By Gwyneth Scholefield, HR director, PwC in Scotland
We now know that the people of Scotland have opted to remain part of the UK. Whilst the referendum may be over, the debate as to the future direction of Scotland continues apace.
The Scotland Act 2012 will continue its process of implementation, incorporating any amendments that may flow as a result of further devolved powers from Westminster to Holyrood. However, changes are already in progress that will have a major impact on employers and employees based in Scotland, but also throughout the rest of the UK.
A key aspect is the Scottish Rate of Income Tax (SRIT) for Scottish taxpayers which, under current constitutional arrangements, will come into effect in April 2016 and will apply to non-savings income, including employment income.
This means that we could see a divergence from the current UK rates of income tax as a result of the tax varying powers given to the Scottish Government. Broadly, under the existing provisions of the Scotland Act 2012, each of the three current UK rates of income tax will be reduced by 10p in the pound, which means that if the Scottish Government wishes to retain the same income tax rates as the rest of the UK, it must set the Scottish rate at 10%, canceling out the reduction. Alternatively the Scottish rate could be set at a higher or lower rate.
What might this mean for UK business – the workforce – and the HR landscape?
Firstly, employers move and place their talent to meet business needs and drive growth, which inevitably means there is a high incidence of workforce mobility across the UK. If the Scottish tax rate was anything other than 10p in the pound, income taxes would differ north and south of the border, and it is this divergence that could necessitate changes to the way employers approach the recruitment, reward and retention of their workforce and key talent.
Secondly, businesses will need to consider who their Scottish taxpayers are and the impact the changes might have on their wider workforce in the rest of the UK. In general terms, a Scottish taxpayer is someone who is UK resident for tax purposes and who has their only or main place of residence in Scotland for all or the majority of the tax year. However, there are a number of additional factors that will impact on whether someone is a Scottish taxpayer. For example, a ‘place’ of residence includes a place on board a vessel or other means of transport.
In theory at least, this could mean that offshore oil and gas workers who live in England, Wales or Northern Ireland, who for the majority of the tax year spend most of their time on board a vessel, could become Scottish taxpayers if the vessel is considered to be their main place of residence or it is the place that they spend most of their time, and it is deemed to be in Scottish waters. UK Waters have yet to be defined for this purpose.
Very quickly, you begin to understand the potential future impact of cross-border movement within workforces and that tracking and monitoring mobility more closely could be a key requirement for businesses, particularly those with international and UK-wide mobility, where there could be an impact on the cost of assignments and on reward structures. Fundamentally, businesses will need to ensure that they fully understand the profile of their workforce.
Assessing the impact of strategic change within a business which could have a direct impact on Scottish taxpayer status (for example, relocation of sites, hubs and operations which might affect workers and where they live), will also be a key consideration.
Tax rate differentials may influence worker migration, and careful consideration will need to be given to the effectiveness of existing policies and processes in ensuring an organisation’s workforce, and its key talent, continue to be placed to meet business need and drive growth.
Essentially, we are entering unchartered territory with SRIT – it is the first time the rate of income tax for a UK resident individual will be determined by the location of the place they consider to be their home.
Change is certain, and more is anticipated. So it is vital businesses begin preparing for, and adapting to, the changes that will be introduced in April 2016 and beyond now.