The first full Scottish Budget?

15.12.17

...or, as we were repeatedly told, the draft Scottish Budget, for 2018-19. The Scottish Government will still need to find sufficient additional political support to get its Budget through the Holyrood Parliament. There is a great deal to get through; and support for some aspects may demand changes in others. So what we have been told thus far may not be the end of the story.

You'll find in this article anaylsis on: Scottish income tax ratesLBTTNon-domestic (Business) ratesLandfill TaxAir Departure Tax; and Aggregates levy.


As was telegraphed well in advance, this was always likely to be the first time that the Scottish Government utilised its powers to vary income tax for the earned (and property) income of Scottish taxpayers. As such, on the tax front, it was a much more comprehensive event than in previous years. 


Alan Barr Brodies Head of Personal Tax Planning
A number of possible models were published in advance; the one adopted was a little different from all of those, but fell on the side of marginally reducing the tax burden for a significant number, whether compared to taxpayers elsewhere in the UK or (in particular and rather disingenuously) compared to the current year; while increasing it for others, generally those with higher incomes. 


For the latter, it seems that pragmatism may have overcome (some) principles – there is no proposed return to a 50% tax rate, on the realistic basis that this might well have led to a significant reduction in the overall tax take. This was heavily informed by technical advice from the Council of Economic Advisers. The hope must be that those with higher earnings will not be driven by a relatively modest rise in their tax bill (especially in the highest rate) to attempt to cease being Scottish taxpayers at all. 


Derek Mackay’s Budget speech reversed the natural order of things, in that he told us what he was going to spend the money on before turning to the tax source of that spending. The income tax changes are forecast to raise an additional £164 million, but the structure put forward produces a complex matrix of winners and losers. In the already ridiculously complicated UK tax system, a new maze is opened, with five bands of income tax.


We have an extended tax vocabulary to incorporate the new bands – so for the Scottish taxpayer the UK rates designated as Starting, Basic, Higher and Additional are joined by rates called Starter, Scottish Basic, Intermediate, Scottish Higher and Top. Add to this possible zero rate allowances for savings and for dividends,  three further possible different rates for dividends and separate rates for capital gains tax and it is very difficult to imagine how it could be made more complicated. The costs charged by HMRC for administering the changed Scottish rates are a work in progress – but it seems certain that the greater the divergence from the rates in the rest of the UK, the greater will be the cost of collecting and administering Scottish income tax.


With such a headline-grabbing change, other tax matters were always likely to receive shorter shrift. There is to be consultation on an extension of the nil rate band for land and buildings transaction tax for first time residential buyers. The proposal is much more limited than that announced for the rest of the UK, although lower Scottish house prices prompted a reminder that most first time buyers in Scotland do not pay the tax in any event. Other parts of the devolved tax system (such as air departure tax) seem to be having a pause.


Whether this draft Scottish Budget becomes final in this form remains to be seen. It might be better to await that finality before challenging your calculator to work out whether you are one of the winners or the losers.

 

Scottish Income Tax rates

 

In a move that is radical, at least in terms of structure, Scottish taxpayers will face five bands of income tax in 2018-19, for their non-savings income.

 

Scottish income tax rates

 

Scottish Bands 

 

A Starter Rate of 19%

 

Over £11,850 - £13,850

The Scottish Basic Rate of 20%

 

Over £13,850 - £24,000

An Intermediate Rate of 21%

 

Over £24,000 - £44,273

A (Scottish) Higher Rate of 41%

 

Over £44,273 - £150,000

A Top Rate of 46%

 

Above £150,000

 

The way that these bands are presented is a little confusing, because the figures include the proposed 2018-19 UK level for the basic personal allowance. The figure at which the Scottish higher rate starts (£44,273) stands out for its confusing precision, that being based on an inflationary increase of the 2017-18 Scottish higher rate threshold. Structural consistency as well as arithmetic convenience might wish for a bit of rounding up - or even down.
Alan Eccles Brodies LLP


It is worth remembering that the Scottish rates will only affect the non-savings income (essentially that derived from employment, self-employment, pensions and rent) of Scottish taxpayers (essentially those whose home is in Scotland). Those with savings and dividend income will pay tax at the UK rates, where those are different; and will benefit from the UK specific allowances for such income. In deciding which rates to apply, savings income is treated as the highest part of income; and dividends are treated as being the highest part of savings income.


This produces anomalies – Scottish taxpayers within the Starter Rate band may pay a higher rate on their taxable savings income than on their earnings, while those within the intermediate and higher rate bands will pay at a lower rate (20% or 40%) on similar income. 


An existing anomaly gains further weight. Those with income above £100,000 have their personal allowance reduced on the basis of £1 for every £2 of additional income. This will produce a marginal rate of 61.5% for the slice of income just above £100,000 – to which can be added National Insurance of a further 2%.


Much was made in the Budget of the impact of the proposed new rates in relation to four policy tests – revenue raising, protecting lower earners, progressivity and economic growth. In sheer arithmetic terms, assuming forecasts come true, the new structure will support the first three. In particular, a greater number of bands of tax must increase progressivity . The last test is much more nebulous and the Budget paper is most defensive about it, prompting the question of whether a greater tax take can ever be a stimulus to economic growth. Other tests could of course be set; and the addition to the complexities of the overall system cannot be welcomed. But the changes meet a new fundamental test – the Scottish Parliament has extensive tax-varying powers now and this is a significant use of powers long sought after. The relatively modest overall and individual effects of the proposals are more akin to dipping a toe into potentially very hot water than a full scale plunge into a high-tax society.


Click here to download tables indicating the effects of the proposals at different levels of earnings.

 

Isobel d'Inverno Brodies LLP

Land and Buildings Transaction Tax

 

The rates of LBTT for 2018-2019 remain unchanged but the Scottish Government has proposed, and will consult on, a new LBTT relief for first-time buyers of properties up to £175,000. 


The relief raises the zero tax threshold for first-time buyers from £145,000 to £175,000, and the Scottish Government figures suggest that 80 per cent of first-time buyers in Scotland will pay no LBTT at all. If a new house costs more than £175,000, first time buyers will still get the benefit of the relief.


The relief is lower than the £300,000 SDLT first time buyers’ relief announced for first time buyers in the UK budget last month, but house prices are lower in Scotland so the lower limit makes sense. 


The Scottish Government will launch a consultation on the policy before introducing the first-time buyer relief in 2018-19.

 

Non-domestic (Business) rates

 

Almost all of the recommendations of the Barclay review have been adopted – including three yearly revaluations and removal of some charities reliefs, and the annual  increase in the poundage will be capped at CPI not RPI. A Barclay implementation plan is published. 


The Barclay review was set up in 2016 to review non-domestic (business rates) in Scotland. Chaired by Ken Barclay the group also included Professor Russel Griggs OBE, Isobel d’Inverno, Nora Senior CBE and David Henderson. The resulting report published on 22 August 2017 contained 30 recommendations to support growth, improve administration and increase fairness.  


The most significant Barclay recommendation was to reduce the revaluation period from five years to three years, with the valuations based on a date (the tone date) one year before the revaluation date. This should ensure rateable value keeps pace with property values and allows businesses to plan for business rates costs.

Scottish business will benefit from the new growth accelerator which gives a 12 month delay before rates are increased when a property is expanded or improved and before rates apply to a new property. In addition, new properties will not be included in the valuation roll until they are occupied. 

Matt Farrell Brodies LLP

Charity relief will be removed for most independent schools, apart from special schools, from 2020 although the charity relief for Universities will continue as before.  


Barclay also proposed to remove charity relief for ALEOs – Arm’s Length External Organisations - which have been set up by many local authorities to provide leisure and similar services. As previously trailed, the Scottish Government has decided to retain charities relief for existing ALEOs, but if future ALEOs are set up, the funding to the Council will be reduced by the amount of the rates relief. 


The Scottish Government has published a Barclay Implementation plan setting out its substantive responses to all 30 recommendations together with the Government’s implementation actions. The measures proposed go beyond what Barclay recommended, including several that are unique in the UK, in a package that has been widely welcomed by business. 


The annual rise in business rates will be capped at CPI, rather than RPI.

 

Landfill Tax

 

Landfill tax is a fully devolved tax and is therefore administered and collected by Revenue Scotland.  


The Scottish Government has announced an increase in the standard rate, to £88.95 per tonne, and the lower rate has been increased to £2.80 per tonne for 2018-19.  This is in line with the rates that apply to the rest of the UK. 


However, the credit rate for the Scottish Landfill Communities Fund has been increased to 5.6%, exceeding that of the UK at 5.3%. 


Operators can voluntarily contribute to the Fund in return for a tax credit, equal to 90% of the contribution. By increasing the cap on this tax credit at a rate higher than the rest of the UK, operators are able to contribute to a “greater degree than their UK counterparts, without any increase in the overall tax burden”. 


These contributions support community and environmental projects. 

 

Aggregates Levy

 

On-going legal issues in relation to EU state aid mean that the Scottish levy has still not been introduced. 

 

Air departure tax

 

Air Departure Tax is being deferred until the issues raised in relation to the application of state aid rules have been resolved. Currently journeys from Highland and Islands airports are exempt. 


In order to replace Air Passenger Duty with Scottish ADT, EU approval will be needed. Time scales for this may postdate Brexit and therefore the Scottish Government’s plans to reduce ADT by half is on hold until this approval is granted.