Scottish income tax decisions may face limitations, warn tax professionals

Having control over some parts, but not others, of a complex interacting tax system may limit the Scottish Parliament’s ability to maximise the use of its income tax raising powers, tax professionals have warned.

The Chartered Institute of Taxation (CIOT) in Scotland was responding to the publication today (2 November) of the Scottish Government’s discussion paper on the future of income tax in Scotland.  The document is widely considered the precursor to more fundamental changes to Scottish Income Tax rates and bands.

The Institute said that there needed to be careful consideration of the Scottish Government tax policy objectives2 and the continuing interactions between devolved and reserved taxes, which the document acknowledged but did not outline in specific detail.

Since April of this year, the Scottish Parliament has had the ability to set the rates and bands of income tax on earned income – with the money raised from these – together with other devolved tax receipts – assigned directly to the Scottish budget3.

However, income tax is only partially devolved, and Holyrood does not have control over key aspects of the income tax system – such as the tax base (deciding who and what can be taxed), the tax-free personal allowance, and income tax on savings and dividends.  Corporation tax (a tax on company profits) and National Insurance contributions are likewise reserved to the UK Parliament.

The CIOT cautioned that any substantial changes to Scottish income tax rates and bands had the potential to result in additional complexity for Scottish taxpayers and changes in taxpayer behaviour because of the continued interaction between devolved and reserved taxes.

While the potential behavioural impacts of tax changes in Scotland are hard to quantify (with little in the way of recent historical precedent), the Institute has urged MSPs to be wary of these potential constraints as they decide on future income tax rates and bands.

Commenting, Moira Kelly, chair of the CIOT Scottish Technical Committee, said:

“Despite the devolution of a significant number of tax raising powers to the Scottish Parliament in recent years, the fact remains that Holyrood’s ability to set and raise taxes remains constrained by tax policy decisions taken elsewhere in the UK.  These have the potential to influence taxpayer behaviour.

“There are many interesting proposals contained within today’s document, which is a very welcome contribution to the debate around Scotland’s devolved tax policy options.  But even if a political consensus emerges in favour of major changes to income tax in Scotland, these policy decisions cannot be considered in isolation from the wider UK tax regime.

“A markedly different income tax regime north of the border may, for example, incentivise self-employed businesses to incorporate in order to shift their liabilities from higher rates of Scottish income tax to lower rates of UK-wide corporation and dividend taxes.

“Similarly, in the case of very high earners, it shouldn’t be ruled out that those people could choose to relocate to other parts of the UK or elsewhere if significant amounts of tax were at stake.

“Recent history doesn’t tell us very much about what the potential impact of these changes may be.  When the UK-wide 50p top rate of tax was introduced in 2010, it did not remain in place long, while a long lead in time to its introduction and removal allowed some higher earners to plan their income in advance.

“MSPs must be mindful when exercising their tax raising powers that they do so in a way which recognises and responds to the continuing interaction with the wider UK tax base and the potential impacts on the Scottish Government’s budget.”


Notes for editors

1.       The Chartered Institute of Taxation (CIOT)

The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 18,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

2.       The Scottish Government’s four policy tests are revenue (mitigating forthcoming budget reductions), progressivity, protecting lower earners and supporting economic growth.  These are published alongside the Scottish Government’s Adam Smith principles of proportionality, certainty, convenience and efficiency.

3.       The Scottish Parliament is responsible for a range of tax raising powers.  These include taxes that are fully-devolved (Land and Buildings Transaction Tax (LBTT) and Scottish Landfill Tax (SLfT), Council Tax and Business Rates) and partially devolved taxes (Scottish Income Tax, where Parliament is responsible for setting rates and bands of income tax on non-savings and non-dividend income).  From April 2018, the Scottish Parliament will assume responsibility for Air Departure Tax (fully-devolved) and from April 2019, will be directly assigned a proportion of VAT revenues raised in Scotland.

4.       The additional rate of tax of 50% was in place for the tax years 2010/11, 2011/12 and 2012/13, applying to income over £150,000. The introduction of the 50% rate was announced in Budget 2009 and its removal was proposed in Budget 2012.

Contact: Chris Young, External Relations Officer, 07900 241 584;