We will now take evidence from HM Revenue and Customs on its role in implementing the financial powers that arise from the Scotland Act 2012. I welcome to the meeting Mr Doug Stoneham and Ms Sarah Walker from HMRC. I also welcome Colin Beattie MSP from the Public Audit Committee, who is attending the meeting for this item.
Thank you for inviting us to come up and see you today. I am the head of the devolution team in HMRC and my colleague Doug Stoneham is a senior policy adviser in that team. The job of my team is to co-ordinate HMRC’s involvement in devolution—in policy development and delivery, in particular—and to lead the department’s relations with the devolved authorities on tax policy matters.
Thank you very much. In time-honoured tradition, I will start the questioning, which I will then open out to committee colleagues.
The accounting officer will be available to appear before Scottish Parliament committees and will give the same account of our spending on the Scottish rate of income tax as they would to the Public Accounts Committee at Westminster, so we see the parliamentary accountability as being exactly the same. The accounting officer has not yet been nominated. We expect that to happen in the next few months. That person will be willing to come and explain themselves to this committee.
Ultimately, the accountable officer will be responsible to the UK Government. Is that correct?
Yes. The Scottish rate is part of the UK income tax system—it is one aspect of the tax that is collected from everybody in the UK—and it is difficult to separate accountability for one aspect of the delivery of the income tax system from the rest. Constitutionally, HMRC is a non-ministerial department, but ministerial responsibility in Parliament is taken by David Gauke. That arrangement will not change. However, in so far as we will spend Scottish Government money under the agreement about how the changes will be funded, we will clearly be called to account by the Scottish Government and Scottish ministers, who will expect answers through the Joint Exchequer Committee.
They will of course expect answers, but what control, if any, will the Scottish Government have if it is unhappy with the performance of HMRC in the collection of taxes or the preparation of tax rates?
Such issues are part of the negotiation that we are having about the terms of the memorandum of understanding. We will reach an agreement about how to deal with disputes. Obviously, we hope that there will not be disputes. We need to strike a balance between what we need to have control over because of the integrity of the UK tax system and what is specifically attributable to the introduction of the Scottish rate. Where there are changes that are specifically attributable to the introduction of the Scottish rate, we would expect the Scottish Government to have a say in how those changes were made, and we expect to reach agreement on the way in which we intend to implement those. If there are disagreements, they can be referred to ministers on both sides.
Will HMRC prepare a timetable for the implementation of key milestones that can then be adhered to for delivery?
Yes. Now that the Scotland Bill has received royal assent, we are setting up a formal delivery mechanism that is overseen by a programme board. The board will have representatives not just from HMRC but from the Scottish Government. One of the board’s first jobs will be to ensure that there is a comprehensive plan with milestones and agreed dates as to when things have to happen. That plan will also be overseen by the Joint Exchequer Committee.
The set-up cost is £45 million. Will it be capped at that figure? Do we have a breakdown of how the figure of £45 million was arrived at?
It is an estimate that was made when the bill was published. It is early days yet in terms of our detailed planning for the implementation of the Scottish rate. It will depend on all kinds of decisions. For instance, how will we go about contacting people whom we think are Scottish taxpayers? Do we write to them? Do we write to them once or more than once? How much publicity do we do? All that has still to be discussed and worked through in detail.
Thank you. I open up the discussion to questions from colleagues.
As the convener said, the estimated cost for the implementation of the Scottish rate of income tax is £45 million. Do you have estimated costs in relation to stamp duty and landfill tax?
The cost of introducing a Scottish stamp duty and a Scottish landfill tax will depend on what sort of taxes the Scottish Government wants. It has not yet published or announced any details of the kind of taxes that it wants to collect or stated whether they will look very much like the existing UK taxes or will be something completely different. It is therefore difficult to comment on the cost.
So you have not provided any cost estimates as part of your discussions with the Government.
No, because we have not yet been told what kind of tax the Government wants to introduce.
Okay. If the Scottish Government was to ask HMRC to run stamp duty, how easy would that be? Is HMRC prepared to do that—when I say “prepared”, I mean in the background—especially if there are separate rates or a different system is introduced in Scotland compared with that in the rest of the UK?
The Scotland Act 2012 is set up in such a way that the Scottish Government can choose whether to ask us to operate the devolved taxes, and we have the freedom to agree or not. The act is completely open: it is up to the Government to say whether it wants us to do that; equally, it is up to us to say whether we feel that we can do it and whether it fits in with our existing business.
Are you saying that HMRC could turn round and refuse to operate stamp duty on behalf of the Scottish Government if it decides to do something radically different from what is done south of the border? Might HMRC turn round and say, “No—we’re not interested”?
In theory, yes. Obviously, we cannot write a blank cheque for the Scottish Government. There is a precedent. The Northern Ireland Executive asked us to operate a plastic bag tax in Northern Ireland and we turned round and said we could not do that because we simply do not have the right infrastructure. It would be no easier for us to do it than it would be for somebody local to do it, and we said that we would not do it.
I am interested in how your scenario will play out over time. Let me be hypothetical. If the Scottish Government initially asks HMRC to run stamp duty, and it is set at the same rate as south of the border, there is no problem. However, if at a future date the party of Government changes or the Government’s policy direction changes, and the policy becomes more radical, HMRC could turn round and say, “We’re not doing this any more.” That could cause difficulties, especially given the short turnaround time required to put in place a whole new mechanism for the collection and application of stamp duty. Do you agree that particular logistical problems would be posed further down the line if that happened after HMRC had initially taken on the running of stamp duty?
That scenario could come up. In any agreement on the operation of stamp duty that we reached at this stage, we would hope to be very clear about the terms under which we were taking it on. Theoretically, we could say that HMRC would run it but only for as long as we could run it in a particular way, or that we would be prepared to cope with adjustments but only if we had a certain amount of notice. Such conditions would have to be part of the deal that we do with the Scottish Government.
If the Scottish Government decides to do something slightly different from what is done south of the border—on stamp duty, landfill tax or a Scottish rate of income tax—how easy will it be for HMRC to implement and administer such changes within the required timescales?
That really depends on the nature of the differences. We have a lead time up to 2015, which would be fairly tight if we had to set up new systems. We would have to look at the implications for IT and the way in which we deal with correspondence, technical advice and processing the payments and forms. It is quite a complex business.
You identified payroll changes that would need to be made and said that most companies should at least have made changes to their payroll systems to take account of potential fluctuations in the basic rate of income tax. What is your estimate of the cost to business to make the payroll changes that will be required to cover a Scottish rate of income tax?
We do not have a figure for the cost of changes. My feeling is that simply to accommodate the different rate at all three tax rates rather than just at the basic rate would be relatively easy for payroll software, and we would expect that to be built into the annual updates that employers tend to get for their software so that they can cope with all sorts of changes in legislation and taxation.
On that theme, how would an average employee or worker be affected and what differences would they see? From the notes that we have been given, I understand that tax codes would have an S at the beginning, for example. Could you explain a little about the tax codes and what else would be affected?
When pay as you earn was done on paper, employers would use a set of tax tables that set out the amount of tax to be deducted for each level of income, and then the code. The codes show the amount of tax-free income—they have a number that translates into the income that is not taxed and then, above that figure, the rates in the tax tables are applied. With the Scottish rate, there will be a different set of tables that will apply different rates for people who are liable for the Scottish rate.
Other things being equal, for somebody in Scotland who had a code of, say, 900, that would continue because the allowances would be exactly the same throughout the UK. The only difference would be that there would be an S at the beginning, and the rate of tax might be higher or lower or the same.
Yes. The only slight wrinkle is that, in some cases, the code will include an allowance for an amount of tax that, for example, is owed from a previous year. That is translated into tax-free income using the expected marginal rate. For Scottish taxpayers, the code might be slightly different because a different marginal rate will be assumed. In practice, most people will not notice that.
That takes me to my next point, which is about the construction industry scheme for subcontractors. If I understand your technical note correctly, that tax will still be deducted at the UK rate, and therefore, for all those people, the adjustment will be made when they do a self-assessment or through their code. Is that correct?
Yes, that is right. The construction industry scheme is really a payment, on account, of the tax that is owed on profits and on PAYE. For the sake of simplicity, we decided to leave that scheme as it is, because any different liability resulting from the Scottish rate will come out when the tax liability is finalised.
I accept that, for a UK employer, that is probably simpler because they pay everybody’s tax at the same rate. However, would not it make sense, for an entirely Scottish employer, to take it off at the UK rate?
I will let Doug Stoneham comment in a minute on the discussions that we have had on that. On all the issues that are covered in the technical note, we have tried to strike a balance between administrative simplicity—to avoid costs to business and to have a simple rule—and getting the scheme absolutely accurate. The conclusion that was reached in the consultations that we held was that it is much easier to have a flat rate across the UK than to try to differentiate.
It is worth setting out that the construction industry scheme involves a flat deduction—I believe that it is 20 per cent, at present—for subcontractors who are registered with the scheme. That is different from PAYE, in which there is the tax-code element and the tax code is taken off and then the marginal rate is applied. The construction industry scheme always involves an estimate of the amount of tax that we expect to be due at the end of the year. In the majority of cases for the self-employed subcontractor, we would still expect them to claim a slight refund or to have a small payment to make at the end of the year. The payment is just meant to be a proxy for the tax that we expect them to pay at the end of the year. I would expect that to continue under the Scottish rate. If the Scottish rate were to be slightly higher or lower, that might just have an effect at the margins.
Is that the kind of thing that you will keep under review? At a number of points in your paper you say that, if rates were to diverge, you might have to look at things differently.
We would want to put in place something practical and sensible. If the Scottish rate were to be radically higher or lower than the UK rate, with the result that all subcontractors who are Scottish taxpayers faced either an extremely large payment or repayment, we would, for reasons of practicality, have to look at that. At present, we are trying to get something that is simple for the people who operate the scheme and for the subcontractors who are in receipt of payments. I believe that the approach that we have taken is the right one at the moment, because we want something simple.
Am I right in thinking that all subcontractors fill in self-assessment forms at the moment, and so will not have to fill in extra forms as a result of the changes?
Yes—self-employed subcontractors have to fill out self-assessment returns. No subcontractor should have to start completing a new self-assessment return as a result of the changes. As I said, if the rates vary, that might mean a slightly greater underpayment or overpayment, depending on any variation.
On the £45 million cost of implementation, the point has been made that that was the sum when the bill was introduced, so the figure has, potentially, already changed as a result of inflation. Some of us are concerned about how high it might go. Could it go higher with inflation?
I cannot rule out the possibility that the cost might increase. The estimate was not a precise estimate that would need to be index linked, but a broad-brush figure that includes an awful lot of elements on which we have not done a lot of work. Equally, as our technology improves and we introduce efficiencies to our system, the cost could come down. We are under a lot of pressure to improve the efficiency of our processes in order to save money; any relevant efficiencies would feed through to that figure. There is not a one-way bet on that estimate. It is the best figure we have at the moment, but we hope that the amount will come in at less than that.
Do you see yourselves having to give a solid explanation to the Public Audit Committee, the Finance Committee or Scottish ministers if there are variations?
We very much see that: that is the intention behind the formal appointment of an officer who will be accountable for that to the Scottish Parliament. We would expect to give a full account. Further, under the arrangements that are set out in the command paper, the National Audit Office will audit our operation of the Scottish income tax rates, and its reports will be available to the Scottish Parliament.
That takes care of my questions, but I would like to make a comment. I understood that, under the Scotland Act 1998, if either Scotland or the UK introduces new legislation, the Administration that does so must pay the associated costs. It is still my opinion that, according to the 1998 act, that £45 million should be an expense for Westminster, but I accept that that is not a question for you.
I cannot but agree.
That estimate is based on the experience of operating other kinds of tax. It is easier to predict an on-going running cost than a capital cost, because it is based largely on the number of people who move into or out of Scotland and therefore become Scottish taxpayers or stop being Scottish taxpayers, and the cost of dealing with them.
My colleagues have addressed many of the points that I wanted to raise. It was helpful to hear the definition of a Scottish taxpayer—that has afforded me greater clarity than had hitherto been in my possession.
Such people would be defined as Scottish taxpayers. I will let Doug Stoneham come in on that—he is the expert—but the intention is that such people would count as Scottish taxpayers because their main base would be in Scotland, regardless of the fact that they leave Scotland to work. The approach is not based on counting hours or days; it is a matter of where a person’s home or base is. Under the rules, we would view that person as a Scottish taxpayer.
That is absolutely right. In crafting our definition, we tried to simplify the definition under the Scottish variable rate, under which a majority of people would have had to count the number of days they spent in Scotland and in the rest of the UK. On the scenario that has been outlined, it is clear that things will be more complicated if someone has more than one place of residence, but we would expect to consider a number of factors, which we will set out in guidance prior to introduction of the rate. We would consider, for example, whether the person’s family lives in Scotland, whether they are registered with a doctor or dentist in Scotland, whether all their correspondence goes to Scotland and whether their bank account is registered in Scotland. They may be in London for just three or four nights a week to work there. In those circumstances, their main place of residence would be in Scotland, so they would not need to count the number of days they spend in London and would therefore be a Scottish taxpayer.
You envisage such factors being clearly set out in the guidelines that are published.
Absolutely, we do.
Yes. We certainly intend to publish guidance well ahead of the introduction of the rate to assist people in making such decisions.
That was my only question. Thank you very much.
I have a couple of brief questions. If I heard correctly what was said, you will write to people whom you think will be Scottish taxpayers in 2015. Is there a timetable for engaging with employers and businesses, for example, about the changes that they will have to make? I presume that that will happen before 2015.
We are already working with a number of representative groups, including employers, pension payers, accountants, lawyers, trade unions and other interested bodies. Those consultations informed the decisions that we published in the technical note, for instance. We also have a well-established process for working with the software providers who develop payroll software for employers. A large proportion of employers use standard payroll packages—from Sage, for example. We work with those producers to ensure that all the right tax provisions are built into their software. We have started that work already and are currently giving explanatory talks to employers organisations.
Okay.
My impression is that the information will be available fairly soon, but you would have to ask the Scottish Government for details.
I am interested in residency issues, partly because I represent Dumfriesshire, which is near the border. Some people live in Dumfries and Galloway and work in Carlisle, and some people live in Cumbria and work in the eastern part of Dumfries and Galloway. What is the legal requirement on people’s advising HMRC of their current address? Do people suffer a sanction if they do not tell HMRC that? Will a sanction be brought in?
My understanding is that there is no legal requirement for somebody to tell us their address. We need to have an address for correspondence, but that is not necessarily what we call somebody’s main residence, if they have more than one property. That is why we must go through the process of contacting people—starting with those who appear from our records to live in Scotland—to ask whether we have their correct address.
I am interested in whether there is a sanction for not giving you the correct information. If the tax rates on both sides of the border were similar, people would have no particular reason not to be honest about the side of the border on which they lived, but if the tax rates were to differ, it might be financially advantageous for somebody to make out that they live on the side of the border with the more advantageous tax band when they do not really live there. Would a sanction prevent people from doing that?
There are penalties for not paying the right amount of tax. If somebody were to misinform us deliberately about where they lived or whether they should be a Scottish taxpayer, we would have the option of imposing penalties for not having declared information properly and therefore for not having paid the right amount of tax.
Do you cross-reference your records with council tax records, for example?
We need to do work between now and the implementation date to see what third-party information we could helpfully check against. It would make sense for us not to base our activity just on the addresses that we have and on what taxpayers tell us. There are several third-party sources of information about people’s addresses, which we would look to use to cross-check information.
It is worth adding that people such as those in Dumfriesshire and Carlisle were precisely the people whom we thought of in designing the definition as we have. If somebody says that they live in Dumfries but work nights in Carlisle, they will not have to say which side of the border they were on at midnight—they will just have to consider whether their main place of residence is in Dumfries; if it is, they will be a Scottish taxpayer. We have tried to simplify arrangements for people who might cross the border daily.
If, the day after a higher tax rate in Scotland was announced, a lot of people suddenly told us that they had changed their address to Carlisle, we would notice that and would operate the right compliance checks.
I am amused that MSPs are defined as Scottish taxpayers. I jolly well hope that we all live in Scotland.
A big element of the cost will relate to additional staff to process changes of address from people moving in and out of Scotland and to process consequential tax changes. Sending extra coding notices to people will also have a cost, as will ensuring that contact centres are available to deal with more phone calls from people who want to make inquiries.
Do you have any idea how many additional staff will be required?
I do not have a specific number.
You will have experience of cross-border issues in relation to Northern Ireland and the Republic of Ireland, although those are obviously not the same country. Will that experience help you with the cross-border issue here?
We will certainly draw on experience of operating across the border between Northern Ireland and the Republic of Ireland. A consultation is under way on the definition of UK residents, which is a more complex and difficult definition to operate than that of Scottish residents, because of international borders. The definition of Scottish residents will be simpler than the definition of UK residents. However, you are right that there is experience of people who live on one side of that border and work on the other. We will ensure that we learn whatever lessons we can from that.
There are also people who live in London and the Cayman Islands.
Indeed, there are.
That kind of cross-border issue has been a major problem for HMRC for many years.
I appreciate that, because of the uncertainty about costs, which we have discussed, you will not be able to say exactly how many additional posts you will need at this stage. However, as a principle, will those jobs be located predominantly in Scotland? Over the years, there have been concerns about HMRC and other Government agencies withdrawing jobs from local centres where people can go for advice. Will there be opportunities to ensure that the jobs are located in Scotland, even if it is just in the cities, so that people have local access to advice on issues such as residency, rather than having to contact centres outside Scotland, in which staff might not be familiar with the geography or other issues?
I cannot give a specific undertaking about jobs being located in Scotland but, given that the Scottish Government will be financing the jobs, I am sure that it will press us hard to ensure that there are jobs in Scotland. I can make two points. The first is that we have a local network of inquiry centres and a policy of covering the whole UK so that face-to-face advice is available if people want it. Secondly, a larger proportion of our staff dealing with tax matters across the UK are located in Scotland compared with the relative population. I think that 13 per cent of our staff are in Scotland. We have major offices in places such as East Kilbride, Bathgate and Livingston, which deal with tax for people across the UK, including England. So although we are centralising a lot of jobs, many of them are being centralised in sites in Scotland.
Yet MSP tax returns go to Cardiff.
True.
Then they get lost.
Yes. They do not just get lost—they certainly do not get accurately assessed.
I gather from your answers to Elaine Murray that there is currently no requirement on people to disclose residency and that that will not become a requirement per se under the new arrangements. At present, penalties that are applied in relation to tax are based on income. People are legally required to declare their correct income so that they can be tax banded appropriately, but the new tax bands will be based on residency, rather than income. If there is no legal requirement to disclose residency, and if the banding is applied to residency rather than income, how easy will it be to penalise people for not paying the correct tax?
We have not yet developed the whole regime. We have not absolutely ruled out a legal requirement on people to tell us where they live. I think that that would be fairly difficult to enforce, as we would have to ensure that we caught people who did not tell us the day after they moved house. I would prefer not to take that approach.
It is worth setting out that if, for example, we opened an inquiry into the return of a self-assessment taxpayer who said that they were not a Scottish taxpayer and we thought that they might be, we would consider that as part of the process. The amount of penalty that they were charged would be assessed on the amount of extra tax that they were required to pay, which could be mitigated for a number of reasons. If it were determined that they were or were not a Scottish taxpayer when they had declared the opposite, that would be factored in.
Michael McMahon has a question.
I wanted to ask about residency, but those issues have been covered by you, convener, and by the supplementaries to Elaine Murray’s question. I will just state that I wonder whether we need a separate section for people who are resident abroad—in Bermuda, New York, the Cayman Islands or wherever—and want to come to Scotland every now and again and tell us how we should pay taxes in this country.
Thank you for that, Michael. Colin Beattie, would you like to ask some questions?
Thank you for the opportunity to participate. I have a couple of questions, and I emphasise that the Public Audit Committee has taken no position as regards what the outcome of the questions might be.
It is not quite right to say that the relationship with the Scottish Parliament is governed by the memorandum of understanding. That concerns our relationship with the Scottish Government. The relationship with the Scottish Parliament stands with what was said in the command paper that was published at the time that the Scotland Bill was published. It said that we would appoint an additional accounting officer who would be accountable to the Scottish Parliament and its committees for the expenditure on the Scottish rate.
I see that the matter would be covered in your annual report to HMRC in connection with performance. The question in that regard is that of accountability and transparency in the way that the National Audit Office is independently auditing the expenditure—I am talking about the £45 million set-up costs, specifically—and how that would be reported back to the Scottish Parliament. At the moment, there is a clear route by which Audit Scotland can perform that function. The Public Audit Committee is less clear how the National Audit Office can do that.
I am afraid that I do not know the details of exactly how that kind of relationship works, except to say that the National Audit Office will publish a report that will be available to the Scottish Parliament. Were anything beyond that required, and were there proposals that you wanted to make, ministers would need to consider how that would work.
That area would certainly bear a little more examination.
The National Audit Office will report specifically on our operation of the Scottish rate of income tax and the on-going operational costs of that. That would be covered in the arrangements that we have already discussed. As for the arrangements for the operation of the devolved taxes, if we are asked to operate the devolved taxes on behalf of the Scottish Government, that would be part of the agreement that we reach with the Scottish Government. If that were to include some sort of role for Audit Scotland in looking at expenditure, that would be perfectly reasonable. Clearly, however, that would be a matter for agreement between ourselves and the Scottish Government.
It seems clear that, with an annual expenditure of £4.2 million, the income tax side is an area of public expenditure that would require some sort of auditing, and the mechanism around that would need to be agreed.
Absolutely. The provision for the National Audit Office to report specifically on that expenditure is meant to deal with that; we accept that point.
HMRC is consulting external representatives, including employers, payroll professionals, accountants and tax advisers on the implementation of the Scottish rate. Will the results of that consultation be placed in the public domain?
The main results of that are contained in the technical note that we have published. For example, with regard to the way in which we are treating gift aid donations, there is an issue about whether you want to allow a charity to reclaim the tax on a gift aid donation at the correct rate, depending on whether the taxpayer is liable at the Scottish rate—which might or might not give them a little bit more relief—or to allow it to reclaim gift aid from everybody at the UK rate. We discussed that with charities, and they told us that, because of the administrative complexity of trying to identify the status of each individual donor, they were happy to have a flat rate for all gift aid donations and take a risk that that might make a slight difference to the amount of revenue that they got, rather than trying to get a precise answer. Those sorts of consultations are reflected in the decisions that have been announced in the technical note.
Will any further consultations be published?
One outstanding point, which, again, is mentioned in the technical note, is how we deal with certain types of pension contributions. We have not yet satisfied ourselves and the industry that we have got a solution for giving relief for pension contributions that minimises the cost for pension schemes. The issue is similar to the one that arises in connection with gift aid, as identifying the rate of relief that is due for each individual taxpayer is potentially expensive and difficult for the pension schemes to do. In that case, we have agreed to continue talking to the industry to see whether there is a better solution than that which we have come up with. The results of those discussions will be published as soon as we have come to a conclusion.
It is worth adding that the technical note is available for public comment—I think that we have given people until the end of August to get back to us. Following that, we will need to introduce some secondary legislation to implement the legal aspects of some of the changes. We would expect to consult on that legislation prior to its introduction.
Thank you for answering our questions; it is very much appreciated.
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