BUSINESS NEEDS HELP – NOT MORE TAXES THAT COST JOBS
THE attitude of business towards the Scottish political landscape is changing. The Scottish parliament has been with us for 17 years and for most of that time its primary focus has been on public spending.
Yes, it has always had responsibility for setting and raising business rates in Scotland – but the other tax raising power it had, the variable rate of income tax, was never used.
This is now changing. The Scottish parliament is in the process of acquiring new responsibilities, including substantial powers over taxes. This represents a fundamental shift in the balance and purpose of the parliament and it is vital that our politicians, across the political spectrum, adapt accordingly.
The Land and Buildings Transaction Tax and the Scottish Landfill Tax have been with us for more than a year now. It is perhaps too early to judge the success or otherwise of their application; but in the case of the former, there was a clear intent by the Scottish Government to introduce a redistributive element to it by increasing the burden on high value transactions while raising the threshold below which no tax is paid.
The result has been a fall in Scottish average house prices of 8.4 per cent, though it is possible at least some of this could be attributed to the increase in high value sales concluded in early 2015 to get in ahead of the new tax. It would perhaps be fairer to judge this tax after is has had time to settle in but it is clear it has so far had a distortive effect on the market.
These effects and the risks of unintended consequences must rapidly become part of the consciousness of new and returning MSPs after the election.
In addition to these two relatively small taxes, the new parliament has growing control over income tax.
During this Scottish election campaign, politicians of various parties have been quick to propose increases to income tax. This is an area where we would urge caution, as the distortions and unintended consequences of a change in Scotland’s tax policy could be damaging for business and the public purse, particularly at a time when Scotland’s economic growth rate is flat-lining.
At a basic level, the temptation to raise taxes is understandable, especially for politicians with 17 years of experience of spending money, rather than raising it.
The theory goes that if a tax raises a particular sum of money and you increase the rate of that tax, you will raise a proportionately larger sum of money. The problem is it isn’t that simple.
Take the additional rate of income tax. Our politicians seem to be doing their best to outbid each other on how much we should increase this from its current rate of 45 per cent.
This is a rate paid by only 14,500 people in Scotland – 0.5 per cent of all income tax payers and only 0.3 per cent of the population.
It is easy to understand the popular appeal of raising the bur- den on this small section of topend taxpayers but consider this: that 0.5 per cent are responsible for paying around 12 per cent of Scottish income tax. In other words, they are already contributing very substantially to the cost of providing public services.
MANY of these wealthy individuals are also very mobile and if income tax became substantially higher than elsewhere in the UK, there is a real risk Scotland’s tax revenues could be at a substantial risk of falling, not increasing.
This is not just a problem that affects the super-rich. A substantial variation in the burden of income tax in Scotland relative to the rest of the UK would be a real consideration for businesses with staff based in Scotland and for those considering employing staff in Scotland. Tax levels are a factor in business decisionmaking and uncompetitive Scottish taxes could run the risk of discouraging investment.
The solution to bolstering Scotland’s public finances is to ‘grow the cake’ – enabling and supporting the creation of new businesses and new jobs. To achieve this, some taxes may need to be reduced, rather than increased.
As Scotland’s politicians focus on their new powers, we would also urge them not to forget the one tax they have had control of all along – business rates.
Successive Scottish Governments have been reluctant to reform this tax but with a broad portfolio of taxes under its control, there can be no excuse for the next one if it fails to act swiftly and imaginatively. Here is a tax based on notional rental values established before the last recession, assessed by 14 regional assessors, collected by 32 local authorities and where appeals procedures vary depending on where your business is located.
A review was announced by Finance Secretary John Swinney in December. It is imperative the new Scottish Government delivers a fundamental review of this tax from the ground up to ensure that it works.
If our politicians are to take one thing on board, it should be this: in the next Scottish parliament, you will have a range of tax-raising powers, many directly affecting business. Please consider the balance of these taxes collectively and develop the drivers which will create a Scottish economic environment which places business first and enables us to realise our ambitions for success.