Tax ramifications of SNP ascendancy
By Donald Drysdale for ICAS
19 December 2019
Looking at the Scottish National Party’s strong performance in the general election, Donald Drysdale wonders what the tax implications might be for Scotland and the UK. The views expressed are his own and not necessarily those of ICAS.
Relative strengths
The Conservatives have won a decisive victory at Westminster. With their majority of 80 seats in the House of Commons, no other party or combination of parties would be able to defeat them unless there were numerous dissenters among the Tory ranks.
The Scottish National Party, having enjoyed a net gain of 13 seats, is now represented by 48 of Scotland’s 59 MPs at Westminster. This contrasts with its position at Holyrood, where it has only 63 of the 129 MSPs and therefore comprises a minority administration.
The SNP’s general election manifesto, ‘Stronger for Scotland’, decried Brexit and called for Scottish independence, but neither plea has gained any traction with Prime Minister Boris Johnson.
Over the past three years, House of Commons business – especially on Brexit – has often divided MPs along non-party lines. This placed the then minority Conservative government at the mercy of smaller parties, including the SNP, but the situation has now changed.
SNP members at Westminster may have little power to influence decisions of the new Tory government. Certainly, their vehement opposition to the UK leaving the EU seems unlikely to alter the outcome of Brexit.
The relative strengths of the two parties in their respective homelands mean that pressure is building for a second referendum on Scottish independence – a topic examined in depth by the Institute for Government in a paper published on 13 December.
The SNP is unlikely to stop flexing its muscles. Its manifesto called for devolution of further tax powers – pointing out that, in an independent Scotland, the Scottish Parliament would have full control over tax and social security policy.
Income tax
Scottish income tax – payable by Scottish taxpayers on their non-savings, non-dividend income (i.e. broadly, their earnings, pensions and property income) – is currently the key fiscal tool devolved to the Scottish government.
Holyrood has already adopted a clear policy in this regard, implementing more progressive income tax rates and thresholds than those set for the UK as a whole. This means that middle and high earners pay significantly more tax in Scotland than they would in other parts of the UK.
The SNP manifesto contained no proposals for Scottish income tax rates and thresholds for 2020/21. This is understandable, since the UK Budget must first set the scene by proposing the UK personal allowance, which applies in Scotland, and the rates and thresholds for the rest of the UK, which might influence the SNP’s direction of travel. I shall return to this topic below.
National insurance contributions
The manifesto supported a ‘freeze’ on NIC, an increase in the NIC employment allowance, and a reduction in employers’ NIC to help with job creation. It also wanted NIC rates and thresholds aligned with those for Scottish income tax. On all these it is at the mercy of Westminster, since NICs are a reserved matter.
A key concern of the SNP is undoubtedly the very high combined marginal rate of income tax and NICs on Scottish earnings currently falling between the Scottish higher rate threshold of £43,430 and the UK higher rate threshold of £50,000.
Business taxes
The manifesto emphasised the SNP’s continuing support for tax incentives for creative industries, including film and television.
To help attract tourists to Scotland, the SNP wants the UK government to cut VAT for the hospitality sector. Paradoxically, this coincides with the Scottish government proposing to implement a new, devolved ‘transient visitor levy’ on tourists.
It remains to be seen, too, how the assignment of VAT to Scotland is to work in practice. It has proved difficult to agree an assignment method, and it has not yet been implemented.
Changes to IR35 for the private sector are to be introduced in April, and the manifesto said that these rules should be reviewed; however, this is unlikely to be undertaken by the incoming Tory administration.
The SNP also called for a review of the 2019 loan charge on certain ‘disguised remuneration’ loans. In fact such a review is already underway, led by Sir Amyas Morse, former head of the National Audit Office, but progress may have been delayed by the general election.
Unsurprisingly, the SNP wants reforms to UK excise duty to ensure fairer tax on Scotch whisky, although this might require Brexit to be achieved. It would also fight to retain EU protections for the sector and resist US tariffs.
Anti-avoidance
The SNP wants to ensure that “big corporations and the super-rich pay their taxes like everyone else”, and its manifesto supported a crackdown on tax avoidance and evasion. It called for a review of the closure of HMRC offices in Scotland and across the UK.
It also had smaller businesses within its sights – questioning why HMRC have been slow to use digitisation to create a 21st-century tax payments system to help tackle avoidance and evasion.
It advocated reform of Companies House to uncover the beneficial ownership of Scottish limited partnerships, other companies and trusts.
Climate change
The SNP would back substantial reforms to the UK tax system to support greener choices for individuals and businesses.
It called specifically for VAT to be reduced on a number of supplies including green modes of transport and home energy efficiency improvements.
Budget timetable
Scottish Finance Secretary Derek Mackay must now be facing one of his worst nightmares.
Until the forthcoming UK Budget is formulated, he has no way of knowing exactly what tax changes the Chancellor of the Exchequer will propose – though comments from Boris Johnson and Sajid Javid have suggested that such changes might be substantial.
Once he knows the wider picture for the UK, Mackay may face profound questions on how Scotland should react. If the UK higher rate threshold was to be raised significantly, should Scotland follow suit, or would it choose to diverge much further from UK income tax?
Mackay might then have little time to present a radical Budget at Holyrood, secure political support from at least one other party, and ensure that the Scottish rate resolution was passed by the statutory deadline of 5 April to fix the Scottish income tax rates and thresholds for 2020/21.
Article supplied by Taxing Words Ltd