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Scottish Budget forecasts

Mackay to resist calls to curb tax rises in Budget

Derek Mackay (photo by Terry Murden)
Derek Mackay (photo by Terry Murden)

Finance Secretary seeks to rebalance wealth

Finance Secretary Derek Mackay is under pressure to use his first Scottish Budget today to tackle a weakening economy.

He is being urged to give companies help on business rates and help boost commercial property investment.

Mr Mackay is expected to confirm that the threshold for 40% income tax earners will not rise in line with England and Wales.

His budget follows a debate in parliament yesterday in which the Conservatives urged Mr Mackay not to raise taxes above those elsewhere in Britain.

The Tories warned that firms may be forced to top up salaries in order to retain or attract highly skilled staff in Scotland.

They say that plans to withhold increases in tax thresholds and to raise taxes will make Scotland uncompetitive and could encourage employers to leave Scotland.

Earlier, chartered accountants and business advisers, Johnston Carmichael has warned that “A number of our clients are flexible and ready to move should the costs of retaining a Scottish base become penal.”

Martin Bell, head of tax at BDO in Scotland, said: “This time last year, the inflexible nature of the Scottish income tax rate setting power was cited as the reason for keeping the Scottish Rate of Income Tax (SRIT) at the same level as the rest of the UK.

“However, that inflexibility has now gone and the Scottish Government can act if it wishes to achieve its stated policy of making income tax on employment, self-employment and pension income earned by Scottish residents better reflect the taxpayer’s ability to pay. 

“The safe option is not to stray too far from the UK taxing model at least for the time being.

“But I would not be surprised to see a new rate applying to the highest earners and progressive increases for those earning more than £50,000 a year.”

Mr Bell says there could be tough times ahead for those in this income bracket as they are also likely to be affected by the recent vote by MSPs to increase the top four bands of council tax in Scotland from April.

The firm is also predicting changes to Land and Buildings Transaction Tax (LBTT) which has been criticised for dampening deals at the top end of the market.

Mr Mackay may be sympathetic to making changes as the tax has failed to achieve the revenue returns expected by the Scottish government.

James Paterson, property tax expert at the firm, said: “We could see an increase in the 5% LBTT band to £500,000 given the reduced activity being reported at the £325-£750,000 level in the residential market. 

“Current LBTT annual yields are £355m and £230m on residential and non-residential property transactions respectively and are expected to rise to £545m and £260m by 2020-21, assuming of course a continued increase in house prices at current levels. 

However, additional significant LBTT yield will be tricky to achieve without adversely affecting the volume of property transactions.”

Further details of the proposed changes to Scottish Air Passenger Duty from April 2018 are also likely.

Nicola Barclay 1
Nicola Barclay (photo by Terry Murden – DB Media Services)

Measures to stimulate house building are being encouraged by the sector’s trade body.

The Scottish Government today reported a 4% increase in house building completions in the 12 months to June 2016 compared to a year earlier.

Homes for Scotland described it as “a step in the right direction”, but pointed to an 11% drop in private sector starts over the same period, which it described as “worrying”.

Nicola Barclay, chief executive, said: “Whilst this increase in completions is welcome, at less than 600 homes, much more obviously needs to be done in order to effectively tackle Scotland’s housing crisis and this will require many thousands of new homes of all tenures. 

“Over the period from 2010, annual completion levels have effectively flatlined at an average of around 15,000 and we now see a worrying drop in the total number of homes being started, with alarming disparity between public and private sectors.

“The system therefore remains in need of resuscitation to ensure that the pipeline of new homes coming through is not blocked or delayed by bureaucratic processes.

“This is reflected in comments made by some of our members that it has never been harder to open new sites and get homes out of the ground.”

David Melhuish 2
David Melhuish (photo by Terry Murden – DB Media Services)

The Scottish Property Federation, representing the real estate sector, has called for efforts to boost commercial property investment following the release of figures showing a fifth quarter of decline in investment in the sector.

In a submission to Mr Mackay the SPF outlined with a framework of 16 key proposals, including:

– Development rates relief, to support projects currently delayed through concerns over empty rates charges and to inspire confidence in the market.

– Raising the LBTT threshold to £500,000 as a means of releasing additional economic activity and revenues for public services.

– Reform of the large business supplement to support occupiers and move back into line with its equivalent in other parts of the UK to ensure Scotland retains a competitive rates system. 

The SPF’s analysis shows the total value of all commercial sales in Scotland between July and September 2016 (Q3) fell to £636m – 22.3% down from Q2 2016 and 6.5% lower than in Q3 2015. 

Aberdeen continues to see a major market realignment while Glasgow posted its lowest quarterly total sales value since Q2 (Apr-Jun) 2013. In Q3 the city saw £53.9m in sales of commercial property from 114 transactions, down 73% in both quarter-on-quarter and year-on-year comparisons. 

In addition, SPF noted “with some alarm” that there is no speculative Grade A office development anticipated in the city until 2019 at the earliest.

Edinburgh is also suffering from a lack of speculative commercial development despite reports of good take-up of office space. 

David Melhuish, director of the SPF said: “The latest investment transaction figures show that there was already a marked dip in commercial sales for investment across Scotland up to Q2 2016 – something that the uncertainty caused by EU referendum did nothing to correct.

“That’s why it’s more important than ever that the Scottish Government uses the policy levers at its disposal to show that Scotland means business when it comes to growing the economy, creating jobs and expanding the tax base sustainably.

“We have suggested sixteen measures, including making business rates competitive, reforming empty property rates to support new development and reforming the 5% residential LBTT rates.

“We would urge the Cabinet Secretary not to delay before providing the support that the sector and wider Scottish economy needs so urgently.”

src-rates-and-closures

The Scottish Retail Consortium claims its analysis (see graphic above) shows a direct correlation between falling numbers of shops in Scotland and the increase in non-domestic rates over the last seven years.  

This comes after SRC and 12 other business groups in September wrote to the Finance Secretary urging him in his Budget to restore the level playing field with England on the large business rates supplement.

Doubling the supplement costs firms operating in Scotland an extra £62.4 million in tax each year. 29,000 commercial premises in total – of which 7,000 are retail premises – in Scotland are affected by the doubling of the rates supplement.

David Lonsdale, SRC director, said: “The last seven years have seen the burden of business rates ratcheted up with little consideration for the consequences for shops and high streets or trading conditions.

“Almost 1,700 shops have closed in Scotland over that time, whilst the Scottish Government has increased its tax take from business rates by £687 million.

“This situation isn’t sustainable and the strategy of plucking the goose with the minimum of hissing isn’t working.

‘The Finance Secretary needs to take immediate action in this week’s Budget to help struggling shops facing challenging economic and trading conditions; starting with reversing this years’ deeply regrettable doubling of the Large Business Rates Supplement.

“However, that should just be an interim step. Once the Barclay Review of Business Rates is complete, the devolved administration needs to implement a modern, simpler, more flexible, and above all more competitive business rates system.

“Otherwise the regrettable trends highlighted here will only be exacerbated.”

 

 



One Comment to Mackay to resist calls to curb tax rises in Budget

  1. Can someone introduce SNP Finance Minister Derek Mackay to the Laffer Curve, which will demonstrate to him why lower taxes always have a positive result on work output and employment, and therefore bring increased revenues to Government. Simple really. The opposite is also true. For example, Government’s recent LBTT hike is already reducing revenues having brought activity in that section of the market to a virtual halt.

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