Back in 2009 the Calman Commission’s Report on Scottish Devolution recommended that the Scottish Parliament be given additional powers over income taxation in Scotland. The Scotland Bill, which is currently making its way through Westminster, seeks to give legal effect to this proposal – although the new powers are not expected to become available until at least 2015.

In summary, the Bill provides that 10 percentage points will be deducted from each of the basic, higher and additional rates of UK Income Tax, with the Scottish Parliament having power to set a single “Scottish” rate which will be added to each. The resulting blended rates will then be the rates of Income Tax which will apply to Scottish taxpayers in respect of their earned income. The Scottish rate will not apply to savings or dividend income.

With everyone much more mobile these days, it will be important to know to whom the Scottish rate will apply. Although the fine detail of the new rules has yet to be confirmed, it appears that Scottish taxpayers will be identified through a “closest connection” test, which will require consideration of a number of factors, including where the taxpayer’s main residence is located. Any taxpayer whose only residence is in Scotland appears to be caught, regardless of where in the UK he or she works. For those owning properties both north and south of the border, the number of days and nights spent in Scotland will be very relevant.

A number of practical issues appear to arise. For example, taxpayers who own property and/or work in Scotland and their employers will be required to keep detailed records to enable them to ascertain whether they are Scottish taxpayers, and the PAYE system will have to be adapted to take account of the Scottish rate. Clarification will be required as regards the impact of the rate on the Gift Aid regime for charitable donations. And what will the position be for those who move to or from Scotland in the course of a tax year?