Written evidence submitted by The Low
Incomes Tax Reform Group (LITRG)
WHO WE
ARE
1.1 The Low Incomes Tax Reform Group (LITRG)
is an initiative of the Chartered Institute of Taxation (CIOT)
to give a voice to the unrepresented. Since 1998 LITRG has been
working to improve the policy and processes of the tax, tax credits
and associated welfare systems for the benefit of those on low
incomes.
1.2 The CIOT is a charity and the leading professional
body in the United Kingdom concerned solely with taxation. The
CIOT's primary purpose is to promote education and study of the
administration and practice of taxation. One of the key aims is
to achieve a better, more efficient, tax system for all affected
by it—taxpayers, advisers and the authorities.
INTRODUCTION AND
SUMMARY
2.1 The focus of this submission is on Part 3:
FINANCE of the Scotland Bill, so we are responding to the third
bullet point in the Committee's terms of reference: "what
are the fiscal and financial implications of the provisions in
the Bill for Scotland?".
2.2 It is often thought that people on low incomes
have simple financial affairs. As a general rule, the lower one's
income:
— the
more difficult it is to find one's way around the intricacies
of tax at various rates and benefits, let alone the interactions
between the two;
— the
more government departments one has to deal with, whether central
government or local authority, with different rules, practices
and cultures;
— the
less one can afford to overpay tax, or to reimburse tax underpaid
in error; and
— the
less accessible is HMRC or any form of independent advice on tax.
2.3 In addressing the fiscal proposals in the
Scotland Bill, as with any new policy, it is therefore necessary
to consider what would be the effect on low-income, unrepresented
Scottish taxpayers if any of the systems set up to deliver the
mechanics of the policy were to go wrong.
2.4 The current proposals introduce new complexities
into the tax affairs of Scottish taxpayers, not helped by uncertainties
as to which income is to be subject to the Scottish rate of income
tax ("the Scottish rate"). Such complexities will bear
most harshly on those Scottish taxpayers who are on lower incomes
and unrepresented by professional agents.
2.5 In the worst such cases, if anything went
wrong with the computer systems intended to collect the Scottish
rate, taxpayers could be left with overpayments and underpayments
of tax. In the former case, they would pay extra tax which they
could ill afford; in the latter, they might be required to repay
underpaid tax many years after it had accrued and at a time when
they had every reason to think their tax affairs for the year
in question had been finalised.
2.6 As the universal credit gradually takes over
from the existing welfare regime of tax credits and numerous working
age social security benefits, and entitlement to welfare is assessed
on the basis of net income, the introduction of the Scottish rate
of income tax will bring a new level of complexity for Scottish
benefit claimants.
2.7 As HMRC will doubtless expect residents of
Scotland to work out their own tax and decide for themselves whether
or not they are Scottish taxpayers, clear comprehensible and accurate
official guidance on which the general public can rely will be
crucial if the mechanics of the new rate are to work.
UNCERTAINTIES INHERENT
IN DEFINITION
OF INCOME
SUBJECT TO
THE SCOTTISH
RATE
3.1 Clause 27 of the Bill provides that the Scottish
rate of income tax should apply to non-savings income. There is
a definition of savings income in section 18 of the Income Tax
Act 2007, to which there is a link. Thus tax professionals should
be able to follow the legislation to determine which part of their
or their clients' income is to be subject to the Scottish rate,
although areas of doubt remain such as whether pension income
is properly part of savings income or non-savings income, or part
one and part the other.
3.2 However, if a lay Scottish taxpayer wished
to check their tax bill, how would they know to distinguish between
savings income and non-savings income, and what guidance would
be available to help him or her in the task?
3.3 There are uncertainties even as regards who
is liable for the Scottish rate. The Bill defines a "Scottish
taxpayer" but there are lacunae, for example are personal
representatives included in the definition? What will be the status
of students who study in Scotland for more than half the year
but their home is elsewhere in the UK?
COMPLEXITIES IN
THE COLLECTION
OF TAX
AT THE
SCOTTISH RATE
4.1 While UK taxpayers already have to contend
with six different rates of income tax, these proposals will add
a seventh rate which Scottish taxpayers will have to take into
account when computing their tax liability.
4.2 It is intended that the Scottish rate should
be collected through the PAYE system via the new Real Time Information
(RTI) computer program. Therefore, all should work well provided
the only income subject to the Scottish rate is PAYE income. But
non-savings income, which is subject to the Scottish rate, is
not co-terminous with PAYE income—for example, income from
self-employment and property will have to be accounted for separately.
4.3 There seems much scope here for both taxpayer
and official error, with the result that Scottish taxpayers will
be more likely to pay too much, or too little, tax to the extent
that the Scottish rate varies year by year from the basic rate
of tax for UK taxpayers.
4.4 If for any reason a Scottish taxpayer paid
too little tax, and it took several years for HMRC to notice the
resulting underpayment, the unsuspecting taxpayer would be expected
to make good the loss to the Exchequer, most likely in a lump
sum, as HMRC has shown itself reluctant to forgive any tax in
such circumstances. There is a widespread belief that the PAYE
system somehow ensures that one's tax is accounted for accurately
and on time—it does not, as the events of the last few months
have shown. Yet HMRC take the view that it is up to the individual
taxpayer to ensure that they are paying the right amount of tax,
irrespective of their familiarity or lack of familiarity with
the tax system.
SELF-ASSESSMENT
5.1 For self-assessment taxpayers, the tax calculation
will inevitably be more complex than it is at present. It will
be necessary to ensure that not only will the online tax calculation
software work properly, but also that paper filers will have access
to straightforward and accurate directions as to how to calculate
their liability—separating out non-savings income and applying
the right rate for any given year.
5.2 It is unclear as yet whether Scottish taxpayers
will be able to use the short tax return, but it is conceivable
that the systems associated with the short return will not be
able to process the Scottish rate, and that useful simplification
will become a thing of the past in Scotland.
5.3 We hope the facility for small businesses
to return a three-line set of accounts will remain in place for
Scottish taxpayers.
TAX/BENEFITS
INTERACTION
6.1 Another area of major concern for us is the
interaction between tax and benefits. Para 3.95 in Sir Kenneth
Calman's report[2]
recognises this issue—but notes that the devolved administration
will be able to make or receive payments to UK Government departments
directly in respect of such costs. Given the complexity of such
interactions, that can only be a partial solution.
6.2 Under a new Section 80G of the Scotland Act,
the Treasury has power to make an order excluding or modifying
the effect of the Scottish rate of income tax, for example (per
the explanatory notes) in calculating gross or net rates of tax
for the purposes of certain tax reliefs and deductions. Clearly
any such statutory instrument should be laid in draft with sufficient
time for comment and consultation before coming into force.
6.3 It will also be important for any such order
to take account of the fact that entitlement to most welfare benefits
(excluding tax credits) is calculated by reference to income net
of tax, and from 2013-14 onwards universal credit will follow
the same pattern (also being progressively withdrawn by reference
to a taper rate based on net income). This concerns us particularly
given the lack of certainty in how Scottish taxpayers are defined
for social security purposes (cf Sch 3, para 1(2)). Page 41 of
Strengthening Scotland's Future suggests that the effect
of the Scottish rate will be taken into account when determining
benefits entitlement—but exactly how is as yet unknown.
COST AND
IMPACT ASSESSMENTS
7 The White Paper indicates that impact assessments
cannot yet be fully comprehensive, but without them the cost of
these measures to government, taxpayers and businesses cannot
be easily quantified. To the extent that the fiscal proposals
will bear heaviest on low-income taxpayers unable to afford to
pay for advice, it would also seem appropriate to carry out an
equality impact assessment under the Equality Act 2010. Yet there
are already funding restraints on HMRC and on welfare, and doubtless
some of the costs of administering the additional rate through
the PAYE system will fall upon employers on both sides of the
border. In our view, it is essential—indeed obligatory under
the Equality Act—to carry out the appropriate impact assessments
well before any part of the policy is implemented.
GUIDANCE
8 As HMRC will doubtless expect residents of
Scotland to work out their own tax and decide for themselves whether
or not they are Scottish taxpayers, clear comprehensible and accurate
official guidance on which the general public can rely will be
crucial if the mechanics of new rate are to work.
January 2011
2 Serving Scotland Better: Scotland and the United
Kingdom in the 21st Century (June 2009) Back
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