For the 2016-17 tax year, the Scottish Parliament decided to effectively match the income tax rates in Scotland to those in the rest of the UK. HMRC estimates it will collect £4.6bn attributable to the Scottish rate of income tax (SRIT) for 2016-17, although the actual amount collected will not be known until July 2018.

In 2017-18, income tax rules in Scotland will differ from the rest of the UK for the first time. Scottish taxpayers pay the higher rate of tax (40%) when they earn £43,000 – as opposed to £45,000 in the rest of the UK. The Scottish government forecast this will generate additional revenue of £127m.

HMRC estimate that 386,000 Scottish taxpayers are now paying the higher rate of tax but does not expect that the difference in the higher rate threshold between Scotland and the rest of the UK will lead to avoidance or evasion.

However, in its report the National Audit Office (NAO) notes that HMRC plans to increase its compliance activity in future, if the thresholds and rates between Scotland and the rest of the UK diverge more substantially.

HMRC expects to spend £26.8min total by 2019-20 on implementing changes in income tax rules in Scotland. The majority of the spending has been on IT costs, such as the cost of changing systems to account for the Scottish higher rate income tax threshold.

The NAO’s report found that HMRC has now rectified issues that led to it not identifying 420,000 people as potential Scottish taxpayers in 2015.

However, the biggest challenge facing HMRC is maintaining accurate address records of Scottish taxpayers. Neither taxpayers nor employers are legally required to tell HMRC of changes of address. Around 80,000 people in the UK move into or out of Scotland each year.

While HMRC carried out an online marketing campaign in Spring 2017 promoting the message that people should inform it if they move house, and used social media to promote this message, it does not know how many people it has reached or what impact it has had on public readiness to update HMRC about changes of address.

The audit watchdog says HMRC also needs to ensure people paying into pension schemes receive the right amount of tax relief. Some taxpayers may initially receive the incorrect amount of relief at source if the basic rate of income tax diverges between Scotland and the UK, and the information held by the pension provider is not up-to-date.

Both providers and HMRC are making significant changes to strengthen the alignment between their information systems. HMRC has created a single online route for pension providers to submit annual returns which will improve the consistency of data. However, this will only become mandatory from April 2019, the NAO noted.

Amyas Morse, head of the NAO, said: ‘HMRC has made good progress in assuring itself of the accuracy of the Scottish taxpayer population, but could do more with its own data to improve the accuracy of income tax receipt estimates.

‘People are at risk of paying the incorrect amount of tax if they do not provide HMRC with accurate address data, and HMRC do not know whether its interventions to raise awareness of this has been successful.’

The administration of the Scottish rate of Income Tax 2016-17 is here. 

Report by Pat Sweet