Scottish Budget: Next steps
By Donald Drysdale for ICAS
18 December 2018
Now that the Scottish Budget for 2019/20 has been unveiled, Donald Drysdale studies its tax proposals and reflects on political uncertainties surrounding it. The views expressed here are his own and not necessarily those of ICAS.
Scottish income tax proposals
For accountancy and tax practitioners, Scottish Finance Secretary Derek Mackay’s tax proposals for 2019/20 can be set out succinctly. However, Scottish taxes are not well-understood by ordinary Scots, for whom their long-term implications may be far-reaching.
Scottish income tax (SIT) applies to the non-savings non-dividend income of Scottish taxpayers (as defined). The SIT rates for 2019/20 won’t change from those that apply now, and thanks to Chancellor Philip Hammond the personal allowance will rise from £11,850 to £12,500 for all UK taxpayers.
There are to be a couple of changes to the SIT thresholds, which are proposed as follows:
| SIT bands for 2019/20 | Band names | SIT rates |
|---|---|---|
| Over £12,500* – £14,549 | Starter rate | 19% |
| Over £14,549 – £24,944 | Basic rate | 20% |
| Over £24,944 – £43,430 | Intermediate rate | 21% |
| Over £43,430 – £150,000 | Higher rate | 41% |
| Above £150,000 | Top rate | 46% |
* Assumes the Scottish taxpayer has a UK personal allowance of £12,500 (reduced by £1 for every £2 of adjusted net income over £100,000).
The starter rate band of £2,000 was introduced last year to help those on lower incomes. An inflation-based adjustment will increase this band to £2,049 for 2019/20, boosting the maximum annual saving from the starter rate by 49p to £20.49 – the equivalent of (say) 21 units of alcohol or 40 cigarettes. One has to question whether this justifies the additional complexity the starter rate brings to the tax system.
Similarly, an inflation-adjusted rise will lift the Scottish basic rate band from £10,150 to £10,395, providing a maximum annual tax saving of £2.45. If these diminutive handouts are eventually approved, it is to be hoped that the thresholds will be rounded to more user-friendly figures to simplify tax calculations.
It is for those on middle incomes and above that SIT really bites. Compared with £50,000 for the rest of the UK (rUK), the Scottish higher rate threshold for 2019/20 will be frozen at £43,430 – the same level as in 2017/18 and 2018/19. The top rate threshold will also remain unchanged at £150,000, in line with the additional rate threshold for rUK.
Taking the following sample earnings in 2019/20 and the two preceding fiscal years, Scottish taxpayers will pay more tax than their counterparts in rUK, by the amounts shown:
| Earnings per annum | 'Gap - i.e. excess of SIT over income tax in rUK | Rise/(fall) in gap in 2019/20 | ||
|---|---|---|---|---|
| 2017/18 | 2018/19 | 2019/20 | ||
| £30,000 | £0 | £40 | £30 | (£10) |
| £43,430 | £86 | £174 | £164 | (£10) |
| £60,000 | £400 | £924 | £1,644 | £720 |
| £90,000 | £400 | £1,224 | £1,944 | £720 |
| £124,000 | £400 | £1,683 | £2,409 | £726 |
| £150,000 | £400 | £1,943 | £2,669 | £726 |
Mackay’s claim, that “On current incomes, 99% of all Scottish taxpayers – those earning less than around £124,000 – will pay less [SIT in 2019/20] than they do this year”, might usefully have been qualified.
First, as many taxpayers receive even modest pay rises, they may pay more SIT – especially as more of them are drawn into higher rate bands by fiscal drag.
Second, Scots on middle earnings and above will lose out on the ‘bonus’ of some £720 which Hammond has offered by increasing the rUK higher rate threshold from £46,350 to £50,000. This appears in the above table as the extra SIT being imposed in 2019/20, and approximates to the tax value (at 20%) of the hike in Hammond’s threshold.
Other tax proposals
Changes to land and buildings transaction tax (LBTT) are to take effect from 25 January 2019, except on contracts made before 12 December 2018.
On residential properties, the rate of additional dwellings supplement (ADS) will increase from 3% to 4% – an astonishing 33% increase in the tax rate. However, there is no proposal (yet) to replicate precisely Westminster’s plan for a 1% SDLT surcharge on purchases by non-residents, alongside their higher rate for additional dwellings (HRAD). Taxpayers should note the importance of trying to avoid falling into ADS on simply moving house.
| Comparison of residential LBTT and SDLT rates from 25 January 2019 onwards | ||||
|---|---|---|---|---|
| Consideration | LBTT | LBTT + ADS | SDLT | SDLT + HRAD |
| £200,000 | £1,100 | £9,100 | £1,500 | £7,500 |
| £350,000 | £8,350 | £22,350 | £7,500 | £18,000 |
| £850,000 | £60,350 | £94,350 | £32,500 | £58,000 |
Non-residential LBTT rates are to be changed. The lower rate will be cut from 3% to 1%. The upper rate, up from 4.5% to 5%, will start at £250,000 instead of £350,000. Differentiating correctly between residential and non-residential properties will continue to be crucial. Subject to consultation, two new reliefs are planned for later in 2019 to encourage investment in Scottish real estate.
The rates of Scottish landfill tax are to remain in line with those in rUK. The introduction of air departure tax and the replacement of aggregates levy in Scotland continue to be delayed. The methodology for assigning VAT revenues to the Scottish Budget has still to be agreed.
The Budget also sets new policies for non-domestic rates, while local authorities will again have the flexibility to increase council tax levels by up to 3%.
The need for political support
Holyrood’s minority SNP administration needs political support from at least one other party to get Mackay’s Budget approved. Last year it secured the necessary support from the Scottish Greens.
Reports this year suggest that preliminary negotiations have proved inconclusive. It seems that the Scottish Liberal Democrats won’t play ball unless the SNP put independence on the back burner, while the Scottish Greens would insist on fundamental reforms to council tax. The Scottish Conservatives won’t support tax rises, and Scottish Labour want stronger support for public services.
The Brexit perspective
At the time of writing this, Mackay faces even greater uncertainties because the outcome of the UK Government’s negotiations on exiting from the EU is still unknown.
Prime Minister Theresa May has seen off a no-confidence vote within her own party, but announced that she won’t lead them to the polls. Her EU deal seems unlikely to secure parliamentary approval, and a no-confidence vote in Parliament might yet lead to a general election.
In his Budget speech on 29 October, Hammond made it clear that there might be a need for an emergency Spring Budget. Mackay too has warned that he might have to revisit the priorities in his Scottish Budget, but he could find himself backed into a corner.
For example, if Hammond decided to increase income tax rates in rUK while also cutting back on public expenditure in reserved areas, the Barnett consequentials could squeeze the Scottish block grant. As a result, Holyrood might want to increase SIT revenues – the largest slice of Scottish Government funding over which Holyrood has significant fiscal power.
Scotland Act 1998 requires a Scottish rate resolution to be passed by 5 April 2019 to set the SIT rates and bands for 2019/20. If a rate resolution, once passed, is cancelled, it is treated as though it had never been made – and in that case, a new resolution could be passed by 5 April.
Beyond that date, Mackay would be unable to adjust the rates or thresholds for SIT. Pushing LBTT rates even higher would bring in little revenue, or might have a negative impact by causing stagnation in the property market. The Finance Secretary might be reluctant to cut public expenditure, but could find that he has few other options.
Article supplied by Taxing Words Ltd