Ross Stupart

The Scottish Budget represents an opportunity to give Scotland’s businesses greater transparency on the government’s tax strategy, so businesses can see clearly how taxes will work for the foreseeable future and make plans accordingly. We’d also like to see a tax strategy that is aligned with the Scottish Government’s economic strategy, and which has a mechanism that promotes accountability, with the Scottish Government required to be more transparent with taxpayers on what their taxes are being spent on.

Scotland’s current approach to income tax is making it more difficult to hire people, as they can pursue a career outside of Scotland, where there are more favourable tax treatments for employees. Freeports and investment zones are a good idea in theory as a mechanism to attract inward investment and stimulate economic growth, but businesses need to have confidence that they will be able to attract people with the right skills for these initiatives to work in practice. The current income tax system in Scotland is seen by many businesses as a barrier to growth.

Announcements in Rachel Reeves’s UK Budget are already set to have a big impact north of the border. Increases to employers’ national insurance rates and reductions to the thresholds when employers start paying will see a considerable increase in the cost of employing staff. This could restrict the creation of additional jobs, and slow down salary rises, which could hurt the Scottish economy overall.

With only a small number of Scottish taxpayers paying less income tax than their English peers, and the national insurance increases putting a squeeze on wage inflation in future, it will be interesting to see if the Scottish Government is tempted to follow a similar strategy to Rachel Reeves of retaining the freeze on income thresholds. Alternatively, they could seek to inflate the thresholds to relieve the financial pressures on lower and middle income earners.

What businesses would really like to see is parity again between Scottish and English income tax rates, to provide a level playing field in the war for talent. With the Institute for Fiscal Studies (IFS) recently warning that Scottish Income Tax rate changes in the last few years may have already slightly decreased the Scottish income tax take, it suggested the Scottish Government should at least pause on increasing income tax on Scottish higher earners.

Given the additional £3.4bn Barnett Formula contribution coming to Scotland out of Rachel Reeve’s budget, which will provide additional funding for some much-needed investment in Scotland’s health, education and infrastructure projects, the Scottish Government has an opportunity to show it has been listening to businesses.

The finance minister has had a lot of feedback from Scottish businesses looking for some positive changes to tax policy that will ease the burden on business and stimulate growth. If there are changes and reforms to the Scottish rates of income tax and business rates in the Budget on December 4th the Scottish Government may have listened. If not, it can expect renewed challenges from business leaders, particularly if the mismatch between tax and economic strategies continues.

Ross Stupart is office managing partner and head of tax for RSM in Edinburgh