Get ready for SRIT part I: what does it all mean?
Ian McCall is a Partner at Deloitte
So much has happened in British politics over the last year that it would be easy to lose track of what is actually changing. Between the General Election, the Smith Commission, the beginnings of the EU referendum, among many other developments, there’s a lot for businesses to keep up with.
One of the biggest changes, and a move that is still under the radar for many organisations, is the introduction of the Scottish Rate of Income Tax (SRIT).
After an initial media flurry, there’s been little information on what it means for businesses and individuals. Yet, it will be introduced in less than eight months’ time and will affect a large number of organisations across the UK – whether they are headquartered in London or Linlithgow.
Here’s what you need to know about one of the biggest transfers of tax power from Westminster to the devolved administrations to date:
What will it allow the Scottish Government to do?
In essence, from April 6 2016 the tax rate for residents in Scotland will reduce by 10p, leaving the Scottish Government free to adjust it accordingly. If it wants to stick with the status quo, that would mean setting the SRIT at 10p, with the basic rate remaining at 20p, the higher band at 40p and the additional rate at 45p.
However, the Scottish Government will initially have to make the same changes to each of the tax bands. If, for example, it wishes to increase the additional rate to 50p in total, this would also mean an increase to 25p and 45p for the other two bands. That may limit what the Government decides to do in the short term.
It is anticipated that the Scottish Government will set the 2016-2017 SRIT during their Budget this autumn. These new rates will apply to all non-savings income, i.e. employment, self-employment and pension income.
Where do you get information?
Her Majesty’s Revenue and Customs (HMRC) will determine who has to pay SRIT and recently issued a business bulletin highlighting the SRIT’s introduction. In advance of the new tax year HMRC will be issuing tax codes with “S” as a prefix, known as S codes, identifying the individuals who will be liable for the new Scottish rate.
While the Scottish taxpayer position is a decision for HMRC and the individual, HMRC has begun its communications campaign with employers, and a media campaign aimed at individuals is also in the offing. On top of that, residents of Scotland can expect a letter through their doors later in the year notifying them if they will be liable for the new SRIT. Any individual receiving a letter and disagreeing with HMRC’s decision should contact them immediately.
Most employees are more likely to contact their employer, rather than HMRC, to get an understanding of what it means – hence the decision to contact employers first. For organisations, that means it’s a good idea to have answers prepared.
Who will it affect?
Legislation defines who will be classed as a Scottish taxpayer and technical guidance from the Revenue clarifies that those who are residents of Scotland will be liable for the SRIT. Essentially, it will apply to anyone who counts a Scottish address as their home.
In practice, that means if your business is in Carlisle but you have 50 employees who live in Dumfries, they will all have to pay the adjusted Scottish rates (i.e. the reduced UK rate plus SRIT).
In 99% of cases that should be a straight forward process. However, when it comes to businesses with employees who travel for the majority of the year or who don’t necessarily count a single property as their home, it becomes a bit complicated.
What if an employee moves?
If an employee moves to another part of the UK, the short answer is that which tax system they fall under will depend on where they have stayed for the longest period of time during the tax year.
If they spend nine months in Edinburgh, only to be transferred to London for the remaining three months of the year, the employee will still be liable for the adjusted Scottish rates rather than the normal UK rates.
It’s worth bearing in mind that it is incumbent on the individuals to inform HMRC if they move address, providing all the necessary dates. If they want to be reclassified for the following tax year, it’s their responsibility to do something about it.
In part II of this blog, I’ll be looking at some of the steps employers can take to get ready for the SRIT’s introduction in April 2016.