Scottish Budget 2017: RSM reacts to progressive tax reform

Responding to today’s Scottish Budget announcement, Stephen Hay, tax partner at RSM said:

‘As expected Derek Mackay has taken the bold step to reform tax policy in Scotland, using the devolved powers to propose a five rate tax system for the first time.

‘Due to the fiscal backdrop in Scotland, a need to generate more tax revenues was the driver of change and the announced tax rate bands at 19p, 20p, 21p, 41p and 46p will indeed raise £164m more than the current system. However, this is lower than the decrease in block grant funding at £200m and a pretty small sum in comparison to the growing deficit which sits at £12bn.

‘In addition, the changes bring another level of complexity for HMRC to process Scottish taxes and the Scottish government will have to foot the bill for the additional administration so the net gain will be reduced. However, the proposed tax reform will see 55 per cent of taxpayers paying less than the UK, confirming that middle and higher earners will take the brunt of the tax hikes.

‘The finance secretary also followed the UK chancellor’s lead and offered first time buyers a new relief on LBTT – introducing a nil rate band for properties up to £175k, which would deliver around a £600 savings. However, it didn’t go far enough to consider high cost areas, such as Edinburgh, or to address the calls from industry to increase the 10 per cent threshold on home purchases between £325k and £500k – missing an opportunity to stimulate the top end of the property market.

‘This historical move towards a more progressive tax framework should be commended. It brings Scotland more in line with other OECD countries and generates more tax revenue, but it does signal significant divergence from the UK system for the first time and add another level of complexity. However, do the plans go far enough to support public services, economic growth, home owners and Scotland’s fiscal health? Food for thought as part of the draft Budget discussions in the New Year.