What will happen to Scottish tax reforms post-Brexit?

13 July 2016

The Brexit vote has cast further uncertainty over Scotland’s future in the UK, with the Scottish government already preparing to stage a second independence referendum. If such a vote went ahead, what would happen to Scottish tax reforms?

We had expected a new 50 per cent income tax rate to be considered in the forthcoming Scottish Budget in November 2016, together with the possibility of at least one further marginal income tax rate band being applied from 6 April 2017. 

On VAT, we expected clarification and guidance on how the amount to be allocated to the Scottish government will be calculated to represent the first 10 per cent points, i.e. half of the standard (20 per cent) VAT rate, and 2.5 per cent points i.e. half of the reduced (5 per cent) VAT rate, of VAT collected in Scotland.

However, the Brexit vote and resultant resource implications for HM Treasury, HMRC and civil service in negotiating trade deals, and the possibility of a second referendum on Scottish independence could stall any proposed changes. 

There are a number of constitutional hurdles to overcome before a second referendum could happen, as the Scottish government would need to seek approval from Westminster to proceed. Previously, this was unlikely.

However, this decision will now fall to the new UK prime minster, who may take a different approach.

If the Scottish government pushes ahead with its plans to seek independence, it would be counterproductive to enforce any adverse tax changes as this could influence voters to opt to remain in the UK. It therefore seems unlikely that the Scottish government would move away from the existing tax rates that are applied in the rest of the UK until such time as full independence had been achieved and all taxes, including corporation tax, were devolved. 

As a consequence, despite all the efforts of the Smith Commission report published in November 2014 to devolve certain taxes, and all the related political arguments on tax policy, Scotland’s tax rates today remain broadly in line with those in the rest of the UK. This is now likely to remain so for at least another two years until we have more clarity on the relationship between the UK and Europe and the impact this will have on Scotland’s future.

If you would like any more information on this issue please get in touch with your usual RSM contact.

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