Scottish Income Tax Research

6 Key findings and points to consider

The most common top priority identified over the next five years among the businesses interviewed was growth. Several had made significant investments in their business over the last five years, with some businesses having bought a new office or acquired other businesses. The main drivers of investment decisions tended to be their desire for growth, as well as keeping up with the competition. The most common internal factors that drove investment decisions were the needs of the business, as well as its capabilities in terms of cashflow and staff capacity. Meanwhile, the most common external factor that drove investment decisions was the wider economic outlook, for example business confidence and the price of goods and services.

There were several challenges currently being faced by businesses; the most common being taxation, regulation, competition with other businesses, and the rising cost of goods and services. Regarding taxation, it tended to be employer taxation that posed a challenge, with the recent changes to employer National Insurance Contributions and the impact this had on staff costs frequently mentioned. This coupled with the changes to the minimum wage meant it was significantly more expensive to employ people.

For many businesses, their experience of recruitment had become harder over the last five years. One of the main reasons for this was the quality of the applicants, for example candidates lacked relevant experience. Some businesses that operated in both Scotland and other parts of the UK said they noticed a difference when recruiting in Scotland, with these businesses feeling that it was harder to recruit in Scotland. Staff retention appeared to be somewhat easier than recruitment, with businesses often explaining that they tried hard to look after their employees. Where challenges were experienced, this tended to be losing staff to competitors who offered higher salaries or more flexible working arrangements.

While the meaning of ‘competitiveness’ varied somewhat based on the specific industry the business operates in and their business model, businesses mentioned factors such as the quality of a product or service, price, and the extent to which customers thought the businesses provided a unique product or service and the extent to which they were seen to add value. Businesses commonly said that they remained competitive by maintaining a strong focus on customers, with many emphasizing the importance of building personal relationships, being responsive to customer needs, and delivering high-quality service.

Most businesses interviewed indicated that tax policy had a notable impact on their operations, however, it was generally UK-wide taxes that were of greater concern than Scottish taxes. In particular, a majority of businesses cited recent changes to employers National Insurance Contributions as having significantly increased their labour costs - often with direct implications for their ability to compete in labour markets, retain talent, and afford new investment.

Levels of awareness of Scottish Income Tax though were generally low, with the majority of businesses unaware of the recent changes. Frequently, respondents indicated that there was little reason for them to pay particularly close attention to SIT changes, as they had little demonstrable impact on their operations.

Overall, recent changes to Scottish Income Tax policy have had little to no noticeable effect on most of the businesses interviewed, however, there were some differences across sectors. The retail and hospitality sectors appear to be the least impacted, largely due to the fact that most employees within these industries do not earn incomes at a level where such tax changes would have an impact. However, some businesses expressed concern that higher tax rates would affect consumers’ disposable income which could subsequently impact their business. These businesses felt this could affect their business’s ability to grow or stay competitive, however, in the majority of cases, SIT did not have a significant impact.

Some businesses felt that higher tax rates could make it more difficult for them to recruit and retain highly-skilled employees, particularly in higher-paying sectors such as technology and finance where workforces are particularly mobile. However, in most cases, businesses reported that the recent increases in SIT had little demonstrable impact on recruitment and retention.

There was little evidence, even among businesses that had been impacted by SIT, that it had prompted changes to business structures or significantly impacted decision making, including investment decisions.

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