ALEX Salmond’s demand to set Scotland’s business tax rate from Edinburgh has taken a major blow in an authoritative new report which warns it would be “at best a calculated risk” that could leaving the country short of money to pay for its schools, hospitals and public services.
A study by the Institute for Fiscal Studies (IFS) concludes that moves to hand the key business tax to Edinburgh, Belfast and Cardiff would “be difficult” and “could reduce the revenues of all administrations within the UK”.
It says that, under EU law, if the Scottish Government was to cut corporation tax it would have to accept the consequences in terms of lower or higher revenues which would flow as a result.
SNP ministers claim that cutting the tax would boost business activity and bring more cash flow into the Scottish Government coffers.
But Labour last night criticised the plans as a “race to the bottom” as UK nations would seek to cut tax on business in an attempt to out-compete one another.
In a further blow to the SNP plans, CBI Scotland said it backed the IFS study, saying businesses were not convinced that, if the tax was devolved it would not lead to more bureaucracy and, eventually, a higher rate.
In the study, the think-tank says that if different rates applied around the nations of the UK, businesses would shop around, taking advantage and ensuring “a fall in corporate tax revenues in the UK over time”.
It added that under EU law, if the Scottish Government was to reduce corporation tax, it would have to accept lower income as a result.
The report also notes that, because corporation tax rates are volatile, a devolved government could “experience a shortfall in their ability to complete spending plans if… revenues turned out to be lower than expected”.
It continues: “A concern is that allowing separate rates across the four nations could lead to harmful tax competition within the UK, which would reduce tax revenues for all nations.”
The study concludes: “There are some compelling reasons to maintain a single rate of corporation tax across the UK: it is administratively much simpler, and cheaper, and reduces the potential for harmful tax competition, which could reduce the revenues of all administrations within the UK. Implementing devolution would at best be a calculated risk, with unknown long-term consequences for the UK tax system.”
A Scottish Government exercise last year examined the impact of a measured 3 per cent reduction in corporation tax, finding that it could lead to 27,000 jobs being created as business was stimulated.
However, the IFS says: “It is hard to judge whether the benefits from greater levels of activity would be sufficient to outweigh the costs of the public spending cuts that would be needed to finance reductions in the rate of corporation tax and the additional compliance costs and distortions to corporate decision-making that would result.”