The new Chancellor announced various new economic measures in his 'mini-budget' this morning, but not all of them apply in Scotland, so Insider has analysed what the fiscal changes mean for businesses north of the border.
For a start, Kwasi Kwarteng's announcement that the UK basic rate of income tax will be reduced to 19p and the UK additional rate of income tax abolished from April 2023 does not apply, with the power to set rates and bands of non-savings, non-dividend income tax are devolved.
However, it will lead to further points of divergence between the Scottish and UK income tax regimes in the absence of changes to the existing Scottish income tax regime.
Sean Cockburn, chair of the Chartered Institute of Taxation's Scottish Technical Committee, explained: “Bringing the reduction to the UK basic rate forward by a year means that, as things stand, from next year, Scottish Ministers will be unable to say that some Scots face lower tax bills compared to the rest of the UK.
“We won’t know how the Scottish Government intends to respond until later this year so absent this detail, it raises the prospect that all Scottish taxpayers earning more than £14,732 will now pay more income tax compared to taxpayers in the rest of the UK.
“As an illustration, someone in Scotland earning £27,850 would have paid the same amount of tax as someone living in the rest of the UK this year - the changes announced by the Chancellor mean that from next year, they would pay £152.80 more.
Cockburn continued: “The abolition of the additional rate tax raises the prospect of significant income tax divergence for taxpayers with income above £150,000.
“In Scotland, the ‘top’ rate of tax (as it’s called) is charged at 46p, so someone earning £200,000 next year would pay £6,045 more in income tax compared with someone in the rest of the UK.”
Cockburn, also a director in the tax advisory team at Mazars, also pointed out that the Stamp Duty Land Tax cuts will not apply in Scotland, but history suggests the Scottish Government will be considering revisions to the corresponding Land and Buildings Transaction Tax.
“And the reduction in the basic rate tax rate means Scotland can no longer claim to have any taxpayers paying less than those in the rest of the UK.
“Furthermore, the abolition of the Additional Rate Band means that, absent any changes, Scottish taxpayers at the top end will be paying 6% more than those in other parts of the UK next year for the privilege of living in Scotland.“
Sharon Blain, tax director at PwC Scotland, said: “While several of the measures announced in the Chancellor’s statement will not apply in Scotland, there is no denying the impact many of the reforms will have on Scottish consumers and businesses – and potentially on the Scottish Government’s plans for its own budget later this year.
“The reduction in the UK income tax rates, for example, will boost Scottish Government revenues as less money will be knocked off the block grant that is paid to Scotland by the UK.
“However, the removal of the higher rate of tax for top earners will give the government north of the border food for thought as it considers ways to remain competitive in terms of attracting those individuals to Scotland under its own tax framework – particularly when coupled with measures like the reduction of stamp duty.“
Additional rate taxpayers in 2020/21 represent 0.6% of Scottish taxpayers, but provided 16.1% of total income tax receipts.
The lowering of the basic income tax rate to 19% now applies from the nil rate of £12,570 up to salaries of £50,270. In Scotland the 19% rate only applies to salaries between £12,571 and £14,732, increasing to 20% for those earning £14,733 to £25,688 and then 21% to £43,662.
Daniel Hough, financial planner at Brewin Dolphin, said: “The changes to the tax regime made by the chancellor in today’s budget will likely put further pressure on the Scottish Government to change Scotland’s tax system - no matter what you earn, you are now worse off in Scotland than you would be in other parts of the UK.
“Scrapping the additional rate will also leave those affected paying much more tax in Scotland than they would in other parts of the UK, which could be significant.
“With the rise of remote working following the pandemic, we could find a situation whereby those in highly remunerated jobs decide to live and pay tax in England but work in Scotland.
“Ultimately, this would hurt Scottish tax takings if it is not addressed in some way soon.”
Soon after Liz Truss was named the new Prime Minister, acting Finance Minister John Swinney said he would conduct and explain a fiscal review within two weeks of Kwarteng's emergency budget.
First Minister Nicola Sturgeon has already published her Programme for Government, laying out various measures to help tackle the rising cost of doing business.
Andrew McRae, Scotland policy chair for the Federation of Small Businesses, stated: ”Many of the more eye-catching announcements - on everything from income tax to investment zones to planning reform - are either wholly devolved to Scotland or at least involve co-operation between our various governments.
”It will be interesting to see how the Scottish Government decides to proceed in light of these moves and, indeed, how it chooses to spend any consequentials.”
Dr Liz Cameron, chief executive of the Scottish Chambers of Commerce, commented that the plans for investment zones strike an ambitious tone, but these plans must provide equitable benefits to the UK nations ensuring new economic activity is generated, not simply displaced from one location to another.
So far, these zones are set for the west Midlands, Thames Estuary, Tees Valley, west Yorkshire and Norfolk, but Kwarteng said Westminster was in early discussions with devolved administrations about where they could be set up outside of England.
Cameron also said that fixing the burdensome planning system must be a joint priority for both the Scottish and UK Government if investors are to be attracted.
“As we look ahead to the Scottish Government’s emergency budget, businesses and households now play the waiting game to see if the Scottish Government opts to take similar moves.
“With control of powers such as income tax and land and buildings transaction tax devolved to Scotland, the expectation will be for Scottish Government to deliver parity with the rest of the UK - divergence between the nations risks dampening business and investor confidence.”
Blain from PwC added: “Retaining the competitive edge for investment will also be front of mind following the announcement of regional Investment Zones.
“While the UK Government has reiterated its commitment to freeports, this more extended approach to using tax incentives combined with planning changes to support ‘levelling up’ offers a more integrated and targeted package of benefits that could create more competition from areas in the North of England when it comes to attracting key investment.
“As a result, it will be interesting to see how engagement between the Scottish and UK governments progresses in terms of bringing the Investment Zone model north of the border.”
Glasgow North East MP Anne McLaughlin introduced a petition in the Commons yesterday calling on the UK Government to bring the Energy Bill Relief scheme in line with the Energy Price Guarantee - by extending it to two years and bringing in an energy price cap for businesses.
She also called for the eligibility for the Energy Bill relief scheme to be extended, as currently it is restricted to SMEs, public sector organisations and charities which have fixed contracts agreed on or after 1 April 2022, as well as to deemed, variable and flexible tariffs and contracts.
The SNP has also called for the Westminster government to reintroduce the 12.5% rate of VAT for leisure and hospitality businesses, and roll-out a further, broader windfall tax.
McLaughlin said: “The Tory government said small businesses would receive the same level of support as domestic customers but this was misleading, given they still haven’t brought in an energy price cap for SMEs and the Energy Bill Relief scheme only lasts six months.
“The Chancellor had an opportunity today to stand by that promise and failed to do so, as well as refusing to extend the windfall tax on large corporations making excess profits to ease the burden on ordinary families and small and medium sized businesses.
“I am urging Kwasi Kwarteng to address this urgently so that small businesses, charities and public sector organisations - and livelihoods - can carry on, instead of going under.”
Elsewhere, Scottish Liberal Democrat spokesperson Christine Jardine said: “Instead of a real plan to grow the economy, the Conservatives are reheating the same old failed policies and lifting the cap on bankers’ bonuses.
“It’s clear that the Conservatives are taking people for granted and have no plan to deal with soaring energy bills, sky-high petrol prices and rising food costs - what we should have seen today was a windfall tax on the oil and gas giants and new guarantees for businesses struggling with energy costs.”
Meanwhile, Scottish Labour leader Anas Sarwar called the statement economically illiterate and morally bankrupt.
“They have lifted the cap on bankers bonuses, given a tax cut to those at the very top, and delivered a windfall instead of a windfall tax for the energy giants making record profits – all while letting energy prices almost double and working people struggle to make ends meet.
“After 12 years of economic failure and bribes for billionaires, we deserve better.”
David Lonsdale, director of the Scottish Retail Consortium, welcomed measures to protect consumers and businesses from energy price rises.
“However, many of the announcements today will only have a limited impact on Scottish consumers and businesses.
“With the UK Government accelerating its planned reduction in the headline rate of income tax, bringing it forward to next April, Scottish Ministers should ensure workers on low or modest earnings here in Scotland benefit similarly to boost household incomes and encourage discretionary spending.
“Furthermore, today’s announcement provided no insight on what decisions might be made on business rates,” he pointe out. ”With the Scottish poundage already at a 23 year high and with inflation elevated the biggest question for many retailers will be how large next year’s Bill might be – and whether they will be able to afford it.
”Scottish retailers alone are facing a £60m uplift in their rates bills next April, so the upcoming Emergency Budget Review and Scottish Budget need to freeze the business rate and speed up the commitment to restore the level playing field with England on the higher property business rate.”
Colin Wilkinson, managing director at the Scottish Licensed Trade Association, complained that the two biggest concerns for the hospitality sector - a reduction of the 20% VAT rate and a cut in business rates - did not even get a mention.
“The hospitality sector has been pushing for a permanent reduction in VAT, similar to those introduced during the pandemic, to bring us in line with our European competitors and for industry support to be given through rates relief or cancellation of rates for the next year - both of these pleas have simply been ignored.”
He said that while the cancellation of the increase in corporation tax is welcome, it will only benefit those who are making a profit.
“A recent survey by the Night Time Industries Association (NTIA) highlighted that nearly 50% of night-time businesses are barely breaking even and a further 20% stated they’re losing money.
“The Chancellor has only given SMEs and independent operators yet another sticking plaster to fix a broken leg - it’s too little, too late.”
Indeed, NTIA Scotland responded to the mini-budget by calling it a missed opportunity to support businesses that have been hardest hit during this crisis.
“We urge the Chancellor and UK Government to reconsider these measures, given the limited impacts of the current tax cuts on the immediate crisis for many businesses across the sector, the extremely vulnerable position the night time economy and hospitality sectors remain in, and re-evaluate the inclusion of general business rates relief and the reduction of VAT within these measures.
“Additionally, the one targeted measure currently supporting night time economy businesses in England, that of 50% business rates relief for this financial year, has not been passed on to businesses in Scotland who were only offered this support for three months, instead of the 12 months available south of the border.
“The Scottish Government must now take immediate action to protect the 70% of hospitality businesses in Scotland unable to trade profitably from the threat of imminent closure and pass the 50% discount on in full for this year.”
Scottish Tourism Alliance chief executive Marc Crothall commented: “There were positives in today’s statement, such as the move to introduce tax free shopping for overseas visitors, however, the measures announced today do not go anywhere near far enough in providing immediate or indeed long-term solutions to the cost of living and cost of doing business crisis.
“Business rates relief and the lowering of VAT, which was expected and hoped for by many across the tourism and hospitality sectors in today’s announcement would have provided an immediate benefit to struggling businesses within the sector and vital supply chain, as we head into what will be our most challenging winter yet.
“I look forward to our continued discussions with the UK and Scottish Government over the coming weeks to highlight the immediate need for much greater short-term support from both governments for Scotland’s tourism and hospitality industry.”
As for some actual Scottish businesses, the fiscal event got a mixed review.
Euan Cameron, founder of Glasgow-based video interview start-up Willo, called it the worst budget announcement he's ever heard.
“For new businesses and organisations that are looking to grow, this mini-budget was a real disappointment.
“UK growth and productivity has been stagnant since 2011, and cutting taxes will not fix that - but investment in businesses, training and apprenticeships will.
“Today’s mini-budget statement tells me that the Chancellor has no interest in fixing the problems facing our economy, and as a business means we will seek to increase our operations in international markets which are continuing to grow and thrive.”
Duncan di Biase, chief executive of internet service provider of Brillband, commented: “We need swift, fast action from the government to ensure households can stay connected without having to pay huge bills.
“People need help now, and innovation cannot be a mutually exclusive swap for ensuring families can afford their broadband bills.
“We want to see the UK Government go further and make a commitment to support a digital innovation drive by protecting EIS, promoting early stage investment while ensuring bills aren’t pushed up further by providers.”
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