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CHAPTER SEVEN: THE COLLECTION AND ADMINISTRATION OF LOCAL INCOME TAX

BODY RESPONSIBLE FOR COLLECTION

7.1 While council tax is currently collected by local authorities, proposals for a local income tax suggest that this should be collected by HMRC; the body which currently collects UK income tax. Respondents were asked who they thought ought to collect a local income tax and chart 7.1 shows the responses from the 418 individuals who replied to the consultation questions..

Chart 7.1
Question 9 - Which of the following do you think should collect a local income tax?

Base: Individuals (418)

Individual responses

7.2 While collection by HMRC was favoured by 60% of individuals, looking at the data on the working situation of respondents shows retired respondents were most likely to want local income tax collected by HMRC (76%) but over one in 5 (22%) employed or self-employed respondents said they would like to see collection by local authorities.

7.3 Three out of the 5 responses from individuals commenting on this question felt HMRC was the most logical choice. One respondent acknowledged that HMRC was generally considered to be the government's favoured candidate, but expressed worry that no evidence had appeared as to how this would be implemented. One respondent argued that the tax should be collected by a Scottish Government agency instead.

Organisational responses

7.4 Collection by HMRC was favoured by 27 of the 30 organisations who directly answered question 9 "Which of the following do you think should collect a local income tax?" Only 3 'other' organisations gave an alternative answer; 2 wanted to see collection through local authorities and one through a Scottish Government Agency.

7.5 There was also widespread agreement amongst organisations who commented more fully on question 9 with 21 organisations suggesting that HMRC should be responsible for collecting local income tax.

7.6 As one tax, pay or finance organisation stated, "there are considerable advantages in having HMRC collect the tax, in particular: HMRC have the experience of dealing with the complexities of income taxes including countering avoidance." Another highlighted concerns over data sharing:

"There would be no need for a number of different bodies to hold personal data on individual taxpayers. With the problems already encountered with data loss in HMRC and other Government bodies, it is unlikely that taxpayers would feel comfortable with a separate collection agency or even local authorities holding personal financial data.

(tax, pay or finance)

7.7 In addition, in the interests of reducing collection costs and promoting efficiency as well as from a purely practical standpoint, one local government organisation noted "there is a strong argument to say that the collection role should be undertaken by HMRC through existing PAYE and self assessment processes." A different local government organisation considered that "collecting local income tax by anyone other than HMRC would mean duplication in administration and therefore the cost of collection. There would also be an increase to the additional costs which would be incurred by employers."

Payroll systems

7.8 In relation to actual payroll systems, one IT organisation was of the view that:

"The collection and reporting of local income tax requires interaction with central systems, whether HMRC or other. These central systems need to be available at least 6 months before the live date to allow payroll software houses to test their new software against the central system...The central system providers will need to be consulted as to the lead times they need, but in our experience they ask for 2 years."

7.9 Three other organisations (one IT, one representative group and one tax, pay or finance organisation) also stressed the importance of informing and giving software developers advance notice of changes to allow them time to develop new software; to test the software and issue new software to their users. A timetable for implementation was deemed vital to the successful implementation of a local income tax.

Concerns

7.10 Whilst the general consensus was that HMRC should be responsible for collecting local income tax, 8 organisations queried whether HMRC will be either "willing" or "able" to administer the tax (2 tax, pay or finance, 2 representative groups, one local government, one political, one legal and one retail/ business organisation). Two organisations (one representative group and one from retail/ business) referred to recent press coverage indicating that HMRC are not expecting to be part of the tax collection process.

7.11 It was also suggested by 3 organisations (one legal, one political and one representative group) that the UK Government would need to introduce legislation (in the form of a separate Bill) to give HMRC the necessary powers. Specific reference was made in relation to the Tax Management Act 1970. It was suggested that further research and engagement with HMRC is required on the practicalities and feasibility of the proposal to use HMRC as the collection vehicle (tax, pay or finance organisation).

Other collection agencies

7.12 Four organisations discussed collection of tax via a Scottish Government collection agency (3 tax, pay or finance organisations and one representative group). Overall, it was considered that this would be "costly to administer" and "unrealistic both commercially and practically". It was also suggested that this would cause duplication.

7.13 It was felt that collecting local income tax using a private sector collection agency would be an excessive use of funds. Whilst it was acknowledged by one tax, pay or finance organisation that there are likely to be many private companies with experience of credit control and collecting funds, it was suggested that a private sector collection agency may not have the experience of dealing with HMRC and PAYE systems, procedures and policies. A different tax, pay or finance organisation also noted:

"Given the problems already encountered with data loss in HMRC and other Government agencies, it is unlikely that the taxpaying public would feel comfortable with a private sector collection agency."

Collection by local authorities

7.14 Eight organisations discussed the option of local authorities collecting local income tax. This consisted of 4 tax, pay or finance organisations, 3 local government organisations and one political organisation. Whilst, it was considered that local authorities are unlikely to have the "required knowledge of payroll" and the resources to set up, train, collect and police such a tax" (2 tax, pay or finance organisations), on the other hand, "If funding for local needs is to be encouraged and local income tax is to be locally set then the collection would be better handled by the local councils." (one local government organisation).

Cost of collection

7.15 Irrespective of which organisation actually collects local income tax, several organisations (9) including 5 local government organisations, 2 trade unions, one retail/ business and one tax, pay or finance organisation were concerned about the future of the current staff involved in administering council tax and the associated job losses:

"The proposals for the income tax give far too little thought to the future of the current staff involved in administering the council tax."

(trade union)

7.16 In addition, 10 organisations (including 7 local government organisations, 2 tax, pay or finance and one from retail/ business) made reference to the cost of collection. It was suggested that the proposed model for collection of local income tax provides no estimate of costs and that these should be stated more clearly. Three local government organisations also raised queries on whether:

"Collection and administration costs to HMRC for local income tax are likely to be less than the current cost of collecting council tax and administering council tax benefit."

HOW TAX SHOULD BE COLLECTED

7.17 At present, UK income tax is collected either at source (through PAYE for earners) or through collection for those who pay income tax through self assessment. Proposals in the consultation document indicate that a Scottish local income tax would be collected in the same combination of ways. At question 10, respondents were asked whether local income tax should be collected at source or through payment and chart 7.2 shows the results from individuals.

Chart 7.2
Question 10 - Do you think local income tax should be collected at source or through payment?

Base: Individuals (418)

Individual responses

7.18 Collection at source was the preferred option across all classifications of individual respondents; 62% in total supported collection at source. Roughly the same numbers wanted to see local income tax collected through payment (15%) and through a combination (14%); 9% did not reply or said 'don't know'.

7.19 Of those respondents who replied at question 4 that the tax rate should be set locally, fewer wanted to see tax collected at source (52%) than those who wanted the tax rate set on a national basis (71%); 20% who said 'locally' at question 4 wanted to see collection through payment while 22% favoured a combination.

7.20 Four of the free-flowing responses from individuals covered this issue. Two of these 4 preferred a combination of collection at source and through payment, with one advocating collection through payment and the other respondent favouring payment at source.

Organisational responses

7.21 Thirty organisations gave their preference for a collection method at question 10:

• 14 wanted to see local income tax collected at source - supported by 5 local government, 3 tax, pay or finance and 6 'other' organisations;
• 13 wanted to see a combination of collection at source and payment - 8 local government and 5 'other' organisations;
• 3 favoured collection through payment - one tax, pay or finance and 2 'others'.

7.22 There were a number of organisations (12) who provided comments to support the view that there should be collection at source. This consisted of 4 local government organisations, 2 representative groups, 2 tax, pay or finance organisations, one equality, one political, one retail/ business and one IT organisation. The IT organisation explained "The Pay As You Earn system is fundamental to all UK payroll products".

7.23 The following quote represents a typical response received from these organisations:

"Local income tax would be best suited to collection at source via the PAYE system as there are likely to be considerable under-recoveries and delays if the tax is collected by another method."

(tax, pay or finance organisation)

7.24 In addition, collection at source was deemed the most appropriate method because "there is likely to be considerable loss and probably delay if the tax is collected other than via a PAYE system" (tax, pay or finance organisation). While one representative group agreed collection at source is an "efficient mechanism" the same organisation also felt that "there are limits to how much can be included in a PAYE code" and questioned "the wisdom of adding further requirements to PAYE codes". One tax, pay or finance organisation also noted:

"It would be exceptionally hard to operate PAYE on the basis of a different measure of total income for local income tax which, for example, gave no relief for pension contributions, charitable donations, venture capital trust and enterprise investment scheme investments and interests on loans for business purposes."

7.25 A different tax, pay or finance organisation added that a Scottish-wide rate of local income tax would be best collected at source as there would be no need to factor in local variances. This organisation went on to say "If locally set, deductions at source (with employers having to deduct different rates of tax from each employee depending on where they lived) would have cost implications for business that would reduce Scottish business' competitiveness."

Collection through payment

7.26 Very few organisations discussed the 'collection through payment' option. Of those that did, one political organisation felt that although this is an additional administrative burden, it ought to be possible to develop a simplified self assessment return to cater for most individuals falling into this category. One representative group raised the issue of tax evasion stating "Some people who are not on PAYE might try to evade local income tax".

Combination of methods

7.27 Seven organisations consisting of mostly local government organisations (6) and including one political organisation discussed the 'combination of collection at source & payment' option. These organisations were in agreement that local income tax should be collected in the same way that national income tax is currently collected. Two local government organisations and one political organisation were of the view that:

"A combination of collection at source (employees, savings etc) where possible and by payment (self employed, rental income etc) where necessary, reflecting the current systems used for IT."

(local government organisation)

"A combination of collection at source ( PAYE, interest earned etc) and by interim payment (self-employed, rental income etc) to maintain fiscal treasury and cash-flow considerations."

(local government & political organisation)

Cash flow implications

7.28 In addition to commenting on the 3 possible collection techniques, 10 organisations also referred to 'cash flow implications' (also described as 'time lag') between the collection of tax revenues by HMRC and subsequent payment to either the Scottish Government or directly to local authorities. The following 2 quotes illustrate typical responses:

"The majority of council tax is currently collected in year. In moving to a local income tax based system consideration would need to be given to the potential impact of those who pay tax through self assessment, where not all of the tax is collected in year and furthermore is paid in a lump sum rather than as on-going monthly revenue."

(local government organisation)

"In the case of self assessment, the timing of collection and payment has to be borne in mind. Self employed individuals and those with multiple sources of income would be constantly catching up with the payment of their local income tax liability compared to an employee who falls wholly within the PAYE system."

(tax, pay or finance organisation)

7.29 Two local government organisations stressed that if, as recommended, HMRC are the collecting organisation, assurance would have to be given that local government cash flow would be unaffected.

IMPLEMENTATION

7.30 The consultation document acknowledges that there will be an impact on employers as they will have to apply different rates for those employees who live in Scotland. In order to minimise this burden the Scottish Government propose to provide clear guidance to employers and help for businesses to plan for the introduction of a local income tax.

Individual responses

7.31 Question 11 asked "If the Government were to offer support to employers to implement these proposals, which would be the most appropriate medium of support in your view?" and answers from individual respondents to the options given were as follows:

• information booklet for employers (69%);
• website with a section of ' FAQs - frequently asked questions' (63%);
• designated advice hotline (56%);
• designated advice email (44%);
• media advertising (37%);
• workplace visits (30%);
• roadshows for employers (28%).

7.32 Three out of the twelve free-flowing responses provided a reply to this question on the most appropriate medium of support, with 2 indicating that all seven options could be utilized. The third respondent in this grouping stressed that collection should not involve employers at all.

Organisational responses

7.33 Four local government and 10 'other' organisations supplied answers to question 11 and support for each of the options was fairly consistent; all 4 local government organisations supported all of the options and support from the 'other' organisations was as follows:

• designated advice hotline (supported by 8 'other' organisations);
• information booklet for employers (7 'other' organisations);
• website with a section of ' FAQs - frequently asked questions' (6 'other' organisations);
• designated advice email (5 'other' organisations);
• media advertising (4 'other' organisations);
• roadshows for employers (3 'other' organisations);
• workplace visits (2 'other' organisations).

7.34 A range of organisations commented on the need for all the suggested methods of support to assist employers in implementing the proposals. Responses in relation to this question were provided by 9 local government organisations, 4 tax, pay or finance organisations, one political organisation and one other organisation. In general, it was considered vital that employers receive support across the board (including those who are self employed).

7.35 It was also recognised that there will be additional costs for employers:

"The proposals will have a huge impact on employers. To achieve a successful implementation of the new proposals it will be necessary for employers to understand and apply the new system correctly. In view of this all mediums of support should be used... As well as support it must be recognised that there will be additional costs for employers throughout the whole of the UK especially where payroll software changes are required."

(local government organisation)

"All of these will be helpful but it must be recognised that there will be additional cost to employers throughout the UK in relation to added administration and payroll software changes etc. In addition the self employed sector will also need support in terms of information and clear guidance in terms of how their assessment of local income tax will be dealt with."

7.36 One tax, pay or finance organisation specified they would welcome further planning and research as well as a timetable to ensure that government processes are approved and streamlined by the time local income tax is introduced. This organisation went on to say "This timetable should also ensure that there is adequate time and information provided to software and training providers to enable them to update their systems and provide appropriate working systems to businesses ready for the collection of local income tax."

7.37 One local government organisation also stressed there will be a need for early information to be made available of the intent to introduce local income tax because of the significant work which employers and software companies will face.

7.38 Two organisations highlighted the fact that HMRC currently provide advice via a combination of different media. It was suggested that a similar system of support would be necessary for the implementation of local income tax in Scotland (tax, pay or finance organisations).

7.39 A number of additional techniques were also highlighted by organisations as other ways of providing advice and support to employers. These include:

• HMRC workshops/ seminars (local government organisation);
• media advertising for communicating with the general public (local government organisation);
• free computer payroll programmes (representative group);
• financial incentives/ direct financial support to employers faced with the administration of local income tax (one tax, pay or finance and one political organisation).

7.40 In relation to the consultation question itself, one local government organisation noted:

"It appears somewhat incongruous to have included such a detailed question in the consultation about the specifics of communicating the 'local income tax message' to the public, when so many important elements of the proposed scheme, on which reasoned and informed responses will depend, have not been adequately communicated in the consultation document itself."

Employers administrative burden

7.41 Analysis of the qualitative responses from organisations highlighted an issue which many respondents commented on, namely the increased administrative and cost burden that employers will incur in terms of having the responsibility for tax collection of local income tax. Twenty-nine organisations highlighted this as an issue (12 local government organisations, 6 tax, pay or finance, 5 representative groups, 4 retail/ business, one political and one IT organisation). The following 3 quotes demonstrate typical responses in received relation to this issue:

"The introduction of a local income tax will, undoubtedly, increase the administrative costs on business as the proportion of local tax for which employees are liable will need to be calculated. This will require changes to existing payroll systems… There may also be an added administrative burden in identifying a Scottish tax payer."

(representative group)

"It is important to point out that the burdens of any new local income tax system would not be confined to businesses based and operating solely in Scotland. Businesses which operate across the UK would find that their payroll arrangements became more complex as they would be required to make separate payroll arrangements for those staff working in the country and for those working elsewhere."

(retail/ business organisation)

"There would be an administrative requirement placed upon Scottish employers, and employers of income tax payers who are resident in Scotland. This additional cost to business was estimated by Burt ² to be between £17M to £28M annually. Clearly, the administrative impact, in terms of cost, will spread across the private sector as well as the HMRC."

(local government organisation)

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