Scottish Income Tax Research

3 Main challenges currently facing businesses

Main challenges

There were several challenges currently being faced by businesses. The most common challenges were taxation, regulation, competition with other businesses, and the rising cost of goods and services. While these challenges were reported both spontaneously and after prompting from the interviewer, taxation was more likely to be mentioned as a challenge after prompting, while the remaining most common challenges were often reported organically. However, it is worth noting that when taxation was prompted by the interviewer, specific areas of tax were not stated, so any challenges related to a particular tax were spontaneously mentioned.

Taxation

Regarding taxation, the changes to employer National Insurance Contributions were frequently mentioned. This included both the increase in rate and the lowering of the threshold. Several highlighted that the changes meant it was more expensive to employ people. Furthermore, some businesses reported having to absorb the cost, as they feared they would lose customers if they put their prices up.

“National Insurance is biting quite hard at the moment. With the number of staff we've got, a small change made a big difference, a big additional cost to us, which we're having to absorb.” - Small business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

A couple of large businesses, before being prompted later in the interview, specifically referenced the impact of Scottish Income Tax, citing an increased tax burden compared to other parts of the UK.

“I think the bigger inflationary factor for us would be salaries, and therefore probably tax, I mean, income tax is probably something that you hear being discussed more. I think people are beginning to notice more the increased tax, income tax burden that comes from being a Scottish taxpayer, rather than a taxpayer in England and Wales.” - Large business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

“I think there's a big frustration with the tax system in Scotland, the differentials between Scotland and England. We've been spending the last few years expanding south of the border in England. Traditionally in surveying, a lot of people went from Scotland down to London, or Manchester, and then returned back because that's a traditional pathway. What we've found in recent years is actually it's a one-way traffic. We've had a number of people wanting to go to England, but not one – not one person - based in England wants to come to Scotland.” - Large business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

Regulation

Regulation most commonly cited as a challenge was the increase to the minimum wage. Businesses often mentioned this in tandem to the increase in National Insurance Contributions, adding to increased staff costs.

“The minimum wage has been increasing a lot over the last four or five years, and recently with the increase in the national insurance as well, that has been a huge, huge impact on our payroll.” - Medium business; Retail, Hospitality and Leisure (operating exclusively in Scotland)

One business explained that the increase to the minimum wage put pressure on them to increase the wages of their other staff. They said the changes could mean taking on an apprentice and having to pay them the same amount as experienced people who have been at the company for a few years, which they deemed unfair. This had increased their costs to such an extent that the increase in revenue they experienced to the year prior was almost neutralised.

“We turned over like a million pounds more last year than the year before, but our staffing costs went up by most of that because when you push up the minimum wage, you have to push other people up proportionately because otherwise you would be having people overtaking. It doesn't just affect those on the national wage; it affects everybody because we've got to try and keep pace and keep things fair.” - Medium business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

One micro business explained that the changes made a couple of years ago to how directors can take dividends has meant their PAYE bill has increased. That alongside the increase to employer National Insurance Contributions had increased their monthly PAYE bill by £2,500-£3,000, which they highlighted is a lot for a company of their size.

Others, for example those in Finance and Insurance or the Professional, Technical and Scientific Services sector, reported there being a lot of red tape. Additionally, one business highlighted that legislation is often changing due to changes in government.

Competition with other businesses

Competition with other businesses was another common challenge, with those in a variety of sectors explaining that it’s the sheer number of businesses they are competing against that poses a problem. It therefore makes it harder for them to differentiate their product or service enough to stand out.

“We've been in operation for 23 years. So, when we first started out, there wasn't that many debt collection companies. Now there's loads of companies doing it. So people tend to shop a bit more and stuff like that. So it's a bit harder to get work.” - Micro business; Other including Administrative Services (operating in Scotland and the rest of the UK)

Another area of competition with other businesses was staff recruitment. Some businesses felt an increased pressure to offer attractive remuneration packages in order to attract talent.

“For us, it’s the competitiveness of the market we are in. There are a lot of law firms, frankly, and therefore there's a lot of competition for the talent.” - Large business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

Rising cost of goods and services

Several businesses reported the rising cost of goods and services as a current challenge they were facing. Some businesses referenced the war in Ukraine as the starting point of the price inflation, while others referenced the UK leaving the EU or the COVID-19 pandemic. Some businesses pointed to the more recent “cost-of-living” crisis, reporting that the cost of everything has increased.

Energy prices were among the specific price increases experienced, with some businesses explaining they have increased so much that they would not be able to pass the cost on to their customers.

“It’s probably 30% more expensive to switch the lights on now than we were five years ago.” - Small business; Technology and Digital Industries (operating in Scotland and the rest of the UK)

“We've noticed a significant increase over the last 10 years to the point that it is now a real concern about how we can provide our services when unit rates have doubled and tripled over the last maybe six, seven years.” - Small business; Retail, Hospitality and Leisure (operating exclusively in Scotland)

Rental costs

Meanwhile, a few businesses reported the rise in rental costs as a challenge.

“Everything's rising. Our rent in this tiny office just increased by £2,000 a year. Now that relates to about 50, 60 of our customers paying us an annual fee of equivalent of the £2,000. So, it was like us losing 50 customers by having to pay the increase in rent.” - Micro business; Other including Administrative Services (operating exclusively in Scotland)

Macroeconomic climate

Some businesses reported the macroeconomic climate and the current uncertainty as a challenge. Global conflicts and the tariffs being imposed by the US were cited, resulting in an instability in the global economy. One respondent explained that business confidence seemed to be very low at the moment.

Experience of recruitment

When asked how they would describe their business’s experience with recruitment over the past five years, while a few said it had remained the same or that they had not recruited during this period, many respondents said it had become harder to recruit - likely due to the lingering effects of COVID-19 constricting the labour market across the UK. One of the main reasons for this was the quality of the applicants, for example candidates lacked relevant experience.

“You put an ad out there and some of the applications you'll get, CVs you'll get back, you look at them and say they've got no experience. We're looking for people with experience and it's quite a specialized industry, so it's just getting somebody with the correct qualities to do the job well.” - Micro business; Other including Administrative Services (operating in Scotland and the rest of the UK)

A few businesses explained that the lack of skills or experience was coupled with people wanting salaries that far outweighed their skillset, particularly among younger applicants. Meanwhile, some felt there had been a generational shift in how work was viewed. For example, one engineering business said the field of engineering was not deemed an attractive employment option for young people, with it involving long shifts and working away from home. They felt there was now an increased focus on work-life balance.

Businesses in sectors such as surveying and advertising explained there was a lack of applicants in general. The surveying business felt there was a lack of younger people entering the industry. They explained that they had a demand for people coming out of university with a General Practice Surveying qualification, but universities had reduced this provision. This had restrained the growth of the business.

Meanwhile, the advertising business said that applicants came from overseas or from England, rather than Scotland, which they said was not a good thing for the future of Scotland’s economy. They felt that the excitement for advertising had diminished somewhat and explained that the discipline is becoming much more complex and requiring skills that perhaps the universities and colleges do not teach or fully comprehend.

“More often than not, all the applications when we advertise for positions are coming from overseas or from England. There's very few coming from within Scotland, so it feels that we're not actually educating our own people, which for the future of an economy, it's not a good thing.” - Medium business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

For some businesses, the vast number of players in the market meant there was an increased competition for talent.

Some businesses that operated in both Scotland and other parts of the UK said they noticed a difference when recruiting in Scotland. These businesses had found it to be harder to recruit in Scotland. One business in the Professional, Technical and Scientific Services sector said the apprenticeship scheme in England had aided recruitment and that they felt this would be beneficial in Scotland. Meanwhile, another said it was due to the remote location they were based in.

“We're in the far northeast of Scotland, so yeah, it's really hard up there. I think it's just a lack of people in general. A lack of people with our skills is even rarer. It's most certainly easier in the [rest of the] UK to recruit.” - Medium business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

“I would say Scotland is more challenging than our English offices. It's been a much more settled picture there, and easier to attract there than it seems to be particularly in Scotland.” - Small business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

Experience of staff retention

Staff retention appeared to be somewhat easier than recruitment. Some businesses said their experience of staff retention over the last five years had remained consistent. Businesses often explained that they tried hard to look after their employees. Some reported efforts made to improve staff retention, for example, introducing or enhancing staff benefits, offering flexible work arrangements, or trying to salary match if an employee got an offer for a job at another company for higher pay.

One business said that staff retention had increased, through a combination of efforts the business had made and there being less opportunities in the market.

“We like to credit that to our own activities, but some of that in the market has become more challenged as well. So, a mix of both. More focused on retention, but also less opportunities for people to move to.” - Large business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

However, some businesses reported that staff retention had become harder in the last five years. Reasons for this included competitors poaching staff, with those who are more profitable able to offer very attractive pay packages. One business explained that due to the number of players in the market, employees have more opportunities to move to other companies.

Other reasons for retention having become harder in the last five years included people having higher expectations for flexible working and a work-life balance since the COVID-19 pandemic and younger people, including those on apprenticeships, deciding to change their career path.

Changes in labour costs

Most businesses reported that they had been affected by rising labour costs in recent years, while just two businesses reported experiencing no changes at all due to either steady business operations or the ability to pass those costs onto clients through higher rates. The main drivers of increased labour costs cited were increases in the minimum wage, higher employer National Insurance contributions, and general wage inflation.

“Well, the minimum wage has been one, although we've always been above it. It just went up and up and up over the years. The changes to the national insurance has added additional cost to us as well.” - Small business; Retail, Hospitality and Leisure (operating exclusively in Scotland)

Several businesses who historically paid above the minimum wage now found that statutory increases were catching up with their pay bands, leading to knock-on effects across pay structures.

“We've always paid above minimum wage, but that's gone up so much it's caught up our lowest paid people and now they're now almost touching the bracket above them. So, the knock-on impact is quite significant actually, it's costed us a lot.” - Medium business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

Some businesses pointed to the impact of broader economic factors, such as inflation and the cost of living, which have driven up salary expectations and made it more expensive to attract and retain staff.

In certain cases, the competitive labour market was also seen as a factor, with a couple of businesses noting that employees now have more bargaining power and that skills are increasingly transferable across industries, allowing workers to move more freely and command higher wages.

“[The main reasons driving the change in labour costs is that] other competitors [are] maybe paying more, and people being more aware. I think the other thing is that some of the skills that we have can be used by lots of other industries. In the past people would move within advertising. Now you can move from advertising to gaming or to something else. And the other thing is that post-COVID, it feels like the employees have more power in negotiating than they used to.” - Medium business; Professional, Technical and Scientific Services (operating in Scotland and the rest of the UK)

Approach to wages and pay progression

The types of employees businesses had varied to some degree by sector. For example, those in the Retail, Hospitality and Leisure were more likely to employ unskilled labour and were more likely to have a higher proportion of employees working either part time or on zero hour contracts. Meanwhile, some businesses in Professional, Technical and Scientific Services or Construction and Engineering reported employing apprentices. Some businesses in Professional, Technical and Scientific Services also said they had a graduate training programme.

It was most common for businesses in Retail, Hospitality and Leisure to report employing people on minimum wage. Some explained that they used to pay above the minimum, but as the rate had increased over the years, they could no longer afford to.

Some businesses explained that they pay the “going rate” for roles in their business, by comparing the market. Several mentioned conducting annual pay reviews, with some explaining they would try to give an increase to match inflation but with the high inflation rates seen in recent years this has not always been possible.

Others reported offering generous employee remuneration, including bonus schemes or additional employee benefits in addition to salaries, such as private healthcare and enhanced employer pension contributions.