HMRC upbeat about its efforts to collect Scottish Income Tax

On 12 May, the Scottish Parliament’s Public Audit Committee took evidence from HMRC and Scottish Government officials on the Administration of Scottish Income Tax in the 2020/21 tax year.

You can read the full transcript of the session here, or watch it on the Scottish Parliament website here.

Five broad areas were covered during the session:

1. Scottish taxpayer identification and compliance
2. Data sources
3. The pandemic and HMRC
4. Inflation and its impact on tax receipts

Scottish taxpayer identification

Much like its predecessor in the last Holyrood term, the Public Audit Committee retains a keen interest in Scottish taxpayer identification. Some MSPs have expressed concern that failing to identify Scottish taxpayers will have a noticeable impact on income tax revenues and that further divergence might lead to increased avoidance or evasion activity. HMRC remains confident that it is doing all it can to maximise Scottish taxpayer identification, that it can identify 99 per cent of all Scottish taxpayers, and that while there has been no evidence that divergence has led to avoidance, it has UK-wide procedures in place to ensure taxpayers pay the tax they owe.

Sharon Dowey (Conservative) wanted to know about the processes used by HMRC to identify Scottish taxpayers and minimise opportunities for non-compliance with the regime. Responding for HMRC, Jackie McGeehan, deputy director for income tax policy, said that the process of identifying Scottish taxpayers was an “ongoing process” and “absolutely at the core” of its administration of Scottish income tax.

McGeehan explained that HMRC was able to identify around 99 per cent of all Scottish taxpayers through a range of checks including postcode and address verification, and real time (RTI) and self-assessment data. She expressed confidence in the robustness of HMRC’s data. Where taxpayer errors had been identified, these appeared to be unintentional, underscoring points made later in the session that the overwhelming majority of Scots are complying with the Scottish income tax regime.

Craig Hoy (Conservative) was concerned about the prospects of evasion and avoidance resulting from income tax divergence. HMRC expressed confidence that people were complying with their tax obligations and that the relatively small differentials between Scottish and UK rates of tax meant it unlikely that people were choosing not to comply with their obligations.

Asked whether further divergence might lead to increased opportunities for avoidance, Jonathan Athow, HMRC’s director general for customer strategy and tax design, said it wasn’t possible to quantify the potential impact. He went on to outline HMRC’s approach to tax compliance across the UK and the rules on residency that underpin the Scottish income tax regime. 

Colin Beattie (SNP) cited National Audit Office (NAO) figures showing a 70 per cent increase in missing postcode data, an indicator used to identify Scottish taxpayers, and expressed concern that this could “equate to a fairly large sum of money in tax, especially if they (taxpayers) turn out to be individuals with a high net worth”.

Jonathan Athow explained that HMRC had stringent procedures in place for identifying Scottish taxpayers and that the number identified by the NAO – 23,351 – represented a small proportion (1 per cent) of all Scottish income tax payers. Although it hadn’t been possible to identify the reasons behind the increase, he was confident it had no meaningful impact on revenues.

Richard Leonard (Labour) asked why HMRC had not set themselves specific targets for identifying the number of missing Scottish taxpayers. Athow defended the procedures they have in place, noting that the number of incorrect codes issued to Scottish taxpayers had fallen from 4 per cent to 1 per cent since ‘S’ codes were first issued in 2016. Where issues arise, Athow explained these were likely the result of employers applying incorrect PAYE codes. This can be rectified, with Athow assuring the committee that “in the end, the right amount of tax is collected”.

Data sources

Colin Beattie (SNP) said he was concerned with the accuracy of the estimates used to forecast Scottish income tax receipts. Jonathan Athow said that estimates were necessary to enable organisations like the National Audit Office and Scottish Fiscal Commission (SFC) to prepare budget forecasts. When it came to the actual amount of income tax collected, Athow said HMRC was confident in its ability to collect 97 per cent of income tax owed via the PAYE and self-assessment systems, with the additional 3 per cent subject to some degree of forecast and estimation.

Athow also explained that a wider programme of work was ongoing between HMRC and Scottish officials to improve the quality of data used for tax and wider economic forecasting. He said that the data used at present was based on UK-wide assumptions, which may make it harder to capture specific Scottish nuances. This, he said, was based on the use of data sources and information capturing techniques pre-dating devolution.

Richard Leonard (Labour) asked the Scottish Government why it prioritised SFC tax forecasts over those produced by the NAO data. Alyson Stafford, director general of the Scottish Exchequer, explained to the committee that the role of the SFC was enshrined in legislation and the fiscal framework, obligating ministers to use the information provided. She added that the SFC also provided forecasts of the fully devolved taxes (Land and Buildings Transaction Tax, Scottish Landfill Tax and Non-Domestic Rates), meaning it was able to provide a more complete picture of the tax receipts that should be attributed to the Scottish Budget each year.

The pandemic and HMRC

The pandemic has had an impact on HMRC’s day-to-day activity, but the impact of government-backed support schemes has helped support economic recovery.

Willie Coffey (SNP) asked about the impact of the pandemic on tax receipts. Jonathan Athow told the committee that the impact had been “less pronounced” than originally forecast. He added that overall levels of employment and wage growth had “held up better than people expected” and had “recovered quite quickly”. The UK Government’s pandemic support schemes had helped mitigate the shock of the pandemic, with the ending of these schemes last autumn not having a profound effect on levels of unemployment, despite some inevitable job losses. Alyson Stafford added that RTI data did not appear show any profound shocks to the system but that this would be clarified when the outturn (actual) figures are published later this year.

Coffey then asked about the impact of the pandemic on the level of HMRC’s compliance activities, which he said had declined in recent years. Athow acknowledged that the pandemic had led to a reprioritisation of HMRC activity but said that it expected a return to pre-pandemic levels of activity.

Colin Beattie (SNP) cited the work of the House of Commons Public Accounts Committee (PAC), which had criticised HMRC for failing to have a clear plan for tackling tax debt built up during the pandemic and helping vulnerable people who may need require extra support to meet their obligations. Athow acknowledged the PAC report and stressed progress was being made to address their concerns. He added that HMRC would respond to the committee’s report in due course.

Inflation and tax receipts

Inflation is driving up prices and wages. HMRC is starting to see some buoyancy in the revenues it is collecting, but different policy choices could mean that the impact is less pronounced in Scotland.

Richard Leonard (Labour) wanted to know whether increased inflation had resulted in increased tax revenue. Jonathan Athow said that a “a combination of wage and price rises” had led to “some buoyancy” in tax receipts. Pressed on what the Scottish Government might look to spend increased tax receipts on, Alyson Stafford would not be drawn, explaining that “it would be for the Cabinet or ministers to decide”. Fiona Thom from the Scottish Government’s tax directorate noted that because Scottish Ministers had chosen to uprate the starter and basic bands of Scottish income tax by inflation, the impact of inflation on income tax take may be less than in the rest of the UK. She also said that the presence of fewer Scottish taxpayers at the top end of the income scale might also impact the overall amount of revenue that is collected.