A number of recent surveys have shown that a large proportion of the public do not have a clear understanding of the UK tax system and most Scots do not understand what taxes have been devolved to the Scottish Government. The tax profession is tasked with helping to explain how the tax system operates to increase public awareness and understanding. This article attempts to help with that project.
Each year a portion of UK government revenues is handed over to the Scottish government. This is known as the block grant. The Scottish government is responsible for raising the remainder of the funds it wishes to spend and it does this by imposing certain taxes on residents of Scotland and transactions taking place in Scotland.
The Scotland Act (2012) devolved stamp duty land tax and landfill tax to the Scottish Parliament from April 2015. It also provided for the introduction of a Scottish rate of income tax (SRIT) to apply to the income of Scottish taxpayers from 1 April 2016.
Further measures have been discussed and proposed but are not yet implemented, including:
Aggregates levy
Air departure tax
Revenue Scotland
Revenue Scotland was established as a Non-Ministerial Department on 1 January 2015. Its remit is set out in the Revenue Scotland and Tax Powers (Scotland) Act 2014 and the Scotland Act 1998. It is the tax authority responsible for the administration and collection of Scotland’s devolved taxes – Land and Buildings Transaction Tax (LBTT) and Scottish Landfill Tax (SLfT). These taxes came into effect on 1 April 2015, replacing their UK equivalents (Stamp Duty Land Tax and UK Landfill Tax respectively).
Revenue Scotland works closely with the Registers of Scotland on LBTT matters and with the Scottish Environmental Protection Agency (SEPA) on landfill tax matters.
All other taxes, including the Scottish Rate of Income Tax (SRIT) are administered by HMRC. There are no changes to the gathering of local taxes in Scotland. For example council tax and non-domestic rates remain the responsibility of local authorities.
Land and buildings transaction tax (LBTT)
LBTT is a tax applied to the purchase of residential and commercial land and buildings located in Scotland and to commercial leasing transactions. The structure of LBTT is designed so that the charge is proportionate to the actual price of the property. The higher the value of the property, the higher the tax.
In addition, a further charge is made where the purchaser of a residential property in Scotland already owns another residential property, even if the other property is jointly owned or is not located in Scotland. This is known as the additional dwelling supplement (ADS).
Scottish Landfill tax
SLfT is a tax on the disposal of waste to landfill and is charged by weight on the basis of two rates: a standard rate for active materials; and a lower rate for less polluting (referred to as ‘inert’) materials. Operators of landfill sites in Scotland are liable for SLfT, and this cost is passed on to the local authorities and businesseswho dispose of waste at the landfill sites.
All revenue raised from these taxes flows straight to the Scottish Government.
VAT
Under the Scotland Act 2016, the Scottish government is assigned a share of the VAT raised in Scotland but there are no changes to how the tax is administered and collected by HMRC. Revenue Scotland is not involved.
VAT is a European tax and EU law does not allow a member state to vary rates within its own boundaries, preventing full control from being devolved. Some people believe that Brexit will bring an opportunity to fully devolve VAT to the Scottish government but so far the UK government has not indicated that this is likely.
Income tax
The Scotland Act 2012 provided for the introduction of a Scottish rate of income tax (SRIT) to apply to the non-savings, non-dividend income of Scottish taxpayers from 1 April 2016. The UK Government deducts 10 pence in the pound from the basic, higher and additional rates of income tax. The Scottish Parliament then has the power to levy a Scottish rate that will apply equally across these three main tax bands. The tax is administered and collected by HMRC, not by Revenue Scotland. The income raised is paid to the Scottish Government.
The Scottish Government can also adjust the level of the income tax bands to be different from the rest of the UK. So far the Scottish Government has used its powers on income tax to increase the income tax burden on middle and higher earners by keeping the basic rate band (the amount you can earn before higher tax rates apply to you) lower than in the rest of the UK.
Band
Taxable Income
UK Tax Rate
Taxable Income
Scottish Tax Rate
Personal Allowance
Up to £11,850
0%
Up to £11,850
0%
Starter rate
–
–
£11,850 to £13,850
19%
Basic rate
£11,851 to £46,350
20%
£13,851 to £24,000
20%
Intermediate rate
–
–
£24,001 to £43,430
21%
Higher rate
£46,351 to £150,000
40%
£43,431 to £150,000
41%
Additional rate
over £150,000
45%
over £150,000
46%
You pay SRIT if you live in Scotland or if you move to Scotland and live there for more than half the tax year. You must tell HMRC of your new address if you move to or from Scotland. You may pay tax at the wrong rate if you don’t.
If you are employed or get a pension, your tax code will start with an ‘S’. This tells your employer or pension provider to deduct tax at the Scottish rate. SRIT applies to your wages, pension and most other taxable income. Scottish taxpayers pay the same tax as the rest of the UK on dividends and savings interest.
Aggregates Levy
The Scotland Act 2016 carried forward new legislative powers for raising the Aggregates Levy in Scotland. The Aggregates Levy is a tax on the commercial exploitation of aggregate, which includes rock, gravel or sand, as well as the spoil, waste, offcuts and other by-products of:
cutting rock to produce stone with one or more flat surfaces
extracting industrial minerals
producing lime or cement from limestone or limestone and other substances
using shale for a non-construction use
It is an environmental tax designed to discourage the extraction of virgin aggregate and encourage the recycling of construction and demolition waste.
The timetable for devolving the tax to the Scottish Parliament is dependent on the conclusion of the current EU and domestic legal proceedings around state aid in relation to the UK Aggregates Levy.
Air departure tax
It was proposed that Scotland would impose an Air Departure Tax for flights departing Scottish airports in place of the UK tax called Air Passenger Duty. This has been delayed until issues have been resolved regarding flights departing Highlands and Islands airports.
In the meantime, Air Passenger Duty (APD) will continue to apply to all flights departing Scottish airports, and HMRC will continue to have responsibility for administering APD for the time being.
While there was some logic to devolving the land based taxes to the Scottish Parliament, there is no doubt that further tax devolution will increase complexity in the tax system.
Disclaimer: The views and opinions expressed in this article site are solely those of the original authors and other contributors and do not purport to give specific legal advice. The information is current at time of writing but could be subject to change.
