What do the new figures for income tax revenue tell us?

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Last week HM Revenue and Customs (HMRC) published important data in a technical note to its Annual Report and Accounts 2017-18: income tax revenue outturn data for Scottish taxpayers in 2016-17, and a provisional estimate for 2017-18. This is the first time we know what is raised in income tax in Scotland, as prior to 2016-17, Scottish taxpayer codes were not identified in HMRC’s systems.

Background

The Scotland Act 2012 gave Scottish Ministers power over 10p in the pound of income tax on ‘non-savings, non-dividend’ (NSND) income for Scottish taxpayers. This was in place for 2016-17 only, and the Government chose not to vary the rate. Under the Scotland Act 2016, this power was superseded by that to set NSND income tax rates and band thresholds. In 2017-18, the Government set the higher rate threshold at £43,000 (£2,000 lower than the rest of the UK), and in 2018-19 it introduced two additional bands, making five in total (see our blog Scottish Income Tax: how different is it to the rest of the UK? for more information).

Income tax revenue from Scottish taxpayers is still administered and collected by HMRC across the UK, but revenue is now transferred from HM Treasury to the Scottish Government.

Adjusting the Scottish budget to account for the devolution of income tax in 2016-17

To account for the loss of tax revenue to the UK Government, Scotland’s annual ‘block grant’ is reduced for each of the devolved taxes (NSND income tax, Land and Buildings Transaction Tax and Landfill Tax).

For 2016-17, the two Governments agreed the “block grant adjustment” (BGA) for income tax would be -£4,900 million. This was based on the Office for Budget Responsibility’s (OBR) November 2015 Devolved Taxes Forecast and will not be reconciled against outturn data, though the OBR has revised its forecast down and then up since then (Table 1). Last summer, HMRC estimated that 2016-17 revenue would be £4.6 billion.

Table 1: OBR Scottish Rate of Income Tax (SRIT) forecasts for 2016-17 (£m)

Forecast date Nov-2015 Mar-2016 Nov-2016 Mar-2017 Nov-2017 Mar-2018
Income Tax revenue        4,900        4,902        4,590        4,474        4,597 4,609

 

HMRC figures out last week for 2016-17 show much lower SRIT revenue figures than expected, at £4.35 billion. HMRC explain that the 6% difference between £4.6 billion is because:

  • It includes outturn data for Self-Assessment.
  • It is calculated on a liabilities basis, whereas the £4.6 billion estimate was calculated on a receipts basis.
  • It is based on identifying individual taxpayers whereas the £4.6 billion estimate was based on a share of the UK tax revenue.

£4.35 billion is also £550 million (11%) lower than revenue expected at the time of the Draft Budget 2016-17. Had there been a reconciliation to outturn (as there will be in future years), the next Scottish budget (2019-20) would have lost out to the tune of half a billion pounds.

HMRC have also indicatively published total NSND income tax returns for 2016-17, at £10,700m.  This is also 6% lower than the OBR’s most recent (March 2018) forecast for 2016-17, which was £11,415m.

What about 2017-18 onwards?

As part of the 2017-18 budget process, the Scottish government provided the 2017-18 income tax forecast. This was the amount the Government could draw down in 2017-18 from the Scottish Consolidated Fund. It will be reconciled to Scottish outturn data once it is available (around 15 months after the end of the financial year – summer 2019), according to formulas set out in the fiscal framework. The BGA depends on year-on-year changes to tax revenue in the rest of the UK (rUK) for taxes comparable to the devolved ones. Thus the initial BGA for any year will depend on the OBR’s rUK income tax forecast, for that year, and the previous year. Once rUK outturn data is available, the BGA will also be recalculated.

The Scottish Fiscal Commission (SFC) is now responsible for producing Scotland’s economic and fiscal forecasts. Their forecast, published alongside the Draft Budget, sets the amount that the Scottish Government can draw down in the next tax year in relation to that particular tax.

Table 2: Scottish Income Tax forecasts for 2017-18 (£m)

Forecast date Feb-2017 Nov-2017 Dec-2017 Mar-2018 May-2018
Income Tax revenue (SG) 11,857        
Income Tax revenue (SFC)     11,584   11,467
Income Tax revenue (OBR) – for information   11,932   11,873  

 

The provisional BGA set out in Draft Budget 2017-18 was £11,750m. Subtract that from the income tax forecast at Budget Time last year (£11,857m) and you get an extra £107 million to spend compared to a situation where income tax had not been devolved. Since then, the SFC and the OBR have both revised their forecasts downwards, and revenue is now estimated to be £159m lower than the revised BGA forecast of £11,626m. This is all still provisional.

HMRC’s estimate for 2017-18 puts income tax at £11,900 million, close to the OBR’s March 2018 forecast. This would mean a positive difference with the latest BGA estimate of +£274m for 2017-18. It would also mean an 11% leap from income tax in 2016-17 to 2017-18. However, the 2017-18 figure is just an estimate, and if 2016-17 is anything to go by, it might also be revised down (2016-17 was revised down by 6%).  This could have further implications for the amounts available in the Scottish budget in 2019-20 in relation to 2017-18, but this will only become clear when we have the relevant outturn data and any reconciliation is made.

What do the data users want?

Income tax now plays a big role in the Scottish budget. Detailed information on income tax outturn data would help assess how good the Survey of Personal Incomes Public Use Tape, and the forecasts that depend on them, actually are. For forecasters, this is an important exercise to improve future forecasting.

Given the great significance of these figures in the context of economic policy in Scotland, it may make sense to supplement the Trust statement with a more focussed official statistics output in future. Official statistics are, under the Code of Practice for Statistics, expected to address the questions that users want to answer, and can do so in a more focussed way than formal financial statements. The type of information users may look for this statistical report to contain include:

  • Latest and historic NSND liabilities for Scotland.
  • NSND liabilities by type of earnings e.g. Pay-As-you-Earn (PAYE), self-assessment (SA), pensions, property income. HMRC only publish a breakdown by PAYE and SA, though the SA figure seems quite high. This may be because taxpayers who pay both through SA and PAYE are categorised in the SA elements, but this may cause confusion.
  • Number of taxpayers by band and in each of the above categories.
  • An assessment of the operational risks related to Scottish taxpayer identification.

Anouk Berthier, Senior Researcher, Financial Scrutiny Unit