Scotland’s William Wallace moment - a brave move over tax?

ON – OR SHORTLY AFTER – September 18, 2014, we’ll find out whether The United Kingdom, as we know it, will be changed forever. A ‘yes’ vote in the Scottish independence referendum will see a sizeable chunk of the UK go it alone, with elections scheduled for May 2016, should Alex Salmond and Co get their way.

Already, we’ve had cross border skirmishes over issues such as Trident and more recently, the SNP’s desire to keep the Pound and establish a ‘sterling zone’ – cited by George Osborne as a ploy by Scottish nationalists to lessen public anxiety over the independence project. And the debate will only intensify as next September approaches.

What has slipped under the radar, however, is that a major change in the Scottish tax system is already taking place, a change with huge ramifications on both sides of the border.

Under the Scotland Act 2012, from 2016 the Scottish parliament will be obliged to set a Scottish rate of income tax (SRIT). Forming part of the UK tax system and administered by HMRC, it isn’t a fully devolved tax, but is nevertheless a fundamental shift in how the country manages its tax affairs, gifting the Scottish government unprecedented powers.

The SRIT will apply to ‘non-savings income’, including employment, rental and pensions income, with the rate added to the main UK rate bands by the Scottish government after the income tax rate applying to Scottish taxpayers is reduced by 10p. Scottish taxpayers will be issued with a tax code prefixed by an ‘S’, before the start of the 2016/17 tax year and the SRIT applies to Scottish taxpayers no matter where their employer is based.

But just who are ‘Scottish taxpayers’? Identifying them could prove problematic: what of the oil worker who spends most of their time in Aberdeen (or off its coast), but also has a house in England? Or the English stockbroker who boasts homes in both London and Edinburgh?

For the SRIT to apply, the taxpayer must be resident in the UK, and their sole or main residence must be in Scotland – if they have more than one residence in the UK, they’ll be a ‘Scottish taxpayer’ if they are resident for the longest period of time in Scotland.

Clearly, if the Scottish government decides to reduce the income tax rate – for instance to aid businesses by encouraging people to spend more, then anyone with properties on both sides of the border might be tempted to learn the words to Flower of Scotland if they don’t know them already.

A wealthy Londoner, for instance, with a second property in the Scottish capital, may be tempted to ‘work from home’ in their Edinburgh pad a little bit more often to qualify as a Scottish taxpayer. The savings might well make up for a few trips up and down the East Coast Main Line.

There are other complications too. Savings and dividend income will remain liable to the UK rate, rather than the SRIT, which muddies the waters somewhat.

In addition, the SRIT will apply to all three tax bands: basic, higher and additional. This means that the Scottish government won’t be able to reduce income tax rates for basic rate tax payers while raising the rates for the better off.

Like any major change in taxation, the SRIT comes at a hefty price: the new IT systems needed to run it will cost an estimated £45m, with the bill footed by the Scottish taxpayer. Concerns have already been raised over the ability of the Scottish government to hold HMRC to account, should any flaws in the new IT system result in a loss of revenue – and thus have a negative impact on the Scottish government’s Budget.

And as HMRC has recently been criticised by MPs for its “abysmal record” in customer service, Scottish taxpayers might wonder just how well it will cope with as big a shake up as the SRIT.

The introduction of SRIT – even taking the independence referendum out of the equation – would surely have Edward I (otherwise known as Edward Longshanks, the ‘hammer of the Scots’) spinning in his grave. But politics aside, perhaps it was an area best left alone.

Mike Fleming is tax director at Straughans Chartered Accountants