Following an optimistic end to 2024, Scotland has remained the most confident region in the UK according to the latest ICAEW Business Confidence Monitor report for Scotland. However, business sentiment has been gradually easing, signalling growing headwinds as Scottish businesses face tax rises, rising inflation and increased global uncertainty.
According to the latest ICAEW Business Confidence Monitor, sentiment in Scotland eased for the third consecutive quarter in Q1 2025. The fall in the Business Confidence Index in Scotland from +13.1 to +10.4 is modest in comparison to elsewhere in the UK, meaning Scotland maintained its position as the most optimistic part of the UK well above the UK average, which slipped into negative territory to -3.0.
The relative optimism in Scotland may be linked to news that the Scottish economy outperformed the rest of the UK in 2024 with Scottish GDP growing by 1.1% compared to 0.9% for the UK as a whole.
Challenges for Scottish Businesses
Despite relatively strong confidence, Scottish companies reported a domestic growth figure below the national average, and declining exports levels highlight the challenges businesses are facing in this tough economic climate.
The tax burden was the most widespread rising challenge in Scotland — after reaching unprecedented levels following changes announced in the October 2024 budget — followed by regulatory requirements, which are a more widespread issue in Scotland than elsewhere in the UK due to a large presence of highly regulated Energy, Water & Mining, and Banking, Finance & Insurance sectors. The impact of new US tariffs, and the increase in National Minimum Wage, are also new areas of concern and challenge for Scottish businesses.
Labour Market
The report highlights a subdued labour market in Scotland, with annual employment growth slowing significantly, reflecting the declining domestic sales and export levels. Many businesses in Scotland are citing the availability of skills as a growing challenge impacting their recruitment plans, alongside the rising cost of labour as another factor affecting employment growth in the country.
Investment
Scottish businesses reduced their capital investment expenditure growth in the year to Q1 2025, with Scotland being the weakest expansion region in the UK — which does go against the confidence and optimism displayed on the confidence monitor. However, Scottish companies plan to increase investment growth to 2.0% over the next 12 months, surpassing the national projection of 1.8%.
What Can You Do to Keep Business on Track?
The report shows that business confidence is influenced by many factors, some of which can be controlled and some outside a business’s influence. It is important for businesses to focus on areas they can influence and control and plan carefully around these.
Understanding your numbers and knowing exactly how much money is coming in and going out is the first step to taking control. Identifying areas where you can cut costs or increase efficiency through automation can be key. Consider renegotiating contracts with suppliers to get the best possible price for your business. Taking actions such as this should enable your business to maintain profitability levels in anticipation of increased challenges over the coming year.
With the increased tax burden having the largest impact on business confidence, it is important for businesses to be aware of the varying tax rates and changes, and to forecast the impact that increasing tax levels will have on your business. Ensure you are maximising available reliefs such as capital allowances and Research & Development Tax Credits to reduce your tax burden.
If you would like advice and support for your business surrounding any of the areas discussed, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk
