Whether the Scottish people say “Yes” or “No” to independence on 18 September, taxation in Scotland will undergo substantial changes. These changes will certainly affect businesses with a presence in Scotland and if Scotland becomes independent, will affect all businesses transacting with Scottish counterparts.
The changes that will take place following the referendum are summarised below, together with some of the practical implications of those changes.
If Scotland says “No”
With the focus on September’s referendum, it would be easy to miss the changes to Scottish taxation which will come into effect even if Scotland remains part of the UK. Following on from the Scotland Act 2012, from April next year, transactions involving Scottish land will be subject to Land and Building Transaction Tax (“LBTT”) rather than Stamp Duty Land Tax (“SDLT”), while deposits of waste in Scotland will be subject to Scottish Landfill Tax (“SLFT”) rather than Landfill Tax (“LFT”). While both SDLT and LFT are administered by HM Revenue & Customs (“HMRC”), day-to-day administration of the new devolved taxes of LBTT and SLFT will largely be delegated to, respectively, Registers of Scotland and the Scottish Environment Protection Agency. Clients should consider how the new administrative arrangements will impact upon their businesses. For example, it will not generally be possible to register title to Scottish land without having first paid LBTT and in complex cases, it may be difficult to agree the amount of tax due.
In addition, in some cases the scope of the devolved taxes differs significantly from the taxes they replace. For example, under LBTT, there is currently no relief for sub-sales, although a limited relief for forward-funding transactions may be introduced before the LBTT Act comes into force. Further, while licences (as opposed to leases) are exempt from SDLT, no such blanket exclusion will apply to LBTT and commercial tenants will have to put in place administrative procedures to comply with the requirement for three-yearly reviews of the amount of LBTT payable on their leases. Tax payers should bear in mind that there is a broad political consensus that further taxing powers should be devolved to the Scottish Government – it therefore seems unlikely that LBTT and SLFT will be the last devolved taxes.
Scotland will soon have its own tax authority, in the form of “Revenue Scotland”, which will oversee the devolved taxes including LBTT and SLFT. While over the years UK tax payers have built up experience of how to work effectively alongside HMRC, new professional relationships will have to be formed with Revenue Scotland and working practices established. For example, while tax payers can refer to a large bank of manuals explaining HMRC practice, it is unlikely that any such comprehensive reference source will be available from Revenue Scotland for some time. Scottish Government has stated that the aim in drafting devolved tax legislation will be clarity and simplicity, with interpretation of the rules aided by a new Scottish general anti-avoidance rule (“GAAR”). While everyone will welcome clear and concise legislation, there are fears that the far-reaching GAAR will prove too vague and may introduce uncertainty into complex commercial transactions. What is clear, is that in complex transactions, clients will have to look into the policy (both express and implied) underlying Scottish tax legislation and in cases of difficulty, it may be necessary to approach Revenue Scotland for a ruling.
Lastly, the Scottish aspects of UK-wide taxation are changing too. From 2016, the “Scottish Rate of Income Tax” will come into force, which could see Scottish residents pay a different rate of income tax on their non-savings income compared to the rate paid by their counterparts resident elsewhere in the UK. This will have obvious implications for individual tax payers and their employers who have to operate the PAYE system, but also for pension providers, who will eventually have to put in place systems providing for tax relief to be allowed at different rates, depending on where in the UK a contributor is resident.
If Scotland says “Yes”
In the event of a “Yes” vote in September’s referendum, Scotland will remain part of the UK until at least 2016, so most of the changes noted above will take place. In addition, however, the effects of independence on the tax system would be huge, especially for corporate groups spread across the new border. For example, implications include members of such groups no longer being able to share tax losses, transfer capital assets between members tax free, or be members of the same VAT group. The likely tax treatment of transactions across the new border (whether with businesses located in other parts of the former UK, or elsewhere), will have to be considered. For example, as Scotland is currently part of the UK, it does not have a double tax agreement with the rest of the UK. Such a treaty would have to be negotiated and brought into force before independence, to avoid a host of cross-border issues such as withholding on cross-border interest payments and possible double taxation. Likewise, an independent Scotland may not have access to UK tax treaties negotiated with third party countries. Accordingly, businesses should consider their position on tax residence and identify what (if any) cross-border transactions may be vulnerable to change.
Preparing for change
Businesses will no doubt want to prepare for both the changes already legislated for and the possibility of an independent Scotland, sooner rather than later. We will be holding a breakfast briefing on 23rd July to look at the changes in greater detail and discuss what they mean for your business.