Chapter 2 Tax
As part of our immediate response to COVID-19 in 2020-21, we have used our limited devolved tax powers and the local tax system to support businesses and the property market. This has been provided alongside a substantial package of support measures for the individuals and businesses most affected by the pandemic.
Our focus is now on delivering tax policies that will help and support Scotland's economy to recover in 2021-22 and beyond, recognising the role tax can play in supporting the individuals and businesses most affected. This is an incredibly challenging economic, health and social landscape within which to make tax policy decisions, with unprecedented uncertainty, in particular due to the impacts of COVID-19 and EU Exit. This is exacerbated by the delay to the UK Budget, which means that we do not know what the full suite of UK tax, fiscal and economic policies will be before making our own policy decisions.
In September 2020 we published a consultation on devolved tax policy choices for Budget 2021-22 and the Fiscal Framework, in line with our commitment to engage openly and honestly on tax policy. As part of that process, we met with, and listened carefully to, a wide range of stakeholders including tax professionals, business representatives, civil society organisations and leading research institutes.
There was a clear message that now is a time for stability, certainty and targeted support for the individuals and businesses most impacted by COVID-19. This is not the time for sweeping tax cuts across the board, nor significant tax rises. This budget is about striking the right balance between raising the revenue required to fund our public services, through a fair and progressive approach to tax, and supporting the economic recovery through targeted interventions.
The tax package set out below supports the economy, and underlines our recognition of, and commitment to tackle the inequalities further exposed by COVID-19. The revenues we raise from taxation will support the most comprehensive range of free to access public services in the UK, as well as ongoing COVID-19 support. This package is part of a Budget that invests in Scotland's recovery, supporting the individuals and businesses most affected. We are providing certainty and stability for Income Tax payers and home buyers, supporting a Council Tax freeze to protect household incomes and continuing to offer unprecedented support for businesses, including targeted support for the Retail, Hospitality, Leisure and Aviation sectors.
The UK Government must take the same approach at the UK Budget, focusing on stimulating the UK economy and targeting those individuals and businesses in most need of support. This must include extending rates relief for the Retail, Hospitality, Leisure and Aviation sectors, so that we have the funding required to offer a more comprehensive package for Scottish businesses.
Another important message from stakeholders was the need for an open and honest conversation on future tax policy. We will continue to engage the public and stakeholders on how the tax system can underpin a wellbeing economy, and deliver the healthier, wealthier, fairer and greener Scotland we want to see. But we need, and have called for, further devolution of tax and fiscal levers in order to achieve our ambitions.
We also continue to adhere to Adam Smith's four maxims on tax policy, namely that our taxes:
- are proportionate to the ability to pay;
- offer certainty for taxpayers;
- are convenient and easy to pay; and
- are economically efficient.
The Scottish Parliament has the power to set Income Tax rates and bands for the non savings non dividend (NSND) income of Scottish taxpayers, with the revenue received coming to the Scottish Government. However, responsibility for defining the Income Tax base, which includes the setting or changing of Income Tax reliefs and exemptions, and the tax-free Personal Allowance, remains reserved to the UK Parliament. Income Tax on savings and dividends is also reserved, and continues to be paid to the UK Government.
Significant changes to Scottish Income Tax were implemented in the Scottish Budget 2018-19, delivering a fairer and more progressive five-band structure. At the time, a commitment was made that the tax system should be seen as settled for the remainder of this Parliament.
In line with that commitment, Income Tax rates will remain unchanged and the starter and basic rate bands, as well as the higher rate threshold, will increase by CPI inflation (0.5%). The top rate threshold will remain frozen in cash terms at £150,000, as has been our policy since 2017-18.
Rates and Bands
|Starter Rate||Over £12,570 - £14,667||19%|
|Basic Rate||Over £14,667 - £25,296||20%|
|Intermediate Rate||Over £25,296 - £43,662||21%|
|Higher Rate||Over £43,662 - £150,000*||41%|
|Top Rate||Over £150,000**||46%|
* Assumes individuals are in receipt of the Standard UK Personal Allowance
** The Top Rate remains at 2020-21 level. Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000
As a result, all Scottish taxpayers will pay slightly less Income Tax in 2021-22 than in 2020-21, based on their current income. Furthermore, based on our assumptions about the UK Budget on 3 March 2021, 54% of Scottish taxpayers will continue to pay less tax than if they lived in other parts of the UK in 2021-22. At a time when people across our country are dealing with the economic and social impacts brought on by the pandemic, this policy delivers the certainty and stability they need from the tax system.
In the UK Spending Review (November 2020), the UK Government announced that the UK wide Personal Allowance and the UK higher rate threshold would be uprated by CPI inflation (0.5%) for the tax year 2021-22 (to £12,570 and £50,270 respectively). All other policy decisions about UK rates and bands will be announced at the UK Budget on 3rd March 2021.
It had been our intention to implement an 'effective Personal Allowance' of £12,750 by the end of this parliamentary term. However, due to the unprecedented circumstances we now face, we have taken the difficult decision to not include this change as part of our 2021-22 Income Tax policy proposals. We are, and should be, focusing on supporting those lower earners who are currently facing the most significant financial pressures, rather than delivering above inflation benefits for all Income Tax payers, including higher earners.
More information on the 2021-22 policy proposals, including a factsheet and analytical note, is available on the Scottish Government's website.
Scottish Rate Resolution
The Scottish Government will introduce a Scottish Rate Resolution to set the rates and bands for Scottish Income Tax for the 2021-22 tax year. A draft of this motion and an accompanying explanatory note is also available on the Scottish Government's website.
The SFC's forecasts for Scottish Income Tax receipts in 2021-22 determine the revenue that the Scottish Government will be able to draw down from HM Treasury during the year ahead. Forecasts for Income Tax receipts are set out in Table 2.02.
|Income Tax Revenue Forecasts||11,556*||11,838||11,850||12,263||12,907||13,481||14,080||14,718|
* 2018-19 figure represents outturn
Land and Buildings Transaction Tax
Land and Buildings Transaction Tax (LBTT) is a tax applied to residential and non-residential land and buildings transactions (including commercial leases) where a chargeable interest is acquired. The Additional Dwelling Supplement (ADS) is payable, in addition to LBTT, on purchases of all relevant residential properties above £40,000.
The temporary change to the residential LBTT nil rate band introduced in July 2020 has provided support for Scotland's housing market at a difficult time, and helped contribute to a robust recovery throughout the year to date.
However, as intended, for transactions with an effective date from 1 April 2021 onwards, the ceiling of the nil rate band for residential LBTT will return to £145,000. First-time buyers will continue to be able to claim the first-time buyer relief, which has the effect of raising the nil rate band to £175,000 and results in a reduction of tax of up to £600.
No legislative changes are required to provide for this. This approach will provide certainty, ensure ongoing support for first-time buyers, and generate revenue to support public services through a fair and progressive approach.
The ADS rate will remain at 4%. The Scottish Government recognises, however, that there are a number of long-standing calls for change regarding aspects of the ADS, in particular to extend the length of time within which a previous main residence must be sold for a repayment to be claimed, and to address various scenarios involving joint buyers. The Scottish Government acknowledges the need for reform in light of this, but it will not be possible to bring forward legislative proposals in this Parliament. As such, the intention would be to consult on this early in the next Scottish Parliament to identify and agree reforms that can address the concerns, without adding further complexity and unintended consequences.
Existing non-residential LBTT rates and bands for conveyances and leases will remain unchanged. These rates and bands continue to be broadly competitive compared to the position across rUK and provide stability for businesses currently trading under difficult conditions.
As a result of the impact of COVID-19 and the continued uncertainty around the terms of the UK's future relationship with the EU, it has not been possible to issue a planned consultation on legislation to provide for proposed targeted LBTT reliefs related to: the 'seeding' (initial transfer) of properties into a Property Authorised Investment Fund (PAIF) or Co-owned Authorised Contractual Scheme (CoACS); and the exchange of units within a CoACS. This will now be a matter for the next Scottish Parliament.
Rates and Bands
|Nil rate band||Not more than £145,000||0%|
|First tax band||More than £145,000 but not more than £250,000||2%|
|Second tax band||More than £250,000 but not more than £325,000||5%|
|Third tax band||More than £325,000 but not more than £750,000||10%|
|Fourth tax band||More than £750,000||12%|
The ADS rate of 4% 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 2.03.
|Nil rate band||Not more than £150,000||0%|
|First tax band||More than £150,000 but not more than £250,000||1%|
|Second tax band||More than £250,000||5%|
|Band||Net present value of rent payable||Rate|
|Nil rate band||Not more than £150,000||0%|
|First tax band||More than £150,000 but not more than £2,000,000||1%|
|Second tax band||More than £2,000,000||2%|
The SFC's forecasts for Land and Buildings Transaction Tax revenues are set out in Table 2.06.
|Land and Buildings Transaction Tax||517||586||629||664||701||740|
|Residential transactions (excl. ADS)||251||299||325||347||372||398|
|Additional Dwelling Supplement (ADS)||108||108||120||127||131||134|
Scottish Landfill Tax
Scottish Landfill Tax (SLfT) 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. The tax serves as a financial incentive to support a more circular economy and the delivery of our ambitious targets to reduce waste, increase recycling and cut waste going to landfill.
The Scottish Government proposes to increase the standard rate of SLfT to £96.70 per tonne and the lower rate of SLfT to £3.10 per tonne with effect from 1 April 2021. This inflation-based increase ensures consistency with planned Landfill Tax charges in the rest of the UK.
This will continue to 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 increased rates will also support progress towards full implementation of the ban on the landfilling of biodegradable municipal waste, which will now take effect on 31 December 2025.
Landfill operators are able to voluntarily contribute a capped proportion of their landfill tax liability to the Scottish Landfill Communities Fund (SLCF), and claim 90% 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 SLCF.
The credit rate for the SLCF for 2021-22 will remain at a maximum of 5.6% 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, without any increase in the overall tax burden.
The SFC's forecasts for Scottish Landfill Tax revenues are set out in Table 2.07:
|Scottish Landfill Tax||95||88||86||72||74||61|
1 Adjusted downwards for payments to the Scottish Landfill Communities Fund.
Non-domestic rates (NDR), often described as business rates, are a local tax levied on lands and heritages used for non-domestic purposes in the public, private and third sectors. NDR are administered and collected by local authorities, who retain all the NDR revenue they raise to help fund the local services they provide. The NDR poundage is set nationally and annually by the Scottish Government.
We are acutely aware that COVID-19 has had a damaging and widespread impact on the economy and the commercial property market more generally. Other Devolved Governments have recognised this broader impact in their decisions to freeze their poundage rates. Following two years of offering the lowest poundage in the UK, the Scottish Budget goes further by proposing the unprecedented step of reducing the poundage mid-revaluation and offering the lowest poundage level available anywhere in the UK.
The decision to reduce the Basic Property Rate ('poundage') to 49 pence, the same as in 2019-20, will save Scottish ratepayers over £120 million compared with previously published plans. Notwithstanding the limitations of the devolved settlement, we are fully committed to doing all we can to prioritise support for businesses and this unprecedented step will ensure that properties' gross liabilities are no higher than they were prior to the pandemic, all else being equal. Due to the introduction of the Intermediate Property Rate (IPR) on 1 April 2020, properties liable for the IPR will pay less than they did in 2019-20.
The Scottish Government has delivered the UK's most competitive NDR regime for a number of years. Following the publication of the Scottish Budget 2020‑21, and in direct response to COVID-19, we introduced 100% relief for the Retail, Hospitality, Leisure and Aviation sectors (RHL relief) and a 1.6% universal relief. The 1.6% universal relief will end on 31 March 2021 as legislated and the lack of clarity from the UK Government at successive fiscal events has seriously constrained our ability to directly respond to one of the principle asks from the business community to provide early confirmation that the RHL relief will be extended into 2021-22.
However, recognising the priority that the business community has placed on rates relief to provide an element of confidence in the face of continued uncertainty, the Scottish Budget commits to extending the 100% RHL relief for at least three months.
In recent months a number of businesses have publicly stated their desire to repay the value of rates relief provided in 2020-21. Scottish Ministers have been clear that any receipts returned through this public spirited decision would be directed towards supporting economic recovery. Whilst the level of funding to be returned remains uncertain, based upon correspondence and public statements of intent from major corporations, we forecast that this funding will be sufficient to fully fund this extension and provide a unique opportunity to give additional support to the most directly affected sectors within the limitations of the devolved settlement.
Should the UK Government bring forward an extension to their equivalent RHL relief that generates consequential funding, Ministers will match the extension period as part of a tailored package of business support measures. We hope that this interim measure will provide a degree of certainty in the absence of any clarity from UK Government over both the future of their equivalent RHL relief and other macroeconomic support measures such as the furlough scheme.
The amount of tax due is based on the rateable value of the property multiplied by the poundage (or the Intermediate, or Higher Property Rate, where relevant), minus any reliefs to which the property is entitled.
Independent Assessors set the rateable value of a non-domestic property, which is based on the notional annual rent the property would attract on the open market if vacant and to let. Non-domestic properties are periodically revalued to reflect prevailing economic circumstances. The most recent revaluation took place in 2017, with the next now scheduled for 2023, this having been delayed by one year due to COVID-19. The decision will offer certainty to businesses in the recovery period and ensure that values at the next revaluation accurately reflect the property market prevailing at the time.
The main tax rate is the Basic Property Rate ('poundage'), which is a pence in the pound tax rate set by Scottish Ministers. Two additional rates are levied on properties with a rateable value over £51,000 and £95,000 respectively.
In addition to reducing the poundage by 0.8p, the Scottish Budget 2021-22 maintains:
- the Intermediate Property Rate at 50.3p (the poundage plus 1.3p), which will be charged on properties with an RV of between £51,001 and £95,000; and
- the Higher Property Rate at 51.6p (the poundage plus 2.6p), which is charged on properties with a rateable value (RV) above £95,000.
Taken together, these policies will ensure that at least 95% of properties are liable for a lower rate than anywhere in the UK.
|Basic Property Rate ('Poundage')||49p|
|Intermediate Property Rate (rateable values between £51,001 and £95,000)||50.3p (Poundage +1.3p)|
|Higher Property Rate (rateable value above £95,000)||51.6p (Poundage +2.6p)|
The Scottish Budget 2021-22 also introduces the following policies that respond directly to the immediate challenges posed to the commercial property market by the COVID-19 pandemic and the need to promote a green recovery as we strive to meet our net zero emissions target:
- The rateable value upper threshold in order to qualify for Fresh Start Relief will be increased from £65,000 to £95,000 to match the Higher Property Rate threshold. This relief encourages the use of empty property by offering 100% relief for up to twelve months to properties that have been empty for six months or more;
- Business Growth Accelerator (BGAc) relief will be expanded to property improvements where there has been a concurrent change of use to incentivise the re-use of existing assets. This component of BGAc that any increases in NDR due to improvements to, or the expansion of, existing properties will not take effect until twelve months after those changes are made to the property.
- Unoccupied new builds will be able to claim BGAc relief for up to three years, providing certainty to investors and developers.
- One hundred per cent Day Nursery Relief for all standalone nurseries in the public, private and charitable sectors will be extended to at least 30 June 2023.
- In order to provide investor certainty and also respond to the findings of the Tretton Review of Small Scale Hydro Plant and Machinery, the Budget extends the current 60% hydro relief and the 50% District heating Relief until 31 March 2032.
- Where district heating networks are powered by renewables, as part of the Heat in Building Strategy, the District Heating Relief will be expanded to offer 90% relief instead of 50% for new District Heating networks. The 90% relief will be available to 31 March 2024.
The Budget will continue to fund the following reliefs which are set annually:
- Small Business Bonus Scheme relief, which has lifted over 117,000 properties out of rates altogether as at 1 July 2020.
- Transitional Relief, which caps annual rates bill increases at 12.5% for Aberdeen City and Aberdeenshire offices and for all but the very largest hospitality properties across Scotland.
The following reliefs will also be maintained: charitable rates relief, disabled rates relief, district heating relief; empty property relief; Enterprise Areas relief; hardship relief; mobile masts relief; new fibre relief; renewable energy relief; reverse vending machine relief; rural relief; sports club relief; and stud farms relief. Discretionary sports club relief will be subject to new statutory guidance, subject to parliament, from 2021-22, to ensure that it supports affordable community-based facilities, as recommended by the independent Barclay Review of non-domestic rates.
NDR reliefs, like other subsidy or support measures, may be subject to the conditions set out in the EU-UK Trade and Cooperation Agreement, which in certain cases limits sectoral public subsidisation to 325,000 Special Drawing Rights (equivalent to approximately £350,000) over any period of three fiscal years. The Retail, Hospitality and Leisure relief is provisionally being awarded as 'no aid' although this, and the position in relation to the Aviation relief, will be confirmed following the conclusion of the UK Budget. The final policy design will take into account the UK Government's own position on any RHL relief and related Barnett consequential payments accruing to the Scottish Government.
Due to COVID-19, the implementation of the requirement that self-catering properties be let for 70 days or more in order to be classed as non-domestic, as recommended by the independent Barclay Review of non-domestic rates, was initially delayed and will now be in place for 2021-22.
SFC forecasted tax revenues for NDR from 2020-21 to 2025-26 are set out in Table 2.09 below.
Council Tax is a local tax with receipts, which make a significant contribution to the funding of public services, retained by local government and separate from the Scottish Budget. Every household in Scotland potentially has a Council Tax liability, although the Council Tax Reduction scheme reduces this for around 500,000 households according to need and ability to pay.
In recognition of the unique pressures created by the pandemic the settlement also includes an additional £90 million available to compensate councils that choose to freeze their Council Tax at 2020-21 levels, helping to protect household incomes. This additional allocation provides compensation to support services and equates to an increase in Council Tax income of around 3%.
Air Departure Tax
The Scottish Government remains fully committed to introducing the Air Departure Tax (ADT) when a solution to the Highlands and Islands exemption issue has been found. We will engage with the UK Government on their planned consultation on Air Passenger Duty reform and work with stakeholders to find a solution for aviation that remains consistent with our climate ambitions.
The UK Government will maintain the application and administration of Air Passenger Duty in Scotland in the interim.
The Scotland Act 2016 gave the Scottish Parliament the power to introduce a devolved Aggregates Levy in Scotland. The levy is paid on the commercial exploitation of aggregates, i.e. sand, gravel and crushed rock.
Outstanding state aid issues related to the UK Aggregates Levy have now been resolved and the UK Government has completed its review of the UK levy. Whilst a timeline has not yet been agreed for introduction of a devolved levy, the Scottish Government will continue the necessary work to allow for this, building on the research published in 2020.
It will be for the next Scottish Parliament to consider the legislation that would be required to provide for a devolved levy in Scotland. The UK levy will continue to apply in the interim.
The Scotland Act 2016 provides for receipts from half of the VAT raised in Scotland to be assigned to the Scottish Budget (known as VAT assignment). VAT assignment had been expected to commence with effect from April 2021, with full fiscal impact in the Scottish Budget 2021-22. Due to the current economic climate, the Scottish Government has agreed with HM Treasury to delay implementation of VAT assignment until the Fiscal Framework Review. To ensure robust and prudent fiscal management, it is our belief that we must avoid introducing a new element of unpredictable volatility to the Scottish Budget at this time. We have provided more detail on the options around VAT assignment implementation in the Medium Term Financial Strategy, published alongside the Budget.
2. Introduced through the Land and Buildings Transaction Tax (Tax Rates and Tax Bands) (Scotland) Amendment (No.2) (Coronavirus) Order 2020
3. Figures may not add to total due to rounding.