Nicola Campbell

Shona Robison, the Finance Secretary, will next week tackle the annual Hobson’s Choice of the Scottish Budget – pressure to raise more money to fund public services or risk declining revenues as the Laffer Curve, the point at which tax rates result in falling revenue, takes effect.

Additionally, a key risk is that raising Scotland’s tax rates will further widen the tax gap with England, Wales and Ireland, causing competitive disadvantage for businesses and deterring investment.

Hard pressed businesses and tax-payers concerned by the Chancellor’s substantial changes to National Insurance contributions, pensions and inheritance will be hoping that the Scottish Government will leave tax rates in Scotland untouched.They will also be hoping that the Scottish Government realises that the Laffer Curve has been reached if not passed. Feedback from Azets’ clients is clearly in favour of ‘leaving things alone’.

In 1988, Nigel Lawson abolished the 60% top rate of income tax, arguing that it reduced tax revenues as labour and businesses switched activities to lower tax areas, left the country or found ways to legally avoid taxes. Research indicates that higher taxes also restrict capital investment, productivity, innovation and investment in skills and training.

It will be interesting to see if the Scottish Budget will be affected by the ending of the alliance with the Green Party. The recent Westminster Budget could provide enough good news for Ms Robison through the provision of additional funding which could alleviate pressure to widen the tax gap further.

The key devolved areas are Stamp Duty (where we have Land and Buildings Transaction Tax instead) and income tax on earned income and unincorporated business profits. Scottish working taxpayers still reach higher rate 42% tax at £43,662 whereas the rest of the UK does not reach a rate of 40% tax until income exceeds £50,270.

National insurance for employees remains 8% until the UK threshold is reached creating a 50% effective tax rate in Scotland on earnings between £43,662 and £50,270 compared to just £28% in the rest of the UK. That gap equates to £1,454 less income per person per year. With the average UK household gas bill estimated at £1,717 it is easy to imagine the impact of higher taxes on Scottish households.

The last Scottish Budget also set rates on higher earnings of 45% (£75,000) and 48% (£125,140) which, when compared to 40% and 45% for the rest of the UK simply amplifies the tax gap for higher earners.

Much talk is always made of emigration (or at least migration) to save tax by moving to England. There is insufficient evidence to suggest that these differentials in anything other than a trickle, but others might be cautious about moving to Scotland and large corporate employers may seek to tax equalise (make up the tax gap) where employment is moved north.

It is important to remember what is devolved (and what is not). For example, if you own your own business in a limited company the dividends are still taxed on UK thresholds and rates, so there is simply no difference in the tax on that income.

What is clear is that businesses, entrepreneurs and employees are calling out for a halt to tax increases and to see a move towards tax simplification and consistency.

Additionally, SMEs often tell us that they would be more supportive of income tax rates if the Scottish Government could better demonstrates its work on improving the return on tax revenues by cutting government waste, inefficiency and bureaucracy. Perhaps efficiency will come more into focus when the tipping point on the Laffer Curve is passed.

Nicola Campbell is a partner and head of accounts and business advisory services in the Glasgow office of Azets