taxrates and UKbandsexpected

Issue ofScottish taxcodes byHMRC

Royal assentfor ScotlandAct 2015

ScottishParliamentElections

Possibleintroductionof furtherdevolvedpowers overincome tax

Scottishincome taxrates– GoLive

From Nov2015

Nov/Dec2015

Feb2016

Apr2016

May2016

2018

Further information

Shona Blair

T: +44 (0) 131 260 4059

E: shona.blair@uk.pwc.com

Gwyneth Scholefield

T: +44 (0) 131 260 4134

E: gwyneth.scholefield@uk.pwc.com

Karen Melville

T: +44 (0) 131 260 4640

E: karen.melville@uk.pwc.com

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should notact upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express orimplied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law,PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for anyconsequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decisionbased on it.

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