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HMRC Defends Devolution Record Amid Tax Code Error Reports

POSTED ON Jan. 25, 2019

HM Revenue & Customs defended its implementation of devolved income tax rates as U.K. tax professionals reported errors in the identification of Scottish taxpayers.

HMRC was unable to provide the U.K. National Audit Office (NAO) with an action plan for the implementation of Welsh income tax, setting out “lessons learned” from the earlier implementation of Scottish income tax, the NAO said in a January 24 report. The plan was drawn up after a July 2017 event attended by HMRC staff involved in the Scottish project.

That event identified lessons involving project management, communications, and finance, the NAO said. But a March 2018 health check review for the Welsh project found that “none of those lessons had been included in the required project documentation.”

The NAO said that while the documentation has now been updated, HMRC “has not been able to provide us with the action plan referred to in the project documentation to demonstrate active management and monitoring of those lessons by project management to support the delivery of the Welsh rates of income tax.” HMRC has relied instead on “the inclusion of staff in the Welsh project team who have experience of Scottish implementation, and the continuity of wider stakeholder contacts inside and outside the department,” to deliver improvements, the NAO reported.

But the NAO noted that an October 2018 review completed by “independent Welsh government and HMRC reviewers” found that HMRC had made progress since April 2018 on the implementation of Welsh rates. That review concluded that that successful delivery would be likely “if project risks are managed effectively.”

HMRC needs to identify the Welsh taxpayer population from existing taxpayer records to ensure that “the right amount of tax is collected from individuals and allocated to the appropriate government,” the NAO added.

Pay As You Earn Code Errors

“All the professional bodies [are] receiving reports of Scottish taxpayers in self-assessment being classified to ‘not-Scottish’ (rest of UK) tax rates,” Helen Thornley, a technical officer at the Association of Taxation Technicians, tweeted January 18. “Payroll teams, keep an eye out for tax codes incorrectly re-classifying Scottish taxpayers to English and vice versa,” Leicestershire-based payroll consultant and lecturer Kate Upcraft tweeted January 21.

Upcraft told Tax Notes January 24 that she found it bizarre that HMRC would do a “lessons learned” exercise but “not use it on the next country.” A key problem with the Scottish project is that employers’ obligations under the Real Time Information Pay As You Earn system do not include keeping HMRC’s data on employees’ private addresses up to date, she said. “It’s not a mandatory requirement to do that — apart from when someone begins work with you and there isn’t a National Insurance number — so the data set was never going to give HMRC the required accuracy,” Upcraft said.

“We know that some [Scottish] postcodes were missed, and some taxpayers were excluded because HMRC’s system did not recognize Scotland as being part of Great Britain. There were some fairly basic issues,” Upcraft added. “Whenever I’m in Scotland, employers will tell me they have people who’ve never been identified as Scottish taxpayers, and people who suddenly lose their Scottish tax code marker for no apparent reason.”

HMRC has “taken the lessons from the successful implementation of Scottish income tax into its work on Welsh rates of income tax,” an agency spokesman said. “We welcome [the NAO’s] positive report, which highlights the good work we have done with the Welsh government to implement the devolved tax rates,” he added.

In a November 30 report, the NAO said HMRC had implemented “several assurance processes to maintain the completeness and accuracy of the estimated 2.53 million Scottish taxpayer population.” But the NAO also noted that this remains “a key challenge facing HMRC in ensuring that Scottish income tax is assessed and collected properly.”

HMRC has “robust systems in place” to identify Scottish taxpayers and ensure that they pay tax at the correct Scottish rates, Financial Secretary to the Treasury Mel Stride said in a House of Commons written answer November 23. “Where a customer reports a change in address it is recorded on HMRC systems and, where it involves a move from the rest of the U.K. to Scotland, or vice versa, which changes their taxpayer status, HMRC update their tax code accordingly,” he added.

Welsh Rates of Income Tax

The National Assembly for Wales has the power to vary, from April 2019, the rates of income tax paid by Welsh taxpayers on income other than savings income and dividends. For this purpose, the U.K. basic, higher, and additional rates will be reduced by 10 percentage points, and the Assembly will determine the Welsh rates to be added to the reduced U.K. rates.

For the tax year 2019-2020, however, the Assembly has approved Welsh rates equal to the reduction in the U.K. rates, so Welsh taxpayers will pay income tax at the same overall rates paid by taxpayers in England and Northern Ireland. The Welsh rates were announced in the October 2018 budget and approved on January 15.

On January 22 HMRC updated a guidance note on Welsh taxes to take account of the Assembly’s decision. “Pay As You Earn customers resident in Wales will receive a new tax code that begins with ‘C,’ including customers whose income is below the tax threshold,” HMRC said, adding that self-employed taxpayers “will be asked to note their country of residence on their 2019-2020 return.”

HMRC will continue to collect income tax, but HM Treasury will pass the revenue from the Welsh rates to the Welsh government.