Chapter 2 - Tax
This chapter sets out the policy for fully devolved taxes and non-savings non-dividend (NSND) income tax for 2019-20. Council tax, which is a local tax set and collected by councils and for which the receipts are excluded from the Scottish Government fiscal budget, is not considered in this chapter.
Tax revenues raised in Scotland fund around 40 per cent of Scottish Government expenditure. Once Air Passenger Duty, the Aggregates Levy and the assignment of VAT raised in Scotland are devolved, this proportion will increase to around half.
The Fiscal Framework agreed between the UK and Scottish Governments determines how the Scottish Government’s block grant will be adjusted to take account of new tax revenue.
Since 1 April 2017, the Scottish Fiscal Commission has been responsible for producing forecasts of revenue from fully devolved taxes and NSND income tax to support the Scottish Budget. The Commission’s report of Scotland’s Economic and Fiscal Forecasts accompanies this publication. All forecast tax revenues in this chapter are produced by the Commission.
Scottish Income Tax
The Scotland Act 2016 conferred on the Scottish Parliament the power to set all income tax rates, and the thresholds of bands that apply to the NSND income of Scottish taxpayers. The Scottish Government receives all NSND revenue raised from Scottish taxpayers.
Income tax remains a partially devolved tax. The responsibility for defining the income tax base, including the setting or changing of income tax reliefs and exemptions (including the Personal Allowance), continues to rest with the UK Government. Income tax on savings and dividends continues to be paid to the UK Government, at the rates and bands it sets.
Her Majesty’s Revenue and Customs (HMRC) is responsible for the collection and management of Scottish income tax. The Scotland Act 2016 defines a Scottish taxpayer as someone who is a UK taxpayer and has their main place of residence in Scotland. HMRC will continue to take actions to maintain and improve the accuracy of its Scottish taxpayer database. A Service Level Agreement exists between the Scottish Government and HMRC, to ensure that Scottish taxpayers and the employers of Scottish taxpayers continue to be treated in the same way as income taxpayers in the rest of the UK. The National Audit Office and Audit Scotland report annually on HMRC’s operation of Scottish income tax.
As part of the 2018-19 Budget, significant changes to Scottish income tax were announced with the introduction of two new bands and a change to some rates. A commitment was made that this new structure of income tax should be seen as settled for the remainder of the Parliament, and as such this budget makes no changes to rates, and does not introduce or remove any bands.
The previous income tax policy was developed on the basis of four key tests, which have also been applied in the development of this year’s policy. Table 2.01 sets out the Scottish Government’s proposed rates and bands for 2019-20.
Table 2.01: Scottish Income Tax Rates and Bands for NSND income
|Scottish bands||Band name||Scottish rates (%)|
|Over £12,500* - £14,549||Starter||19|
|Over £14,549 - £24,944||Basic||20|
|Over £24,944 - £43,430||Intermediate||21|
|Over £43,430 - £150,000**||Higher||41|
*Assumes individuals are in receipt of the Standard UK Personal Allowance.
**Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.
The Scottish Government continues to take an approach which ensures that lower and middle-earning taxpayers remain protected, and this has been delivered by an inflationary increase in the Starter and Basic Rate bands and no changes to rates of tax.
To deliver on a commitment to progressivity and to raise additional revenue to invest in public services and the economy, the Higher Rate Threshold will be frozen at £43,430 and the Top Rate Threshold will remain frozen at £150,000.
As a result of these changes, 55 per cent of income taxpayers in Scotland will pay less tax than people earning the same wage in the rest of the UK. Moreover, on current incomes, 99 per cent of all taxpayers will pay less tax than last year in cash terms.
In developing income tax policy, the Scottish Government has consistently taken a responsible approach to balancing improving progressivity and raising revenue, and ensuring tax policy does not undermine revenues or competitiveness. To ensure that the scale of behaviour effects remains low, the Council of Economic Advisers will be asked to extend their remit from a consideration of the Top Rate of tax to considering all income tax policy related behavioural effects and associated risks, and if necessary, what any mitigating actions may be.
Scottish Rate Resolution
The Scottish Government will introduce a Scottish Rate Resolution to set the rates and bands for Scottish income tax for the 2019-20 tax year. A draft of this motion and an accompanying explanatory note will be published on the Scottish Government’s website.
The Commission forecasts for Scottish income tax receipts in 2019-20 determine the revenue that the Scottish Government will be able to draw down from HM Treasury. Forecasts for income tax receipts are set out in Table 2.02.
Table 2.02: Scottish Income Tax Revenue Forecasts (£ million)
|NSND Income Tax||11,684||12,285||12,746||13,242||13,805|
As noted in the Commission’s report, the forecasts for the years beyond 2019-20 are estimated on the assumption of an inflationary uplift to all thresholds bar the Top Rate Threshold, and no further changes to tax rates for the remainder of the forecast period.
The Commission forecast the Scottish Government’s policy will raise an additional £68 million revenue in 2019-20 compared to an inflationary uplift in all thresholds and a freeze in the Top Rate Threshold (Table 2.03).
Table 2.03: Scottish Government Income Tax Policy Revenue Forecasts (£ million)
|Policy forecast (£m)||68||71||75||80||84|
Land And Buildings Transaction Tax
Land and Buildings Transaction Tax (LBTT) replaced UK Stamp Duty Land Tax (SDLT) in Scotland from 1 April 2015. LBTT is a tax applied to residential and commercial land and buildings transactions (including commercial leases) where a chargeable interest is acquired. The Additional Dwelling Supplement (ADS) was introduced from 1 April 2016 and is payable on purchases of additional residential properties.
The Scottish Government’s policy priority for residential LBTT remains to help first-time buyers, and to assist people as they progress through the property market. Since its introduction, this policy has ensured that over 80 per cent of taxpayers benefit from LBTT by paying either no tax or less tax than in England.
The Scottish Government will increase the ADS rate from 3 per cent to 4 per cent. The increase in the supplement forms an important element of the Scottish Government’s drive to protect opportunities for first-time buyers in Scotland, reinforcing the progressive approach in place for LBTT rates and bands. If approved by the Scottish Parliament, the rate change will come into force from 25 January 2019, but will not apply if the contract for a transaction was entered into prior to 12 December 2018. Existing arrangements allowing for the supplement to be reclaimed will continue.
The Scottish Government will reduce the lower rate of non-residential LBTT from 3 per cent to 1 per cent, increase the upper rate from 4.5 per cent to 5 per cent, and reduce the starting threshold of the upper rate from £350,000 to £250,000. Taken together, these changes mean that non-residential LBTT rates and bands are the most competitive in the UK for all non-residential transactions. These changes are proposed to come into force from 25 January 2019, but will not apply if the contract for a transaction was entered into prior to 12 December 2018.
In order to safeguard the investment in, and the development of, Scottish real estate and to further increase the attractiveness of Scotland as an investment destination, the Scottish Government plans to introduce two targeted reliefs over the course of 2019 following further consultation. These are: a relief for the ‘seeding’ (initial transfer) of properties into a Property Authorised Investment Fund (PAIF) or Co-owned Authorised Contractual Scheme (CoACS); and a relief for when units in CoACS are exchanged. This decision follows an initial consultation exercise in summer 2018. A consultation on draft legislation and potential impacts will be published once there is sufficient clarity on the terms of the UK’s withdrawal from the EU.
Rates and Bands
In 2019-20 we propose to maintain residential rates and bands of LBTT at their current (2018-19) levels. The proposed rates and bands for non-residential LBTT transactions, are set out in Table 2.04.
Table 2.04: LBTT Rates and Bands for Residential and Non-residential Property Transactions
|Residential transactions||Non-residential transactions*||Non-residential leases|
|Purchase price||LBTT rate||Purchase price||LBTT rate||Net present value of rent payable||LBTT rate|
|Up to £145,000||0%||Up to £150,000||0%||Up to £150,000||0%|
|£145,001 to £250,000||2%||£150,001 to £250,000||1%||Over £150,000||1%|
|£250,001 to £325,000||5%||Over £250,000||5%|
|£325,001 to £750,000||10%|
*Non-residential rates and bands will come into force from 25 January 2019.
The new ADS rate of 4 per cent applies to the total price of the property for all relevant transactions above £40,000, and will be charged in addition to the rates set out in Table 2.04.
The Commission’s forecast tax revenue for residential ADS, and non-residential LBTT for the six-year period 2018-19 to 2023-24 are set out in Table 2.05.
Table 2.05: LBTT Revenue Forecasts 2018-19 to 2023-24 (£ million)
|Land and Buildings Transaction Tax||569||643||680||716||751||787|
|Residential transactions (excl. ADS)||267||296||324||349||373||398|
|Additional Dwelling Supplement (ADS)||94||122||123||127||130||134|
Note: Figures may not sum due to rounding.
Table 2.06 shows the Commission’s forecast for the change in revenue from the ADS policy set out above. This is forecast to increase revenue by £25.4 million in 2019-20. It is also forecast to increase revenue by £2.3 million in 2018-19, due to introduction in the 2018-19 tax year and the forestalling (bringing forward) of some transactions that would otherwise have occurred in 2019-20.
Table 2.06: ADS Policy Revenue Forecast (£ million)
|Policy forecast (£m)||2.3||25.4||24.2||25.3||25.6||26.0|
|- of which net ADS revenue||2.2||27.3||25.5||26.7||27.4||28.1|
|- of which residential LBTT revenue||0.1||(1.8)||(1.3)||(1.4)||(1.8)||(2.1)|
Note: Figures may not sum due to rounding.
Table 2.07 shows the Commission’s forecast for changes in revenue from the non-residential LBTT policy set out above. These measures are forecast to increase revenue by £2 million in 2018-19, £13 million in 2019-20, rising to £15 million by 2022-23.
Table 2.07: Non-Residential LBTT Policy Revenue Forecast (£ million)
|Policy forecast (£m)||2||13||14||14||15||15|
Scottish Landfill Tax
Scottish Landfill Tax (SLfT) was introduced on 1 April 2015, replacing UK Landfill Tax. It is a tax on the disposal of waste to landfill, charged by weight on the basis of two rates: a standard rate, and a lower rate for less polluting materials.
SLfT rates continue to provide financial incentives to support a more circular economy, and the delivery of our ambitious targets to reduce waste, increase recycling and cut waste going to landfill.
Landfill operators are able to voluntarily contribute a capped proportion of their landfill tax liability to the Scottish Landfill Communities Fund, and claim 90 per cent of the contribution as a tax credit. In order to claim a credit, the funds must be used for one or more of the objectives set out for the Communities Fund.
The Scottish Government proposes to increase the standard rate of SLfT to £91.35 per tonne and the lower rate of SLfT to £2.90 per tonne in 2019-20, in line with RPI inflation and to ensure consistency with Landfill Tax charges in the rest of the UK. This will provide a stable tax environment for industry to invest in alternative waste treatment options, whilst addressing concerns over potential ‘waste tourism’ should one part of the UK have a lower tax charge than another.
The credit rate for the Scottish Landfill Communities Fund for 2019‑20 will remain at a maximum of 5.6 per cent of an operator’s tax liability. This will ensure that landfill site operators can continue to contribute to community and environmental projects near landfill sites to a greater degree than their UK counterparts, without any increase in the overall tax burden.
The Commission’s forecast tax revenue for SLfT in the period 2018-19 to 2023-24 are set out in Table 2.08.
Table 2.08: SLfT Revenue Forecasts 2018-19 to 2023-24 (£ million), adjusted for payments to the Scottish Landfill Communities Fund
|Scottish Landfill Tax||136||104||83||13||13||14|
In 2019-20 and 2020-21, increasing energy from waste capacity across Scotland is expected to drive revenue downwards as more waste is diverted from landfill. Based on the latest evidence, the Commission have also now included in their central forecast the impact of the legislation which will ban biodegradable municipal waste (BMW) being landfilled from early 2021. Though this will result in increasing energy production from waste capacity, it is also expected to be a significant factor in reducing revenue from 2021-22 onwards. Local authorities and waste management companies are currently preparing for the changing regulatory landscape from January 2021 and are therefore already reacting to the ban on the landfill of biodegradable municipal waste.
Non-domestic rates (NDR), or business rates, is a property tax collected and used by councils to fund the local services received by the property.
New policies to be introduced in 2019-20 include:
- a below-inflation increase in the non-domestic rates poundage, the lowest poundage available anywhere in the UK;
- an enhanced 100 per cent fibre broadband relief for a 10 year period to 31 March 2029; and
- a continuation of the transitional relief cap for Aberdeen City and Shire offices and all but the very largest hospitality properties across Scotland. This means that 2019-20 bills will rise by no more than 12.5 per cent in real terms (14.8 per cent in cash terms) for eligible properties.
The 2019-20 Budget also maintains:
- the Small Business Bonus Scheme which provides record relief to over 119,000 business properties across Scotland and has lifted 100,000 recipients out of rates altogether;
- a Business Growth Accelerator, which ensures new build properties are not liable for rates until 12 months after first occupation and any rates bill rises due to improvements to or the expansion of existing properties will not take effect until 12 months after those changes are made to the property;
- the day nurseries relief to support nursery providers who have such an important role to play in ensuring our children have the best start in life;
- the 60 per cent relief for hydro generation which is in place until the final report of the Hydro Plant and Machinery Review is received and the conclusions are implemented; and
- the Fresh Start Relief which was expanded to include all property types, halving the qualifying period the property has to be empty to qualify from 12 months to six, doubling the level of relief from 50 per cent to 100 per cent for the first year of new occupation.
Some of these measures will be awarded under the EU State Aid de minimis regulation.
Taken together these decisions confirm the Scottish Government continues to offer the most generous package of reliefs available in the United Kingdom, forecast to be worth a record £750 million in 2019-20, up from £732 million in 2018-19. Councils may also offer their own local reliefs under the Community Empowerment (Scotland) Act 2015.
The amount of tax paid is the rateable value of the property multiplied by the poundage rate, minus any relief to which the property is entitled.
Independent Assessors set the rateable value, which is broadly the amount of annual rent the property would attract on the open market. Non-domestic property values are regularly revalued to reflect prevailing economic circumstances. The most recent revaluation took place in 2017 with the next scheduled for 2022, after which legislation planned for introduction in 2019 will provide for a statutory three-year revaluation cycle.
The main tax rate is the poundage, which is a pence in the pound tax rate set by Scottish Ministers. A small supplementary tax rate is levied on properties with a rateable value over £51,000.
Tax rates for 2019-20 will be as set out in Table 2.09.
Table 2.09: NDR tax rates
|Large Business Supplement (rateable value above £51,000)||2.6p|
Forecast tax revenue for NDR in the period 2019-20 to 2023-24 are set out in Table 2.10.
Table 2.10: NDR Revenue Forecasts 2019-20 to 2023-24 (£ million)
Table 2.11 shows the Commission’s estimate of revenue changes following from the policy changes presented above.
Table 2.11: NDR Policy Revenue Foregone Forecasts (£ million)
|Continuation of transitional relief||(7)||(5)||(3)|
Source: Scottish Government, Scottish Fiscal Commission. Figures may not sum due to rounding.
Air Departure Tax
Following the commencement of section 17 of the Scotland Act 2016 on 23 May 2016, the Scottish Parliament passed the Air Departure Tax (Scotland) Act 2017 on 20 June 2017.
The Cabinet Secretary for Finance, Economy and Fair Work informed Parliament on 1 June 2018 that the introduction of Air Departure Tax (ADT) will be deferred beyond April 2019. The Scottish Government has been clear that a resolution to the Highlands and Islands exemption issue must be found before ADT can be introduced in Scotland, to ensure that devolved powers are not compromised. The Scottish Government continues to work closely with the UK Government, and with the new Highlands and Islands ADT Working Group, to seek a solution. The UK Government will maintain the application of Air Passenger Duty in Scotland in the interim.
The Scottish Government remains committed to delivering a 50 per cent reduction in the overall tax burden of ADT and to abolishing it altogether when resources allow. This is intended to help boost international connectivity and generate sustainable growth.
Aggregates Levy is a tax paid on the commercial exploitation of aggregates, i.e. sand, gravel and rock. The Scotland Act 2016 gave the Scottish Parliament the power to legislate for a tax to replace the Aggregates Levy in Scotland. However, there are ongoing legal issues in relation to the UK tax, which need to be resolved before the power can be commenced.
The ability to set the rate of Aggregates Levy will provide opportunities to better integrate waste and other environmental policies within Scotland. The Scottish Government will work with the UK Government and stakeholders, and conduct research in anticipation of the Levy’s eventual devolution.
Value Added Tax Assignment
The Scotland Act 2016 provided for the first 10 pence of the Standard Rate of Value Added Tax (VAT), and the first 2.5 pence of the Reduced Rate, to be assigned to the Scottish Government. The assignment of VAT will be based on a model that will estimate expenditure in Scotland on goods and services that are liable for VAT. The draft model for calculating Scottish VAT receipts has been published, and finalising the model will be discussed through the Joint Exchequer Committee in spring 2019.
The Scottish Government will continue to monitor the methodolgy in advance of a final agreement, including a focus on the robustness of the data that underpins it and the potential level of undue votality which may be associated with its operation.
2019-20 will be a transitional year, where VAT assignment will be forecast and calculated, but with no impact on the Scottish Government’s Budget. From 2020-21, provided both Governments are assured that the assignment methodology is working effectively, the Scottish Government’s Budget will be determined by forecast and final estimated VAT receipts in Scotland and corresponding block grant adjustment. The Scottish Fiscal Commission will forecast Scottish assigned VAT receipts. Table 2.12 shows the assigned VAT forecasts for Scotland.
Table 2.12: Scottish Government assigned VAT Revenue Forecasts (£ million)
|Policy forecast (£m)||5,631||5,801||5,966||6,122||6,279||6,434|
Tax Block Grant Adjustments
Changes in the Scottish Government’s block grant are determined via the operation of the Barnett Formula. Under the Fiscal Framework, the block grant is then reduced to reflect the tax revenues devolved to Scotland under the Scotland Acts 2012 and 2016. These reductions are referred to as Block Grant Adjustments (BGAs).
The impact on the budget is initially determined by the difference between forecasts of these BGAs and forecasts of Scottish tax revenues. When outturn figures are available, ‘reconciliations’ are made to the budget. Further detail on the operation of the Fiscal Framework is set out in the Fiscal Framework Outturn Report.
Table 2.13 shows the most recent forecasts for revenues, BGAs and their net impact on the budget.
Table 2.13: Forecasts of Revenues and Block Grant Adjustments (£ million)
|Block Grant Adjustments||2017-18||2018-19||2019-20||2020-21||2021-22||2022-23||2023-24|
|NSND Income Tax||Revenue||11,008||11,452||11,684||12,285||12,746||13,242||13,805|
|Net impact on budget||(38)||(43)||182||196||268||288||312|
|Net impact on budget||(27)||23||76||85||84||83||66|
|Net impact on budget||35||32||13||0||(68)||(61)||(48)|
|Net impact on budget||(30)||12||271||281||284||310||329|
Notes: The BGA and revenue forecasts shown for 2017-18 and 2018-19 differ from Table 1.02. Table 1.02 shows the BGAs and forecasts that were used to determine the budget in each of these years. This table presents latest forecasts. These do not affect the 2017-18 and 2018-19 budgets.
The total tax BGA does not include the non-tax BGAs for fines, forfeitures, fixed penalties, and proceeds of crime. For the total BGA including tax and non-tax elements, please refer to Table 1.02.
The 2017-18 LBTT and SLfT revenue and BGA figures are outturn figures.
The BGAs shown are calculated using the Indexed Per Capita (IPC) indexation method. This method in practice determines the BGAs applied to the budget. This is set out in more detail in paragraph 2.22 of the Fiscal Framework Outturn Report.
Figures may not sum due to rounding
Income Tax Baseline Value
Since the publication of the previous forecasts in ‘Scotland’s Fiscal Outlook’, income tax outturn data for Scotland for 2016-17 has become available. The outturn figure of £10,719 million will be used from now on as the baseline value for the income tax BGA.
This figure was £548 million lower than the 2016-17 forecast used in ‘Scotland’s Fiscal Outlook’ (£11,267 million). While this causes the revised BGAs and revenues to be significantly lower than those published in ‘Scotland’s Fiscal Outlook’, it has no direct impact on the Scottish Government’s Budget. This is because the BGA deducted from the Budget and the forecast tax revenues added to the Budget have been revised down by the same amount.
Impact of Reconciliations of 2017-18 Outturn Data on this Budget
A negative £3 million reconciliation has been applied to the 2019-20 Budget relating to 2017-18 revenues for Land and Buildings Transaction Tax, Scottish Landfill Tax and Fines, Forfeitures and Fixed Penalties. This reconciliation is needed because the outturn figures for those BGAs were, in total, £3 million higher than had been forecast at the time of the 2018-19 Budget.
The forecasts for both Scottish tax revenues and corresponding BGAs are based on the latest available information at the time of the Budget. Once the outturn data is available for the Scottish tax revenues and the BGAs, reconciliations will be carried out.
For Scottish income tax, outturn data is available around 15 months after the end of the financial year. For 2019-20 income tax, outturn data will be available in summer 2021 and a reconciliation will be applied to the 2022-23 Budget to both forecast revenues and the BGA.
For LBTT and SLfT, data is available six months after the end of the financial year. Revenue Scotland collects LBTT and SLfT and these revenue streams feed in to the Scottish Budget as they are collected. The BGAs for these taxes are updated twice. The first update is made within the financial year at the UK Budget, on the basis of the most recent Office for Budget Responsibility (OBR) forecasts. Once outturn data is available in the following financial year, a final reconciliation is applied to the block grant for the financial year thereafter (i.e. two years after the year to which the revenues relate).
For 2019-20 LBTT and SLfT, the BGAs will therefore be updated at Autumn Budget 2019 based on the latest OBR forecast; this update will be applied to the 2019-20 Budget. Following the publication of outturn data in summer 2020, the final reconciliation will be applied to 2021-22 Budget.
3 Scottish VAT assignment – Summary of VAT assignment model: https://www.gov.uk/government/publications/scottish-vat-assignment-summary-of-vat-assignment-model