A boldly stated budget, but couched in uncertainty

In some respects, Derek McKay’s job is like being in opposition. He can commit to spend what he thinks is best, and if the income doesn’t come in, he can point to the UK Government.

As expected, he also suggested that whatever plans are in place are subject to change if and when the outcome of Brexit is known.

If the UK Government has to announce another budget, the Scottish Government will have to follow suit, and this was emphasized both during and after the announcement.

The Scottish Government have precious little that they can actually change, but they will change things where they can, and are happy to increase the tax gap between Scotland and the Rest of the UK.

What was good to hear was the investment to be made in an Advanced Manufacturing Fund  which will enable Scottish manufacturers to have access to advanced manufacturing techniques, Exports, Digital Skills and Enterprise and Skills Bodies.

Tax bands and rates

The rates of tax within each band remain unaltered for 2019/20, however, the starter and basic rate bands have been increased by inflation (Starter band is now £12,500 - £14,549, and basic rate is £14,550 - £24,944), with the threshold for higher rate tax being frozen at £43,340. The Scottish Government anticipate that this will raise a further £68 million.

This will, however, further increase the tax gap between north and south for higher earners, albeit the Scottish Government’s own paper highlights that only 15% of Scottish taxpayers pay tax at the higher rate.

In 2018/19 a Scottish taxpayer earning £50,000 per year paid around £400 additional in tax per year compared to the rest of the UK. This will widen to £1,500 in 2019/20, hence a couple each earning £50,000 will pay a combined amount of £3,000 more in Scotland than in the rest of the UK.

Whilst the actual tax paid by an individual earning £50,000 will reduce in Scotland reduces by £140 year on year, this is more than consumed by the increase in National Insurance that will be paid of £340, resulting in the Scottish taxpayer worse off by a net £200.  This is another by-product of rates and bands being set under two jurisdictions.

Additional Dwelling Supplement for Land and Buildings Transaction Tax

The government has announced an increase in the Additional Dwelling Supplement (‘ADS’) for the Land and Building Transaction Tax (‘LBTT’) from 3% to 4% from 25 January 2019 which will be levied on the purchase of additional property. This continues the Scottish Government’s move towards putting additional cost on the buy to let market.

Property Taxes have not been as successful as were originally hoped, however it may be anticipated that those paying the charge would be less sensitive to a 1% rise in the supplement, albeit it represents a 33% increase in the supplement itself.

It appears that the Scottish Fiscal Commission Report of September 2017 and 2018 have made it pretty clear that the ADS is a reliable revenue generator, hence the increase is not a surprise.

Non-residential LBTT

The lower rate of non-residential LBTT will be reduced from 3% to 1%, with the upper rate being increased from 4.5% to 5%. This will be accompanied by a reduction in the starting threshold for the upper rate from £350,000 to £250,000. Some analysis will be required as to the effect of this.

Business Rates

The Scottish Government have introduced a below-inflation increase in non-domestic rate poundage, ensuring that more than 90% of properties in Scotland will be charged a lower rate - set at 49p - than other parts of the UK.

The Small Business Bonus Scheme, which gives 100% rates relief on properties with a rateable value of up to £15,000 will be maintained, and there will be transitional support for businesses in hospitality, and for office premises in Aberdeen and Aberdeenshire as part of a £750million package of rates relief.

Landfill Tax

There will be an increase in the standard rate for Scottish Landfill Tax (‘SLFT’) to £91.35 per tonne and the lower rate of SLFT to £2.90 per tonne in 2019/20, in line with RPI inflation and Landfill Tax charges in the rest of the UK.

To Summarise

The Scottish Government spending plans for 2019/20 were set out against a backdrop of economic uncertainty presented by Brexit and said many of the right things. The use of tax raising powers was again utilised to generate an estimated £68 million from middle to higher earners, increasing the tax gap between Scotland and the rest of the UK, and the Additional Dwelling Supplement was increased as it has proved to be a lucrative area in the past.

We will need to wait and see if the budget is voted through, as it will need support from other parties, and then what the effect of Brexit is on the budget altogether.

Watch this space…

If you have any questions following the Scottish Budget, please call Jim Lockhart on 0141 233 0711 or email him using the link below.

Contact Jim

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