Hear the one about the Englishman, the Scotsman and …
Still waiting for the Treasury to issue the draft legislation on the Statutory Residence Test, we got another interesting diversion, the definition of a Scottish Taxpayer.
HMRC have issued a technical note “Clarifying the Scope of the Scottish Rate of Income Tax”
The Scotland Bill received Royal Assent on 1st May 2012 and became the Scotland Act. http://www.scotlandoffice.gov.uk/scotlandoffice/16981.html
The Act allows a Scottish rate of income tax to be charged on the non-savings income of those defined as Scottish taxpayers. The rate will be determined by reducing the UK basic, higher and additional rates by 10 pence in the pound and then adding a new Scottish rate set by the Scottish Parliament.
Although the Scottish Parliament sets only one rate (the Scottish rate), this effectively gives rise to three rates: the Scottish basic rate; the Scottish higher rate; and the Scottish additional rate.
So the UK rates would be reduced to 10%, 30% and 35%. A Scottish rate of 7% would mean a Scottish Basic rate of 17%, a higher rate of 37% and an additional rate of 42%. Alternatively, a Scottish rate of 11% would lead to a Scottish Basic rate of 21%, a higher rate of 41% and an additional rate of 46%.
The non-savings income of a Scottish taxpayer (as defined by Part 3 of the Scotland Act 2012) will generally be liable to the Scottish rate of income tax.
Savings income and dividend income will still be taxed at the UK rate.
Of course, the key to all this is to define a Scottish taxpayer. The legislation defines a Scottish taxpayer as
80D Scottish taxpayers
(1)In any tax year, a Scottish taxpayer is an individual (T)—
(a) who is resident in the UK for income tax purposes, and
(b) who, for that year, meets condition A, B or C.
(2)T meets condition A if T has a close connection with Scotland (see section 80E).
(3)T meets condition B if—
(a)T does not have a close connection with any part of the UK other than Scotland (see section 80E), and
(b)T spends more days of that year in Scotland than in any other part of the UK (see section 80F).
(4)T meets condition C if, for the whole or any part of the year, T is—
(a)a member of Parliament for a constituency in Scotland,
(b)a member of the European Parliament for Scotland, or
(c)a member of the Scottish Parliament.
(5)In this Chapter “the UK” means the United Kingdom.
80EClose connection with Scotland or another part of the UK
(1)To find whether, for any year, T has a close connection with any part of the UK see—
(a)subsection (2) (where T has only one place of residence in the UK), or
(b)subsection (3) (where T has 2 or more places of residence in the UK).
(2)T has a close connection with a part of the UK if in that year—
(a)T has only one place of residence in the UK,
(b)that place of residence is in that part of the UK, and
(c)for at least part of the year, T lives at that place.
(3)T has a close connection with a part of the UK if in that year—
(a)T has 2 or more places of residence in the UK,
(b)for at least part of the year, T’s main place of residence in the UK is in that part of the UK,
(c)the times in the year when T’s main place of residence is in that part of the UK comprise (in aggregate) at least as much of the year as the times when T’s main place of residence is in any one other part of the UK, and
(d)for at least part of the year, T lives at a place of residence in that part of the UK.
(4)In this section “place” includes a place on board a vessel or other means of transport.
80FDays spent in Scotland or another part of the UK
(1)T spends more days of a year in Scotland than in any other part of the UK if (and only if)—
(a)the number of days in the year on which T is in Scotland at the end of the day
equals or exceeds
(b)the number of days in the year on which T is in any other part of the UK at the end of the day.
(2)But T is not to be treated as being in the UK at the end of a day if—
(a)on that day T arrives in the UK as a passenger,
(b)T departs from the UK on the next day, and
(c)during the time between arrival and departure T does not engage in activities which are to a substantial extent unrelated to T’s passage through the UK.
So as a first step at ( a) the individual has to be a UK tax resident. This will be as defined under the new Statutory Residence Test to be introduced from 6th April 2013. If you are not a UK tax resident, you cannot be a Scottish Taxpayer.
Once UK tax residence is established an individual will then need to go through the steps to discover whether they are a Scottish taxpayer. If according to the Test at Section 80E, the individual has only one main residence in the UK and that residence is in that part of the UK (not Scotland) , they would not be in a Scottish taxpayer. In other words if an individual only has one main residence and that residence is in Scotland, they are not a Scottish Taxpayer.
If an individual has two main residences one another part of the UK and one in Scotland, then if they spend a longer period at the Scottish main residence, they will be a Scottish Taxpayer.
For individual who cannot decide their main residence based on that test, then we start counting midnights in Scotland.
Anybody who is defined as a Scottish taxpayer will be a Scottish taxpayer for the whole year.
For the avoidance of doubt, HMRC’s FAQs, establish that Scottish people living outside Scotland are not Scottish Taxpayers. English, Welsh or even French people living in Scotland, who are UK tax residents will be Scottish taxpayers.
Personal allowances will be the same throughout the United Kingdom.
The Scottish tax rate is bound to cause some anomalies. A and B both work side by side for the same employer in Berwick in England and both earn £30,000 a year. A lives in England and B lives in Scotland. B is, therefore, a Scottish taxpayer. So despite having the same income, they could end up paying a different rate of tax and having a different net income, based on their residence.
As employees, both are subject to PAYE. In order that the employer knows that B is a Scottish taxpayer and subject to a different tax rate, there will be a Scottish tax code beginning with an “S”. So under the current system, A would have a code of 810L and B would have a code of S810L to identify him as a Scottish taxpayer. For the self-employed, HMRC will kindly be writing to them to advise them if they appear to be a Scottish taxpayer.
Pensioners will also pay the Scottish tax rate on their pension income (since it is defined as non-savings income).
Some further tweaks will also be necessary to allow for the effect of differing basic rates on pension and charitable contributions.
Fortunately, all MPs, MEPs and MSPs for Scottish Constituencies will be Scottish taxpayers even if they live elsewhere in the UK.
Since it is not a discrete tax, but rather a separate tax rate, the United Kingdom’s Double Tax Treaties will continue to apply.
I am sure we will return to this subject in the future as more anomalies or special cases are revealed.
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