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What NE businesses need to know about SRIT

With just months until the new Scottish Rate of Income Tax is introduced, George Hardey of Waltons Clark Whitehill looks at how it might affect businesses in the North East of England.

You could be forgiven for not noticing the introduction of a Scottish Rate of Income Tax (SRIT). It became law as part of the Scotland Act (2012) and is due to be introduced next May. While the majority of businesses and people in the North East have no reason to worry about it, this is not the case for everyone. If income tax is increased in Scotland it could mean businesses and people crossing the border in an attempt to avoid paying more.

New tax raising powers allow the Scottish Parliament to vary the effective rate of income tax from ten pence in the pound lower than the rate in the rest of the UK to an unlimited amount above it, for all bands. So while in England the basic rate of income tax will still be 20% in the tax year 2016/17, in Scotland the basic rate will be 10% plus the Scottish rate.

The higher and addition rates will be 30% and 35%, respectively, plus the SRIT. This new tax replaces the Scottish Variable Rate, which allows the Scottish Parliament to increase or decrease income tax by 3 pence in the pound, and has not been used since it was introduced in 1998.

The Scottish Parliament can do one of three things when setting the SRIT; set it below 10%, set it at 10%, or set it above 10%. If they set it at 10%, it is for the most part business as usual for businesses, taxpayers, and even accountants across the UK. If they vary it then a number of factors come into play.

Workers who reside on one side of the English-Scottish border but work on the other pay the rate of tax for the country in which they live. Firms should note that the tax codes of individuals resident in Scotland will be prefixed by an ‘S’, even if they work in England. The opposite is true for English based employees working Scotland, whose tax codes do not gain such a suffix.

Individuals with homes in both England and Scotland will be taxed at the rate of the country their main home is in, which in most cases is the home they live in and spend most of their time. HMRC has published detailed guidance on what counts as a main home, and are already taking steps which will allow them to identify people switching homes to avoid paying the SRIT, which includes acquiring external data such as when people change their address. They are now confident that they are able identify ‘Scottish taxpayers’, having said as recently as February that they may need data from the NHS to confirm where people are resident.

It is expected that if the SRIT is varied from the rate in England, Wales and Northern Ireland, it would be set at a higher level. This stands in stark contrast to the Scottish Parliament’s plan to use devolved powers to cut and perhaps even scrap Air Passenger Duty, a move that proved controversial in our region, especially at Newcastle airport who predict many of their passengers would be tempted to fly from Edinburgh instead.

HMRC will contact potential Scottish taxpayers before April 2016. If the address HMRC holds for you is in Scotland you’ll be classed as a Scottish taxpayer. Something individuals may need to be aware of is that anyone moving home to Scotland is responsible for informing HMRC of this, so they can be assigned the correct tax code. In this case your tax code will be back dated to the beginning of the tax year in which you move to or from Scotland, and the amount you pay adjusted accordingly. This is not the only extra complexity being added to the system, which HMRC predict could cost between £2 million and £6 million per year more.

While it is necessary to clarify that the introduction of the SRIT could mean nothing changes, if the Scottish Parliament choose not to vary the rate, the possibility of it affecting the North East makes in an important issue. If the rate is set at a level that means Scots pay more tax it could mean businesses and people moving to England, especially our region. Should the opposite be the case, however unlikely, then we may even see North East companies moving north of the border.

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This was posted in Bdaily's Members' News section by George Hardey .