Pressure pays off as Swinney unveils review of business rates
Mr Swinney, who confirmed there would be no change to income tax rates, told parliament that he shared a desire to ensure the rates system minimised barriers to investment.
Five key business groups in Scotland have demanded a review in line with a similar process under way south of the border.
“I am mindful of the views of many in the business community..I can announce that we will launch a review of the non-domestic system in Scotland,” he said.
However, he said changes to rates reliefs would provide £130 million of extra income for the Scottish Government. His Budget, the last of the parliament, drew criticism for failing to reverse the Chancellor’s austerity policies as promised and instead imposing deep cuts. Cosla claimed a freeze on council tax together with other economies would lead to 15,000 job losses, while there were also cuts to the arts budget.
He announced a commitment to building 50,000 more affordable homes and to extending digital connectivity across the country.
He opted to follow the Chancellor’s decision to impose a 3% supplementary tax on second homes and buy-to-let properties.
“Our objective is to make sure that first time buyers have the greatest possible chance to enter the housing market.
“We are therefore taking action to avoid the likely distortions which will arise in Scotland from the new UK SDLT surcharge on the purchase of additional properties – including buy-to-let and second homes – which could make it more attractive to invest in such properties in Scotland compared to other parts of the UK.
“Our LBTT additional homes supplement therefore seeks to ensure that the opportunities for first time buyers to enter the housing market in Scotland remain as strong as they possibly can. The proposed additional levy of three percentage points on transactions over £40,000 is proportionate and fair.”
He criticised the Westminster government’s austerity measures and said he would protect public services while introducing measures to ensure Scotland remained economically competitive.
“A strong and sustainable economy lies at the heart of a successful Scotland,” he said.
“This Draft Budget provides the resources to deliver this by supporting innovation, investment, internationalisation, and inclusive growth.”
He said the UK government’s cuts mean the Scottish Budget will “continue to fall in real terms – as it has done since 2010 – until the end of this decade.
“We believe that with a relentless focus on tackling inequality and boosting productivity, we can create the foundations for a stronger and more inclusive economy.”
“Scotland can accept these Tory cuts or we can rise to the challenge and choose a Scottish alternative to austerity.”
“We choose to rise to the challenge. We choose the Scottish alternative.”
Mr Swinney said the Scottish government’s aims were made more difficult to achieve by the UK Government’s continued austerity agenda.
The deputy first minister said that by 2020 the Scottish budget will be 12.5% lower in real terms than when the Conservatives came to power.
Even the capital budget will still be more than half-a-billion pounds a year lower in real terms in 2020-21 than it was in 2010-11, he says.
On building more homes, Mr Swinney said: “I am delighted to announce that we will be increasing the budget for affordable housing next year by £90 million enabling us to invest around £690m in housing supply.”
Labour finance spokesman Jackie Baillie said: “Does it provide an alternative to austerity? The answer to that is ‘no’.”
Scottish Conservative finance spokesman Murdo Fraser (right) said: “The finance secretary has chosen to set the Scottish rate of income tax at the same level as elsewhere in the UK.
“We applaud this decision – we do not believe that hard-pressed families in Scotland should pay higher taxes than those elsewhere in Britain.
“But it cannot be forgotten that John Swinney had the choice in the matter, and he chose not to increase the resource available to him by levying additional taxes.
“For years, the finance secretary has portrayed himself as a prisoner of Westminster austerity, but now that he has been given the key to the door of his cell, he has decided not to use it”.
David Glen, head of Tax, PwC in Scotland, said: “As anticipated, John Swinney confirmed no change to the Scottish Rate of Income Tax (SRIT), with the rate continuing to mirror UK levels for another year as he seeks to protect those on low incomes across Scotland.
“But it’s likely that this will only be a one year reprieve -when the long awaited fiscal framework agreement is reached, we are likely to see both rates and bands diverge from the rest of the UK from April 2017 giving a more progressive outcome. Expect to learn more about what this will entail before the dissolution of Scottish Parliament in March next year.”
Stephanie Niven, Associate Director for Employment Solutions at Grant Thornton, said: “While it’s welcome news that the Finance Secretary has clarified what the Scottish Rate of Income Tax will be for now, there is still a great deal of uncertainty amongst business leaders and their employees around what changes they must make in relation to this matter.
“The Scottish Government must act quickly to inform and reassure employers about their obligations and provide the necessary information required by everyone involved to make sure they are ready for one of the most significant tax changes Scotland has witnessed in recent years.”
Ian McCall, Tax Partner at Deloitte in Scotland, said: “The Scottish Government may have decided to remain with the status quo for its SRIT, but there are still important changes which both individuals and businesses need to prepare for ahead of next April.
“As Her Majesty’s Revenue and Customs (HMRC) looks to define those liable to pay the SRIT, individuals should be proactive in making sure that HMRC has up-to-date information about their circumstances – it’s possible that it doesn’t have your most recent address, for example.”
Cara Heaney, director of people advisory services at EY in Scotland, said: “It is no great surprise John Swinney has decided Scottish taxpayers, recently identified as such by HMRC, will continue to pay the same rate of income tax as the rest of the UK under the new SRIT. He stated any change would have a disproportionate impact on the Scotland’s poorest people owing to the limited powers currently afforded to him and he may well be waiting for greater control over tax as part of the Scotland Bill 2015.
“The Deputy First Minister has steadied the course for Scotland, allowing the new SRIT to bed in with employers and employees. The foundations have been laid for more significant changes. The big question is ‘what next for Scotland?’ and the answer lies with the Scotland Bill 2015. All eyes are now focused on future powers for Scotland and the possible outcomes.”
Andy Willox (right), Scottish policy convenor, Federation of Small Businesses, said: “Today’s budget shows that the Scottish Government has carefully taken the pulse of the business community at large. Member feedback suggests a majority of business owners will be pleased with the Scottish Government’s decision not to change income tax rates on this occasion.
Hugh Aitken, CBI Scotland Director, said: “We’re pleased to see the Scottish income tax rate unchanged, providing stability as we await new powers coming down the track. It will be important that the Scottish Government follows up by setting out a long-term roadmap for business taxes and how future revenues will be used to boost growth, while maintaining stable public finances.
“Companies will also welcome the business rates review and the CBI looks forward to working with the Government ahead of its conclusion to ensure rates remain competitive. But companies will be seeking urgent clarification from the Government on the proposed increase to the large business supplement and other reliefs, which could affect investment intentions.
“Elsewhere, while firms back further investment in the modern apprenticeship programme concerns remain about the impact of the new UK levy. They will want assurance that resulting revenues from businesses will be ring-fenced for apprenticeships.”
David Melhuish, director of the Scottish Property Federation, commented: “For years, we have been advocating significant reform of the business rates system, alongside a number of other bodies. The business rates system has existed in its current form largely unchanged for some 26 years and the postponement of the revaluation and increase in tax burden demonstrates that the system is ripe for review.
“The change to empty property rates relief on industrial properties is worrying though – it is effectively a tax on industrial development and investment. This is a sector that shows good demand but we will fail to capitalize on this business interest if we make the speculative development of new industrial properties too risky, not to mention penalising struggling industrial businesses and landlords in a still fragile sector of the economy.
“We look forward to engaging positively on the review of this key business tax which must become more responsive to changes in the economy.”
David Lonsdale (right), director of the Scottish Retail Consortium, said: “We are delighted that the Scottish Government has listened to the retail industry and the growing chorus from across business and commercial life in Scotland who have spoken up in favour of fundamental reform of business rates, and we very much welcome the promised review of business rates.
“The review heralds a great opportunity to recast business rates for the decades ahead and we look forward to working with the Government to ensure the reformed system is modern, sustainable and competitive.
“Business rates are set to generate almost £2.8 billion in tax revenues next year, up from £2.1 billion just six years ago. A fundamentally reformed rates system and a substantially lower tax burden would increase retailers’ confidence about investing in new and refurbished shop premises, create more jobs and help revive high streets.”
On the proposed rise in business rates paid by larger firms, Mr Lonsdale added: “The hike in the large firms rates supplement is concerning, and it now appears that larger firms operating in Scotland will be paying more in business rates than firms operating in comparable premises down south. That would be a departure from the pledge to keep rates here at the very least in line with the rest of the UK, and undermines claims to have the most competitive rates regime in the UK.”
Brian Rogan, Head of Business Rates in Scotland for CBRE, commented: “The news that there will be an increased business rates burden for properties with a rateable value over £35,000 will be most unwelcome from the business community.
“It will be important for the Scottish Government to monitor whether the effects of these changes will bring empty properties across Scotland back into use.”
Douglas Smith, chairman of CBRE in Scotland, added: “Changes in the relief available for empty commercial property, which will impose additional costs on owners and developers alike, are unhelpful to both the commercial property and construction sectors.
“In most parts of Scotland speculative commercial development is not yet viable as the extent of recovery enjoyed in other parts of the UK has not yet reached north of the border with any strength.
“Making provision for this additional cost burden will delay the point at which development viability is achieved and there must now be a real risk that wider UK markets turn downwards even before the Scottish markets have achieved levels of activity anywhere near “pre-recession” levels.
“At a time when private sector capital investment is being actively sought and encouraged this announcement is likely to have a depressing effect on that ambition.”
Bryan Buchan, CEO of Scottish Engineering said: “John Swinney has offered very little for business with the spectre of raising business rates for large companies while protecting the Small Business Bonus.
“His plan to channel £345 million for research and innovation will not address the issue of business productivity. The major issues of productivity arise from the lack of process and capital investment since the run up to last year’s referendum.
“Creative destruction simply has not happened on the required scale and the focus should be on producing stimulus to these SMEs who form the backbone of Scottish industry in making the investments on their business to truly make a difference as they recover from the numbing effects of the collapse in oil prices.”
Andy Willox of the FSB, said: “FSB has pushed hard for the reform of the out of date Scottish business rates system. Mr Swinney must be applauded for grasping this thistle and promising to deliver a tax more appropriate for the 21st century.
“Changes to supplements and reliefs might alarm some medium sized firms – though a huge number of small firms will warmly welcome the Scottish Government’s ongoing commitment to the small business bonus scheme.”
Blair Stewart of Strutt & Parker said: “With the introduction of LBTT in April this year, top end property sales slowed dramatically, having seen unprecedented activity before the introduction of the new tax. With this increased LBTT for Buy To Let (BTL) and second homes we predict that there will be a similar pattern in this sector of the market at beginning of 2016.
“This is going to have a detrimental effect on this sector of the market and may well have a negative effect on the overall tax take. The Edinburgh market has a large number of investment buyers who may baulk at paying the extra LBTT.
“In the rural residential market there are many people from both Scotland and other parts of the UK who buy second homes (often with a view to retiring there in the long term) – indeed our Inverness office sells a significant percentage of their properties to holiday home buyers.
“We feel that this is a short sighted move which will, in the long term, be detrimental to the property business as well as the economy in general.”
“This supplement will be 3% of the total price of the property for all relevant transactions on or above £40,000, and will be in addition to the current Land and Buildings Transaction Tax (LBTT).
“Many investors work hard to get the minimum 25% deposit together and to ensure that they can secure a mortgage. This increased cost may mean that some investors have to look in areas that were not their first choice so they can afford a property.
“Taking a balanced look at the changes, it’s important that first time buyers can get onto the market, but it’s also important to have a strong private rented sector as people will always require rented accommodation as well as being able to buy.”
Key Budget points
- A 10p Scottish Rate of Income Tax, meaning the rates paid by Scottish residents stay the same
- Land and Buildings Transaction Tax (LBTT) maintained at current levels, thus ensuring 93% of home buyers either pay less than under UK stamp duty land tax (SDLT) or pay no tax at all
- A LBTT ‘second-homes’ supplement on purchases of additional residential properties, including buy-to-let properties
- Scottish Landfill Tax of £84.40 per tonne at standard rate and £2.65 per tonne at lower rate.
- Total investment in housing supply of around £690 million, an increase of around £90 million in affordable housing supply year-on-year – the first step in the Scottish Government’s commitment to provide 50,000 new affordable homes by 2020-21
- £1 billion investment in roads and transport projects, including the electrification of the Edinburgh-Glasgow rail line and of the Aberdeen Western Peripheral Route.
- Further investment in total of more than £130 million for Scotland’s digital strategy, mostly supporting infrastructure to help towards the 2017 target to ensure 95 per cent of premises in Scotland have access to next generation broadband, alongside investment through the Emergency Services project, which will enhance mobile coverage.
- Continued investment in 600 hours of annual free early learning and childcare for three and four year olds and eligible two year olds, as well as free school meals for P1-P3 pupil
- £33 million to be invested to accelerate activity to raise attainment and improve standards for all
- An £88 million funding package to maintain teacher numbers and ensure teaching induction places are secured for all probationers requiring one
- Sustained investment in school buildings through local authorities and Scotland’s Schools for the Future programme
- Expansion of the Education Maintenance Allowance and Modern Apprenticeship programmes
- £70 million to continue the council tax freeze in 2016-17 for the ninth consecutive year
- £88 million to maintain teacher numbers at 2015 levels nationally and places for all probationers who require one under the teacher induction scheme.
- Total revenue funding for local government of £9,545.4 million.
- Protecting investment in Scotland’s colleges and continuing to invest over £1 billion in higher education, while ensuring Scottish domiciled students continue to benefit from free tuition
- A transfer of £250 million from NHS to local authorities to support integration of health and social care
- Working with our partners – including enterprise agencies, the Scottish Funding Council and universities – to consider how best to use research and innovation budgets of over £345 million to drive increased collaboration and support the forward the development of new products, processes and services
- Protecting the Small Business Bonus for around 100,000 small firms and in order to support this investment a review of business rates which will include an increase in the Large Business Supplement
- Continuing to provide funding for our eight Innovation Centres, where universities, research institutes, businesses and others will work in partnership to support the commercialisation of world-class research in big data, digital health, industrial biotechnology, sensor technology, construction, stratified medicine, aquaculture and oil and gas
- Promoting the Scottish Business Pledge for companies that show public leadership through innovation, internationalisation and championing Fair Work by paying the real Living Wage
- Ensuring that Scotland continues to be a world leader in social enterprise by investing £24.5 million in the Third Sector in 2016-17