HMRC issues wrong tax codes for Scottish MSPs

HMRC has been forced to admit that it failed to treat one third of members of the Scottish parliament (MSPs) as Scottish taxpayers, despite the fact the legislation introducing the devolved income tax regime specifically states that all MSPs, Scottish MPs and Scottish MEPs should be treated as Scottish taxpayers by default

The issue was one of a number was raised by the public audit and post-legislative scrutiny committee (PAPLS), which pointed out that 45 out of 129 MSPs had been issued with an incorrect code for 2019-20, including the committee’s convenor Jenny Marra.

In a letter to the committee Jim Harra, HMRC’s deputy CEO, said the default position,  as provided in Scotland Act 2012, means that the process to allocate tax codes to parliamentarians does not follow HMRC’s normal automated business rules (which are based on the taxpayer’s residential address) and instead requires manual intervention.

Harra said: ‘Unfortunately, this was not completed correctly in all cases this year, and HMRC incorrectly issued 2019/20 tax code notices without a Scottish residency identifier to 45 MSPs.

‘We identified our error and corrected these tax codes well in advance of the start of the new tax year, and so no-one will pay an incorrect amount of tax because of this.

‘We have also undertaken a review of the tax records of parliamentarians for 2017/18 and 2018/19 and I can confirm that the correct tax has been paid, or will be paid, once the relevant self assessment return is made.’

HMRC is to adopt a rolling programme of assurance for all Scottish parliamentarians, and check tax codes for this population at several points in the year, and its internal audit department is to review the processes used.

Only Scottish parliamentarians are subject to the rules that mean they are Scottish taxpayers by default. For the vast majority of the population, Scottish taxpayers are automatically allocated ‘S’ codes based on their address through HMRC’s normal business rules, in a process which relies on them self-identifying by ticking a box.

Harra’s letter also shows this has been subject to teething difficulties, because when completing their 2017/18 returns, around 30,000 taxpayers did not tick the relevant box confirming that they were a Scottish taxpayer. As a result HMRC systems calculated their tax using UK, rather than Scottish, tax rates.  This then had to be corrected via their self assessment calculation.

Harra explained that under self assessment, a tax return is a return of all the information needed for the taxpayer or HMRC to calculate the total taxable income and the tax due, including their residency status. Where someone enters a residence status that does not match the one held by HMRC, and they do not provide HMRC with details of a change of address, HMRC’s systems automatically pick up the discrepancy. However, the department uses only the information provided on the return to calculate the tax due.

Harra said in his letter ‘we had not anticipated that so many customers would not complete this field correctly and would instead select a different status to that held by HMRC without providing address change details.

‘We have amended our systems to ensure that in future where a return does not match information we hold regarding Scottish taxpayer status, we will calculate tax based on the information in our records, rather than the tax return.

‘We will alert the taxpayer to the mismatch between their return and our records and make enquiries into these mismatches as necessary. This should give a more accurate result.’

Jim Harra, HMRC letter to PAPLS

Pat Sweet

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