Corporate report

Scottish Income Tax - HMRC Annual Report 2019

Published 19 February 2020

Purpose

The Scotland Act 2012 enabled the Scottish Parliament to set a Scottish rate of Income Tax to apply to the non-savings and non-dividend income of Scottish taxpayers. This power was exercised for the first and only time in February 2016 setting a rate of 10% for the 2016 to 2017 tax year. The power to set a Scottish rate was superseded by the Scotland Act 2016, which provides the Scottish Parliament with further Scottish Income Tax powers – enabling them to set the Income Tax rates and thresholds that apply to the non-savings and non-dividend income of Scottish taxpayers.

The tables below show how this further power has been exercised since it was first used in February 2017, including the current England and Northern Ireland rates as a comparison.

Scottish Income Tax rates 2017 to 2018

Rates	Bands
20%	£11,501 - £43,000
40%	£43,001 - £150,000
45%	£150,001+

Scottish rates 2018 to 2019

Rates	Bands
19%	£11,850 - £13,850
20%	£13,851 - £24,000
21%	£24,001 - £43,430
41%	£43,431 - £150,000
46%	£150,001+

Scottish Income Tax rates 2019 to 2020

Rates	Bands
19%	£12,500 - £14,549
20%	£14,550 - £24,944
21%	£24,945 - £43,430
41%	£43,431 - £150,000
46%	£150,001+

England and Northern Ireland Income Tax rates 2019 to 2020

Rates	Bands
20%	£12,501 - £49,999
40%	£50,000 - £150,000
45%	£150,001+

HM Revenue and Customs (HMRC) administers Scottish Income Tax through existing Pay As You Earn (PAYE) and Self Assessment processes, including through existing approaches to Income Tax compliance and communications. This ensures the correct amount of tax is collected and in the vast majority of cases Scottish taxpayers will notice no difference in how HMRC interacts with them.

To ensure consistent quality of service to Scottish taxpayers to allow both HMRC and the Scottish Government to meet their respective Scottish Income Tax responsibilities, a Service Level Agreement (SLA) has been agreed. The SLA sets out requirements and performance measures for the operation of Scottish Income Tax. One of the key requirements is for HMRC to report annually on its delivery of the agreed services.

This report sets out information about HMRC’s administration of Scottish Income Tax, covering:

• compliance activity (including address assurance)
• the collection of and accounting for Scottish Income Tax revenues
• customer service and support
• data for Scottish Income Tax rate setting and forecasting
• data for Scottish Government cash management
• the costs of delivering Scottish Income Tax, and recharging of HMRC costs

1. Identification, assurance and compliance

The SLA requires HMRC to:

• identify and maintain an accurate and robust record of the Scottish taxpayer population
• apply risk based compliance activity to the collection of Scottish Income Tax in the same way as is applied to the collection of Income Tax from taxpayers in the rest of the UK

Scottish taxpayer identification and compliance

HMRC undertakes a range of activities to support Scottish taxpayer identification, including communications with taxpayers and ongoing checks for address assurance. The activity is summarised in the Communications Overview and Identification and Assurance Activity Undertaken in 2017 to 2018 and 2018 to 2019 sections.

Scottish taxpayer identification is also supported by compliance activity. The exact nature of the compliance activity HMRC undertakes for any given year will depend on Income Tax decisions made by the UK and Scottish Parliaments. In broad terms, the greater the divergence between the 2 regimes, the greater the risk of a non-compliant behavioural response by customers that requires HMRC compliance activity to address.

HMRC has agreed with the Scottish Government to produce an annual assessment of risk, a plan of activity to address that risk, and to annually publish high level compliance outcomes relating to that activity. The Compliance Strategy Overview section outlines activity undertaken in 2018 to 2019 and planned activity for 2019 to 2020.

Communications overview

HMRC has continued to use the extensive existing channels of communications it has with taxpayers to reinforce key Scottish Income Tax messages, in particular the need for customers to update address details with HMRC when they move.

Communications channels HMRC has used include the Employer Bulletin, Agent Update, Customer Compliance Managers’ engagement with large businesses and public bodies, forums for employers, payroll managers and agents, GOV.UK and social media.

HMRC will continue to work with the Scottish Government on its communications approach.

Identification and assurance activity undertaken in 2018 to 2019

Ensuring accuracy of ‘S’codes for Scottish taxpayers under section 80D(4) of Scotland Act

All Scottish parliamentarians are automatically Scottish taxpayers, regardless of their residence, by virtue of Section 80D(4) of Scotland Act, and are identified on HMRC systems accordingly.

HMRC has introduced an additional assurance programme for the 2019 to 2020 tax year as a result of the operational issue that arose with the status of Scottish parliamentarians in February 2019. Parliamentarians’ records will be reviewed at regular intervals throughout the tax year to provide extra assurance that all Scottish parliamentarians pay Scottish Income Tax and their Scottish taxpayer status is accurately reflected on HMRC systems.

Quality Management checks on postcode data supporting the identification of Scottish taxpayers

Postcodes and the properties within them occasionally change to reflect new properties being built and subdivision of existing properties. HMRC receives quarterly postcode updates from Royal Mail and updates its processes for flagging Scottish residency to ensure ongoing postcode accuracy.

HMRC has also developed a scan to ensure it holds accurate postcode information. This operates in 2 parts:

• identification of taxpayer records with a Scottish postcode prefix but where the postcode is not recorded on HMRC’s list of live and deleted Scottish postcodes
• identification of taxpayer records with a blank postcode but which has a key word in the body of the address that indicates it is a Scottish postcode, for example Aberdeen

Records are subsequently updated to ensure that they have the correct postcode and residency status.

Comparison of HMRC address data with third party address data

As part of the preparations for the commencement of the Scottish rate of Income Tax in 2016, HMRC undertook a data clash exercise which looked to match HMRC address records with third party data, such as the electoral roll, data held by credit reference agencies, and employer records. This enabled HMRC to test whether its identification of Scottish taxpayers was corroborated by other address records. The results of this exercise provided evidence to suggest that HMRC’s identification of Scottish taxpayers was correct in 98% to 99% of cases.

In 2018 a similar exercise was undertaken to establish whether HMRC’s address data, and thus its identification of Scottish taxpayers, retains the same level of accuracy. This assurance exercise provided evidence to support the view that HMRC’s identification of Scottish taxpayers remains correct in 98% to 99% of cases.

HMRC will continue to assure the accuracy of its identification of the Scottish taxpayer population, and this exercise will be repeated in 2019 to 2020.

Compliance strategy overview

Compliance checks into tax affairs of Scottish taxpayers

HMRC assesses compliance risks and undertakes checks into the tax affairs of UK taxpayers, including Scottish taxpayers.

HMRC will apply risk based compliance activity to the collection of Scottish Income Tax in the same way as is applied to the collection of Income Tax from taxpayers in the rest of the UK. This includes conducting enquiries into Scottish Self Assessment taxpayers. The Scottish Government is not recharged for this activity.

2018 to 2019 Scottish rates and thresholds differ from those across the rest of the UK with the introduction of 5 rates of tax and an increase to the higher and additional rates. This introduces an open ended divergence at the highest rates of taxation but is limited to 1% of taxable income.

The largest impact is on those liable at the highest rates of tax where there is a 1% difference on all income above £150,000. The customers with the highest level of risk already have the highest level of monitoring.

For the 90% of customers with income below the higher rate threshold, the difference is less than £200. Therefore for those with average income levels, HMRC considers that the impact of the difference on compliance risk is low.

Divergence also increased around the higher rate threshold. The 2018 to 2019 higher rate threshold for Scottish customers began at £43,431, and for UK customers at £46,531. Scottish customers with income between £43,431 and £46,531 therefore pay 41% in Income Tax, compared to 20% paid by customers elsewhere in the UK with the same income. Customers affected only paid the differential rate on a small slice of their income.

The individual impact on Scottish taxpayers, however, is that Income Tax charged on the same level of income was lower in 2018 to 2019 than it was in 2017 to 2018.

The changes to Scottish Income Tax rates in 2019 to 2020 were limited to the movement of thresholds. There was further divergence around the higher rate threshold which did not increase in Scotland while it rose to £50,000 in the rest of the UK. However, customers affected will only pay the differential rate on a small slice of their income.

Overall, HMRC currently assesses the increased risk of a non-compliant behavioural response from customers as a result of the differences between rates and thresholds in Scotland and the rest of the UK to be low.

Address assurance

For all individuals, whether in SA or PAYE, HMRC continues to monitor cross-border migration trends through comparison of customer base, analysis of returns and changes to tax accounts to identify possible evidence of customer behavioural response and also validate the accuracy of reported moves and the completeness of its address data. HMRC will also continue communications activity to customers, reinforcing the need to update address details with HMRC when they move.

Knowledge building

Using settled enquiries into Scottish taxpayers HMRC will seek to identify any behavioural issues that impact on Scottish Income Tax.

Wealthy Individuals

HMRC will continue to use the existing Customer Compliance Manager (CCM) model and other interactions with wealthy customers to raise awareness, educate customers of their Scottish Income Tax obligations and assess compliance risk related to misrepresentation of Scottish taxpayer status or understatement of income liable to Scottish Income Tax. A specific Scottish Income Tax lead within HMRC’s Wealthy Taxpayer Unit oversees activity in relation these customers.

Employer compliance and assurance

HMRC is keen to ensure that the Scottish ‘S code’ is being accurately and correctly applied in the PAYE regime. HMRC has therefore carried out scans to test employer application of ‘S codes’ issued by HMRC. Any employer not applying the correct code is sent a reminder and HMRC monitors the response to these reminders to identify employers that HMRC may need to engage further with.

Timing

In addition to the scans carried out in-year, the end of year PAYE reconciliation programme checks the tax deducted against the tax due for all customers. Any underpayments are collected from the customer, usually through an adjustment to the subsequent year’s PAYE code, and any over-payments are refunded.

Self-employed customers are on an annual return cycle and SA returns for 2018 to 2019 tax year are not required to be submitted until January 2020. Compliance checks on 2018 to 2019 returns would therefore commence in 2020, although enquiries may be opened earlier for returns submitted before the deadline.

2. Collecting and accounting for Scottish Income Tax revenues

The SLA requires HMRC to collect and account for Scottish Income Tax revenues Scottish Income Tax rates.

HMRC collects Scottish Income Tax through the PAYE and Self Assessment systems. It pays Scottish Income Tax revenues into the UK Consolidated Fund and these revenues are subsequently transferred to the Scottish Government and the Scottish Government’s resource block grant is reduced accordingly, reflecting its revenue-raising powers.

HMRC reports the amount of Scottish Income Tax collected in its Annual Report and Accounts and provides an extract of its accounts to the Scottish Parliament each year. In July 2019 HMRC also released a new statistical publication, Scottish Income Tax Outturn Statistics, which included the information shown in the HMRC annual accounts and further breakdowns of Scottish Income Tax and equivalent information for taxpayers in the rest of the UK.

Scottish Income Tax outturn 2017 to 2018

For 2017 to 2018, the first year for which Scottish Income Tax legislation applies with all Income Tax on non-savings/non-dividend income from Scottish taxpayers devolved to Scotland, the amount of Income Tax attributable to the Scottish Government budget is £10.916 billion. The table below shows the revenue from Income Tax on non-savings/non-dividend income for non-Scottish taxpayers (rest of the UK taxpayers) in 2017 to 2018. The table also shows the components of the rest of the UK figure. The rest of the UK figure is compiled in line with the Income Tax powers devolved to Scotland as part of the Scotland Act 2016, where all tax on non-savings/non-dividend income from Scottish taxpayers is Scottish Income Tax.

2017 to 2018 Income Tax revenue from non-saving/non-dividend (NSND) income of Scottish and non-Scottish taxpayers[1]

	rUK NSND (£bn)	Scottish NSND (£bn)
SA Established Liability[2]	83.403	4.514
PAYE Established Liability	67.330	6.293
Estimated further Liability	7.443	0.431
Less: Adjustment for uncollectable amounts	(1.198)	(0.079)
Reliefs[3]
Relief at Source (RAS)	(1.587)	(0.141)
Gift Aid	(1.192)	(0.103)
Final Revenue for the tax year 2017-18	154.199	10.916

Notes:

1. Based on Scottish powers from Scotland Act 2016
2. Includes an element of PAYE for Self Assessment customers
3. These reliefs are those not allocated to individual taxpayer accounts

The methodology for calculating the 2017 to 2018 Scottish Income Tax outturn is the same as that used last year to calculate the 2016 to 2017 outturn, but reflects the tax regime changes between years. This methodology has been agreed and signed off by HMRC and the Scottish Government and has been audited by the National Audit Office (NAO).

The time lag in confirming the actual amount Scottish Income Tax outturn for 2017 to 2018 is due to the PAYE and Self Assessment processes. To administer PAYE for taxpayers, HMRC undertakes an end- of-year-reconciliation to assess whether individuals have paid too much or too little tax in any given tax year. Similarly, taxpayers are not required to submit Self Assessment returns to HMRC until ten months after the end of the tax year to which they relate.

HMRC has worked closely with colleagues in the Scottish Government to develop an agreed work programme, and officials meet regularly to ensure new priorities are discussed and factored in against existing commitments. As part of this, both parties have agreed what new information would be useful to help provide more understanding of the Scottish Income Tax outturn. HMRC has also produced and shared other information to support the Scottish Fiscal Commission’s forecasting and the calculation for the block grant adjustment.

3. Customer service and support

The SLA requires HMRC to apply the same level of customer service, support and transparency to Scottish Income Taxpayers as is applied to Income Taxpayers in the rest of the UK.

HMRC administers Scottish Income Tax as part of the UK Income Tax system. In the vast majority of circumstances Scottish taxpayers will therefore notice no difference in the manner in which HMRC interacts with them, and this approach ensures that the correct amount of tax is collected.

Scottish Income Tax is collected through existing PAYE and Self Assessment processes, which have been adapted to reflect Scottish Income Tax rates and thresholds. Scottish taxpayers are able to use HMRC’s usual guidance and customer contact channels for advice and guidance.

In the majority of areas customer service provided to Scottish taxpayers will therefore be included and reported within HMRC’s UK-wide customer service reporting.

The customer service and support for Scottish taxpayers, agents and employers that HMRC has incorporated into its existing processes includes the following:

• providing all Scottish taxpayers and their employers with Scottish tax codes (reflecting the changed higher rate threshold decided on by the Scottish Parliament) prior to the start of the tax year
• annual tax summaries sent to all Scottish Income Taxpayers
• updating online calculators prior to the start of the tax year with the Scottish Income Tax rates/thresholds set by the Scottish Parliament to ensure they remain accurate for Scottish taxpayers
• guidance for payroll software providers on how to correctly incorporate Scottish rates/thresholds into their PAYE products for employers
• guidance on how Scottish taxpayer status is decided and what to do if you feel HMRC has wrongly identified your status
• encouraging customers to update their personal details, focusing on the use of Personal Tax Accounts
• issuing paper tax tables to digitally exempt employers prior to the start of the tax year reflecting Scottish rates and thresholds

While most interactions Scottish customers have with HMRC are via existing processes, and the customer service therefore reported within UK figures, some aspects of customer service are specific to Scottish Income Tax, for example guidance on Scottish taxpayer status and ability to discuss with HMRC if you disagree with the Scottish tax code you’ve been given.

It is important that HMRC can demonstrate that its customer service in these areas matches what it provides across the UK as a whole. The SLA between HMRC and the Scottish Government therefore commits HMRC to collect and report on key, Scottish Income Tax specific, customer contact metrics. The key metrics for 2018 to 2019 are outlined in the Annex of this report.

4. Data for Scottish Income Tax rate setting and forecasting

The SLA requires HMRC to provide the Scottish Government with sufficient relevant and timely information and data for rate-setting and forecasting for Scottish Income Tax.

An overarching aim of the SLA between HMRC and the Scottish Government is for HMRC to provide the Scottish Government with the data it needs to allow it to discharge its own duties in respect of Scottish Income Tax.

Key to enabling this is for HMRC to provide the Scottish Government with relevant data to discharge its duties in respect of rate-setting and forecasting, alongside the Scottish Fiscal Commission, for Scottish Income Tax. At a UK level, these tasks are fulfilled using the Survey of Personal Incomes (SPI).

The SPI is compiled to provide a quantified evidence base from which to cost proposed changes to tax rates, personal allowances and other tax reliefs for Treasury Ministers. It is used to inform policy decisions within HMRC and the Treasury, as well as for tax modelling and forecasting purposes^{[footnote 1]}.

The SPI is based on information held by HMRC on individuals who could be liable to UK tax. It is carried out annually by HMRC and covers income assessable to tax for each tax year. Not all of the individuals are taxpayers because the operation of personal reliefs and allowances may remove them from liability. Where income exceeds the threshold for operation of PAYE, the survey provides the most comprehensive and accurate official source of data on personal incomes.

HMRC provides the Scottish Government with an annually updated copy of the SPI data set. This year’s set was provided, on request, in April 2019 to both the Scottish Government and Scottish Fiscal Commission to undertake their policy costing and receipts forecasting duties. This copy was identical to that used, for similar purposes, at a UK level, with the exception of some minor aggregation of taxpayer data at the highest income levels to avoid potential breaches of taxpayer confidentiality. An additional development for this year was to provide Scottish specific composite records alongside the UK ones. It is anticipated that this will further enhance Scottish specific analysis. HMRC continues to work with the Scottish Government and Scottish Fiscal Commission to ensure the information provided meets their requirements and supports forecasting and rate setting for Scotland.

This SPI data set is subsequently published to enable researchers and academics to use it for statistical purposes.

In addition to this, HMRC has published a new devolved Income Tax statistical publication. The publication includes:

• the Scottish Income Tax outturn for 2017 to 2018, in line with the Trust Statement
• the rest of the United Kingdom non-savings, non-dividends outturn equivalent for 2017 to 2018, by component
• the number of Scottish Income Tax and rest of the United Kingdom non-savings, non- dividends taxpayers by tax band
• the amount of Scottish Income Tax and rest of the United Kingdom non-savings, non- dividend liability split by collection method (PAYE or Self Assessment)
• the monthly Real Time Information (RTI) receipts series for Scottish and non-Scottish taxpayers for 2016 to 2017, 2017 to 2018 and 2018 to 2019

HMRC intends to publish this statistical publication annually alongside the annual report and accounts. This will help inform the Scottish Government and Scottish Fiscal Commission with their analysis, as well as researchers and academics.

5. Data for Scottish government cash management

The SLA requires HMRC to provide Scottish Government with sufficient relevant and timely information and data to discharge its duties in respect of cash management due to any change between forecast and collected amounts of Scottish Income Tax.

Since 2017 to 2018, when the Scottish Parliament took on further Income Tax powers, there has been a reduction in Scotland’s resource block grant. This reduction is equal to the total non- savings/non-dividend Income Tax generated in Scotland in 2016 2017, uplifted using the mechanism set out in the fiscal framework, which was agreed between the UK and Scottish Governments in February 2017.

Each year, both the tax receipts generated and the block grant deduction will initially be based on a forecast and then reconciled to actual receipts collected which will become known around 15 months after the end of the financial year in question.

A key requirement of the SLA is therefore for HMRC to provide the Scottish Government with sufficient data to discharge its duties in respect of cash management linked to any change between forecast and collected amounts of Scottish Income Tax. To fulfil this requirement HMRC has agreed with the Scottish Government and Scottish Fiscal Commission to provide Scottish Income Tax figures from the Real Time Information (RTI) data received from employers. This is the best indication of trends in Income Tax liabilities available in real time, but is not a complete picture of Income Tax liabilities because it excludes tax paid through SA and some adjustments made to PAYE liabilities after the end of the tax year. This data is now provided by HMRC to the Scottish Government on a monthly basis.

HMRC included the RTI information which has previously been shared with the Scottish Government for tax years 2016 to 2017, 2017 to 2018 and 2018 to 2019, in the new Scottish Income Tax statistical publication released in July 2019.

6. Recharging of HMRC costs: data for Scottish government assurance and budgeting purposes

The SLA requires HMRC to provide the Scottish Government with sufficient relevant and timely information for assurance purposes and to budget effectively for any net additional administrative costs to be recharged to the Scottish Government.

HMRC is responsible for the operation of Scottish Income Tax as part of the UK Income Tax system. Under the Fiscal Framework Agreement between the UK and Scottish Governments, the Scottish Government will reimburse HMRC for net additional costs wholly and necessarily incurred as a result of the implementation and administration of Scottish Income Tax powers.

HMRC has made changes to its systems and processes to ensure the effective and efficient collection and management of Scottish Income Tax. Associated with these changes are new and ongoing administrative costs to operate Scottish Income Tax processes and systems.

HMRC and the Scottish Government have jointly agreed a framework that sets out the principles that HMRC will apply when identifying the Scottish Income Tax administrative costs that will be recharged to the Scottish Government.

The Framework document is kept up to date to reflect all known and anticipated administrative costs and should be read in conjunction with the Memorandum of Understanding and SLA (to which it is annexed) between HMRC and the Scottish Government.

Costs of the implementation and operation of Scottish Income Tax

	2012-13 (£m)	2013-14 (£m)	2014-15 15 (£m)	2015-16 (£m)	2016-17 (£m)	2017-18 (£m)	2018-19 (£m)
Implementation costs	0.18	0.78	1.97	8.13	6.08	4.48	2.04
Operating costs	N/A	N/A	N/A	N/A	0.17	0.35	0.78
Total cost of Scottish Income Tax invoiced in financial year[1]	0.17	0.79	1.74	8.36	6.25	4.83	2.82

Notes:

1. Figures shown may not be an exact sum of implementation and operating costs due to invoicing schedules.

Annex – Annual business intelligence report 2018 to 2019

Customer contact - telephone

HMRC has a Scottish Income Tax telephone route within the HMRC Personal Tax helpline. This gives customers generic pre-recorded Scottish Income Tax messages prior to speaking to an HMRC customer adviser. These figures do not represent all calls by Scottish taxpayers to HMRC.

Quarter	Total Calls	IVR (ITA) Deflected	Busy	Abandoned in queue	Average wait before abandoned	Average queue of answered	Answered	Percentage answered in less than 2 mins	Percentage answered in 2-3 mins	Percentage answered in 3-5 mins	Percentage answered in 5-10 mins	Percentage answered in 10-20 mins	Percentage answered in more than 20 mins
Quarter 1	232	28	5	24	06:35	06:03	175	24.8%	2.7%	4.2%	13.6%	34.3%	20.4%
Quarter 2	139	22	4	13	06:29	05:37	100	24.4%	2.1%	10.4%	17%	27.4%	18.7%
Quarter 3	234	12	1	36	05:04	06:28	185	28.2%	1.4%	4%	13.2%	21.9%	31.4%
Quarter 4	224	23	6	32	05:17	07:38	163	15.3%	1.1%	8.5%	10.5%	31.3%	33.3%
Total/Average	829	85	16	105	05:51	06:27	623	23.2%	1.8%	6.7%	13.6%	28.7%	26.0%

Customer contact - post

HMRC track all post to ensure the correspondence is being processed within customer service targets. Scottish Income Tax post enquiries are monitored as part of the wider ‘Impact Indicators – Customer measures’ which are published in the Business plan indicators quarterly performance update.

HMRC received no Scottish Income Tax specific postal queries in the year to April 2019. This figures does not represent all postal enquiries by Scottish taxpayers to HMRC. This information is still available to HMRC but will not be reported on for future years.

Complaints

HMRC track all Scottish Income Tax customer complaints to ensure they are processed within the HMRC customer service targets. These figures do not represent all customer complaints received from Scottish taxpayers.

Quarter	Tier 1 Customer	Chief Executive Treat Official	Less than 15 days	More than 15 days	HMRC Target %	Less than 15 days against annual target	More than 15 days against annual target
Quarter 1	8	0	5	3	80%	81%	19%
Quarter 2	8	0	8	0	80%	91%	9%
Quarter 3	7	1	6	2	80%	84%	13%
Quarter 4	11	0	7	4	80%	82%	31%
Total	35	1	26	9	80%	82%	17%

Details of all customer contact are included in the HMRC Annual Report and Accounts.

Web traffic

HMRC have a number of Scottish Income Tax-related web pages that are hosted on GOV.UK and user traffic to these pages is monitored.

Quarter	Income Tax in Scotland	Work out if you’ll pay Scottish Income Tax	HMRC manual - Scottish Taxpayer Technical Guidance	Tell HMRC about a change to your personal details
Quarter 1	92,601	2,818	568	383,693
Quarter 2	64,191	2,484	483	406,076
Quarter 3	74,353	2,802	426	355,382
Quarter 4	140,514	3,975	654	552,612
Total	371,659	12,079	2,131	1,697,763

1. It is also used to provide summary information for the National Accounts that are prepared by the Office for National Statistics and to provide information to Members of Parliament, other government departments, companies, other organisations and individuals. ↩