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Warning on tax rate move 'havens'

Other parts of the UK could become havens for affluent Scottish taxpayers if income tax is set at a higher rate north of the border, an accountancy firm has warned.

PKF said a separate rate of income tax in Scotland would lead to confusion and could see wealthy people declare they are not Scottish residents.

The new Scotland Act devolves new financial powers to Holyrood and was agreed by the Scottish and UK parliaments earlier this year.

It provides for a Scottish income tax which will start 10p below the UK rate. MSPs will be able to decide how to make up the difference or whether to set a different level. The power is expected to be transferred by April 2016.

HM Revenue & Customs (HMRC) has recently issued a technical note clarifying the way in which the proposed Scottish tax rate will affect people in Scotland.

PKF said uncertainty arises because of residency and how it is defined. If a person has a house in Scotland, and another home elsewhere in the UK, they will have to decide which country is their main residence.

This can be done by counting the number of days they spend in Scotland during a year. If more days are spent in Scotland than elsewhere, then they will be liable to pay the Scottish tax rate.

Neil Whyte, a tax partner with PKF, said: "As there are no border controls between England and Scotland, there is no way of verifying how many days are spent in either jurisdiction. As a result, it's possible that an individual may decide residency based on the most favourable level of taxation."

He went on: "The likelihood of improving the tax take is limited if the most affluent in society can simply declare they are not Scottish residents if the tax rate is higher north of the border, or they are Scots if the tax rate is lower. As tax liability is determined on a year-by-year basis, we may find individuals who annually flip residency depending on their tax liability. For HMRC to prove residency under these circumstances, other than through the use of surveillance, seems impossible."

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Warning on tax rate move 'havens'