Scottish Independence - impact on payroll and employers

Scottish Independence
    impact on payroll and employers
    Diana Bruce MCIPPdip, Senior Policy Liaison Officer

    With the Scottish referendum approaching this September, the CIPP takes a
    look at the background of the debate along with the potential implications an
    Independent Scotland could have on payroll departments and employers.

cipp.org.uk

‘Should Scotland be an independent country?’ is the question that the Scots will be
    asked on 18 September 2014. The First Minister Alex Salmond, leader of the Scottish
    National Party (SNP) claims that strong foundations are already in place and that Scotland
    can afford to be independent. He says that at its heart, independence is not about the
    Scottish government or any political party; decisions about Scotland should be taken
    in Scotland to reflect the views and concerns of the Scottish people. Salmond wants
    the Scottish Parliament to have the powers that Westminster has over matters such as
    taxation, welfare and the economy.

    Under Westminster, representatives of Scotland make up just 9 per cent of the 650 members of the House of Commons. The
    Horse of Lords has slightly higher representation at 14 per cent but, unlike the House of Commons, it is wholly unelected and is
    politically impartial. It is the lower representation of Scotland within the UK government which Salmond refers to when he talks
    about the different priorities that he believes Westminster has.

    In an agreement signed by the First Minister and the Prime Minister on 15 October 2012, both governments committed to work
    together constructively in light of the outcome of the referendum in the best interests of the people of Scotland and the rest of
    the UK. Take note of this agreement as you read on.

    Scotland’s Future
    The SNP’s 650 page white paper ‘Scotland’s Future’
    (published Nov 2013) is full of commitment to changes, such
    as:
    l The removal of the bedroom tax
    l Free personal care
    l Decent pensions
    l Free tuition fees for students
    l Removal of the married couples tax allowance due to come
    in April 2015
    l Abolition of the shares for rights scheme (introduced
    September 2013) which offers tax incentives for those willing to give up
      employment rights
    l National Minimum Wage rates to rise at least in line with inflation
    l Further help with National Insurance for small businesses
    l Commitment to a revolution in childcare provision. The aim being to provide every child between the ages of one and starting
      school age with thirty hours guaranteed childcare provision for thirty eight weeks of the year
    l A halt to the rollout of Universal Credit in Scotland and Personal Independence Payments. This would be ‘requested’ in
      September to allow time to reform Scotland’s welfare system before April 2016

    The structure of local government would remain the same with local councils continuing to deliver the range of services that they
    do now, including schools, leisure and social services.

    British citizens habitually resident in Scotland would become Scottish citizens as would those who are Scottish born living
    outside Scotland and those with dual citizenship with another country. Scottish citizens would have the right to acquire a Scottish
    passport but there wouldn’t be requirement to hold one.

    There has been speculation about Scotland’s oil and gas and would it be relying on this to become independent. According to
    the white paper Scotland won’t depend on this as although 90% of the oil and gas revenues are from fields in Scottish waters,
    without this its economic output per head is virtually the same as the UK as a whole. With oil and gas it apparently produces
    nearly a fifth more.

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The Queen would remain head of state as she is for 16 commonwealth countries and Scotland would also become a member
of the European Union (EU) and of the United Nations. Defence alliances are discussed in detail and although Scotland and
the UK would ‘work together’ on this area, the white paper states that ‘Trident’, Britain’s nuclear weapons system, would be
removed from Scotland’s soil. The Navy’s fleet of nuclear submarines is currently based at Faslane on the Clyde; a costly venture
to relocate one would assume.

The ‘Scotland’s Future’ publication would certainly seem to have a ‘something for everyone’ appeal to it. However it is significant
to appreciate that there are few proposals in the publication which can be guaranteed. It is basically the SNP’s vision for
independence and is also part manifesto for 2016 when the next Scottish elections will take place. Another Scottish party could
well be voted in and even if the SNP remain in power, there will be many months of negotiations with the UK government and
also the EU to be worked through.

Powers already devolved
Since the Scottish Parliament was re-established in 1999,
responsibility for governing Scotland has been split. The
Scottish Parliament and Scottish Government in Edinburgh
are responsible for a range of ‘devolved’ matters including
the NHS, education, justice, social services, housing, the
environment, farming, fisheries and some aspects of transport.
Some employers will already have an awareness of some
areas, for instance Scottish Arrestment of Earnings Orders,
as the priority and administration differs from other types of
earnings orders.

The Westminster government and parliament have what are called ‘reserved’ responsibilities, basically those not devolved, which
include defence, foreign affairs, macroeconomic policy, the welfare system, financial and business regulation and most aspects
of taxation.

Taxes raised in Scotland pay for both governments but devolved services are largely funded by a block grant, called the Barnett
formula, determined by Westminster. There have been calls in the past for an overhaul of the Barnett formula, as it allocates
money to Scotland based on population share rather than need and it hasn’t changed since its inception almost 40 years ago.
Since the referendum was announced many are calling for its abolition which has been suggested before as opinion is that
the Scots receive more than their fair share under the current formula. Whatever the outcome of the referendum the Barnett
formula’s days are numbered as a no vote would likely see it being reformed and a yes vote would surely see it removed
altogether.

Scottish Variable Rate (SVR)
The Scottish Variable Rate (SVR) is the power set out in the Scotland Act 1998 that enables the Scottish Parliament to vary
the standard rate of income tax in Scotland by up to 3p, up or down, in the pound. The IT systems necessary to operate the
SVR were originally set up by the Inland Revenue from 1998 onwards. Following the first Scottish parliamentary elections in
May 1999, the Scottish administration decided not to use the powers in the lifetime of that Parliament and following the 2003
elections, that decision was made again but the tax varying powers in the Scotland Act remain in place. The UK Government’s
Scotland Bill, published in November 2010, proposed to replace the powers.

Scottish Income Tax
Proposals to replace the Scottish Variable Rate of income tax with a new Scottish rate of income tax were agreed and are due
to be implemented in 2016 under the Scotland Act 2012. The income tax would still be collected by HMRC, and would apply
to the basic, higher and additional rates of income tax. These rates would be reduced by 10 pence in the pound and the block
grant from the UK to the Scottish Parliament would be reduced accordingly. The Scottish Parliament would then have the

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responsibility of levying a new Scottish rate of income tax which would apply equally to all of the main UK rates. The structure
    of the income tax system, including the bands, allowances and thresholds would remain entirely the responsibility of the UK
    Parliament.

    The CIPP policy team were involved in both the high level and technical consultation groups to look at the key issues and
    operational details that would be required of payroll, however due to the referendum, consultation is on hold. There were areas
    left unresolved such as what would be required to be shown on the payslip; the CIPP recommending that as long as employees
    are made aware of the different rates then the S prefix tax code could be shown on the payslip and this would be sufficient for
    transparency.

    HMRC would determine who is a Scottish tax payer and would inform employers through the tax code if the Scottish rate is to
    be applied to an employee. Employers would continue to pay a single tax to HMRC and their systems would then identify the
    split in tax so employers would not have to. Those of you familiar with the SVR may well have it incorporated into your payroll
    software, and will know that it was only ever supposed to be applied to the basic tax rate whereas the new Scottish rate would
    have to apply to all three rates. Within the technical consultation group we had a payroll software expert and were assured that
    the SVR will be able to take account of all the rates. This is only a brief overview as whatever the outcome of the referendum,
    the detail will all have to be re-visited when consultation resumes.

    Under the Scotland Act 2012, the devolution process has also resulted in:
    l the replacement in Scotland of Stamp Duty Land Tax and Landfill Tax with Land and Buildings Transaction Tax (LBTT) and
    Scottish Landfill Tax (SLfT) respectively together with new related anti-avoidance legislation, with effect from 1 April 2015.
    l the establishment of Scottish Tax Tribunals to deal with appeals in relation to LBTT, SLfT and other devolved taxes
    l the establishment of Revenue Scotland, which will have full responsibility for administering and collecting LBTT, SLfT and other
    devolved taxes.

    As per the last bullet Revenue Scotland will be the tax authority responsible for the administration of Scotland’s devolved taxes.
    The Scottish government website states, “In the first instance, Revenue Scotland will focus on administration of the LBTT and
    SLfT.” This leaves it somewhat open to interpretation as to whether they will at some point also deal with Scotland’s Income tax
    under a ‘no vote’? We don’t always give HMRC the best press, but maybe it is better the devil you know.

    With independence the Scottish parliament would make decisions about all aspects of taxation and also mentioned in the report
    is that independence would provide an opportunity to design a Scottish tax system based on specific Scottish circumstances,
    preferences and principles. Tax rates and allowances would be set by the Scottish government and as Scotland’s public finances
    are healthier than those of the UK as a whole, there would apparently be no requirement for an increase in the general rate of
    taxation to fund existing levels of spending. So independence could see a whole new tax system developed in Scotland.

    Pensions
    There has been huge change in the pension’s arena over
    recent years and not just with the introduction of automatic
    enrolment in 2012. Apparently life expectancy is shorter in
    Scotland so the Scottish Parliament are concerned with the
    rapid move to 67 for the State Pension age (SPa), and of
    course this is due to increase to 68 by the mid 2030’s and no
    doubt above and beyond after that. There are plans to set up
    an independent commission to consider the appropriate SPa
    for Scotland over the long term.

    The National Association of Pension Funds (NAPF) has called on Scotland to avoid altering pensions tax relief if it becomes
    independent. According to NAPF, any changes to the pensions tax relief policy in Scotland would have cost consequences for

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schemes with employees across Scotland, England and Wales as they would be likely to manage separate Pay As You Earn and
corporate tax assessment and collection systems.

‘Scotland’s Future’ informs us of plans to set up a Scottish single-tier pension from April 2016 which will be set at £160,
slightly higher than the rate currently expected for the UK. And the pensions triple lock is also to remain in place. Although
supportive of automatic enrolment the Scottish government plan to set up their own version of NEST called SEST – ‘Scottish’
instead of ‘National’ Employment Savings Trust, which will accept any employer as NEST currently do. The white paper states
that on independence, the current arrangements for automatic enrolment in Scotland would continue - its staged roll-out and
the criteria for automatic enrolment and contribution levels would remain the same. However, it goes on to say that a future
Scottish government would be able to vary arrangements for automatic enrolment in order to ensure effective implementation
of the policy. Again there are assurances of an alliance with the UK government and they will work together on transitional
arrangements to ensure that individuals and employers in Scotland continue to have access to NEST and that individuals’ rights
and entitlements which have accrued in NEST would continue to be accessible. A Scottish Pensions Regulator would also be set
up to ensure interests are protected.

And so to business
Media speculation on the impact to business has seen a lot
of major businesses and key individuals speak out against
an Independent Scotland. CBI, Blackrock, Citigroup, Shell,
Lloyds, Barclays, Standard Life, RBS, The Prime Minister, David
Bowie and even Kermit the frog have publically announced
they want the union with Scotland to continue. Some firms,
Standard Life being one, have contingency plans in place to
move operations out of Scotland into the rest of the UK if
independence happens.

RBS has been reported as saying that a yes vote would cause damage to the group’s credit rating as well as legal and regulatory
complications. It is also rumoured that major financial firms such as RBS and Lloyds are likely to have to move their registered
offices to London following a European Union directive that they must be headquartered where most of their business is
transacted. Whether there is complete truth in the news reports or not, they are likely to have a detrimental effect on the SNP’s
campaign for independence.

‘Scotland’s Future’ states that the expert Fiscal Commission Working Group concluded that retaining Sterling would be the best
option under independence as it will provide continuity and certainty for business and individuals. I’m sure we can all agree
with that but if the news reports are anything to go by, the UK government does not agree. The Chancellor, and his opposite
numbers in Labour and the Liberal Democrats have reportedly ruled out formally sharing the pound because it would be
unstable economically and unpalatable to the electorate. So where would that leave Scotland? Creating its own currency or
adopting the Euro? Neither would bring any kind of reassurance to the public north or south of the border. Salmond is insisting
that it is bully boy tactics and if independence is voted in then the government cannot refuse to share the pound. Ultimately, it
is a political decision; an independent Scotland would actually be perfectly within its rights to continue to use sterling without
asking anyone else’s permission, as a host of British territories already do. We can already see the cracks emerging between the
governments who agreed to “work together constructively…..in the best interests of the people of Scotland and the UK”. These
types of public conflict before the referendum do not bode well for negotiations.

Economists say that the costs of throwing up a border are almost certainly higher than the gains but that it’s not all about
economics. The message from business has been that independence would be a negative thing; however recent polls have
shown a rise in support for separation. Could this be from supporters such as Sean Connery and Frankie Boyle publicising their
enthusiasm for independence? Unlikely, however what we can’t overlook is the sense of belonging and pride that many Scots
have about their country, which is sure to prompt some to vote in favour. The opposite could also be true as many favour the
security of being part of a ‘United Kingdom’. Facts, figures and speculation can’t predict the outcome when human emotion is
involved.

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What is the likelihood of an independent
    Scotland?
    According to recent polls as many as 30 per cent remain
    undecided or will not discuss how they will vote in September.
    Who can blame them when a 650 page document lies
    between them and a decision. That’s not even a fair analysis
    as who can possibly know what will happen. Even those who
    are politically savvy can’t know but will have a more informed
    approach to making a decision. Many negotiations are going to
    have to take place if independence is gained, so yes voters will
    be taking a huge leap of faith, but then again don’t we all do
    that to some extent when voting?

    Opinion polls have long shown that Scots would vote to reject independence by a clear margin; however recent polls are
    showing that there is a marked increase towards the yes vote. A poll in March of this year showed that 42% would vote no,
    with 28% voting yes. In a recent report the British government minister responsible for Scotland said that the SNP could win an
    independence referendum this year because of complacency among those campaigning to hold the United Kingdom together.
    Take TV talent shows as a light hearted example; how many times have we hummed and hawed at decisions made through
    votes, saying that we were sure ‘such and such’ would make it through? But did we vote?

    If the vote is yes then independence is proposed to commence on 24 March 2016 with the first election in an independent
    Scotland taking place on 5 May 2016. This gives a transition time of about 20 months from vote to what could be dubbed
    ‘Independence Day’. Is this a good sign or a bad one? That could depend on whether you are feeling patriotic or in need of
    a box of popcorn in the company of Will Smith, Jeff Goldblum and some little green men! Speaking of which negotiations
    between the Scottish Parliament and Westminster would begin after a yes vote and would have to cover a large range of
    matters, mainly the approach to the assets and liabilities of the UK, the delivery of services and the position of individuals
    working within public services. Agreements would have to be made on cross border operational matters and of course Scotland
    would have to takes its share of UK debt and at the moment it is assumed that this would be done on a population share,
    however that is also subject to negotiation.

    What could this all mean for employers
    and the payroll profession?
    There are more questions than conclusions on this possibility.
    Unless you are an employer who operates solely outwith
    Scotland, the impact could be very significant. In summary
    some of the key thoughts are:
    l Under ‘Revenue Scotland’ will employers who have
      employees both north and south of the border end up
      having to administer two sets of PAYE as Scottish tax rates
      and allowances would be set by Scotland? The report states
      there will be no requirement for an independent Scotland to
      raise the general rate of taxation to fund ‘existing’ levels of spending. No mention of future levels of spending?
    l If Scotland creates its own tax system how would National Insurance work? Given that employee NICs are supposed to fund
      benefits such as the State Pension? Would there be one single tax? This is a simplification that Westminster is working towards
      but the complexities of getting there will take years. Could Scotland just start from scratch?
    l There could be different income tax rates and National Minimum Wage rates to deal with. Would the latter leave employers
      open to litigation as surely pay inequality would be an issue?
    l As for reporting requirements, one would have to assume that most employers in Scotland are already reporting in real time,

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so the hope would be that Revenue Scotland would adopt the same process. But then again bearing in mind that the driver of
  Real Time Information (RTI) – ‘Universal Credit’ - would be stopped, would there be political reasons to revert or change to a
  different system? Would payroll have to have two sets or versions of software to deal with reporting requirements if Revenue
  Scotland decides not to continue with RTI?
l HMRC currently has two core sites in Scotland; East Kilbride where the customer helplines are based and Cumbernauld where
  the accounts office is based. Combined, these two sites employ around 2000 staff. Would these be taken over by Revenue
  Scotland and the employees transferred across or would independence see the closure or relocation of these two key sites?
l Who would take responsibility for informing employers of who is a Scottish citizen on their payroll? Under the devolution of
  Scottish Income Tax that was to be HMRC’s job but would this be passed to the employer under an independent Scotland?
  And how would it be determined, given that Scottish passports would not be obligatory and getting up to date address
  information from employees has always been a challenge?
l The State Pension age (Spa) may differ if Scotland’s review dictates that the Scottish SPa should be lower than the age set for
  the UK. Employees stop paying National Insurance Contributions when they reach Spa, so would payroll have two sets of rules
  to deal with?
l The transition of Automatic Enrolment into a workplace pension relies on both governments working together and there would
  ‘also’ be the introduction of a separate Savings Trust and Pensions Regulator to consider; two additional bodies for employers
  to deal with. The current UK government has successfully removed several quangos due to the fact that they are publically
  funded and the sheer volume of them was costing too much. So will we see more quangos emerge in the form of Scottish
  equivalents for all the various regulatory bodies?
l A ‘revolution in childcare provision’ has been promised and we can only speculate as to how that would be introduced and
  what involvement employers would have with funding.
l It is also quite a thought to contemplate two sets of Budgets every year and all that they encompass.
l What will happen to all the UK web addresses that employers use for guidance/ reporting/paying? Will gov.uk turn into gov.
  england&wales? A step too far?

The impact list and possible complexities are quite endless so Scotland’s ‘Freedom’ could be a rather high price for employers
to pay. But before you despair, payroll professionals and employers have coped with many challenging changes over the years;
the move to all (almost) things digital being a key one. More recently and still in progress is the introduction of Real Time
Information and Automatic Enrolment. Changing legislation is something that has become the norm and regardless of the issues
we still make it happen on the ‘shop floor’ as it were. And you never know independence may not happen but rest assured that
on 18 September 2014, the CIPP policy team will be watching and waiting, ready to leap into ‘consultation’ action if required.

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