Tax professionals respond to National Audit Office Income Tax report

Increasing income tax divergence between Scotland and the rest of the UK underscores the need for HMRC to maintain accurate, reliable and up to date information on the tax residence status of Scottish taxpayers, tax professionals have said.

The Chartered Institute of Taxation (CIOT) and Association of Taxation Technicians (ATT) were responding to the publication today of the National Audit Office (NAO) report, The administration of the Scottish rate of Income Tax 2016-17.

The report acknowledged the “significant work” undertaken by HMRC to identify and address issues identifying Scottish taxpayers but warned that maintaining accurate records of taxpayers’ addresses represented “the biggest challenge facing HMRC”.

With income tax rates expected to diverge further from the rest of the UK next year, the report also warned that the potential for avoidance or evasion could increase, further underscoring the need for HMRC to have reliable and accurate address data.

Moira Kelly, chair of the CIOT’s Scottish Technical Committee, said: “If, as expected, Scottish income tax rates and bands diverge further from those across the rest of the UK, HMRC will need to ensure that it maintains accurate and up to date records of those taxpayers who are eligible to pay Scottish income tax and those who are eligible for income tax at existing UK rates.

“HMRC appears to have made good progress in identifying Scottish taxpayers but it needs to make sure that it maintains reliable data so that the Scottish Government receives the tax receipts that it is due in future years.

“In cases where someone is wrongly identified as being either a Scottish or a UK taxpayer, they may end up paying more or less tax than they are required to, which could result in a potential loss of revenue for the Scottish Government.

“HMRC will also have an important enforcement role to play given the potential for further income tax changes to drive behavioural responses. For example, some self-employed taxpayers may choose to incorporate their business, shifting their liabilities from Scottish income tax to UK-wide corporation and dividend tax.”

Yvette Nunn, co-chair of ATT’s Technical Steering Group, added: “While HMRC has been making progress on identifying Scottish taxpayers, focusing purely on a taxpayer’s address does not necessarily result in the correct outcome.

“Scottish tax residence is determined by a specific set of tests, and the ATT have previously highlighted cases where individuals, tax resident overseas, have been misclassified as Scottish taxpayers because they are using a Scottish address for correspondence.”