Scotland politics

HMRC faces 'challenges' over Scottish income tax

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Administering the new Scottish rate of income tax (SRIT) will present "significant challenges", a watchdog has warned.

In its report, the National Audit Office (NAO) confirmed the HMRC failed to contact 420,000 people to confirm the accuracy of its records.

HMRC began contacting potential Scottish taxpayers last December.

But an error in the "design of HMRC's taxpayer identification exercise" meant 420,000 people did not receive letters.

The Scottish government said it had made it clear to HMRC that the identification of Scottish taxpayers "must be robust and accurate".

The letters from HMRC were intended to confirm the accuracy of its records of taxpayers who live in Scotland and would pay the Scottish rate.

After the mistake was discovered, those who had not been contacted received "coding notices" which informed them of the change in their annual tax code, and provided basic information on what is meant by an "S" code.

But the audit report found that "by not issuing the same level of information as the 2.45 million taxpayers originally identified in December 2015, HMRC may have created a less informed group of taxpayers".

Responding to the report, an HMRC spokesman said: "HMRC is fully on track to deliver devolved tax powers to the Scottish Parliament on time and within budget."

Holyrood will have full powers over income tax rates and bands from April of next year.

Finance Secretary Derek Mackay confirmed in his draft budget last week that he will not make any changes next year.

Potential problems

But he will not replicate the UK Treasury's tax cut for higher earners, with the 40% threshold only rising by inflation, to £43,430 in Scotland.

The higher tax rate will start at £45,000 elsewhere in the UK.

The NAO report said the "potential for problems" existed when there were different tax thresholds between Scotland and the rest of the UK.

HMRC will collect income tax payments on behalf of the Scottish government.

The report said HMRC also needed to be able to report the actual amount of Scottish income tax provided to the Scottish government and provide an IT solution that allowed private pension providers to claim relief at source.

It said: "HMRC continues to make progress in ensuring that income tax levied under the Scottish rate will be assessed and collected properly, but still faces significant challenges to ensure that all Scottish taxpayers are correctly identified.

"The key challenge to HMRC's delivery of the Scottish Rate of Income Tax (SRIT) is maintaining and updating its record of address details in order to identify Scottish taxpayers.

"Building on work undertaken in previous years to assure the accuracy of its initial Scottish taxpayer population, HMRC continues to mitigate this key risk."

Responding to the NAO report, a Scottish government spokesman said: "As the National Audit Office recognises, the Scottish government was instrumental in identifying the taxpayer misidentification issue and ensuring that HMRC developed and applied an appropriate solution to it.

"Our officials regularly meet with HMRC to receive assurances that the identification process is carried out in a satisfactory manner, that the integrity of Scotland's income tax base will be maintained and to ensure where any issues are identified that they are addressed quickly.

"HMRC has developed a strategy to address compliance risks and this will commence next year."

He added: "HMRC is a UK organisation and draws on resources across the UK to deliver against all their responsibilities. The Scottish government has been reassured that a reduction in staff in Scotland will not impact on the ability to robustly operate Scottish income tax."

'Turbulent upheaval'

The Public and Commercial Services Union, which represents tax workers, said HMRC was "continuing to experience a period of turbulent upheaval".

It highlighted ongoing "restructuring plans" which could see tax offices in Scotland closed and said these proposals should be scrapped in order to focus on delivering the changes to the tax system.

Scottish Labour MP Ian Murray said the report raises "serious questions" about HMRC's capacity to administer the new tax powers being transferred to the Scottish Parliament.

He added: "It is vital that businesses and taxpayers have all the information they need so that such errors are not repeated and that any disruption to taxpayers and future tax revenues is minimised."

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