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the Scotland Act

By Kevin Russell | 23 May 2012

The Scotland Act

The Scotland Act 2012 received Royal Assent on 1 May 2012.


The Act gives the Scottish Parliament the power to set a Scottish rate of income tax to be administered by HMRC. Applying to the non savings income of Scottish taxpayers and expected to be implemented from April 2016, it provides for a number of taxes to be devolved to Scotland, including land taxes.


The definition of a Scottish taxpayer is based on the location of an individual’s main place of residence. So, a Scottish taxpayer could be employed by an English (or Welsh or Northern Irish) employer who will have to apply the Scottish rate of income tax.


Each main rate of UK income tax (that is, the basic, higher and additional rates) will be reduced by 10%. At the same time, the Scottish Parliament will set a rate that may be higher or lower than 10% and will be added to the main UK rates (as reduced). So, if the UK basic rate is 20% and the higher rate 40% and, at the same time, the Scottish rate is set at 12%, Scottish taxpayers will pay a basic rate of 22% (20% less 10% plus 12%) and higher rate taxpayers 42%. Similarly, if the Scottish rate is set at below 10%, Scottish taxpayers will pay a lower overall rate of tax than taxpayers elsewhere in the UK.


Savings and dividend income of Scottish taxpayers will be taxed at the main UK rate and is unaffected by the Scottish rate. An added complexity!


This all clearly has implications for charitable giving and Gift Aid – which have been discussed by an HMRC high level technical group on which Stewardship was represented. We concluded that it would be unduly complex both for charities and for taxpayers if Gift Aid donations were to be made by reference to the Scottish basic rate of tax. Therefore Gift Aid will continue as now. When a donor makes a gift to charity, after April 2016, they will be deemed to have deducted tax at the UK basic rate and not the Scottish basic rate.


However, the charity is not concerned with the claiming of higher or additional rate relief. This is claimed by the donor on their personal tax return. Accordingly, where a higher or additional rate taxpayer wishes to claim relief on the gross value of their charitable donations, this will be calculated on the difference between the Scottish rates only. So, if the Scottish rate is set at 12% such that the Scottish higher rate is 42% and the Scottish basic rate is 22%, the calculation will be on the difference between 42% and 22%.


Note: the deemed gross value of a charitable donation by a Scottish taxpayer, for the purposes of the higher or additional rate relief only, will be grossed up at the Scottish basic rate rather than the UK rate. This means that the value of the higher / additional rate relief may differ slightly from a donor in the rest of the UK.


For example, if a non Scottish UK donor makes a gift of £100 to charity, the value of the gift grossed up at the UK rate of 20% is £125. Higher rate relief is calculated on £125. If a Scottish donor makes a gift of £100 and the Scottish basic rate is 22% (as above), the grossed up value of their gift is £128.21. The higher rate relief will be based on this figure and not £125 despite the fact that the charity will always reclaim the basic rate tax of £25 (ie the UK wide rate) regardless of the geographical location of the donor.


Gifts made by Scottish taxpayers under the payroll giving scheme will always be calculated at the Scottish rates. This is because the donor’s PAYE code will identify them as a Scottish taxpayer – even if they work for a UK employer based outside Scotland (for example where the taxpayer lives in Scotland but goes to work the other side of the border).


Relief for gifts of shares or property to charity that qualify for income tax relief is given through the self assessment tax return. The charity does not claim income tax relief on these gifts as it is all given to the donor. As such, it is a straightforward process for all of the relief to be given at the Scottish rates.


A Technical Note (‘Clarifying the Scope of the Scottish Rate of Income Tax’) has now been published and HMRC are inviting comments until 31 August 2012. To access your copy of the Note, click here.

Posted by Kevin Russell

Our Legal Eagle guru and Stewardship's Technical Director, Kevin constantly has his finger on the pulse of all things tax and charity law-related. His briefing papers for charities, churches and individuals are an invaluable resource on everything from VAT to Gift Aid. 


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