The Scottish perspective - Budget update

20 January 2016

Scotland’s Finance Secretary, John Swinney, delivered his budget to the Scottish Parliament on 16 December 2015. There were few surprises as he ruled out any increase in income tax rates for Scottish taxpayers, and followed George Osborne’s move by introducing a 3 per cent surcharge on the land and buildings transaction tax (LBTT) for the purchase of many second homes and buy-to let properties next year.

The Scottish rate of income tax

As predicted, the Scottish rate of income tax (SRIT) was confirmed as 10p in the pound – effectively meaning no change in the rate of tax to be paid by Scottish residents. Mr Swinney really had no alternative here, which he made a point of explaining during his speech, as under the current structure, where the SRIT applies uniformly to all rate bands, to do otherwise would either impact adversely on the poor or give unwelcome tax reductions to high earners. However, Mr Swinney has stated that he will review the position again before May 2016 and make a further announcement on SRIT for 2017/18.

The 3 per cent surcharge on the land and buildings transaction tax

The 3 per cent tax supplement for purchases of second homes of more than £40,000 was disappointing, but again Mr Swinney may have had few options. Possibly anticipating a flow of investment monies from the South, this move favours first time buyers in Scotland by keeping the lower priced properties within their reach. However it will be interesting to see how much tax he will raise by this measure, which may be far less than the £17m - £29m predicted for 2016/17. Recent property sector commentary suggests the measure will not make a major dent in investment activity at that level either.

The revised fiscal framework

Mr Swinney also made numerous references to the fiscal framework, which will underpin the Scotland Bill when it is passed, and there is clear frustration in many quarters that decisions on longer term budgets have had to be deferred until the fiscal framework, which will underpin the block grant, Barnett formula and borrowing powers, has been agreed. With the Scottish General Election on 5 May 2016, the Scottish Parliament will be dissolved on 24 March 2016, and assuming that the Scotland Bill can be passed before then, the revised fiscal framework needs to be in place soon. All parties will want the opportunity to present coherent budget proposals as part of their manifesto.

What is in store?

As 2016 gets underway, one might be forgiven for thinking that the election campaigns have already started. Although the independence referendum was less than 18 months ago, when the Scottish electorate opted to stay within the UK, First Minister Nicola Sturgeon has indicated a renewed debate on the principle of independence, stating her confidence that majority support for an independent Scotland can be built over the next few years. How the parties choose to implement the increased tax powers and exercise the increased borrowing powers the Scotland Act will bring in due course will be an important part of that debate.

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