The Scotland Bill

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;

· 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 [1] 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