Her Majesty’s Revenue and Customs (HMRC) will face “significant challenges” administering the new Scottish rate of income tax, according to a report by the National Audit Office.

“Her Majesty’s Revenue and Customs continues to make progress in ensuring that income tax levied under the Scottish rate will be assessed and collected properly, but still faces significant challenges to ensure that all Scottish taxpayers are correctly identified,” the report said.

The report stressed that the key challenge to HMRC’s delivery of the Scottish Rate of Income Tax (SRIT) is maintaining and updating its record of addresses in order to identify Scottish taxpayers.

The NAO said: “It is essential for HMRC to identify Scottish taxpayers and maintain a correct record of their addresses so that it can calculate accurately tax collected and the amount of revenue that the Scottish Government receives as part of its block grant in future years.”

However, the NAO report said that “as a result of an error in the design of HMRC’s taxpayer identification exercise in December 2015, 420,000 potential Scottish taxpayers did not receive a notification letter.”

“HMRC was notified quickly of this issue by other stakeholders, such as the Scottish Government, employers and taxpayers …

“The 420,000 omitted taxpayers received coding notices which informed them of the change in their annual tax code, and provided basic information on what was meant by an ‘S’ code.

“By not issuing the same level of information as the 2.45 million taxpayers originally identified in December 2015, HMRC may have created a less informed group of taxpayers.”

The NAO said a permanent IT solution was implemented in October 2016 “to bring these taxpayers within HMRC’s automated process for future years, and to ensure that all in-year changes of Scottish taxpayer status for these customers were correctly reflected in 2016-17 codes.”

The NAO added: “HMRC’s ability to assure the amount of tax collected for the Scottish Government will be undermined where taxpayers fail to update their address details …

“A future divergence of tax rates or thresholds between Scotland and the rest of the UK presents the possibility of tax avoidance and evasion.

“HMRC has developed a compliance strategy that considers this risk. The majority of compliance activity will commence in 2017-18.”