Tax policy and the budget – a framework for tax: consultation analysis

3. Scottish Tax priorities - Scottish Budget 2022-23 and Parliamentary Session (2021-26)

How should the Scottish Government use its devolved and local tax powers as part of Scottish Budget 2022-23?

What should the Scottish Government's priorities for devolved and local tax be over the course of this Parliament (2021-2026)?

There was significant overlap in the themes that emerged in the responses to the above two questions. In order to make this report's structure as clear as possible, and to minimise duplication, the responses to both questions have been analysed together and summarised below.

Overall, respondents shared a broad range of views on how the Scottish Government should use its devolved and local tax powers. For example, the majority of individual respondents called for more progressive tax policy, whereas some organisational responses commented that policy decisions had the potential to limit the revenue that the Scottish Government can use to meet its strategic priorities.

Additionally, numerous respondents highlighted the importance of using tax powers to reach Scotland's net zero targets, with one respondent stating that "tax policies should work towards Scotland's environmental objectives". Many respondents called for tax policies to be used to incentivise sustainable behaviours, for example, the installation of heat pumps in homes and the use of public transport.

Some respondents also highlighted the importance of working closely with the UK Government when developing tax policy. The Royal Society of Edinburgh stated that "improved intergovernmental relations, with genuine opportunities for devolved administration influence, will be crucial to increasing the likelihood that the UK Government's macro-economic levers are used to best address issues facing Scotland's economy."

3.1 Devolved & Assigned Taxes

Income Tax

The number of organisational respondents cautioned against freezing Income Tax rates, noting that this will limit revenue that the Scottish Government can use to fund its policy agenda, for example establishing a new National Care Service. Reform Scotland commented that: "the Framework highlights the Scottish Government's stated aim of not increasing income tax for the duration of this parliament. This leaves unanswered questions as to where additional revenue for new spending policies will be found."

In contrast to the above points, multiple respondents called for Scottish Income Tax rates to be realigned to the rates set by the UK Government.

Multiple individual respondents also called for some Income Tax rates to be reduced, while calling for more progressive Income Tax reform. One respondent suggested reducing "all tax rates below £150k and compensate by introducing a £350k+ band at 60%, similar to France". Another individual commented that "given the need for extra resources, there is a strong case for maintaining higher rates and adding more bands. Lower bands might also be confined to those paying no more than the standard rate of tax as in some other countries."

Land and Buildings Transaction Tax

A range of views were expressed in relation to Land and Buildings Transaction Tax (LBTT) policy. Multiple respondents called for higher levels of taxation on the purchase of high value properties or multiple properties. For example, the Community Woodlands Association stated that "raising the Additional Dwelling Supplement to 20% would, in conjunction with Council Tax surcharges, etc, help reduce demand for second homes and help tackle Scotland's housing crisis."

Similar to the responses on Scottish Income Tax, a number of respondents also called on for LBTT rates to be aligned to the rates set by the UK Government's Stamp Duty Land Tax.

A small number of respondents also welcomed a forthcoming review into the LBTT Additional Dwelling Supplement, with the Law Society of Scotland commenting that "a number of aspects of the existing ADS legislation are unclear and there are a number of issues which have arisen with the application and implementation of ADS which would benefit from resolution or clarification. Many of these would appear to be unintended consequences."

Air Departure Tax

Multiple respondents called for the Scottish Government to publish a timeline on the introduction of Air Departure Tax. An individual respondent commented "Please prioritise development of the Air Departure Tax. The current aim of "taking steps to progress the introduction of a devolved tax" is very non-committal; a specific timeline for introduction and supporting justification should be given". Another individual respondent stated "Bringing in the two new devolved taxes - Aggregates Levy and Air Departure Tax - will have to be priorities."

Other respondents noted that Air Departure Tax could be a redistributive policy lever, with the Royal Society of Edinburgh stating "The possibility of selective increasing, as well as decreasing of Air Departure Tax (ADT) should be considered - drawing from the value of a higher carbon price as means of redistributing income, tackling inequality, and providing economic stimulus as well as incentivising lower carbon alternatives to air transport. Selectively reducing ADT for remote rural areas would provide a means of countering rural inequalities, such as the historic lack of transport provision to the Western Isles, in line with the Scottish Government's National Islands Plan."

Furthermore, the Child Poverty Action Group called on the Scottish Government to "carefully consider the impact of the introduction of Air Departure Tax to ensure that is does not disproportionally benefit high-income households."

Additionally, an individual respondent noted that Air Departure Tax could pose a risk to Scotland's airports, suggesting that "Air Departure Tax should be levied to household travelling by air not departure from a Scottish airport. The challenge is that if there is a disparity in other devolved regional airport charges then Scottish airports will lose business."

Many respondents highlighted the opportunity to align the use of Air Departure Tax with the Scottish Government's net zero ambitions. The Scottish Women's Budget Group noted that "as we consider the urgent action needed to tackle our climate and nature crises, governments will need to closely consider how progressive carbon taxes can be designed to limit pollution and fund a feminist green recovery. In Scotland use of powers for an Air Departure Tax could be a first step in this process."

VAT Assignment and Reserved Taxes

Multiple respondents discussed VAT assignment and full VAT devolution with differing concerns. Regarding the former: some responses commented that VAT assignment does not go far enough to allow the Scottish Government to amend VAT policy for Scottish purposes. Regarding the latter: other responses expressed that a dual VAT regime in the UK would create complications for business as well as enforcement bodies, and distort the UK market for goods and services.

For example, the Scottish Retail Consortium stated "Differing VAT regimes in different parts of the UK would presumably have administrative and cost implications for tills in shops, cafes, restaurants, pubs, cinemas and other consumer-facing establishments to accommodate differing VAT rates."

While this consultation asked for views on devolved and local tax powers, multiple respondents called for the Scottish Government to reform tax policies that are reserved to the UK Government. As noted in our Budget 2021-22 consultation analysis report, this highlights the complexity of the tax system and the ongoing need to improve understanding of tax devolution.

Some respondents referenced the need for further devolution of tax powers which would support efforts to meet climate change targets, and to do so in line with just transition principles.

Furthermore, some respondents raised the issue of wealth taxes, calling for relevant powers to be devolved to the Scottish Government or more generally calling for additional wealth taxes. One individual respondent stated that "it is absurd that Scotland has no power to tax incomes from wealth derived from dividends and interest and that should become a point of argument with the UK government" and called for the Scottish Government to "develop a radical restructuring of the tax base, not merely in relation to the current scope of devolved powers (although all governments have been very timid in testing the range of devolved powers) but as a basis for creating a tax base which is redistributive in relation both to wealth and real income."

The Scottish Human Rights Commission also stated: "Reforming wealth taxes must therefore be given serious consideration as a means to raising revenue in a way that can help to reduce wealth inequality. Examples worth exploring in the Scottish context include a net wealth tax modelled on that levied in Switzerland and taxing the imputed rents of owner occupiers."

3.2 Local Taxes

Council Tax

All of the individual respondents called for Council Tax reform. The majority of these respondents suggested a more progressive system, for example, by adding extra bands at the upper level to increase charges for the most valuable homes and increasing costs for unoccupied or second homes.

Multiple respondents suggested removing the cap on Council Tax charges so that rates can be increased. Other respondents called on the Scottish Government to simplify the process used to collect Council Tax, and commented that Local Authorities should stop writing off arrears to reduce tax avoidance.

Numerous organisational responses also commented that the Scottish Government should prioritise Council Tax reform. Some organisations also called for higher Council Tax charges on second or additional homes, and stated that councils should be empowered to develop taxation policies that are appropriate for their local area.

Other respondents welcomed the proposed Citizens' Assembly on local government funding, a commitment that was included in the Scottish Government's 2021 Programme for Government.

Additionally, further respondents stated that Human Rights should be embedded into any reform of Council Tax and requested further clarity on how the Council Tax exemption for under 22s will be implemented.

Non Domestic Rates

Individual respondents shared a mix of views in relation to how the Scottish Government should tax businesses through Non-Domestic Rates. Some respondents called for reform and a phased transition back to paying pre-pandemic rates, whereas others stated that rates should be increased above pre-pandemic levels.

The majority of organisational respondents, however, commented that the Scottish Government should support businesses as they recover from the impact of Covid-19, as seen in the below responses.

Colliers stated that "a major focus for the coming year will be on recovery from the impact of COVID 19 and helping businesses and the Scottish economy to return to the pre-pandemic levels. For the worst affected areas and sectors a phased return to paying rates would be beneficial, alternatively in certain sectors and circumstances an extension of rates relief would help businesses to survive and begin to try to repay some of the accrued debt as a result of restrictions and the pandemic."

The Scottish Chambers of Commerce recommended that "a moratorium should be placed on all policy measures that increase business costs for the remainder of this Parliament."

Multiple respondents also called for the Scottish Government to confirm that the 2023 Non-Domestic Rates Revaluation is going to take place as planned, and one respondent specifically suggested using Non-Domestic Rates relief as a behaviour change tool to incentivise sustainable business practices, such as organic farming.

Some respondents stated that Non-Domestic Rates in Scotland should be aligned with those in the rest of the UK, with one organisation noting that "The Scottish Government may need to adapt to any changes arising from the UK review of NDR in England."

Additionally, other respondents called for more fundamental policy reform. For example, the Royal Society of Edinburgh stated "(we) believe that the Scottish Government should give early and careful consideration to exercising devolved competence to reform Council Tax, Non-Domestic Rates and Land and Buildings Transaction Tax. We believe that the current system is sub-optimal as a mechanism for financing local government and in the context of the Scottish Government's broader tax policy objectives. These taxes are economically and fiscally essential to ensure more equitable local access to public funds and services."