Taxation – Defining taxpayers for the ‘tartan tax’

From April 2000, the Scottish Parliament will have the power to alterry-Wingfield. the basic rate of income tax for individuals who are classified as ‘Scottish taxpayers’ by up to 3p either way. That’s a long time ahead so why am I writing about it now?

For a number of reasons. First, if the maximum of 3p is added to the basic rate, many of the five million or so people who live in Scotland will pay more tax than their counterparts in the rest of the UK, and many will pay the maximum of #660.

Second, by the time this article is published, the Scotland Bill, which contains the tax-varying powers, will have been debated in Westminster.

What will MPs say on the definition of a Scottish taxpayer?

Will they uphold the old school of Treasury drafting used in the Bill: make sure it’s watertight and intellectually sound? Or will they look for a rule that will merely serve its purpose: never mind if it’s a bit rough and ready, just so long as it can be made to work?

Intertwined with this is the question of who will have to pay the tax.

The answer is, as presently drafted, a Scottish taxpayer is someone who is resident in the UK and either spends at least as many days in Scotland as in the rest of the UK or has his principal home in Scotland.

This leads on to the question of who will bear the tax. The simple answer is the Scottish taxpayers themselves. The not-so-simple answer is that foreign businesses investing in Scotland will bear it too.

When they send people abroad they usually pay them on the ‘net pay’ basis so that their people are no better or worse off than in their home country after taking tax into account.

For instance, if 100 relatively highly-paid staff are brought over to England, paying their maximum #660 Scottish income tax for them will cost the business #121,000 more – after grossing at the top rate for tax and NI on the reimbursement and before relief for corporation tax. That is, investing in Scotland will cost #121,000 more than investing elsewhere in the UK.

For these reasons, the definition of a Scottish taxpayer assumes considerable importance. At present, it has anomalous and unfair features.

Take a much-travelling Frenchman who spends Monday night in Glasgow, Tuesday night in London, Wednesday night in Glasgow and Thursday and Friday nights in London before spending the weekend in France. He will have spent five nights in the UK, but he will be treated for Scottish tax as having spent four days in Scotland, two in the UK and one in France.

Why? Because he is treated as spending a day in the UK if he is there at either the beginning or the end of it, and a tie-breaker ensures that a day spent in both Scotland and England under this test is treated as spent in Scotland.

More troubling than the holes in the drafting is its lack of practicality. A test based on day counts can only be established after the end of the year. That’s far too late.

In the main, Tartan tax is limited to pay, pensions and self-employed earnings. The reason is very clear: most of it can be collected under PAYE and the rest under self-assessment by people who already send in tax returns.

Most people in the UK don’t have to send in returns, and the new tax is designed not to make them … except that unless the Revenue send returns, or at least questionnaires, to all taxpayers in the UK (and even our Frenchman), with boxes for day counts, how ever are they going to police the tax?

It would be much better to drop the day counts and reduce both anomaly and red tape. Instead, the sole test could be whether someone’s principal home was in Scotland.

That would not be without problems, but it’s clear where most people’s home is. The additional tax at risk would probably be less than the saving in cost through having a simpler system.

In particular, all three parties involved – the individual, the employer and the Revenue – would know at the beginning of the year in practically all cases whether the tax should be applied.

I hope MPs will have voted for common sense.

Maurice Parry-Wingfield is a tax consultant with Deloitte & Touche.

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