Approach to tax compliance

Contents

Introduction

The taxes that Revenue Scotland collects help to fund public services in Scotland. Revenue Scotland's function is the collection and management of the fully devolved taxes. That function includes a responsibility for protecting the revenue against tax fraud and tax avoidance. 

The Scottish Government’s general approach to tax policy was founded on principles articulated in the 18th century by Adam Smith in his book 'The Wealth of Nations'. These evolved to form the basis of the Scottish Government’s Framework for Tax. These principles are reflected throughout the provisions of the legislation that underpins our work and, in turn, inform Revenue Scotland’s approach to tax and to tax compliance.

This information supersedes the previously published Revenue Scotland Compliance Strategy. It draws on Revenue Scotland’s operational experience since the organisation was formed in 2015. It takes a slightly different approach to the Compliance Strategy, moving away from what might be seen as a time-constrained, strategic document, and instead focuses on a more enduring vision of our approach to compliance work and the underlying principles that guide this approach.

Revenue Scotland’s Settlement and Litigation Principles are an important statement of the way we look to apply our principles to resolving disputes and are intended to complement the approach set out here. Disputes, where they arise, will most likely be in the context of the exercise of our work on tax compliance.

What we mean by Tax Compliance

In its 2021 glossary of tax terms, the OECD defined tax compliance as ‘the degree to which a taxpayer complies (or fails to comply) with the tax rules […] for example by declaring income, filing a return and paying the tax due in a timely manner’.

Taxpayers have general duties in relation to the devolved taxes. These include:

  1. to self-assess tax due;
  2. to notify Revenue Scotland of any taxable activities undertaken by them;
  3. to inform Revenue Scotland if tax is due;
  4. to send a tax return in on time;
  5. to ensure that the information in a tax return is accurate;
  6. to pay any tax due on time; and
  7. to keep adequate records relating to tax.

These duties derive primarily from specific statutory obligations set out in the main tax legislation relevant to the devolved taxes. However further obligations that impinge on a taxpayer’s liability can be found in other legislation such as due diligence requirements in relation to environmental requirements.

Together, these duties and obligations, alongside commitments from Revenue Scotland, are reflected in the standards expected of taxpayers and their representatives as set out in our Charter of Standards and Values.

Revenue Scotland’s approach is driven by a desire to assist taxpayers to meet their obligations. This extends well beyond the checking of returns into enabling taxpayers to assess their own tax liabilities, meet their obligations to file tax returns and to make or receive tax payments or repayments.

Revenue Scotland is required to undertake activities where there may be uncertainty as to whether the correct tax treatment has been taken by a taxpayer or their representative, or where taxpayers do not meet their obligations, in order to ensure the revenue due to the Scottish Exchequer is protected and to address compliance failures. This is what we refer to as our tax compliance activity.

The principles that underpin our tax compliance work

In applying its resource Revenue Scotland applies five principles:

  • Proportionate – our activities will be appropriate to the risk posed.
  • Accountable – our activities will be justifiable and open to public scrutiny, with clear and accessible policies and a fair and efficient complaints procedure.
  • Consistent – our communications will be robust and reliable, and we will respect advice provided by others. Our rules and standards will be joined up and implemented fairly.
  • Transparent – we will aim to keep our published guidance simple and user friendly to help taxpayers to understand what is expected of them and what they can anticipate in return.
  • Targeted – we will focus our resources on the basis of risk and employ systematic checking on a range of risks. We will utilise data to detect and tackle the taxpayers at higher risk of non-compliance and the situations, behaviours, or activities most characteristic of non-compliance.

Our approach to compliance has three key elements:

  1. Enabling – helping taxpayers comply with their tax obligations
  2. Assurance – using our resources and statutory powers to ensure that the tax system is performing as expected and identifying non-compliance
  3. Resolution – resolving disputes

We will consider these separate elements in the following chapters.

Enabling: helping taxpayers comply with their tax obligations

Certain provisions within the devolved taxes legislation are designed to promote compliance by taxpayers. The link between registration of title for property transactions and the submission of an LBTT return and payment of tax due is one example of this.

Whilst Revenue Scotland has no discretion to decide how much tax is due, it does have discretion in how it approaches its work. In exercising that discretion, we undertake a range of enabling activities to help taxpayers to comply with their tax obligations. These are considered in more detail in the following sections.

Through our information and systems by providing:

  • clear guidance to help taxpayers, their agents, and other persons to understand their tax obligations, i.e. information is available at the point of completion of a return;
  • an online system for making tax returns that is designed from users’ perspective, including live-time validation of information provided by taxpayers;
  • a number of options for making tax payments quickly and easily.

Through the services we provide:

  • where taxpayers or their agents have queries or difficulties, they can access Revenue Scotland guidance in effective, accessible and convenient ways, including through our website, video channels and other modes of communication;
  • where queries require responses that are not met through these channels we can offer responses to queries electronically or by phone, again with provision for information to be provided in accessible formats;
  • for more technical queries on particular cases, our non-statutory opinions service provides a Revenue Scotland view to taxpayers in relation to areas where there is genuine uncertainty about the application of the devolved taxes legislation.

In our engagement with stakeholders, we will:

  • highlight known or potential compliance issues at various sector or industry-based forums, or through specific groups such as professional bodies;
  • in instances where repeated or systematic errors in tax returns are being made, Revenue Scotland may visit taxpayers or their agents to help them understand what is required;
  • where appropriate, publish further guidance to bring clarity to complex issues.

Our approach to enabling work will be informed by data, feedback, behavioural insight, and user research.

Assurance: using our resources and statutory powers to ensure that the tax system is performing as expected

Revenue Scotland and other interested parties need assurance that the tax system is performing properly.

The interested parties include:

  1. Parliament – to whom Revenue Scotland is statutorily obliged to report in relation to the performance of Revenue Scotland’s functions. Audit Scotland will perform an annual audit of Revenue Scotland accounts which are presented to Parliament.
  2. The public – to ensure that the tax system is being followed by all in order to maximise the revenues for the common good.
  3. Scottish Government Policy colleagues, to ensure that the tax system is performing in line with the Policy intentions.
  4. Stakeholders – this is a wide term, potentially encompassing individual taxpayers, the agents or representatives of taxpayers, professional bodies, industry representatives, other revenue and government authorities and advisory groups, amongst others.

Assurance that the tax system is performing properly covers a broad spectrum of work which could range from correcting simple, unintentional errors, to resolving technical uncertainties, through to tackling deliberate evasion. The following are further examples of our assurance work:

  • Revenue Scotland will design its systems to receive assurance at source that only the correct data can be entered in tax returns at the correct point, or that someone has consciously chosen to give inaccurate information. This is seen as an extension of Revenue Scotland’s enabling role described earlier.
  • When tax returns have been made by taxpayers or their agents, Revenue Scotland also carries out a number of activities to check that the returns are complete and accurate and that the correct amount of tax has been paid.
  • Assurance is also derived from undertaking tax compliance work as described below.
  • We will share risk information with other jurisdictions and agencies where we have the power to do so.
  • We will monitor queries and opinion requests received, as well as Tribunal and Court developments, to consider whether there is doubt about the application of the law, or a need for clarification of the legislation or our guidance.

Pursuing non-compliance

An important element of ensuring that the tax system is performing as it should is to undertake tax compliance work. Revenue Scotland will use its resources proportionately to pursue non-compliance.

Why we pursue non-compliance

As one of our statutory functions we are legally obliged to protect the revenue against tax fraud and tax avoidance.

Moreover, for the tax system to operate effectively, there has to be a consensus that it is operating fairly. Society expects that non-compliance will be pursued.

Notwithstanding society’s general disapproval of those who under-declare their tax liabilities and the measures put in place to prevent accidental misdeclaration, there are those that are determined to inappropriately reduce their tax liability, or those with whom we simply disagree about the interpretation of the law. Undertaking tax compliance will test those views of the application of the law, and also raises further tax revenues for the Scottish Exchequer.

We recognise that taxpayers may require assistance from professional agents in their tax affairs. Taxpayers are also entitled to plan their affairs in a way that minimises their tax liabilities where it does is done so legitimately, and in accordance with the intent and spirit of the law. We also acknowledge that the vast majority of tax agents and advisors who provide taxpayers with advice do so in a diligent and professional way.

Nonetheless, there are a small minority of advisors who will seek to obtain tax advantages for taxpayers in ways which are not in accordance with the intentions of parliament.

The taxes that Revenue Scotland administers are self-assessed taxes and hence taxpayers are expected to take responsibility for the accuracy of their returns. This includes post-return amendments.

Where a taxpayer is offered a means to reduce their tax liability we would urge them to exercise caution and to consider the mantra that if something looks too good to be true then it probably is.

How we approach non-compliance

Revenue Scotland takes a risk-based approach to determining where, how, and when to apply resource to tax compliance activities. We identify where risks to tax revenue in the devolved taxes may exist. Our assessment of tax risks is informed by our operational experience of collecting and managing the devolved taxes since Revenue Scotland was established in 2015 and is supported by effective use of the data we hold.

Revenue Scotland may use data and information from all or any of the following sources to detect non-compliance:

  • We will examine tax returns directly to consider possible instances of non-compliance. We may look at results on a thematic basis, or specific types of return. We may also choose to select returns at random to provide a wider assurance.
  • Information provided by the public can be used to identify possible non-compliance. Such information will always be assessed before use and considered carefully. We will seek, so far as is possible within the law, to protect the source of material received.
  • Commercially or publicly available databases may be used to identify possible instances of tax compliance. 
  • Information sharing with other tax authorities or other public bodies that may highlight non-compliance, for instance using data sharing gateways under the Digital Economy Act 2017.
  • We may use information obtained from one taxpayer or other third parties to check the tax position of another. 
  • Inspections to ensure that activities correspond to tax return data.
  • We may use specialist knowledge to help fill in gaps in our understanding of specialist areas or markets.

Revenue Scotland looks to continually improve its access to, and use of, data and information and anticipates this being an important and growing aspect of its compliance activities as greater interconnectivity and the potential for sharing data increases over time.

Where we suspect that a tax return is non-compliant or where the tax position is uncertain, we may contact the taxpayer or their agent to seek to clarify the position. This may be done informally or using our formal enquiry or investigation powers. Non-compliance will include situations where a return has not been made and Revenue Scotland will seek to detect this form of non-compliance.

Revenue Scotland may issue a determination of the tax owed. Such a determination can only be displaced by a formal tax return being submitted.

There is also a range of fixed, daily, and tax-geared penalties and a wide ranging General Anti-Avoidance Rule (GAAR) which are intended to encourage compliance and deter non-compliance.

The vast majority of Revenue Scotland’s tax compliance activity can be dealt with using civil powers. Where necessary Revenue Scotland may refer cases to other law enforcement agencies.

Measurement of tax compliance

Revenue Scotland will calculate the value of its tax compliance activity. Additional tax collected will be measured, as well as ‘tax protected’. Tax protected includes the value of, for example, repayments prevented where found not to be due, or other preventative work where the cause and effect can be accurately measured. The results of these compliance activities are summarised each year in Revenue Scotland’s Annual Report and Accounts.

Revenue Scotland does not attempt to put a specific value on any particular tax gap, that is to say, the difference between the revenue collected, and the theoretical amount of tax that should be collected.

Tax gap measurement can be an imprecise science, particularly for the devolved taxes collected by Revenue Scotland. These theoretical differences are often based on user experience rather than any qualitative research, involving high uncertainty ratings. To generate such figures as a form of usable statistic (even extrapolating from our measured compliance outputs) would be counter to Revenue Scotland’s approach that published statistics should have public value and be of a high quality.

Revenue Scotland sees more value in putting the resources at its disposal into detecting and evaluating where tax compliance concerns may lie and then testing those considerations. Where a systemic problem arises we will seek to use our resources to work with our Policy partners to address the issues legislatively.

Resolution: resolving tax disputes

Revenue Scotland has published its Settlement and Litigation Principles which set out our general approach to resolving disputes. The accompanying explanatory guidance sets out in more detail our approach on applying these principles in practice.

Appealable decisions made by Revenue Scotland may be challenged by the taxpayer either by requesting a review of the decision and/or by appealing to the First-Tier Tribunal for Scotland. Appeals against decisions of the First-Tier Tribunal on a point of law are heard by the Upper Tribunal for Scotland. Further possible appeals lie to the Court of Session and then the Supreme Court.

Role of tax penalties

The devolved tax Acts set out a range of different penalties where tax obligations have not been met. These typically relate to failure to lodge returns on time, failure to pay tax on time, or penalties due to the incorrect tax being declared by or on behalf of the taxpayer. Depending on the specific circumstances, Revenue Scotland may be required to charge penalties based on a range of non-compliant behaviours by taxpayers and, in certain circumstances, third parties.

Penalties in the context of tax perform a number of functions. They are intended to deter taxpayers from defaulting on their tax obligations—and to punish them if they do (the deterrence function). Added to this they also seek to help define what we consider to be compliant behaviour. Where that definitional approach is not apparent from the legislation then Revenue Scotland will seek to add this explanation through its guidance, where the legislation permits such an interpretation.

Revenue Scotland seeks to apply penalties in the following manner (subject to the governing legislation):

  • We will apply penalties predictably: we publish guidance on how and why we apply penalties and in what circumstances;
  • proportionate to the degree of non-compliance, where the legislation permits;
  • applied consistently across the different taxes and different taxpayers where the facts and circumstances are the same;
  • In a timely manner – Revenue Scotland will seek to apply penalties as closely in time as practical to the actions giving rise to the penalties. For behaviour-based penalties this will typically be once all relevant information has been gathered and reviewed and may be after any relevant enquiry has been closed.

Revenue Scotland has discretion to reduce, remit or suspend some penalties in certain circumstances. This is discussed in our penalties guidance. 

As with other appealable decisions made by Revenue Scotland, where a taxpayer disagrees with a decision in respect of the imposition of a penalty a taxpayer may request a review of the decision and/or can appeal to the First-Tier Tribunal for Scotland.

Role of interest

Interest is commercial restitution for the loss of use of the funds by the Exchequer and as such plays a part in ensuring that taxpayers do not gain any advantage from delaying payment of tax.

Revenue Scotland does not charge a premium rate of interest in areas such as time to pay requests, where an increased margin over Base Rate would commercially be sought to compensate for increased risk of default.

Interest and penalties undertake different roles in the administration of the devolved taxes and are not mutually exclusive. Whilst penalties can in some circumstances be abated through various statutory mechanisms interest will not, as a general rule and a matter of principle, be reduced or waived. This is reflected in the drafting of the relevant legislation.

Appealable decisions in respect of interest are subject to the same rights of review and/or appeal as other Revenue Scotland appealable decisions.

Wider context

Decisions in relation to our function are, of course, made on the basis of the facts and circumstances of any given case. The information presented on this page is not intended to restrict or define any discretion we have nor prescribe any course of action we may take. In the case of any perceived inconsistency between this information and Revenue Scotland’s legal duties under the devolved taxes legislation or any other relevant legislation, the statutory requirements will take precedence.

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