Scotland's Tax Strategy: Building on our Tax Principles

Chapter 3 – Our Approach

This chapter sets out the priorities that we will progress to deliver our vision for the Scottish tax system. Building a system-wide approach to tax policymaking and delivery: one which goes beyond annual Budget cycles, supports economic growth and broader Government objectives of addressing poverty, limiting environmental changes and delivering public services.

These priorities will ensure Scotland’s tax system continues to support revenue raising, provide stability for taxpayers and foster an effective and efficient tax environment for businesses. We must continue to grow our tax base; improve our tax administration, compliance and legislative frameworks; and transparently appraise and evaluate our tax policies against a broad set of measures including behavioural, economic and competitiveness outcomes.

Stakeholders have been clear that a key focus in this Tax Strategy should be a continued improvement in the operation of our current tax system, to ensure it operates as efficiently as possible and recognises the risks of unintended consequences on our tax base and revenues. In addition, consideration of the future evolution of Scotland’s overall tax system, ensuring on-going careful management of the complex basket of reserved, devolved and local taxes, is vital for Scotland’s long-term fiscal and economic prosperity.

Whilst delivering on these priorities will begin immediately, their effects will extend beyond this Parliamentary term.

We will update on progress in early 2026.

Priorities for the Existing Tax System

A stable tax system allows taxpayers to better manage their finances and helps businesses to plan and make investment decisions with confidence. Signalling a period of stability for our largest source of tax revenue will allow us to assess the impacts of recent policy changes, and support the conditions needed for a growing economy.

That is why, for the remainder of this Parliament, it is our intention not to introduce any new bands or increase the rates of Scottish Income Tax.

For the remainder of this Parliament, we will also:

• Maintain our commitment that over half of Scottish taxpayers will pay less Income Tax than they do in the rest of the UK.
• Uprate the Starter and Basic rate bands by at least inflation.
• In light of the UK Government context of a freeze to UK Higher rate thresholds to 2027-28, we will maintain the Scottish Higher, Advanced and Top rate thresholds at current levels in nominal terms. This will be reviewed annually at the Budget.

Ultimately, as with all legislative matters, the implementation of Income Tax policy will require a majority in the Scottish Parliament to support it in any given year.

We will work in partnership with Local Government to ensure that local taxes are fair and sustainable and to explore the creation of more revenue generating powers for local authorities.

To do this, we will:

• Begin the next phase of work of the Joint Working Group on Sources of Local Government Funding and Council Tax Reform (JWG) with a process of engagement in 2025 to build consensus on the way forward for Council Tax Reform. We will publish the outcome of this by the end of this Parliamentary term.
• Support open dialogue and engagement through forums including the sub-group on NDR established under the New Deal for Business, to ensure that the NDR system supports business growth, investment and competitiveness, whilst acknowledging the important role NDR income plays in funding public services.
• Explore how NDR legislation might be consolidated and simplified.
• Carefully consider the outcome of the UK Government’s consultation on ‘Transforming Business Rates’, including its impact on the block grant for Scotland, and noting the differences in the NDR tax base between Scotland and England. This will ensure that we continue to deliver a competitive environment to do business, whilst also recognising the important role that NDR plays in funding public services.

The Scottish Parliament has the power to create new Scottish local taxes (i.e. local taxes to fund local authority expenditure) through an Act of the Scottish Parliament. However, it must also reflect the needs and expectations of businesses and the broader economy. There are a number of criteria that should be considered when determining the level of government at which a tax could be delivered, notably the scope of the taxable activity, administrative efficiency, distribution, autonomy, and constitutionality. Any new taxes or levies being developed also need to go through a thorough due diligence review by the Scottish Government, including the feasibility of administration and collection arrangements.

Where a proposal for a new tax sits at the local level, the Scottish Government works with Local Government to consider its delivery, development, and appraisal. This ensures that any individual new tax aligns with the Scottish Government’s key tax principles, our strategic approach to taxation and complies with national and international laws, including human rights, in accordance with Scotland Act 1998 provisions^[xx].

The Scottish Government and COSLA have already made significant progress on implementing a Fiscal Framework with Local Government, including on the commitment to explore local revenue raising and sources of funding, such as the Visitor Levy.

We will complete the devolution of the remaining taxes the Scottish Government has committed to delivering.

The Scottish Parliament has passed legislation for Scottish Aggregates Tax and Air Departure Tax, the two additional taxes recommended by the Smith Commission.

Delivery of these taxes remains a key strategic priority for the Scottish Government. They will grow our tax base, increase the number of taxes collected and managed by Revenue Scotland, add to the accountability and fiscal powers of the Scottish Government, and demonstrate our ability to make good tax policy and legislation.

To do this, we will:

• Introduce the necessary secondary legislation for the Scottish Aggregates Tax to the Scottish Parliament and work with the UK Government to ensure that the new tax can be introduced on 1 April 2026.
• Work with the UK Government to resolve subsidy control issues with the current Highlands and Islands exemption to enable the implementation of Air Departure Tax.

We have also made significant progress on securing powers to create a new tax – a Scottish Building Safety Levy – which will provide funding for the vital work of remediating buildings fitted with unsafe cladding. Following the completion of the devolution process, we will introduce a Bill within this Parliamentary term to establish the legislative basis for a Scottish Building Safety Levy.

Whilst the Scottish Government remains committed to fulfilling the Smith Commission recommendations^[xxi], we must protect the Scottish Budget from unnecessary levels of risk. This applies to the assignment of VAT, where concerns remain around the levels of uncertainty and volatility associated with the proposed assignment methodology, without appropriate fiscal or policy levers to help manage that risk. The Scottish Parliament Finance and Public Administration Committee discussed VAT Assignment and agreed, on a cross-party basis, that there were inherent challenges with VAT Assignment. Following the conclusion of the Fiscal Framework Review in August 2023, and in light of these concerns, the Scottish and UK Government jointly agreed to work on the options for the future of VAT Assignment.

The Economy and the Tax System

We will drive forward a renewed focus on expanding the tax base and tax revenues by progressing specific economic activities with the potential to grow the economy and get more people into work.

Our priority is creating the conditions for economic growth that increase employment and earnings, lifts people out of poverty and raises living standards. We are focused on activities that will support our economy to be more productive and competitive, and as part of this are taking action to grow our economy and our tax base.

Economic growth is an integral driver of ensuring Scottish public finances are sustainable in the long term, increasing the revenues raised to support public services. In addition, stakeholders have been clear that the Scottish Government must ensure stronger links between our economic and tax strategies.

Actions that we are taking to grow our economy include:

• Maximising the full potential of our workforce, through removing barriers to employment and ensuring our skills and education system is responsive to learners and skills priorities, easy to navigate and supports participation in the labour market.
• Providing Employability Support, including increased access to health services and flexible work – supporting progression in work, helping more people to get back into work, and bring them closer to employment to address long-term economic inactivity.
• Continuing the delivery of Scotland’s Migration Service, which provides practical support to employers in navigating the UK immigration system to recruit internationally; and support to individuals to relocate and settle in Scotland, delivering our strategic approach to addressing the challenges of population attraction and retention within communities facing population decline as set out in our Addressing Depopulation Action Plan^[xxii] .

We are focused on creating the conditions for growth by bringing more people to Scotland, supporting our people into work, and raising wages for those working here. We also recognise the need for our tax environment to support private investment as well as to fund the public services which underpin a competitive economy.

We will broaden our understanding on how the tax environment impacts on the competitiveness and attractiveness of Scotland’s economy.

This has been a clear ask from stakeholders, including the business community. As we strive to grow the tax base and deliver economic growth and prosperity, we understand the impacts that tax policy choices may have on individuals and business decisions and behaviours, and the competitiveness of the Scottish economy.

The interactions between tax policy and competitiveness are complex. The Scottish Government recently published an evidence overview of Scotland’s competitiveness internationally.^[xxiii] The paper outlined that competitiveness is multi-faceted, with many countries scoring highly on international rankings despite differing approaches to taxation. Indeed, many important aspects of competitiveness, such as skills and infrastructure, are supported by revenues from taxation.

To support a broader understanding:

• We will assess the links between tax policy and the economy in greater detail through a programme of evidence development. Our initial focus will be on Income Tax, our largest source of tax revenues, publishing an initial evidence review in 2025.
• In line with the principles of the New Deal for Business, we will continue to engage with businesses and organisations to contribute to the assessment of the cumulative impacts of Scottish, UK and local tax policies on the competitiveness of the economy.

Administration of the Existing Tax System

We will deliver a fair, efficient and effective tax system in Scotland.

Our Framework for Tax principles guide the approach to tax policymaking in Scotland for all devolved and local taxes. The principles of efficiency and effectiveness are paramount to ensuring that the Scottish tax system is fit for purpose and provides a high standard of service for Scottish taxpayers, supporting them to understand what and how to pay tax in Scotland.

To do this, we will:

• Make it easier for Scottish taxpayers to understand and navigate the tax system by increasing public understanding of tax, including through publishing our tax literacy outcomes.

• Strengthen our approach to Scottish tax compliance in collaboration with HMRC and Revenue Scotland.
• Work with tax administrators to streamline and ensure efficient tax collection mechanisms to reduce the costs of tax collection, including exploring how to increase the digitalisation of the Scottish tax system to allow more effective data sharing.

• Renew the consideration of the case for introducing changes to the legislative processes for the fully devolved taxes.

Increasing public understanding of tax

Public understanding of tax is important for many reasons: empowering individuals to manage their tax affairs, supporting tax compliance and improving civic engagement and awareness of how tax supports the delivery of public services.

To support this, in early 2025, we will publish our tax literacy outcomes which seek to improve understanding of tax across the whole system. This work will be developed in collaboration with stakeholders, including tax policy and advocacy specialists.

These outcomes will support work with Local Government, HMRC and Revenue Scotland, employers, educators and tax policy groups to develop, implement and evaluate approaches to improve understanding of the complex tax landscape in Scotland and the UK. This work will be underpinned by the findings from externally commissioned research on international best practice on tax communications and engagement, due to be published in Spring 2025.

Strengthen Tax Compliance

Tax compliance is at the heart of having a fair, effective and efficient tax system.

On Income Tax, the National Audit Office and Audit Scotland^[xxiv] have both highlighted the importance of reviewing and strengthening the approach to Scottish tax compliance, given the increased divergence between the UK and Scottish Income Tax systems. We will work with HMRC to strengthen our joint Service Level Agreement^[xxv], which governs the administration of Scottish Income Tax, to improve our collective understanding of compliance risks and, where necessary, ensure timely and robust measures are taken to address these risks. Outputs will include an updated compliance plan for Scottish Income Tax, increased communication with taxpayers to promote good compliance, and risk-based analysis of compliance risk. These actions will help to ensure that we are responding appropriately to tax divergence across the UK, protecting revenues, and promoting public trust in the tax system.

Revenue Scotland is responsible for the collection and management of fully devolved taxes. Its Approach to tax compliance publication^[xxvi] sets out a high-level, risk-based approach founded on helping taxpayers to comply with their obligations and, where needed, solving disputes and pursuing non-compliance. As the number and range of devolved taxes increases, the Scottish Government will continue to ensure that the legislative arrangements assist Revenue Scotland in its role, including using targeted anti-avoidance rules.

While it is right that these distinct areas of work are progressed by those who administer Scottish taxes, the Scottish Government will ensure that knowledge and best practice is shared widely, for the benefit of the overall tax system.

Streamlining Legislative Processes

Tax and legal professionals have called for a Scottish equivalent to the UK Finance Bill process or other tax-specific arrangements that would allow for regular changes to the fully devolved Tax Acts using primary legislation. This issue was considered by the Devolved Taxes Legislation Working Group prior to its work being paused in 2020, but without a solution being identified. We will renew this consideration in light of the planned introduction of new taxes and seek the Scottish Parliament’s participation in this work, given that the viability of any proposals may depend on changes to Parliamentary process and procedures.

Evidence and Evaluation

We will enhance our evidence base to inform tax policymaking and support evaluation of tax changes.

A robust approach to evidence and evaluation will improve transparency around tax decisions and their impacts; provide evidence on cumulative effects across the whole tax system; and support debate on the existing tax system and future reform.

To do this, we will:

• Publish our first Areas of Research Interest (ARIs) on tax and set out, in the coming months, the exploratory funding available to support the development of these ARIs.
• Develop a systematic and regular programme of appraisal and evaluation across the Scottish tax system.

Areas of Research Interest (ARIs)

The Institute for Government recommended that the UK Government should systematically detail its Areas of Research Interest (ARI)^[xxvii]. These aim to enable researchers to understand where their work could have the most impact on policy decisions, to generate engagement and collaboration between government and external research communities, broadening the evidence base underpinning the development of our tax system.

To support the work in this area, Figure 3 sets out our key tax research areas for the next five years, with more detailed research questions provided at Annex C. These ARIs have been developed and tested with stakeholders as part of the engagement for the Tax Strategy.

It is expected that these will form part of a broader package of work on ARIs being developed by the Scottish Government.

Figure 3 – Areas of Research Interest Themes

• The overall tax system in Scotland and its interactions with UK and broader policy systems
• Behaviour Change and Tax Policy, including distributional impacts
• Tax and Economic Impacts
• The Role of Tax in the Environment
• Local Government Taxation

Evaluation

As part of the Scottish Government’s Corporate Evaluation Action Plan published in August 2024^[xxviii], there is a clear commitment to evaluate significant tax policy decisions to assess impacts and to strengthen future decision making.

We have already evaluated previous tax policy changes. In 2021, we published an evaluation of the 2018-19 reforms to the Income Tax system, following devolution of tax powers^[xxix]. This evaluation sought to assess the revenue and economic impacts of the move to a five-band system, as well as the operational costs and impacts on employers and payroll operators. The analysis found that the changes met the desired policy objectives, raising additional revenue while managing the risks of significant behavioural responses. More recent work with HMRC has focused on taxpayer migration and behaviour change. This found taxpayer migration responses to the 2018-19 reforms were broadly in line with the international evidence, set against a backdrop of continued positive inward net migration of taxpayers into Scotland.^[xxx]

We recognise the need to build evaluation across the devolved and local tax system, ensuring that significant policy decisions are transparently monitored and assessed as further data and evidence emerges.

To do this, we will:

• Formally evaluate the impact of the changes to Income Tax in 2023-24 and 2024-25 once outturn date is available and, in advance of this, closely monitor behavioural impacts on different groups of taxpayers, business, and the economy using a range of economic evidence and stakeholder engagement.
• Conduct our first five-year review of LBTT by the end of this Parliament, to support an evaluation of key aspects of the tax legislation, including the application of the ADS where exceptional circumstances and events occur. The review will support decisions in the next Parliament on the case for any legislative changes.

Future Priorities

We will explore the reforms needed to continue to deliver sustainable and growing tax revenues in the future.

Our devolved tax powers have enabled us to progressively raise significant additional revenue for Scotland. Through the planned introduction of new taxes, such as the Building Safety Levy and Visitor Levy, we have also demonstrated that we can make different choices on tax to reflect Scottish priorities.

However, our system remains closely entwined with that of the UK Government, resulting in a partially devolved system that is complex to navigate. With this comes an increasing need for us to take account of the cumulative impact of both UK and Scottish Government decisions on tax policies across individuals, households and businesses. We also need to recognise the risks of unintended consequences on our tax base and revenues, including those resulting from the interaction of UK-wide National Insurance Contributions with the Scottish Income Tax system.

Guided by our Scottish tax principles, we will begin a programme of work focused on:

• Reserved tax powers

The further devolution of tax powers from the UK Government will ensure that the existing Scottish tax system works more efficiently and will enable more decisions that impact the people and businesses of Scotland to be made in Scotland. Given the complexity of tax policy, and the role it plays in the wider economy, we will consider the tax landscape in the round as we plan our next steps on tax devolution. It is also vital - given the operation of the Fiscal Framework – that a robust and thorough articulation of estimated revenues, distributional impacts and likely behavioural consequences supports any case for further devolution.

• Balance of taxes across labour, income and wealth

Scottish Income Tax provides around 80% of devolved tax revenues and our policy choices since devolution have resulted in the most progressive Income Tax system in the UK. However, there is increasing international debate on balancing labour taxation with other forms of income and wealth, including land and property taxation, to develop tax systems that are more resilient and provide a broader set of fiscal tools to respond to economic shocks and future fiscal challenges.

To support this discussion, we will explore what wealth taxation could look like for Scotland, understanding the opportunities and challenges that this may offer our tax system, and the steps needed to progress towards this broadening of tax options. This will include reviewing how existing local and property taxes would fit within broader structural reform.

• Tax as a lever to encourage positive behavioural change

Taxes have the potential to act as powerful incentives to change behaviour and improve policy outcomes across a wide range of activities. The introduction of the Scottish Landfill Tax has, alongside legislative and other measures, supported the transition to a circular economy and has highlighted both how effective tax can be in supporting behaviour change but also that where behaviour change is possible, the revenues raised are, by definition, transitory in nature.

Alongside this Strategy, we are publishing research we have undertaken with Climate Exchange (CXC)^[xxxi] which highlights the importance of broad engagement when developing policy in this area, the need to build a consensus for change and for clarity around the objectives of any proposed tax. We are also taking forward work with the Scottish Land Commission to consider the role of taxation and fiscal interventions in supporting land reform and reducing greenhouse gas emissions from land.

Evolving the structure of our tax system will take time and involve discussion, debate and engagement with others. That evolution must be underpinned by the need for sustainable and growing tax revenues to support government priorities, ensuring our basket of taxes broadens our tax base and balances risks across tax revenues. We also must continue to recognise the role of tax in the economy, enabling our tax environment to support and incentivise economic activity.

We will set out our detailed programme of work on future priorities alongside the next MTFS in 2025. Our approach will be taken forward in collaboration with stakeholders and will be evidence led. We are also keen to draw on the experiences of other countries in considering longer-term reform of their tax systems, such as the Irish Government’s Commission on Taxation and Welfare, as well as building on the rich evidence base already developed by the Institute of Fiscal Studies, UK Wealth Commission, and others.