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Scottish Taxes – An Update

The Scottish Parliament has devolved powers to control certain taxes.  These ‘Scottish Taxes’ are:

Fully Devolved Taxes

  • Land and Buildings Transaction Tax
  • Scottish Landfill Tax
  • Air Departure Tax (from April 2018)

Partly Devolved Taxes

  • Scottish income tax rates and bands

Assignment of taxes:

  • VAT (expected to commence 2019/20)

The decision by the Scottish Government to restrict the higher rate income tax threshold to £43,000 for 2017/18 will be the first time that Scotland has moved away from the UK’s rate of income tax since the Scotland Act 1998 established the Holyrood parliament and devolved some powers to it.

History
The only taxing powers contained within the Scotland Act 1998 were local taxation and the Scottish variable rate of income tax. This power to vary the basic rate was never exercised by the Scottish Government.

In 2009, the Calman Commission recommended that stamp duty land tax, landfill tax, the aggregates levy and air passenger duty be wholly devolved to Scotland.

The Scotland Act 2012 provided for land and buildings transaction tax (LBTT) and Scottish landfill tax to be wholly devolved from 1 April 2015. The Scottish rate of income tax was also introduced to replace the Scottish variable rate from 6 April 2016.

The Smith Commission, following the independence referendum in September 2014, recommended that although both the UK and Scottish parliaments shared control of income tax, the Scottish parliament should be able to set rates and bands. It also recommended that all income tax levied from Scottish taxpayers (on non-savings and non-dividend income) should be received by Scotland.

The Smith Commission led to the Scotland Act 2016. This provided for air passenger duty and the aggregates levy to be fully devolved. Air passenger duty, to be known as air departure tax, is expected to be operational from April 2018, with no date yet known for the aggregates levy. Vat is to be partly assigned to Scotland, the suggestion being the first 10% of the standard rate of VAT being the assigned amount. The Scottish rate of income tax was also extended by the 2016 Act to the devolution of all rates and bands for non-savings, non-dividend income.

Income Tax
The only variation to the UK rates of income tax made by the Scottish government in their 2017/18 Budget was to freeze the higher rate of income tax threshold at £43,000, the higher rate threshold in the rest of the UK being £45,000. This will be the first year where some Scottish tax payers will be paying more income tax than other individuals in the rest of the UK.

The rates of income tax that will apply to Scottish Taxpayers from 6 April 2017 are set out in the table below:

Scottish income tax rates Scottish Bands
Scottish Basic rate: 20% Above £11,500* up to £43,000
Scottish Higher rate: 40% Above £43,000 up to £150,000
Scottish additional rate: 45% Above £150,000**

*Assumes person is in receipt of the Standard UK Personal Allowance
** Personal Allowance is reduced by £1 for every £2 earned over £100,000.

 

Definition of a Scottish Taxpayer
The definition of a ‘Scottish taxpayer’ is contained within the Scotland Act 2012. A Scottish taxpayer is a UK taxpayer who:

  • has a close connection to Scotland i.e. only place of residence is in Scotland, or if more than one place of residence in the UK, their main residence is in Scotland.
  • where no close connection to Scotland (or any other part of the UK) exists, spends at least as many days in Scotland as elsewhere in the UK

Land and Buildings Transaction Tax (LBTT)
The LBTT rates have been frozen at current 2016/17 levels. An ‘additional dwelling supplement’ has been introduced to be applied on purchases of additional residential properties (such as buy-to-let and second homes) of £40,000 or more. This has been set at 3% of the ‘relevant consideration’ (usually the purchase price).

The rates of LBTT are shown below:

Residential Property
Purchase Price LBTT rate
Up to £145,000 0%
Above £145,000 to £250,000 2%
Above £250,000 to £325,000 5%
Above £325,000 to £750,000 10%
Over £750,000 12%
Non Residential Property  
Purchase Price LBTT Rate
Up to £150,000 0%
Above £150,000 to £350,000 3%
Above £350,000 4.5%

 

Scottish Landfill Tax (SLfT)
Although this replaced the UK legislation from 1 April 2015, its base is the same as for UK landfill tax, and it is thought unlikely that this will change as to do so may encourage unscrupulous waste dumping or fly tipping.

A charge to tax is made on all taxable disposals of waste to landfill sites, with numerous exemptions in terms of the type of material disposed of and the activity carried out.

The current rates of SLfT as set out in The Scottish landfill Tax (Standard Rate and lower rate) Order 2016 apply from 1 April 2016 are as follows:

  • the lower rate of £2.65 a tonne (this applies to less polluting wastes as prescribed in The Scottish landfill tax (Qualifying Material) Order 2016
  • the standard rate of £84.40 a tonne (this applies to all other taxable waste)

Guidance notes are available at www.Revenue.scot/scottish-landfill-tax.

Air Departure Tax
Air departure tax is expected to replace UK air passenger duty from 1 April 2018. The tax will be a charge on any aircraft operator or qualifying private jet that departs from any Scottish airport. No rates and bands have yet been set.

VAT
Some VAT is due to be assigned to Scotland from 2019/20. The first 10% of standard rate VAT and the first 2.5% of the reduced rate of VAT – 50% of the current Scottish receipts will be assigned. The mechanics of what are ‘Scottish’ VAT receipts are still to be decided.

Jean Laing – March 2017