Proposals to allow Scotland to vary income tax rates could lead to a rise in tax avoidance
Proposals by the Smith Commission to allow Scotland to vary income tax rates could lead to a rise in tax avoidance unless properly managed, according to a tax expert at Pinsent Masons, the international law firm.
Karen Davidson, a legal director and tax specialist at Pinsent Masons says that any increase or change to a tax regime inevitably leads to a rise in avoidance – and it is unclear if the Scottish Government would have to follow UK anti-avoidance provisions when dealing with income tax.
Davidson says, “The last time the UK Government moved to the higher 50 per cent tax rate it prompted a huge amount of avoidance activity so the actual tax take ended up not being as significant as it should have been.
“The Scottish Government have been keen to point out it would take a much stricter view on what is defined as avoidance, and there could be an element of frustration if attempts to generate additional income are hampered because it does not have as wide ranging anti-avoidance powers as it might like.”
Overall, however, Davidson says that business will be relieved by the nature of the new powers suggested.
Davidson says, “On the upside, implementation of new rates will not have a significant compliance burden on Scottish businesses as tax regime changes were already due to be rolled out under the Scotland Act 2012.
Scotland by Kbolino
Scotland by Kbolino
“From a business perspective many organisations will be relieved as the income tax proposals are similar to what was already happening under the new proposed Scottish rates of income tax. However, how the new fiscal levers are used will be the key concern from here on. The Smith Commission proposes a level of flexibility which means the government of the day will have free reign to set rates for different sections of the tax paying community as they see fit.
“The government of the day will have a difficult balancing act in deciding how to use new powers. You only need to visit Aberdeen, Glasgow or Edinburgh airport on a Monday morning to understand how mobile the Scottish workforce is.
“Moves to increase tariffs dramatically may, for instance, prompt some high earners who already work in the south to consider a permanent move.
“A higher income tax rate might also leave businesses struggling when trying to recruit the right calibre of employee, and retention could be an issue if it is more financially beneficial to work in other parts of the UK.
“That cuts both ways, of course. Any lowering of taxes could make Scotland more attractive and in turn help meet skills shortages.
“The point is that there will need to be significant reference to rates in England and Northern Ireland, and not just in relation to income tax. If speculation is to believed, Northern Ireland may well get greater control over corporation tax in next week’s budget, so Scotland’s competitive position with regards to tax will need to be considered in the round.”
Alastair Ross, Pinsent Masons’ director of public affairs, said there was a need for the Smith Commission proposals to be communicated clearly to encourage continued inward investment in Scotland.
He said: “The Smith Commission provides a well-balanced political compromise in which all the parties give and take something. However, the risk is that it creates the perception of greater complexity. Considerable effort will need to be expended to reassure businesses and investors that the new regime will not create a significant compliance burden.”
