 Welcome to the 12th meeting of the Public Audit and Post-legislative Scrutiny Committee in 2019. Item 1 is decision on taking business in private. Do members agree to take items 4 and 5 in private this morning? Item 2 is another decision on taking business in private. Do members agree to take consideration of a draft report on post-legislative scrutiny of the control of dogs Scotland Act 2010 in private at future meetings? Item 3 is the administration of the Scottish rate of income tax 2017-18. Can I welcome our witnesses to the meeting this morning, Jim Harra, deputy chief executive and second permanent secretary, HM Revenue and Customs, and Jackie McGeehan, deputy director for income tax policy, HM Revenue and Customs. Thank you very much for coming this morning. Can I please ask Jim Harra to make a brief opening statement? I would like to make two short points, first of all, to reaffirm HMRE's commitment to administering Scottish income tax effectively, which means providing a good service to the Scottish Government and also a good service to Scottish taxpayers so that they can have confidence that they are paying the right tax at the right time. As part of that, we can always improve and we have a joint oversight and governance arrangements with the Scottish Government, including the Scottish Income Tax Board, which I have asked to oversee the steps that we take to gain better assurance of our work. The second point that I wanted to make was just to clarify our inability to share the strategic picture of compliance risk that we have produced for Scottish income tax. It is part of our overall strategic picture of risk for tax compliance, which we do not publish for operational reasons. However, we will include an assessment of the compliance risks in a summary of our compliance activity in our annual report in September, and I will be happy to answer any questions on our compliance plans. I will ask Colin Beattie to open questioning for the committee. I have had a long-term concern about the accuracy of the figures for the Scottish rate of income tax in terms of the numbers of being able to capture the correct number of Scottish taxpayers. Do you agree that the base figures from 2016-17 are the key to the figures going forward? Yes, identification of Scottish taxpayers is our prime operational concern in making sure that we get the administration of Scottish income tax right. That is not a one-off process, but it is an on-going process. There is no perfect benchmark against which we can measure ourselves, so there is no perfect index of Scottish residents. We have undertaken considerable work to identify Scottish taxpayers and to gain a level of confidence in how accurate our index is, and our assessment is that we have confidence of 98 to 99 per cent of its accuracy. That does not mean that the other 1 to 2 per cent is wrong, but it means that we have no means of corroborating that. We have taken extensive steps, and it is as good as it can be at this point, but we are just continuously improving it as we can. Previous evidence session, the National Audit Office said that the box of identifying persons of Scottish taxpayer was in the self-assessment form for 2016-17, but whether or not the box was taken, no action was taken at that time, does that create a concern about the baseline figures that we are working from? No, I do not think so. First of all, our prime way of identifying Scottish taxpayers is through the address data that we hold. All our efforts are in validating our address data and keeping it up to date. In the case of people who file self-assessment returns, they are asked to confirm their address, and those who file them online are also asked to tick a box to say if they are a Scottish taxpayer. We have been learning over the last couple of years how we can use the responses in that box to best effect. For example, this year's tax returns where someone did not signify that they were a Scottish taxpayer, initially we calculated the tax on the basis of what they told us in our self-assessment return, even where we held address data suggesting that they were Scottish taxpayers. Our intention was to pick those cases afterwards and understand what is the reason for the discrepancy, but we very quickly learned that there were a large number of errors in the sense that taxpayers should have ticked the box and did not do so. Therefore, we quickly changed our business processes so that we do not calculate income tax on the basis of what is put on the self-assessment return, we calculated it initially based on what our data tells us is the resonance of the taxpayer, and then we inquired into those discrepancies afterwards. In the case of how we can make best use of that taxpayer representation on the SA return, it has been a learning process for two years and might well continue to be. However, if the 2016-17 figures are the baseline for which we are working and there is no follow-up at that particular time to validate that baseline figure, are we not working in the dark here? I realise that subsequently you have come back on some of those figures and done some alterations in subsequent years, picking on those 30,000 taxpayers that you picked up. However, nothing was done with the original figures, the baseline figures. Are they now irrelevant as a baseline in 2016-17? We did a lot of work to validate the Scottish taxpayer base in 2016-17, including a lot of work to validate our address data against other databases. You are right that we did not use the SA return entries as part of that validation. Our experience is, particularly with the 17-18 returns, that that is of limited use as a validation. It throws up a large number of discrepancies where what we have found is that the address data that we hold is much more accurate than what people are putting on their self-assessment return. However, if the 2016-17 out-turn figure is the figure being used by the Scottish Fiscal Commission and the OBR for their forecasts, does that mean that they are working from incorrect figures? No, our view is that they are working from figures where we can be confident that between 98 and 99 per cent of them are correct in terms of identification of Scottish taxpayers and for the remaining 1 to 2 per cent we have no corroboration. Some of those will be correct and some of them will be incorrect. However, the national audit office says that no action was taken at that time by HMRC in terms of whether a person was elected to be a Scottish taxpayer or not. There was no follow-up on that. That is what the national audit office is saying. That is correct in relation to the entries on the self-assessment tax returns. It does not mean that we did not take any action to validate the Scottish taxpayer index, because we did, for example, validating the addresses that we hold against third-party data sets and following up discrepancies and mismatches between those data sets, the entries on the self-assessment tax returns, our experience is that they are not the best indicator of whether someone is a Scottish taxpayer, because the error rate in them is higher than we would like. Therefore, in order to make good use of that, we are going to have to continue improving the accuracy of what taxpayers put on those returns. In the meantime, we have taken the decision not to rely on what people put on those returns. The 2016-17 return was corrected on the basis of addresses by HMRC. What we did to create the 2016-17 population of Scottish taxpayers is, first of all, we put a flag on our systems for everyone for whom we held a Scottish address. We took some steps where we knew people held more than one address to ensure that the address that we hold is the correct residential address. We then tried to match the information in our data set with other address data sets, for example, the electoral register and from credit reference agencies, etc. Where there were mismatches, we looked to see if we could corroborate which address was right. More often than not, it was the HMRC address that was most up-to-date. Where we could not find any corroboration, we contacted taxpayers to explore the discrepancy with them. The result of that is that we are confident that the accuracy level in the Scottish taxpayer base is between 98 and 99 per cent. In previous evidence sessions, we have had information in front of us that showed that there were some concerns about identifying where there was a company, for example, operating across the border, how they identify their resident employees. That, in the initial stages, at least was a considerable problem. Has that now been eliminated? What happens is that the HMRC identifies whether a taxpayer is a Scottish taxpayer, not the employer. We notify the employer that we regard this person as a Scottish taxpayer and therefore should deduct Scottish income tax. What we have found is that, although the vast majority of employers do that correctly, in some payrolls they make mistakes, either because they have not got their software right or because they have not got their administration of their payroll right. When we get their first return of the tax year, we can then run a scan against it to identify whether there are cases in which they have not deducted Scottish income tax when we were expecting them to, in which case we would re-issue the code and work with the employer to make sure that they get that right. If an employer gets that wrong, it does not affect the amount of tax that the Scottish Government gets assigned to it, because that is calculated by reference to HMRC's systems. What it could mean is that a taxpayer is having the wrong amount of tax deducted during the years that they go along. Therefore, when we did a reconciliation at the end of the year, we would find that they either would do a repayment or had an unexpected tax bill. It is important that we work with employers to get that right from the outset for the sake of taxpayers, but there are fail safes to make sure that we do pick it up in particular a scan in-year and then a reconciliation after the end of the year. You said that you believe that your accuracy is about 98 per cent or thereabouts. How does that sort of accuracy compare with the rest of the UK? I realise that it is a slightly different scenario, but identifying UK taxpayers, you must have a percentage accuracy there as well. As I said, there is no benchmark against which we can measure ourselves. All we can do is do as much operational work as we can to make sure that we get the identification right and then carry out corroboration exercises with other data sets. We do not do that in the case of English and Northern Irish income taxpayers, because there is no need to do that, but we do that for Scottish taxpayers and we now do it for Welsh taxpayers as well. We would expect to achieve that 98 per cent to 99 per cent for both of those populations. Our task is to maintain that and improve on that over time. You said that there is nothing to benchmark against. You are obviously benchmarking by saying about 98 per cent accuracy. What is that based on? What I mean is that there is no perfect benchmark. Yes, we do benchmark ourselves. We corroborate the information that we hold in our data systems with information held in third-party data sets. Where there is a mismatch or an inability to match, we look into that to see whether that is telling us anything about the accuracy of our data set and if necessary we correct our data. That work has shown us that, generally speaking, the address data that HMRC holds, which is the key thing that triggers us to put a Scottish taxpayer identification flag on someone, is generally more up-to-date than the third-party data sets that we corroborate against. However, our work identifies that we believe that we can corroborate and be confident in 98 per cent to 99 per cent. As I say, on the balance, there is no reason to believe that they are all wrong, but some will be, and some will be right. We will continue to try and drive that up, but we have taken all reasonable efforts that we can, and there is no perfect benchmark against which we can check ourselves. If you are doing a data set based on the address that HMRC has rather than what comes in the form, you then have mistakes where you have an English taxpayer wrongly identified as a Scottish taxpayer, and if so, how many cases of that are there? Our process is that, where there is a discrepancy between what the taxpayer tells us on their tax return and what our database holds, we will inquire into that and resolve that discrepancy. The question is what do you do in the meantime in terms of calculating that person's tax? The decision that we initially took in this year's self-assessment run was that we would calculate their tax based on what they had said on their return, but we quickly learned that the level of error in returns was such that it was actually better to calculate their tax based on what we knew from our own database and then follow up the discrepancy afterwards. We follow them up. Obviously, if someone notifies us on their self-assessment return of a change of address, then that is an update to our database, but where they show us a Scottish address but don't take the box to say that they're a Scottish taxpayer, that's a discrepancy that we have to inquire into. So there's discrepancy both ways, which adds to the workload, because I think it's quite easy for us to think about one way of discrepancy and think of a high workload back, so discrepancy both ways, that's an even bigger workload. So how many discrepancies were there, how many queries? So we had to correct 30,000 before we stopped the business rule. In the meantime, we had calculated tax for about 30,000 taxpayers based on their tax return, when in fact we thought with hindsight we thought it would be better to assess it based on the information that we held and then we are carrying out checks into those and subsequent cases. You were right, I mean I think the error rate is too high and therefore it's going to give lots of false positives that we have to inquire into. So one of our tasks is to really improve the accuracy of what taxpayers have to do, just to clarify, in terms of the checks and the clarifications, was there 30,000 checks and clarifications or is there a fewer number of checks and clarifications? No, there will be more than that because there were 30,000 where we had to do a correction because we concluded that it was better to initially assess tax based on our dataset. There will have been other cases after that, where once we are calculating based on the address that we hold, and nevertheless we have to find out from the taxpayer, I don't have a figure for that at this stage. The checks and clarifications are all letters, phone... It'll be both, it'll generally be correspondence. Essentially a lot of work, a lot of resource. A lot of this will be unnecessary work because it'll be a simple error that someone has made, and so we have to look at things like the design of the tax return and the guidance that we've given to say if we can push up the accuracy rate that taxpayers gave us. How many members of staff, how much cost has that been to the HMRC to do the clarifications and the checks? I don't have figures for that at this stage. Or you would put those figures together and provide them to the committee? We can get you whatever we have on that, yes. In terms of the manual entries, because obviously there's a particular assurance that manual entries and MSPs are a good example of that and one third being classified wrongly, how many manual entries were there from Scotland, how many were incorrectly identified? Our general business rule is to set a Scottish taxpayer flag by reference to the address, and that is automated, and that's obviously for the vast bulk of Scottish taxpayers. But for parliamentarians, there is a different legal test, which is you are automatically a Scottish taxpayer if you're a parliamentarian regardless of where you live, and therefore we have to switch off the automated business rule and apply a manual process instead. We have a special tax office that looks after parliamentarians that carries out that process, so it is just the parliamentarians that are subject to that process. Is it all of us sensitive individuals in the round or purely parliamentarians? That would be our MSPs and MEPs in Scotland. Purely MEPs, MPs and MSPs, so MPs were Scottish constituencies. So how many MPs or MEPs were wrongly classified? We identified 45 MSPs, where we had given a sentiment incorrect 1920 code, which did not identify them as a Scottish taxpayer, and that was because of a clerical error in the tax office that looks after the affairs of Scottish parliamentarians. We identified that before the start of the tax year and stopped the problem and corrected the cases that we'd got wrong. We obviously alerted the MSPs whose codes had been wrong, that they were getting to apologise for that, and to issue them with a revised code. We've also taken some steps with the office to make sure that this runs so smoothly. So there were no MPs that were classified wrongly? Was an issue with MPs or MEPs? No, we have double-checked all Scottish parliamentarians and once the self-assessment process is complete, they will all have been taxed on the correct basis, but in the meantime, 45 MSPs did get the wrong code for 1920. That was corrected before the start of the tax year, so no one was impacted. We do have to improve our assurance of that process because it has to be repeated each year. We are also looking at whether we can automate it, but I'm not promising that we'll be able to do that. Do you understand why Scottish parliamentarians who set Scottish rates of income tax are extremely concerned by the fact that one-third of them were wrongly identified and what that reflects on the challenges that may be happening with the wider population? I can understand that concern and I share it. As you might imagine, I was not pleased to learn that the mistake had been made. I am satisfied that there is no read across to the rest of the Scottish population because there is a special clerical process that applies to parliamentarians and that's what went wrong. The process for the main bulk of the Scottish population is an automated one based on the address set, whereas I say that we've done extensive work to gain assurance about the accuracy of that set. I share your concern that this should not have happened. In terms of your communication with employers and employees around the Scottish rate of income tax, how has that gone in terms of public consciousness around the Scottish rate of income tax and how they fill their forms out differently and how is that work going? I think that our main message in administering Scottish income tax to individuals is that they need to tell us when they change their address. They need to keep their address information up to date with us. The vast majority do that. For a lot of people until recently, there hasn't been any difference in the tax that they pay and they don't need to do anything. While you want them to be aware of the fact that there is Scottish income tax, we don't want them to worry or do anything different. Our messages across employers and employees have been about address changes. We will continue to work with Scottish Government colleagues on how else we want to raise awareness and how we can assist with that. However, for each of us, in administering, it is really about the addresses. Can I just pick up on the point that Mr Sarwar raised about MPs and MSPs? We are not asking those questions because we are concerned about our own tax affairs. We are concerned about it because it is a very small group of people. MSPs plus MPs plus MEPs must total about 200 people. It is a very small group compared with the bulk of the Scottish taxpayers. For such a significant clerical error to happen with such a small group when there is a special process in place, that is the thing that worries me about the confidence in the wider system. I was one of the people—I am sure that you will be delighted to hear that I have got an incorrect tax code—but how can Scottish public have confidence when, for such a small group, 200 people, an error like that is made for 45 of them, many of whom there would not have been address issues because we have all been Scottish parliamentarians for many years and will not have lived elsewhere for a significant number of years? I understand your concern if I can explain a bit about the process that we have to apply in order to apply the special rules that are applied to parliamentarians and then how that went wrong. Because there is a special rule that determines the tax status of parliamentarians, which is not based on their residency, we have to switch off the normal business process that would allocate their Scottish taxpayer status depending on where they live. There are Scottish parliamentarians and Welsh parliamentarians whose main residential address is not in Scotland or Wales, so we have to apply that, which means that the default that our computer systems will give is that we will treat them as non-Scottish, non-Welsh taxpayers. That is only MPs. You misidentified 45 MSPs whose residence will all be in Scotland. Yes, but because an MSP's taxpayer status is not determined by their residence, we are determined by a different legal test, we have disapplied in our computer systems the normal rule that would apply to other Scottish taxpayers, which runs on their address. Therefore, as far as the computer systems are concerned, the default is that people are treated as not Scottish, not Welsh taxpayers. Then we rely on a clerical process in the office that deals with parliamentarians' tax affairs to put the flag back on the returns. What happened was that the office that did that did not realise that having set the flag the previous year, it would have to go back in and repeat that because the computer system would remove it again. There was a misunderstanding and they believed that having put the flag on an MSP's record once, it would be retained on the record. In fact, it was an exercise that they had to repeat before we reran the coding run. For 45 MSPs, they missed that before we picked up our mistake and we had to go back and correct those codes. It is a clunky process, I acknowledge, that we have had to put in in order to make sure that the special rule that works for parliamentarians works. If we did it the other way, we would still get some errors the other way as well. That is the process that we have adopted, unless we can automate it in some way. What we have to do is gain better assurance of that clerical process to make sure that we do not make the same mistake again or another mistake. That is what Jackie and the Scottish Income Tax Board have been looking at, how we can do that. It is worth saying that we are looking at what we can do to automate all or some of that part of the process so that we are not relying on individuals having to go back every year and make those changes manually. However, it is a very small number of taxpayers, as you say, so we will look at how best we can do that. It sounds like maybe your technology but also your checking processes need to be tightened up. However, I would just like to repeat that our concern about this is about confidence for the wider population because we feel that if mistakes can be made with such a small sample, I entirely understand that and share that. What I would like to repeat is that it is an entirely different automated process that is run for the general population of Scottish taxpayers who are not parliamentarians, so there is no direct read across. Thank you very much. Willie Coffey I wonder if there were any errors in the numbers of MSPs in MEPs. Ms Coed, you said that there were 45 MSPs, but did you say that there weren't any MSPs in MEPs? I am not aware of any. I am aware that the 45 MSPs for 1920 had a coding error, which we had to correct. I am not aware of numbers. I think that there may have been one or two, but I have not got the numbers. The clerical error just applied to the MSPs. I was one of the 45 MSPs as well, by the way, so it just applied to the MSPs and not the Scottish MPs. As far as I am aware, we checked every single parliamentarian both for the 1920s and for earlier tax years to ensure that the correct tax was being paid by each of them and that the correct flag was on their records so that their tax would get attributed to the Scottish Government and not to the Westminster. We were satisfied when we computed all those checks that, following the correction to the 45 codes that we had made between the Peugeot system and the self-assessment system, that was going to achieve that. I did not apply to any of their Scottish Lordships. There must be hundreds of them, as well, I suppose. Any parliamentarian is my understanding. Right. Not peers. Not peers. Right. Can I ask you about the error that led to the 30,000 in the failure to tick the box or not tick the box? That kind of issue, if you do not mind me, picking up on that. You said before that the previous rule was based on your address, that is the information and the knowledge within the system that would identify where you are from, but in the new form there was a box where people were invited to say whether they were aware or weren't Scottish. Did the box ticking part of that process precede or take priority over the previous information that you already had, based on your address? Was that the error? Essentially, yes. Our orthodox approach is that whatever a taxpayer self-assesses, that is where we start in calculating their tax bill. If we have any doubts about their self-assessment, we can inquire into that afterwards. That is why our default, when we put the tick box on the self-assessment return, was that if people do or do not tick that box, that is the basis on which they are self-assessing their liability, and that is where we should calculate it. If we have any concerns about that, we will inquire into it afterwards. As I said, we quickly learned that the error rate in people failing to tick the box was so high that it made more sense for us not to base the initial calculation of what people put on their tax return but based on what we believed, based on our data, was the correct position. We flipped the business process over. If our address suggests that you are a Scottish taxpayer, we will make our assessment on the basis that you are a Scottish taxpayer, even if you have not ticked the box to say that you are. We will explore that discrepancy with you afterwards. If it turns out that you were right not to tick the box and your address was out of date, for example, we would fix that and repay any excess tax. We concluded after our experience with those initial 30,000 cases that that would give a more accurate outturn than relying on what people put on their returns. What you are saying is that you made the box ticking part of the process, the principle determinant, the new principle determinant of where the person lived, rather than relying on the information that you probably already have about those people. That was the initial business process with which we then have disappeared. You no longer do that because you had the information already that those people were probably Scottish, but you chose to make the determining factor, whether you ticked the box or not. That was the initial position. If we can get the accuracy level on ticking those boxes up sufficiently high, I am not saying that we would not return to that, but unless and until we had assurance that the positive affirmation of residency status is correct in sufficient cases, we would not do that. In hindsight, that was probably a daff thing to do, wasn't it? In hindsight, it was based on an assumption about the accuracy of people's work on that, which was unfounded. By the time we picked it up, 30,000 cases had been dealt with in that way, and we decided that we would go back and adjust them. You mentioned earlier, Jim, that you are 98 or 99 per cent confident that it is accurate. Is that based on your statistical approach? Is that a confidence interval declaration that you are making there? Our statistical unit has calculated that figure. We tried to match the addresses that we held with addresses in other data sets, and we got a match in about 80 per cent of cases. The addresses were corroborated in 96.5 per cent of cases. We did some work for the 20 per cent where there was no match. For example, if someone in Dundee, where we have an address for them in Dundee, but we could not match that with any other data set, we then looked at things like, who are they employed by? If they were employed by a local employer in Dundee, then it was clear that our address was correct because they were employed in the local area, and so that was corroboration. Obviously, if they worked for a national employer, we could make no assumption about that, and therefore we did not treat it as corroborated. Where we still could not get corroboration, we wrote to the taxpayers and asked them questions about whether their address data that we held was correct, and that is how we arrived at the figure of 98 per cent to 99 per cent corroborated and 1 per cent to 2 per cent uncorroborated, of which some will be right and some will be wrong. Just in terms of statistical corroboration and accuracy, there is a standard 95 per cent confidence interval that might be applied to a data set such as this. Is yours that? A statistician. I will write to you if I get this wrong, but I think that this is basically 100 per cent figure. We have counted everyone that we regard as corroborated and everyone that isn't as not corroborated. I am not aware that there is any confidence interval in this at all because it was a 100 per cent scan of our database, but I will write to you if I have got that wrong. Supplementary on this point, and I ask Sarwar. You said to Mr Coffey that you write to them for clarification. What have you written to the wrong address? If you are based on the data that you have and the address is wrong, then you are not getting the clarification because you are writing to the wrong address. In fact, what we found was that in the interval between running the scan and issuing the letters, we had a significant number of address updates from taxpayers, so there was unprompted. They had updated us. In a small number of cases they hadn't, you are right, but there will always be cases in which we cannot get a response, we cannot find the taxpayer, and therefore we have no way of corroborating whether the address data that we hold is the correct address data or not. We will not get to a point of perfection. On that basis, would you go by the address that they put in their form and put them in the box? In those cases, we would treat it as uncorroborated, so it is in the 1 to 2 per cent. However, we would never the less proceed with administering the tax affairs based on the data that we hold, which is the Scottish address. I would like to move on to a slightly different topic. The HMRC's assessment of compliance risk on the Scottish income tax is based on something called a strategic picture of risk, which I understand to be updated annually in September. In this instance, HMRC did not provide it to the Scottish Government until December, I believe. I believe that the reason for that was that pressure on resources meant that it could not be provided. The first question is, why were resources not available for something that seemed so critical? What impact does the late provision have? We aim to complete the strategic picture of risk process by about July each year, and that would give us time to get it to the Scottish Government by September. You are right that last year we did not get it to them until December, and we have taken steps to make sure that that will be on time this year. It is part of a larger cross-UK exercise that we do to complete a strategic picture of risk for the country as a whole, and then we have a subset of that, which is the strategic picture of risk that focuses specifically on compliance with Scottish income tax. There was just a general pressure of work, which meant that that exercise did not get completed as fast as we would have liked. It does feed into our compliance plan, which we publish every year, in our assessment at the moment of the Scottish income tax. In the first couple of years, 16, 17 and 1718, the differentials between Scottish income tax and income tax in the rest of the UK were not sufficient to create any material additional compliance risk. We will repeat that exercise for later years, because the differential is now getting more significant. In that year, the difference in the threshold for a higher rate meant that there was about a £400 differential at the maximum, which we concluded was not sufficiently large to create a risk that we would need to take specific action to tackle. There are three levels of risk here. First, there is the risk that someone will not declare their Scottish residency or will try to disguise that. The second is that they will try to convert what would otherwise be income that is subject to the Scottish income tax into something else that is not subject to the Scottish income tax, for example, a capital gain. The third is that, generally, they under-declare their income, which is a general risk right across the tax system. Depending on the level of differential, those risks could differ between Scotland, Wales and the rest of the UK, but at the stage when we were doing this compliance plan, we did not believe that we would reach that threshold. Just to reflect back, what you are saying is that the previous late provision has not, in your view, had a significant impact, but, going forward, any such late provision could do, presumably. If that is right, will you be providing one in September of 2019? Yes. As the differential goes on, I am not saying at this stage that the differential is sufficient to trigger additional compliance risks that would mean that you would want to do specific additional compliance activity, but we have not reached that view yet with the Scottish Government. You are right that the differential is now wider and therefore it is more important that we act timeously. You have my commitment, and the Scottish Government has my commitment that we will be doing that on time this year. Which is September. Which is September. Just a final point. I just want to take you back, Mr Harre. You talked about the three tiers. I just wonder if you might help the committee to understand to what extent does the current strategic picture of risk identify that risk about Scottish taxpayers misrepresenting their residency? Can you just give us a bit more on that? We have undertaken with the Scottish Government that we will assess that risk every year annually and that we will base our proposals for any compliance activities on that assessment. We obviously have some baseline data for 1617, where we have baseline data about the Scottish population, we have baseline data about movements of people in and out of Scotland, and that enables us to monitor trends as well as risk assess individual cases. At the moment, to the extent that there is a risk, it would largely be among the highest net worth taxpayers, and our compliance strategy for dealing with high net worth individuals is an actual individual risk assessment. Each of them has a compliance relationship manager appointed to them and whose job it is to personally monitor that taxpayer on an individual basis. At this stage, our monitoring of that is both looking at trends for the population as a whole and then specifically monitoring what high net worth individuals are doing or are saying to us. We have a special devolved income tax compliance officer for high net worth individuals to make sure that Welsh income tax and Scottish income tax risks are taken into account in their regular risk assessment of those people. As you said, the differential between Scotland and the rest of the UK is bigger than what it was to start with. From your trend analysis, particularly of the high net worth individuals, is there any evidence of a compliant—I am not talking about people deliberately dodging a remaining tax, I am talking about people taking a legitimate decision from their point of view to relocate from Scotland to other parts of the United Kingdom? Is there any evidence that, as the differential increases, there is any increase in relocation of high net worth individuals from Scotland to other parts of the UK? I will give you some figures that we have. First of all, our definition of a high net worth individual is someone with a wealth of £150 million or more. There is no Parliamentary that has come into that category. I will take your word for that. In 1617, we identified 608 high net worth individuals who we regarded as having Scottish taxpayer status. In 1718, we have identified 609, so there is one more than for the previous year. However, there has been movement within that. Of the 608 people who we identified as high net worth individuals in 1617, our records show that 16 of them had—the following year—said that they no longer lived in Scotland. They had either moved within the UK or moved abroad, but, as I said, there has been a corresponding change the other way, so we have one more high net worth individual in 1718 net than we had in the previous year. Overall, the differential is not impacting net in terms of those people. As I said, our records show that 16 people between 1617 and 1718 changed their residents. I have no way of knowing what their motivations for doing that were, but overall the number of high net worth individuals according to our records between those two years is almost constant. Right. Your definition of a high net worth individual, I think, was someone worth £150 million? That is my main test. We have income levels and everything as well, but broadly speaking. Below that, for example, there have been claims made that the differential is leading to an exodus of consultants and people from the health service who would be paid, depending on the status, something between £90,000 and £150,000 might be slightly more. Have you done any trend analysis on people who are high earners, but not in anything like the scale of net worth that you have defined as £150 million? No, HMRC has not. We have a slightly different interest perhaps than the Scottish Government, because our interest is in whether anyone is behaving non-compliantly in relation to their Scottish income tax. Obviously, a decision to move residents is not a non-compliant action. It is something that people are entitled to do, so we do not have a direct interest in that. The policy makers in the Scottish Government might have an interest in that, and they have access to data and we would help them in any way that we could if they wanted to monitor that kind of thing. Broadly speaking, we divide taxpayers into high net worth, as I mentioned. We have another category called affluent, for whom we have another compliance strategy. I am in the mass market, I would say, so that is probably what I will call the third group. What is the trend analysis show amongst the affluent? I do not have that information. Obviously, in the case of— Can you send it to us? I can say if we have it. Obviously, in the case of high net worth individuals, each case is looked at individually, so that is how we are able to get at that data. I will see what we have in relation to the affluent group. That is very helpful. I will go back to something that you said earlier, that peers who are parliamentarians are exempt from your special scheme for elected members, be it the MSPs, MPs or MEPs. Why are peers exempt from that scheme? It would be something that the Government made on when this Scotland Act was finalised, but my assumption—I am guessing, because I was not involved in it—was that peers are not representing a constituency, and it is not a geographical area that they are representing. The link with Scotland is through where, if they live in Scotland, they will be Scottish taxpayers. I think that there certainly used to be a specific definition of Scottish lords. An interesting point would be that we have had a number of examples of people who have been simultaneously MSPs and sitting in the House of Lords. In that circumstance, would they be allowed to register as non-Scotish? There are a lot of statuses to take precedence. Do you know how many of the 800 lords we have who do such a wonderful job for themselves? How many of them are registered to pay tax in Scotland? I am afraid that I do not. I am not looking for individual names or anything, obviously, but is that information just the number that you would be able to give us? We can take that away and have a look at that, but I do not immediately see any reason why that would not be something that we could disclose. That would be very helpful to see how many of them are actually paying the tax in Scotland, as opposed to the rest of the UK. My third and final question is the treatment of allowances and reliefs. I saw a calculation recently that the pension relief alone is worth about £47 billion a year, which is very heavily skewed towards the higher end of the earning scale. Obviously, we do not have control over that, but does that—where those reliefs take place, where people pay their pension and so on, that they get relief on, does that impact on the revenue that is assigned to Scotland? Yes, it does. It is the next tax that we collect from Scottish taxpayers that is assigned to the Scottish Government. To the extent that someone's tax bill is reduced by a tax relief, such as for pension contributions, that has an impact on the tax receipts of the Scottish Government. Would it be possible for you to give us a figure? I know that I just want to zero in a pension tax relief, because that is something that the chancellor appears of his eye on. Can you tell us—I do not mean just now—how much of that relates to Scottish taxpayers? We can certainly take that away and ask our analysts whether we can produce that. That would be very helpful. Thank you very much indeed. Okay. Bill Bowman, please. Thank you, convener. Good morning. We have been speaking so far about the allocation of taxpayers between Scotland and the rest of the UK. Can you tell me initially how you get into the system and when does your account within HMRC open? We arrive in this country when we are either born, or we fly in, or some such thing. When do you start to take an interest? It will vary. You may have a record with us at any age. We do not automatically set up a record for taxpayers at birth, but you may have a record with us because you claim tax credits, or you claim child benefit, or you have some taxable source of income, or you have claimed a repayment. Our estimate of the number of Scottish taxpayers—the £2.5 million is actually of the number of people who pay income tax. There will be a larger number of people who are on our database who are potential Scottish taxpayers in that our data would tell us that they are resident in Scotland, but they will be, for example, have earnings below the personal allowance or will have income that is not non-savings, non-dividend income. So, £2.5 million is our estimate of the actual number of taxpayers. So, when somebody triggers your interest at that stage, do you then have a decision, either Scottish or not Scottish, of how does that work? The flag is on our system for everyone who we believe meets the criteria of a Scottish taxpayer. So, for example, if you are someone who is self-employed and living in our growth and you are in your early years of self-employment, you are only earning £8,000 a year, whatever, while you set up your business. You are not paying tax because you are below the personal allowance, but the flag is on the system to say that you are a Scottish taxpayer. At any point, if your income goes above the level where you start paying income tax, that will be automatically identified as Scottish income tax. For employees, when an employer takes on a new employee, they are now required to tell HMSE of the employee's address. At that point, if it is someone's first job, we will know that they have a Scottish address. If you have no employment or no income but you are still in Scotland, you would still be a Scottish taxpayer. You would be a Scottish taxpayer if you start having taxable income. If you are currently not a taxpayer, you may or may not be on our database already. So you said that the £2.5 million of people who pay tax, so others who are on your system could be people who have employment, but their allowance is whether it is pension or whatever. Pension payments are perfectly legal, but there is no issue about that. It is good to say for your pension. I would agree with that. Do you then have an estimate of how many over the £2.5 million there are? I think that, from memory, it is about £3.5 million. People on our database in total have a flag against them to say that our records indicate that they are resident in Scotland, of whom £2.5 million are active taxpayers. The other point that was touched on is those who are not recording or avoiding, or evading, I should say, tax. Do you apply roles of pursuing those people across the whole of the UK or is there a difference between Scotland and the rest of the UK? At the moment, there is no difference between Scotland and the rest of the UK in the compliance activity that we undertake and we just do that on a UK-wide basis. As I mentioned earlier, in the future it may be that we will have a specific Scottish income tax compliance plan if we believe that there are specific risks in relation to Scottish income tax that we need to manage, but at the moment what happens is that the Scottish Government gets attributed to it a proportion of the yield that we bring in from our compliance activity across the UK. Do you have any indication whether evasion is higher or lower in Scotland? We have no evidence to suggest that it is higher or lower in Scotland. Obviously, there are some regional differences in the make-up of taxpayers, which affects the inherent compliance risk. For example, employees tend to have a very low compliance risk because they do not really have the opportunities to evade in the same way as, say, self-employed people have, and there are regional variations about how that population is made up. However, we are not aware of any national tendencies to evade or not to evade. What is Scotland and that balance between employee and self-employed? We tend to go on who is in self-assessment and who is in perjurene. Roughly speaking, I think that it is about the same. About 16 to 17 per cent of taxes are paid through self-assessment and the balance is paid through perjurene and that is roughly the same. Do members have any further questions for our witnesses from HMRC? Can I ask a small techie question? Will the £18.19 revenue estimate also take account of the £17.18 Scottish income tax out-turn data, which will be the most up-to-date information at that point? Yes, it will. In previous years, when we made estimates, we had no out-turn data, so they were made purely on the basis of the survey of personal incomes. However, this year, for the first time, we will be able to make our estimate based on that and the out-turn from the previous year, as will the Scottish Fiscal Commission and the Office of Budget Responsibility. I now close the public session of this meeting.