Taxing times as Swinney prepares for Scottish Budget

08 December 2015

There must be at least three major issues for John Swinney to consider as he prepares his budget for 16 December. Firstly, without the agreement on fiscal framework, how will the Scotland Bill pass through Parliament? The UK Government said these details would be available before the Bill completes its passage, and this will include a reform of the Barnett Formula as far as a block grant payment to Scotland is concerned, and a maximum ceiling on Scottish Government debt. Mr Swinney’s unlikely to have this in time for his budget, and so it’s probable the Bill won’t proceed. Indeed, Nicola Sturgeon has warned that if the calculation of the block grant was seen to leave Scotland at a disadvantage, then Holyrood could veto the legislation. Setting a budget against that background will surely be impossible. 

Secondly, without the Scottish Parliament being able to set rates of income tax and the thresholds at which these are paid until the Scotland Bill has been approved, there’s not much Mr Swinney can do about income tax. The Scotland Act (2012) which introduces the SRIT will apply from April 2016, and the UK Government will deduct 10 pence in the pound from the basic, higher and additional rates of income tax. The Scottish Parliament will then levy a Scottish rate applying equally across these three main tax bands.  So if the SRIT is 11p, then taxes increase by 1per cent, and if the SRIT is 9p they fall by 1 per cent. As Mr Swinney can’t introduce and increase the higher or additional rates and also decrease the basic rate until the Scotland Act is enacted, chances are that the SRIT will be set at 10p with no changes to the tax rates compared to the UK.

Thirdly, what of LBTT, the Scottish equivalent to SDLT? The Chancellor has already announced a higher rate of SDLT on additional residential properties such as buy-to-lets from April 2016. The higher rates would be 3 per cent above current SDLT rates, so SDLT payable on affected properties will be significantly higher in the rest of the UK than in Scotland. Currently, a second home costing £350,000 would incur SDLT of £7,500 and LBTT or  £8,350, but from April 2016 the SDLT rises to £18,000. Will Mr Swinney increase the rate in a similar fashion? If the rates were going down, he’d probably follow suit, but leaving the residential property market alone may well be the better option. Taxing times indeed.