Scotland’s tax experts take aim at SNP plans for devolved powers

PwC, Johnston Carmichael, KPMG and industry body ICAS have all issued warnings to Holyrood ministers that their current plans for newly-devolved tax powers north of the border could spark an exodus of Scotland’s highest earners.

Next year, when Holyrood assumes finance powers, Scottish middle earners will face higher income tax rates than elsewhere in the UK under current SNP plans to freeze the threshold for the 40p higher rate, while it expands to £45,000 south of the Border.

And the plans have been questions in a submission to Holyrood’s finance committee, with accountancy firm Johnston Carmichael, calling for a “fundamentally different approach” to the one currently proposed by political leaders.

That sentiment was echoed by other bodies such as ICAS (the Institute for Chartered Accountants in Scotland), and firms PWC and KPMG who called for more clarity about the direction the tax system in Scotland is taking as it diverges from that south of the Border.

ICAS said “certainty” in the tax regime was required, saying “it would be helpful if a relatively longterm view could be taken with a minimum number of changes to the thresholds and rates”.

The interventions were made as part of Holyrood’s finance committee’s inquiry into taxation in Scotland ahead of the new powers coming into force as a result of the post-referendum Smith Commission proposals.

Susie Walker, a partner and head of tax at Johnston Carmichael, Scotland’s biggest independent firm of chartered accountants, set out in its submission its “concerns over the prospect of a “divergence” in tax rates making Scotland a less “attractive location for business”.

She said: “Attracting and retaining individuals to work in Scotland will be a costly business if it becomes necessary to offer tax equalisation packages should the Scottish rates of income tax become higher than the rest of the UK.

“For some businesses where, for example, the workforce are skilled this cost will be significant and may give rise to businesses relocating elsewhere in the UK, or indeed outside the UK altogether.”

She added: “A number of our clients are flexible and ready to move should the costs of retaining a Scottish base become penal.”

Technology, life sciences and the oil and gas industries are the key areas that will be affected, she said.

“This will also have an impact on opportunities for Scottish graduates to continue to live and work in the UK and could have a long-term harmful impact on the economy in Scotland.”

Industry giant KPMG said the prospect of higher tax rates may not only compel people to leave Scotland but also dissuade those from elsewhere the UK from coming.

The ‘big four’ firm said: “This might affect the ability of employers to attract skilled workers to Scotland to support the growth of the Scottish economy, or increase costs for businesses and consumers as a result of such candidates requiring a ‘weighting allowances’ to compensate them for moving to a higher tax regime.”

And David Glen, PWC’S head of tax in Scotland, said the ability of workers to simply leave if they are being taxed too much is a “constraint” on government’s scope to put up taxes, although it depends on confidence in the system.

“Greater transparency around policy making and the use of revenues enhances the confidence and reduced behavioural effects,” he added.

A Scottish Government spokeswoman said the SNP taxation plans were an attempt to make tax in Scotland “fairer and more proportionate” to the ability to pay.

She said; “Our income tax proposals for 2017-18 and beyond will protect lower income taxpayers – but also generate extra revenue of around £1.2bn by 2021-22 to invest in key public services.

“Similarly, we are proposing progressive reforms to local taxation which will, over the lifetime of this Parliament, raise an additional £500m to invest in raising educational attainment.”

However, opposition leaders welcomed the interventions with Labour and the Liberal Democrats calling for a hike in the basic rate of tax for the lowest earners, while Labour also backs a pla for a 50p top rate for high earners.

Scottish Conservative MSP Alex Johnstone said the SNP plans would make Scotland “the highest-taxed part of the UK”, adding: “That’s unacceptable, and these experts are illustrating just how severe an impact that will have.”