Scotland Tax Laws: Reserved Powers & HMRC

Fiscal powers in Scotland

The majority of fiscal powers are currently reserved to the UK Government. Consequently, most of the tax law which applies in Scotland is UK law. HM Revenue & Customs (HMRC) collects and administers UK taxes.

Certain tax raising powers have been devolved to the Scottish Parliament and there are at present two operational Scottish taxes – Land & Buildings Transaction Tax (LBTT) and Scottish Landfill Tax. In addition, Scotland has been granted power to implement its own air passenger duty.

LBTT

LBTT is very similar to stamp duty land tax, which applies in England. From April 2018, a separate Land Transaction Tax has applied in Wales.

LBTT is administered by Revenue Scotland, the Scottish tax authority. LBTT applies on the acquisition of a land interest e.g. a leasehold interest, or outright ownership of a property. It is a progressive tax with rates between 0% and 5% for commercial properties and 0% and 12% for residential properties. An additional rate of 4% applies where a residential property is acquired by a person who is not an individual, or an individual acquires as second residential property.

Scottish taxpayer

The Scottish Parliament also has the ability to set the rates and bands of income tax that apply to Scottish taxpayers. A Scottish taxpayer is (broadly) an individual who is resident in Scotland. The Scottish Income Tax Rate applies to all non-savings and non-dividend income of Scottish taxpayers. It should be noted that, at present, the Scottish Parliament has no ability to decide what is and is not subject to income tax – this power continues to be held by the UK Government.

A business which operates in Scotland and has employees will be required to deduct income tax at the appropriate rate from any payment made to those employees and account to HMRC for any tax so deducted through the Pay As You Earn (PAYE) system. The Scottish rate of income tax is collected by HMRC on behalf of the Scottish Parliament.

Corporate tax

The Scottish Parliament has no powers in relation to the application of corporation tax. This means that where a company is set up in Scotland, or an overseas company chooses to set up a permanent establishment in Scotland, the profits of that company or permanent establishment will be subject to UK corporation tax.

VAT

The UK also operates an indirect sales tax, known as value added tax (VAT). VAT is payable on supplies of goods or services which are made in the course or furtherance of a business. Different rates of VAT (from 0% to 20%) are applied to different types of supplies of goods and services. A business only becomes liable to charge VAT on the supplies which it makes where the value of those supplies is in excess of the VAT registration threshold, which is currently £85,000.

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