Tax Devolution in the U.K.—So What is Changing?

The United Kingdom has recently witnessed some of the most significant changes to tax policy that have been seen for many years. Scotland has seen tax-raising powers in respect of land transaction tax as well as a portion of income tax. Wales is to receive powers over land transaction tax with the potential for further powers over income tax. And Northern Ireland is to be granted the power to set its own rate of corporation tax. So what are these changes and how will they work in practice?

Scotland has seen the most significant devolution activity in recent times, with the devolution of Land and Buildings Transaction Tax and the introduction of a Scottish Rate of Income Tax (SRIT) by way of the Scotland Act 2012 and the Scotland Act 2016. The former Stamp Duty Land Tax (SDLT) is now administered in Scotland by Revenue Scotland, a new non-ministerial department set up under the Revenue Scotland and Tax Powers Act 2014 (asp), and has already seen a variation in the banding of property values liable to the tax. The SRIT, which enables the Scottish Parliament to vary personal income tax bands and rates set by the U.K. government, is to be administered by Her Majesty’s Revenue and Customs (HMRC) alongside U.K. income tax, with Scottish taxpayers identified by tax codes prefixed by an “S”. To date, the Scottish government has not varied SRIT, and so income tax in Scotland remains for now the same as in the rest of the U.K..

Wales is also to see devolution of tax powers under the authority of the Wales Act 2014. A new Land Transaction Tax is to replace the SDLT under legislation to be introduced in the Welsh Assembly from 2016. This will be administered by the Welsh Tax Authority which has already been established under an Act of the Welsh Assembly, and which is to work alongside HMRC to collect the property tax. This tax, as with its Scottish equivalent, is likely to confer powers to vary property valuation bands and rates. The Wales Act 2014 also contains provision for a Welsh Rate of Income Tax, albeit subject to the requirement of a qualifying referendum for its introduction.

Northern Ireland too is seeing devolution of tax powers. Under the Corporation Tax (Northern Ireland) Act 2015, which received Royal Assent on March 26, 2015, the Northern Irish Assembly is empowered to set its own Northern Ireland rate of corporation tax, on which negotiations between Stormont and the U.K. Treasury are ongoing with a view to lowering the rate to 12.5 percent (some 7.5 percent below the current U.K. rate of corporation tax).

Although in its infancy, it is clear that tax devolution is creating the potential for divergent approaches to tax policy throughout the U.K.. Scotland has already made changes, and Wales and Northern Ireland are likely to follow suit. While devolution will allow devolved legislatures to adjust tax policy to local imperatives, taxpayers operating across these territories will require to be mindful of the different approaches.

By Hew Donald, Editor, Bloomberg BNA

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