A computer error meant that 420,000 individuals who should be paying the new Scottish rate of income tax were not told of their changed status, the National Audit Office has found.

A report by the NAO reveals the number of potential Scottish taxpayers who were excluded from the initial identification exercise in 2015 because of an IT error and received their new “S” tax code three months after it came into force last April.

The report identifies “significant challenges” for HM Revenue and Customs, which will assess and collect the new tax on behalf of Scotland. HMRC only discovered the initial scan of its database was incomplete after being contacted by members of the Scottish government and the public who had not received, or knew people who had not received, notification letters.



The Scottish parliament has had the power to apply a Scottish rate of income tax (Srit) since 6 April 2016. Holyrood’s tax-raising powers have been further enhanced by the Scotland Act 2016 and, from 2017-18, it will be able to set the rates and band thresholds, excluding the personal allowance.

The NAO noted that HMRC failed to carry out any special exercise to inform those it had failed to identify, other than sending them a note of their new tax code. This risked the creation of “a less informed group of taxpayers”, it said.

The notification letters received by the 2.45 million taxpayers originally identified last December did not even contain a contact telephone number because HMRC’s strategy was “to minimise telephone contact”, said the NAO. Consequently, HMRC only recorded 312 calls between 1 December 2015 and 20 January 2016 specifically in respect of Srit.

Recipients were instead directed to the relevant gov.uk website pages but, according to HMRC’s own analysis, there was no noticeable increase in the traffic as a result of the notification letters.

The report also identifies the risk of tax avoidance and evasion if there are differences in tax rates or thresholds between Scotland and the rest of the UK.



Scotland’s finance secretary, Derek Mackay, confirmed in his draft budget last week that he would not replicate the UK Treasury’s tax cut for higher earners, meaning that the 40% threshold would only rise by inflation, to £43,430 in Scotland, while it will start at £45,000 in the rest of the UK.

A Scottish government spokesperson said: “We have made it clear to HMRC that the identification of Scottish taxpayers must be robust and accurate. Our officials regularly meet with HMRC to receive assurances that the identification process is carried out in a satisfactory manner, that the integrity of Scotland’s income tax base will be maintained and to ensure where any issues are identified that they are addressed quickly.”

But Scottish Labour’s Westminster spokesperson Ian Murray said the error raised serious questions about HMRC’s capacity to administer the new tax powers.

“It is vital that businesses and taxpayers have all the information they need so that such errors are not repeated and that any disruption to taxpayers and future tax revenues is minimised. In order to achieve this, HMRC must have the staff and resources to function effectively, so the government should urgently review the planned closure of HMRC offices in Scotland, which could lead to the loss of around 2,000 workers,” he said.

“The transfer of new tax powers to Scotland is a major challenge to HMRC and the Scottish overnment – one which they must be prepared to meet. It is difficult to see how drastically cutting staff numbers is conducive to that.”