Business has good reason to fear future of tax policy

Firms warn that increases could lead to workers and companies leaving country, as well as further damaging fragile economy

Uncertainty over the future of tax policy in Scotland has become an almost permanent concern in public policy debate. This was aired throughout the independence referendum battle and again during the Holyrood elections earlier this year. They have now resurfaced as the administration prepares for the forthcoming budget statement with newly devolved powers.

Fresh warnings from leading finance and accountancy firms thus come as no surprise. They fear that demands for tax hikes aired by Labour and the Liberal Democrats while the SNP administration says it will keep its options open on a tax increase for higher income earners could lead to individuals and firms leaving the country.

What is further fuelling concern is the precarious state of the economy in Scotland. Not only has the growth rate been falling but it is now significantly below that for the rest of the UK. Tax rises would add to the pressures on household budgets – taking out, on the Labour leader’s own calculations, £1.2 billion that Scots would have been free to spend.

Further tax imposts at this time with Scots workers taxed more heavily than their counterparts in the rest of the UK would both add to business burdens and act as a disincentive for future skilled workers and university graduates from coming to work here. Technology, life sciences and energy are sectors most likely to be the most affected.

Accountancy firm Johnston Carmichael has told Holyrood’s finance committee that a “fundamentally different approach” to taxa- tion is required. It fears that divergence in tax rates from those in the rest of the UK would make Scotland a less attractive location for business. Other bodies such as the Institute for Chartered Accountants in Scotland, PWC and KPMG also raise issues over lack of certainty in the tax system.

Meanwhile, the parlous state of Scotland’s public finances adds to pressure for a tax rise. The SNP administration now faces a massive £14.9 billion budget deficit, equivalent to 9.5 per cent of Scotland’s GDP – more than double that for the UK as a whole and higher even than that of Greece. Holyrood’s relentless programme of giveaways and higher spending on pet programmes has added to the pressures for higher tax. And demands for tax raising powers are coming from local authorities.

“Hitting the rich” is the populist cry. But there are compelling reasons why adding to the top rate of tax may prove counter-productive. There are just 17,000 additional rate taxpayers in Scotland – 0.7 per cent of the total. Yet those additional rate taxpayers contribute more than £1.5bn or 13.9 per cent of total income tax.

Such is the relatively small number making this major contribution that any changes in that number would have a notable effect on revenue. Given this sensitivity, behavioural consequences need to be considered lest tax hikes prove counter-productive.

Add to this the constant repetition of calls for a second independence referendum, and it is not hard to see why business confidence is being stretched to breaking point.