The Smith Commission Agreement and Scotland Act 2012 · to be implemented from April 2016. The...
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The Smith Commission Agreement and Scotland Act 2012 What you need to know www.pwc.co.uk The Smith Commission agreement and Scotland Act 2012 January 2015
Transcript of The Smith Commission Agreement and Scotland Act 2012 · to be implemented from April 2016. The...
The SmithCommissionAgreement andScotland Act 2012
What you need to know
www.pwc.co.uk
The SmithCommissionagreement andScotland Act 2012
January 2015
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Background
The Smith Commission Agreement and Scotland Act 20122
January 2015
On 19 September 2014, following the ‘No’ vote in theindependence referendum, Lord Smith of Kelvin agreed tooversee the process to take forward the commitments onfurther powers for the Scottish Parliament.
On 27 November 2014 the Smith Commission publishedits report detailing Heads of Agreement on furtherdevolution of powers to the Scottish Parliament(the ’Smith Commission Agreement’).
The additional powers over income tax recommended in theSmith Commission Agreement, represent the biggest evertransfer of fiscal powers to Scotland and, as you will be aware,the impact on businesses with interests across the UK hasreceived extensive coverage in the media.
The additional powers build on measures already devolvedunder Scotland Act 2012 such as a new Land and BuildingsTransaction Tax and Scottish Landfill Tax ( introduced fromApril 2015 ) and the Scottish Rate of Income Tax is scheduledto be implemented from April 2016.
The planned introduction of the Scottish Rate of Income Tax (“SRIT”)from April 2016 will have a major impact on employers and employees inScotland, and throughout the UK. Taken in conjunction with the additionalfiscal powers proposed in the Smith Commission Agreement, businesses, themedia and the people of Scotland are now asking ‘What does this meanfor me?’.
The information contained in this document is the second in a series ofupdates aimed at answering some of the questions you, as an employer, mayhave as Scotland continues on its devolution journey.
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What you need to knowChanges that are already in progress…a recap
The Smith Commission Agreement and Scotland Act 20123
January 2015
How will the changes expected from April 2016impact my employees?
Broadly, under existing legislation (Scotland Act 2012) anindividual will become a Scottish taxpayer from April 2016if they are resident in the UK for income tax purposes andmeet 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
MSP’s, MP’s representing a Scottish Constituency, andMEP’s representing Scotland will automatically be treatedas Scottish taxpayers. To the extent that an employee isidentified as a Scottish taxpayer, this status will apply forthe whole of a tax year.
A ‘place’ includes a place on board a vessel or other meansof transport and ‘place’ is therefore interpreted widely inthis context. More guidance on what constitutes a mainplace of residence for the purposes of determiningScottish taxpayer status is expected from HMRC in thecoming months, together with clarification on the extentto which the RTI reporting process is to be used to notifychanges of address to HMRC.
How will HMRC determine if an employee is aScottish taxpayer?
We understand HMRC’s approach and timetable willinvolve writing to individuals who appear to be Scottishtaxpayers based on the residential address registered onits systems at the end of the Summer next year.Individuals will then have the opportunity to appealHMRC’s decision on Scottish taxpayer status if theybelieve this to be incorrect.
How will I know if my employees areScottish taxpayers?
Employers will be informed by HMRC of the employeeswho have been identified as Scottish taxpayers. There willbe an obligation for the employer to deduct and accountfor the SRIT through the PAYE system, under Real TimeInformation (RTI) reporting requirements. HMRCanticipates that new tax codes will be issued to allemployers in January or February 2016 with an ‘S’ prefix.This will apply to all UK based employers.
We understand that the Scottish Government has askedfor the SRIT to be shown separately in HMRC’s taxcalculators, annual tax summary and the annualstatement of income tax liability (P60). HMRC isconsulting on the specific changes required to the P60 toaccommodate this.
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What you need to knowChanges that are already in progress…a recap
The Smith Commission Agreement and Scotland Act 20124
January 2015
What will this mean in practice?
The following examples serve to illustrate how thelegislation might impact a cross-border workforce:
‘Employee A lives in Edinburgh but works in Newcastle’
If an employee’s sole or main 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 employeewhose sole place of residence is in Newcastle but works inEdinburgh, will not be a Scottish taxpayer.
‘Employee B has a home in London, a serviced apartmentprovided by his employer in Edinburgh, and workspartly in Edinburgh and partly in London. His familycontinue to reside at the home 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 or England based on the location of their‘main place of residence’.
What rate of tax will a Scottish taxpayer pay?
We know that the current UK tax rates (20%, 40% and45%) will be reduced by 10% and the Scottish Parliamentwill set a new SRIT which will apply uniformly across eachof the bandings. There will be no change to the definitionof taxable income or income tax allowances, which will beset by the UK Government. Non-savings income such asemployment income, profits from self-employment,pension and property income (regardless of where in theUK the property is situated) will be subject to SRIT.
How will the Scottish rate affect tax onpension contributions?
Scottish taxpayers will continue to receive tax relief ontheir pension contributions. From April 2016 to April2018, current plans are for scheme administrators tocontinue to operate relief at source as normal i.e. applyingUK rates. Scottish taxpayers will have the necessaryadjustments processed directly through self-assessmentor PAYE coding. After 2018, the pension scheme willclaim tax relief at the Scottish rate of income tax.
How will the Scottish tax rate affect tax onpension income?
Pension income (i.e. annuities) will be treated the same asincome from employment. If an employee is a Scottishtaxpayer, they will pay tax on their pension income at theScottish rates of income tax.
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What you need to knowPost-Smith Commission – additional powers overincome tax
The Smith Commission Agreement and Scotland Act 20125
January 2015
What does this mean and how do the proposednew powers interact with the existing powersunder Scotland Act 2012?
Under the Smith Commission Agreement, it has beenproposed that Income Tax should not be fully devolved tothe Scottish Parliament, with both the UK and ScottishParliaments sharing control over Income Tax.
The Smith Commission recommends that the UKGovernment should remain responsible for determiningthe definition of taxable income and setting the level ofthe annual Personal Allowance (as it is currently underthe provisions of the Scotland Act 2012).
As it is proposed that powers over Income Tax shouldremain shared, Scottish taxes will continue to beadministered and collected by HMRC, and not RevenueScotland. If these proposals are adopted into legislation,the Scottish Government will retain all income taxrevenues raised in Scotland on non-savings and non-dividend income (i.e. earnings from employment, profitsfrom self employment, property income, and annuities).
The Smith Commission Agreement pledges extensiveadditional powers to the Scottish Parliament overIncome Tax, and has recommended that the ScottishParliament should have the power to set both the rates ofincome tax and the bandings to which the rates applywithout restriction.
Are there any devolved powers proposed inrespect of welfare?
Most welfare provisions that will directly impact theemployer's duties to their workforce remain reserved tothe UK Government. The level of National InsuranceContributions and National Minimum Wage will continueto be set by the UK Government. Key worker benefitssuch as statutory sick pay and maternity pay will alsocontinue to be set by the UK Government.
While the welfare benefits under Universal Credit willcontinue to be administered and delivered by the DWP,certain powers to vary specific aspects of these benefits,including housing benefits, will be devolved to theScottish Parliament.
Certain other benefits outside of Universal Credit forcarers and the disabled are also to be devolved as well asother social benefits such as winter fuel payments.
All aspects of state pensions will continue to be set by theUK Government.
The Scottish Parliament is being given the power to createnew benefits in the areas where it has devolvedresponsibility and will have new powers to makediscretionary payments in any area of welfare.
The power to support the unemployed through DWPemployment programmes, such as the Work Programme,is to be devolved to the Scottish Government. Should thislead to changes to these programmes in future, this mayhave implications for employers who are participating inprogrammes across both Scotland and the rest of the UK.
We need to remember that the Smith Agreement hasmade recommendations and Westminster could accept,reject, modify or even expand on these before it bringsforward draft legislation for the full package of devolvedpowers by 25 January 2015. That date and the finalrecommendations may also be influenced by events in theother devolved nations and the English regions. Details ofimplementation and timing will be announced by thenewly elected government following the May 2015 generalelection.
At this stage, it is anticipated that SRIT under ScotlandAct 2012 will be implemented as planned from 6 April2016.
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What is uncertain and what do you need toconsider now?
The Smith Commission Agreement and Scotland Act 20126
January 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 legislative requirements and enables employers to manage and mitigatecosts.
Our experienced team can work collaboratively with you in a way that works best for your business, including supportin the following areas:
• Payroll effectiveness reviews, both in a general sense and focusing on the ability of your payroll function todeliver what is required from April 2016.
• Advice on potentially complex cases and discussing various policy approaches for managing cross-borderemployment tax issues and addressing talent management.
• Compliance support and advice on how the changes will impact on Dispensations, PAYE SettlementAgreements, P11D and Taxed Award Scheme reporting.
• Advice on wider systems and processes covering all aspects of employment taxes.
• Assessing potential impacts on pensions and salary sacrifice arrangements and assistance with the drafting ofemployee communications.
Scottish rates ofincome tax?
Timing ofimplementation
(April 2016or beyond)?
Changes topayroll & HR
systems (one ortwo tier change– SA2012 and
new legislation?
Are furtheramendmentslikely beforelegislation is
finally enacted?Impact of rates
and bands and netpay differentialsacross the UK?
HMRCapproach to
implementingthe legislative
changes?
Cost toemployers ofoperating two
income taxregimes?
Changes toincome taxbandings?
Devolution
Settlement
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Recommended actions
The Smith Commission Agreement and Scotland Act 20127
January 2015
The changes being introduced under the Scotland Act 2012 and the recommendations of the Smith CommissionAgreement are significant and will have a major impact on employers and their employee populations.
As a starting point, we recommend that consideration is given to the following key points:
• Payroll readiness and effectiveness – Is your current payroll system set up (or capable of being set up) to payemployees who are Scottish taxpayers, and is it fully equipped to manage the application of both UK and Scottishtax withholding and compliance requirements.
• Demographics – Identify any employees (or employee populations) where it may be more difficult to determineScottish taxpayer status due to the complexity of their work patterns. For example, those who occupy more thanone property and who travel extensively within the UK.
• Reward policies –How robust are your current domestic travel, relocation and home working policies and howwill you approach net pay differentials across the UK for the same grade/role if tax rates diverge? If Scottish andUK income tax rates greatly diverge, what impact could this have on migration of your workforce and managementof key talent within the business?
• Employee Communications – will communications be required with employees, in Scotland and the rest of theUK, to educate them around the changes?
• Pensions – Impact of changes on pensions to determine the likely impact on your workforce and how will youmonitor, track and administer these?
You will then need to consider the steps it will be necessary for you to take to address these key points and whetheryou have 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 (including whenwe recommend that you start to consider the steps you will need to take to become compliant from April 2016) isprovided below.
Oct 2014
Proposalson furtherdevolvedpowers
SmithCommission
heads ofagreement
Draftlegislationfor furtherdevolvedpowers
SDLTreplaced
with LBTT
Startplanning forpayroll/HR
systemchanges
Intro ofScottish
Landfill Tax(‘SLT’)
Scottishincome taxrates and
bandsexpected
Issue ofScottish tax
codes byHMRC
Scottishincome tax
rates &bands – Go
Live
HMRCcontact
individualsthey have
identified asScottish
taxpayers
Nov 2014 Jan 2015 Apr 2015From
Aug 2015Nov 2015 Feb 2016 Apr 2016
Timeline
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. Youshould not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty(express or implied) 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.
© 2015 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to thePwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
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Further information
Shona Blair
T: +44 (0) 131 260 4059
Gwyneth Scholefield
T: +44 (0) 131 260 4134
Karen Melville
T: +44 (0) 131 260 4640
