HMRC: Scottish income tax liability to be based on where taxpayer lives, not works

Whether a UK taxpayer is classed as Scottish for the purposes of the Scottish rate of income tax (SRIT) will depend on whether that person is resident in Scotland in any particular tax year, according to draft guidance published by HM Revenue and Customs (HMRC).

The SRIT will take effect in April 2016 and will be charged on the non-savings and non-dividend income of those defined as Scottish taxpayers from that date. Whether an individual is a Scottish taxpayer will be a simple question in the “vast majority” of cases, but may be complicated where people work, live and study in different parts of the UK, according to the guidance.

“For most individuals it is going to be straightforward to work out whether they are Scottish taxpayers,” said tax expert Karen Davidson of Pinsent Masons, the law firm behind Out-Law.com. “For those with more than one property available, and with more mobile lifestyles, it will depend upon weighing up a number of factors.”

“In practice, whether or not individuals are treated as Scottish taxpayers is only going to make a difference if the Scottish government imposes different rates of tax to those in the UK. If it chooses to increase the additional rate of income tax above the 45% currently charged in the rest of the UK, high earners are likely to look closely at whether they can reorganised their lifestyles so that they would not be treated as Scottish taxpayers,” she said.

“This will create an interesting tension between HMRC, which will be responsible for applying the tests, and the Scottish government, which will be keen to ensure that high earners cannot avoid being Scottish taxpayers,” she said.

From April 2016, the UK basic rate of income tax for all Scottish taxpayers will be reduced to 10p in the pound, and the Scottish parliament will have to set a rate beyond this in order to generate its own income. Income tax will continue to be administered by HMRC in the UK and not by Revenue Scotland, the Scottish tax body set up to administer the devolved taxes that came into force in April 2015.

The UK government is currently considering a further Scotland Bill which would give the Scottish parliament full control of income tax thresholds and rates on earnings in Scotland, and allow it to keep all the money raised in Scotland. This would allow it to, for example, set a new top rate of income tax beyond the existing 45% UK higher rate without also having to increase the existing basic and standard rates. The new Scotland Bill has been drawn up to deliver on the Smith Commission agreement backed by Scotland’s main political parties after the country voted against independence in a referendum in September last year.

The 2012 Scotland Act inserts new sections 80D-80F into the 1998 Scotland Act, which define who will be a Scottish taxpayer for the purposes of the SRIT. HMRC’s guidance sets out how these sections will be interpreted. Individuals would first have to be UK resident for tax purposes before they can be Scottish taxpayers. The remaining parts of the test are based on the location of the individual’s sole or main place of residence. Individuals that are Scottish taxpayers would remain Scottish taxpayers for the whole of the relevant tax year.

UK taxpayer with more than one place of residence would be a Scottish taxpayer if their main place of residence for the longest period during that tax year was in Scotland. This means that the status of an individual who moved house into or out of Scotland during one particular tax year would depend on where the individual lived for the longest during that year.

Separate rules would apply to members of the Scottish parliament (MSPs), MPs representing a constituency in Scotland and members of the European parliament (MEPs) representing Scotland, according to the guidance. These individuals would all be automatically treated as Scottish taxpayers irrespective of where their sole or main residence is located, according to the guidance. HMRC is also working closely with the Ministry of Defence to prepare separate guidance for those working in the armed forces, according to the guidance.

The guidance sets out relevant tax case law and provides a number of short case studies explaining whether or not someone would be subject to SRIT. HMRC intends to publish “a wider range of simpler, general guidance and advisory products” aimed at individual taxpayers later in the year, it said.