One has to feel a certain amount of sympathy for Derek Mackay at this time of year. In just over a week, on 12 December 2018, he will present his second Scottish budget to Holyrood - an event that is growing in importance as the nascent Scottish tax system continues to diverge from the rest of the UK. Because of Brexit, there is a greater gap between the UK Budget and its Scottish counterpart - but more time to mull options is not necessarily to his advantage

But why the sympathy? This is yet another Scottish budget where the headlines will be driven by decisions made south of the border - especially the changes to income tax announced by the Chancellor on UK Budget day on 29 October. Mr Mackay will be forced to respond (since even silence will - rightly - be construed as a response).

The Scottish rates of income tax highlight the problems faced by an administration which only has control of part of a tax regime - and indeed part only of the biggest tax involved. From April 2019, the personal allowance (not devolved) will rise to £12,500 across the UK and the threshold for the rUK 40% rate when combined with that will rise to £50,000. But Scottish taxpayers face different rates, at least on non-savings income (but including that received from rents).

The Scottish higher rate of 41% for that income in 2018-19 begins at £43,431. Furthermore, national insurance is not devolved and the NIC thresholds are pegged to the UK income tax bands. Thus Scottish taxpayers will find themselves paying a marginal rate of 53% (41% income tax, 12% national insurance) on earnings between £43,431 and £50,000. By contrast, English taxpayers will pay a marginal rate of 32% on the same slice.

Mr McKay has to balance the budget, so it is unlikely that a similar increase to the higher rate threshold will be announced for Scotland. The SNP administration is also keen to set out a distinct "Scottish Approach to Taxation" - Mr Mackay's immediate reaction to the increase was to refer to "a fairer and more progressive path"; a refusal to make much of an increase would be a significant differentiator. The Scottish Government does not have a majority and its most apparent ally in the Greens (along with a number of SNP MSPs) are known to favour much higher tax rates.

On the other hand, there are not huge numbers of higher rate taxpayers in Scotland. If income tax rates in Scotland are set too high, will the grass look greener on the other side of the Solway Firth? For some earners it may not be necessary to up sticks and move. A sole trader or contractor who incorporates could potentially turn their Scottish income tax liabilities into UK corporation tax and dividends taxed at the UK rates. Of course, the difference between Scottish and UK taxes could become keenly felt by the contractor community, whose income may be dragged into the "earnings" net once further changes to the IR35 regime bite in April 2020.

The income tax position may dominate coverage. But what else can be anticipated?

On Land and Buildings Transaction Tax, watch to see whether there is any move to replicate the 1% SDLT surcharge that has been proposed for overseas buyers of residential land. Where might "overseas" start for Scotland? Elsewhere, the Scottish Air Departure Tax (for which legislation was passed in 2017) has failed to launch for another year and will now be delayed until 2020 (due to complications caused by Brexit). Likewise, the Aggregates Levy continues to be mired in EU state aid litigation, and so (due to lack of Brexit) nothing is expected on that front this year. The Scottish government may take the opportunity to chime in to the "national discussion" on the mooted transient visitor (a.k.a tourist) tax.

The Scottish Budget may still lack the sense of occasion of its UK equivalent - but there will be a good deal to consider.

The Scottish Budget will be announced next Wednesday 12 December - look out for our key takeaways, and full analysis on then!


Alan Barr