Commentary on Sections (and Schedules) Part 3: Finance Section 25: Scottish rate of income tax
102.This section deals with the Scottish rate of income tax.
103.Subsection (2) provides that Part 4 of the 1998 Act is to be repealed. Part 4 provides that the Scottish Parliament may fix the basic rate of income tax for Scottish taxpayers – this is commonly referred to as the “Scottish variable rate”. Subsection (4) provides that HM Treasury may, by order, appoint a tax year as the last year for which Part 4 is to have effect.
104.Subsection (3) inserts a new Chapter 2, consisting of sections 80C to 80H, into Part 4A of the 1998 Act. Subsection (5) provides that HM Treasury may appoint a tax year as the first tax year for which a Scottish rate resolution set under the new provisions is to have effect.
105.New section 80C confers on the Scottish Parliament a power to set a Scottish rate of income tax, for Scottish taxpayers.
106.Section 80C(1) provides that this power is exercisable by resolution.
107.Section 80C(2) provides a signpost to the reader that the rate is to be calculated under section 6(2B) of the Income Tax Act (ITA) 2007. Section 6(2B) is inserted by section 26 of this Act.
108.Sections 80C(3) to (6) provide that a Scottish rate resolution applies for only one tax year. The resolution applies for the whole of that year and may specify only one rate, which must be a whole or a half number. The resolution must specify the tax year to which it applies. It must be made before the start of that tax year, but no more than 12 months before the start of that year. Standing orders must provide that only a member of the Scottish Government may move a motion for a Scottish rate resolution.
109.Section 80C(7) provides that if a Scottish rate resolution is cancelled before the start of the tax year for which it is to apply the Income Tax Acts have effect for that year as if the resolution had never been passed. The Interpretation Act 1978 defines the Income Tax Acts as meaning all enactments relating to income tax. If a resolution is cancelled it may be replaced by another Scottish rate resolution provided that that replacement resolution is passed before the start of the tax year for which it is to apply.
110.Section 80D defines a “Scottish taxpayer” for the purposes of Part 4A of the 1998 Act.
111.Section 80D(1) states that a Scottish taxpayer is an individual (and not, for example, a company or a trust) who is resident in the UK for income tax purposes and who also meets condition A, B or C.
112.Section 80D(2) sets out condition A and provides that an individual will meet condition A if they have a close connection with Scotland.
113.Section 80D(3) sets out condition B and provides that an individual will meet condition B if they do not have a close connection with any part of the UK other than Scotland and if they spend more days of that year in Scotland than in any other part of the UK.
114.Section 80D(4) sets out condition C. An individual will meet condition C if, for a whole or part of a year, that individual is a member of Parliament for a constituency in Scotland, a member of the European Parliament for Scotland or a member of the Scottish Parliament.
115.New section 80E defines what is meant by a close connection with Scotland or any part of the UK for the purposes of sections 80D(2) and 80D(3)(a).
116.Section 80E(2) applies where an individual has only one place of residence in the UK in which they live for at least part of the year. It provides that such an individual will have a close connection with the part of the UK in which that place of residence is located. If that place is in Scotland the individual will be a Scottish taxpayer. If that place is in another part of the UK, the individual will not be a Scottish taxpayer (unless they meet condition C).
117.Section 80E(3) applies where an individual has 2 or more places of residence in the UK. It provides that such an individual will have a close connection with the part of the UK in which their main place of residence is located, provided they live in that residence for at least part of the year and provided the times when their main place of residence is in that place comprise in aggregate at least as much of the year as the times when their main place of residence is in any one other part of the UK. If the times when their main place of residence is in Scotland comprise in aggregate at least as much of the year as the times when their main place of residence is in any one other part of the UK the individual will be a Scottish taxpayer.
118.Section 80E(4) provides that, for the purposes of applying the definition of a Scottish taxpayer, a ‘place’ includes a sailing vessel and other means of transport.
119.Section 80F provides the means of determining the number of days in which an individual spends in Scotland or in another part of the UK.
120.Section 80F(1) provides that an individual spends more days in Scotland than in any other part of the UK if (and only if) the number of days in the year in which they are in Scotland at the end of the day equals or exceeds the number of days in the year in which they are in any other part of the UK at the end of the day.
121.Section 80F(2) provides an exception from the rule in section 80F(1) where an individual arrives in the UK as a passenger and, on the next day, departs from the UK without engaging in activities which are to a substantial extent unrelated to their passage through the UK
122.Section 80G provides supplemental powers to modify enactments.
123.Section 80G(1) provides that a Treasury Order may exclude the effect of the tax-varying power in relation to any enactment, or provide that its effect is to be modified in relation to any enactment. Several tax reliefs are calculated by reference to gross income before deduction of income tax. The introduction of a Scottish rate raises a number of questions about the rate which should be used in the calculation of reliefs and of income from which tax is deducted at source. The Government wishes to discuss this with relevant stakeholders before coming to a final view on the treatment of such reliefs and, where appropriate, to deal with such matters by secondary legislation once those discussions have taken place.
124.Section 80G(2) gives HM Treasury a power to make an order modifying any enactment as they consider necessary or expedient in consequence of or in connection with the fact that the Scottish Parliament has the power to set a Scottish rate (under section 80C), in the making of any resolution, or the exercise of the order making power in subsection (1). A number of detailed technical consequential amendments are likely to be required to tax legislation as a result of the introduction of the new Scottish rate. It would not be appropriate to set such details out in primary legislation, particularly as the expected date on which the Scottish rate is set for the first time will not be for several years.
125.Section 80G(3) provides that an order made under subsection (2) may, in particular, postpone temporarily the effect of a resolution in relation to the operation of PAYE. A fundamental part of the PAYE system is the use of tax tables by employers to calculate how much is to be deducted from their employees. If for any reason the Scottish Parliament either did not pass a resolution until shortly before the start of the tax year, or replaced one resolution with another shortly before the start of the tax year, there may be practical difficulties for HMRC, payroll providers and others in making the necessary changes required to properly operate the PAYE system before the start of the tax year. Similar problems may arise if the UK Government were not to make a decision in relation to the main rates of income tax, or to any relevant allowances, until shortly before the start of the tax year. Where such a problem arises in relation to the main rates of income tax the relevant Finance Act will normally contain a provision to deal with the impact on the PAYE system (see, for example, sections 2(3) and 4(3) of the Finance Act 2008). The power provided by section 80G(3) will allow similar provision to be made in relation to the Scottish rate.
126.Section 80G(4) provides that an order under section 80G may, to the extent that HM Treasury consider it to be appropriate, take effect retrospectively from the beginning of the year of assessment in which it is made. It is not uncommon for a Finance Act to receive Royal Assent after the start of the tax year to which it applies and for provisions made under such an Act to be given retrospective effect from the start of that tax year. This power would allow HM Treasury to make any necessary consequential amendments required as a result of such a provision.
127.New section 80H provides that the Scottish Ministers may reimburse any Minister of the Crown or any government department for administrative expenses incurred by virtue of the new Chapter 2 at any time after the Act receives Royal Assent. This would include both the implementation and running costs of the new Scottish rate.