Head of Tax and Succession, Alexander Garden, discusses the recent developments in relation to taxation controlled by Holyrood or affecting Scottish taxpayers. The article originally appeard in Lyon and Turnbull's Valuations newsletter on Wednesday 18th May 2016.
Land & Buildings Transaction Tax
Before coming on to income tax (which, as I will explain, is not a devolved tax) it is worth briefly looking at the Land & Buildings Transaction Tax (LBTT), Scotland’s replacement for Stamp Duty Land Tax (SDLT) brought in in 2015. The purpose of this article is not to examine the detail of the tax, but rather to examine the coming into effect of a new tax and the interaction between, or some might say, the reactions made in the neighbouring jurisdiction because of the decisions made either by the Scottish Finance Secretary or the UK Chancellor of the Exchequer. On 9th October 2014, the Finance Secretary announced the initial rates and bands for LBTT and, as expected, it introduced a progressive basis of calculating the effective LBTT rate distinct from the historic “slab” approach. Basically, it now applies broadly like income tax, coming to an effective rate on the total value of the transaction rather than paying a flat rate on the whole amount because you have breached a certain threshold.
However, the interesting element in respect of tax competition was that the Chancellor of the Exchequer then announced changes to the SDLT rules applying in the rest of the UK on 4th December 2014, but with different rates and thresholds to those initially announced by the Finance Secretary in respect of LBTT. This led to a reaction from the Scottish Finance Secretary and the LBTT rates were somewhat adjusted in January 2015 from the original proposal. This is clear evidence of the potential impact of diverging tax rates north and south of the border and the fact that both the Westminster and Holyrood Governments will need to be aware of what the other is doing.
The second example of this came in November 2015, when the UK Government’s Autumn Statement proposed the introduction of a supplementary SDLT charge of 3% on the purchase of additional residential properties, to take effect from 1st April 2016. As SDLT no longer applies in Scotland and the Scottish Government control LBTT, what would it do? Would it react? In the draft Budget for 2016/2017 which was published on 16th December 2015, a supplementary LBTT charge was proposed on the purchase of additional residential properties in Scotland, also with effect from 1st April 2016 and also at a rate of 3% (this time on top of the current LBTT rate).
LBTT is the only “mainstream” tax which is devolved to Scotland and where we can see what the effect of diverging tax rates north and south of the border might be. I would suggest that these examples on the introduction of LBTT and also the new 3% supplement are instructive.
What about income tax? For the first time, since 5th April 2016, a proportion of a Scottish taxpayers’ income tax is allocated to Holyrood. This is fact. It may seem like there is no change given that the effective rate of income tax for all taxpayers in the UK remains the same. However the Scottish Government had to decide at what rate to set the Scottish rate of income tax and although in doing so at 10% the result for the taxpayer is effectively no change (the tax paid remains identical), that proportion of the income tax take will be allocated to Scotland. As I say, the previous article gives much more detail about the Scottish rate of income tax and I will not repeat that here.
What was the process in the setting of the Scottish rate of income tax for the first time? If one looks back to 2014, the Scottish Government’s draft Budget was announced in October, prior to the UK Government’s Autumn Statement. We have already seen above the way that played out in respect of the introduction of the first LBTT rates, the changes to the SDLT regime and the subsequent changes to the LBTT rates as a result of that. In 2015, when the Scottish Government had to set the Scottish rate of income tax for the first time, the first event was the UK Government’s Autumn Statement and the Scottish Government’s draft Budget was not announced until the December. Was it a game of cat and mouse? It will be very interesting looking forward how and when changes to tax rates are announced.
The wider income tax powers with control over rates and bands will be acquired by the Scottish Government from April 2017. How these powers might be used became one of the key arguments in the lead up to May’s Scottish election. The Scottish National Party’s (SNP) proposals in this regard are interesting. It has been at pains to point out the importance of being aware of the potential risks of diverging significantly from the tax regime of our neighbours across the border. With just 20,000 taxpayers in Scotland paying the top rate of tax the SNP is acutely aware that a significant divergence in tax rates north and south of the border could lead to some taxpayers (and remember that a number of those paying the top rate of tax will be relatively mobile individuals) “voting with their feet”.
The current proposal from the SNP is not to follow George Osborne’s increase to the higher rate tax threshold, but otherwise to leave the rates and bands as they are. This will lead to a slight increase in the amount of income tax payable by higher rate Scottish taxpayers but is perhaps not the more significant kind of change that some people were expecting or indeed that some of the opposition parties in Scotland (Labour, the Liberal Democrats and the Green Party) are advocating. However, even this approach shows how the decisions taken on one side of the border directly influence decisions taken on the other and on this occasion the approach appears to be doing nothing (by not increasing the higher rate tax threshold). It has been presented in such a way that Scottish taxpayers will not be paying more than they are currently – although of course taxpayers in the rest of the UK falling into the higher rate tax threshold will end up paying slightly less tax than they are at present by virtue of the increase in the threshold.
The Scottish election did not deliver an outright majority to the SNP, so it remains to be seen how it will tackle the increasing decisions that need to be taken in respect of Scottish taxation over the coming years. We then await the draft Scottish Budget for 2017/18 and the UK Government’s Autumn Statement (and which order will these happen in this year?) to see what the tax landscape will look like in 2017/18 and whether there will be further divergence in the amounts of tax payable north and south of the border.