Scottish Income Tax and Businesses: Initial Evidence Review of Tax and Competitiveness

2. How businesses understand competitiveness

Scottish Government has previously published work examining how competitiveness should be defined,^[7] highlighting that competitiveness is a complex concept with no single measure and many different meanings. Instead, it should be seen as multifaceted, encompassing a range of factors. These include the tax environment but also availability of skills and public infrastructure. To better understand how businesses view competitiveness, researchers explored this topic with participants.

BICs data (see Figure 1) shows that competition with other UK businesses had been a main concern for businesses in the final month of the IFF’s fieldwork in both Scotland and the rest of the UK (10% and 11% respectively). Researchers firstly therefore attempted to draw out further detail on what businesses generally mean when discussing competitiveness, before exploring how businesses stay competitive and potential measures for increasing competitiveness.

Defining Competitiveness

Businesses offered a wide range of definitions for competitiveness, with most spontaneous responses centred around customer-related factors. These included the quality of products or services, pricing, and the perceived uniqueness or added value of their offerings. Businesses also linked competitiveness to their ability to attract and retain customers, stay ahead of competitors, and maintain credibility in the market. Some businesses defined competitiveness in terms of productivity and efficiency, often measured by the relationship between staff costs and turnover. Notably, factors such as staff wellbeing, government policy, and environmental goals were rarely mentioned unprompted, though some businesses acknowledged their relevance when prompted.

When tax and regulation was explicitly explored, several businesses noted that (subject to proper compliance) it should not have a notable impact on competitiveness since competitors operate under the same rules. Given that businesses did not highlight potential impacts of higher rates of Income tax in Scotland, this may indicate that businesses did not view Income Tax policy divergence as one of the main factors influencing their competitiveness.

Maintaining Competitiveness

Businesses participating in the research maintained their competitiveness through a variety of strategies, often shaped by their sector, size, and market position. A consistent theme across responses was the importance of customer relationships, with many businesses emphasising personal engagement, responsiveness, and high-quality service as priorities.

Another significant factor was the skillset of employees. Businesses in professional, technical, scientific, and administrative sectors highlighted the value of having knowledgeable staff who could deliver quality work and communicate effectively with clients. Investment in staff development, including training and wellbeing initiatives, was viewed as critical to maintaining competitiveness. Competitive salaries and benefits were also considered important for attracting and retaining talent.

Technology adoption emerged as a further driver of competitiveness. At least one business reported using bespoke software and automation to streamline operations and reduce inefficiencies. Other benefits raised by participants included improved service delivery, improved communication with clients and assistance remaining agile in response to market changes. Some also cited marketing strategies—such as social media engagement, local advertising, and word-of-mouth—as effective tools for sustaining visibility and growth.

Finally, a smaller number of businesses focused on unique value propositions, aiming to differentiate themselves through tailored offerings or innovation. This approach was especially important in crowded or highly competitive markets.

Challenges to Increasing Competitiveness

Businesses also identified a range of factors that could enhance their ability to compete, reflecting on both the challenges they currently face and the support they believe would make a meaningful difference. A recurring theme was the difficulty in attracting and retaining skilled staff, particularly in rural areas and specialised sectors. To address this, some businesses proposed loosening immigration rules to fill specialised roles more easily and expand Scotland’s talent pool. Others emphasised the need for greater investment in apprenticeship programmes and vocational training, noting that current funding limitations were restricting opportunities for young people and contributing to skills shortages.

“The apprenticeship one would be quite a valuable one for us to be able to address that because you're able to get people on board at an earlier stage, train them up and be part of the culture and the business ethos from an early stage.” Professional, Technical and Scientific, 10 to 49 staff”

Regulatory complexity and instability were seen as barriers to competitiveness. Businesses expressed a desire for simplified and better aligned regulations to unlock growth opportunities, particularly in sectors like renewable energy. Conversely, further investment in technological innovation, market expansion and infrastructure improvements were seen as enablers of greater competitiveness.

Taxation was frequently mentioned as an area businesses felt could be improved. Businesses raised concerns about various tax types including Inheritance Tax, National Insurance contributions, Property Tax, and Income Tax, citing the impact of policies on recruitment, planning, and operational costs. Only a small number of respondents expressed concerns about the impact of Scottish Income Tax, compared to the rest of the UK, on competitiveness.