Scotland’s growing tax divergence from the rest of the UK is reaching a tipping point where it erodes the country’s competitiveness, according to an accountancy body.
Recent analysis from Tax Policy Associates shows that increases in Scotland’s top rate of income tax may now be costing the country around £22m of lost tax in its first year as higher earners find ways to avoid the top rate.
The Institute of Chartered Accountants of Scotland (ICAS) describes this as a warning that tax divergence could be impacting Scotland’s competitiveness, investment appeal and long-term tax base.
It says that data suggesting Scotland’s 48p top rate of income tax may have reduced rather than increased revenues underlines the need for policymakers to assess the behavioural effects of tax decisions.
ICAS chief executive Gail Boag said: “ICAS has long argued that the UK tax system is overly complex and that simplification is essential to improving compliance, reducing administrative burdens, and supporting business confidence.
“We have warned for several years that Scotland could be approaching a tipping point, where growing tax divergence from the rest of the UK begins to influence decisions about where people choose to live, work and invest.
“Analysis suggesting the 48p top rate may have raised less revenue than expected underlines why that warning matters. Scotland simply cannot afford to treat tax competitiveness as a secondary issue if it wants to protect its tax base and support economic growth.”
Ms Boag says while more evidence is needed before firm conclusions can be drawn, policymakers should not ignore signs that behavioural effects may be starting to emerge.
“These potential behaviour changes include opting against promotion, reducing working hours, increasing potential contributions, or even relocating to other parts of the UK.
“Tax policy can’t therefore be viewed solely as a means of closing short-term budget gaps. It must form part of a long-term strategy that supports economic growth, strengthens competitiveness and ensures Scotland remains an attractive place for people to live, work and invest.”
Separate data from the Scottish Parliament Information Centre says Scotland raises the highest level of corporation tax per head outside of London. It shows businesses operating in Scotland raise on average £1,405 for every person in the country.
This is the highest rate in the UK excluding London and £105 per head higher than the South East England.
While the SNP claimed the figures underlined Scotland’s potential as an independent nation, unionists will say that they show how Scotland is benefiting from being part of the UK, the so-called “union dividend”.
SNP MSP Patricia Gibson said: “These figures underline the strength of Scotland’s economy and the success of businesses operating across the country.
“Scotland’s businesses are creating jobs, driving investment and clearly generating significant tax revenues significant tax revenues to be reinvested in public services.
“With the full powers of independence, including control over corporation tax itself, Scotland could do even more to support private enterprise, attract investment and build a stronger, fairer economy that drives economic growth.”
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