Scottish Budget passes with further tax divergence and a 'tourism tax' at the heart of it

RSM responds to today’s Scottish Budget debate:

Shirley McIntosh, RSM’s head of tax in Scotland, said:

 ‘Despite rhetoric that the draft Scottish Budget might be voted down today, the SNP and the Greens have done a last-minute deal to get the draft fiscal plans through with some concessions. 

‘This means further income tax divergence between Scotland and the rest of the UK as the freeze on the higher rate threshold at £43,430 in Scotland increases the tax gap further, as the higher rate tax will not kick in for taxpayers south of the border until £50,000. 

‘The move aimed to rebalance the overall tax take following the increase in the personal allowance UK-wide where higher earners would otherwise have seen a greater benefit. However, freezing the higher rate threshold not only claws back the personal allowance increase but it adds additional revenues to the tax take – highlighting added pressure on middle earners. 

‘The increase in LBTT additional dwelling supplement rate remains disappointing. Not learning from the impact on the UK private rental market of the various tax changes in recent years, namely increased costs for landlords being passed on to the tenants, could have a huge impact on tenants. Planned investment to increase the stock of affordable housing in Scotland will ease this problem somewhat, but this will take time; so, in the meantime an affordable private rental market remains important. 

‘In addition, taking more properties out of the rental market, which these policies seem to promote raises the question of affordability. The plans will only work for first time buyers if they can afford to buy, and there was no mention of increasing the LBTT first time buyer threshold from £175,000 to bring it more in line with the £300,000 level in the rest of the UK to help support potential homeowners to get on to the housing ladder.’

Jim Burberry, RSM’s head of indirect tax in Scotland, said:

‘The deal with the Greens puts the so-called ‘tourist tax’ back on the table with a commitment to legislate on a Transient Visitor Levy (TVL), but what does this mean for VAT implications? 

‘VAT is normally applied to the entire consideration received for a supply of goods or services - including any levies. If the TVL is actually a ‘tax’ on the accommodation providers, then the TVL will be subject to VAT at the standard 20 per cent rate as it is further payment – so the £2 could become £2.40 for the visitor with £2 going to the Council and 40p to the UK Treasury.

‘If the TVL is a ‘tax’ levied by the Council on the visitors directly, whereby the accommodation providers merely act as ‘agents’, it is likely to be free of VAT; but this will still leave the accommodation providers with the problem of administer and manage the TVL collection.

Conversely, it may also be possible that payment of the TVL to the Council by either or both the accommodation provider or the visitor could be deemed to be subject to VAT in the hands of the City of Edinburgh Council. This could then mean that the Council needs to pay 20 per cent VAT to HMRC from the £2 per room, per night it receives. This would reduce its anticipated gain of £11m income by £1.83m to £9.16m, with the £1.83m swelling the UK Treasury’s coffers.

‘It will be interesting to see the output of discussions with Edinburgh city councillors next week, but VAT needs to play a part of this debate as City of Edinburgh Council and accommodation providers will not want to face an unexpected hefty VAT bill down the line.