Of primary interest was how Derek Mackay would respond to the income tax giveaways in October’s UK Budget and whether we would see a further divergence between Scotland and the rest of the UK. Whatever he announced, Mr Mackay will need to win the backing of least one opposition party in order to get his plans through parliament as the SNP no longer hold a majority.
Below is a summary of the key tax changes:
Scottish Tax Rate
Scottish Income Tax is payable by Scottish taxpayers and applies to salary, self-employment, pension and rental income. The ability to alter the Personal Allowance is reserved by Westminster with the Scottish Government having the power to amend the income tax rates and bands on relevant income. In last year’s Scottish Budget, Mr Mackay introduced a new five-band Scottish income tax regime as part of his ‘progressive approach’ to Scottish taxation.
In October’s UK Budget Mr Philip Hammond, the UK Chancellor, announced an increase in the personal allowance from £11,850 to £12,500 and a rise in the higher rate band threshold to £50,000 from 6 April 2019. However, in this Scottish Budget Mr Mackay advised that there would be no similar increase in the higher rate threshold for Scottish taxpayers with the starting and lower rate thresholds increasing by inflation and the higher rate threshold being frozen at £43,430. Whilst Mr Mackay insisted this makes Scotland the fairest taxed part of the UK, for anyone earning more than about £27,000 it is also the most expensive.
This announcement will fuel further debate on the possibility of tax motivated migration due to the relative increase in the tax cost of living in Scotland and we may well see the incorporation of businesses in order to be taxed under the corporation and dividend tax regimes, the rates and bands for which are aligned with the rest of the UK subject, of course, to the far reaching changes to the administration of IR35.
Land and Buildings Transaction Tax (LBTT)
The big question in relation to LBTT was whether Mr Mackay would replicate the SDLT proposals in the UK Budget and introduce an additional charge in relation to the purchase of residential property by overseas purchasers. Whilst no charge for overseas buyers was mentioned in Mr Mackay’s speech he did announce an increase in the Additional Dwelling Supplement, the surcharge applicable on the purchase of a second residential property, from 3% to 4% from 25 January 2019 if approved.
Mr Mackay also announced changes to the LBTT rates applicable to non-residential purchases with the lower rate dropping from 3% to 1%. However, the higher rate was increased from 4.5% to 5% and the threshold at which the higher rate applies will reduce from £350,000 to £250,000. Again these proposals, if approved, will be effective from 25 January 2019.
In both cases, where the contract was entered into prior to 12 December 2018 the current rates will apply even where completion occurs on or after 25 January 2019.
Despite recommendations supporting the introduction of a Transient Visitor Levy or Tourist Tax Mr Mackay advised that, having consulted relevant stakeholders, he did not believe it to be right or fair to introduce such a levy at this time but he has not ruled it out entirely and will keep the matter under review.