The big squ££ze

Published on Saturday 8 March 2008 18:39

The SNP is promising the biggest tax cut in a generation, but can it work, and will you be worse off?

TREVOR Adams talks music to the ears of Alex Salmond. The master of the Buccleuch Hunt in the Borders is used to heaping scorn on the Scottish Parliament after it banned fox-hunting. But this week, he is waxing with praise for Holyrood.

According to the SNP, Adams will be better off under Alex. This week, the First Minister will unveil plans to scrap the 'hated' council tax and replace it with a new Local Income Tax (LIT). For Adams and his wife, who live off an income of between 40,000 and 50,000 and are currently paying out 1,324 to the local authority for their Band E home in the Borders, that means a tax cut. According to the Scottish Government's figures, replacing this with a rise in income tax of 3p in the pound would leave him with up to 300 extra every year.

"I'd be in favour of it," he declares, unsurprisingly. "There's a bit of the Robin Hood in me so if this means the really wealthy paying a bit more, then I don't see the problem. I think the principle of it is fine. None of us like to pay tax but this might be a fairer method. Although, I also think they should concentrate on getting rid of council wastage – then they might be able to cut the tax to 2p."

Adams is exactly the kind of voter who the SNP will be trying to appeal to this week: a classic middle-income earner who feels it's time for a break. The Government is offering what it will claim grandly is "the biggest tax cut for a generation". Over half a million pensioners in Scotland who currently do not pay any income tax, but still fork out for council tax, will instead pay absolutely nothing. What the SNP calls middle Scotland – although their definition is challenged by the opposition – will be between 260 and 350 better off.

And while Adams talks of Robin Hood, the SNP claims only the richest Sheriffs of Nottingham will actually have to pay out, with just the wealthiest 10% in Scotland paying more. Ministers admit the new 3p rate would fall 900m short of the 2.1bn the council tax system currently provides for the country's 32 local authorities. But they insist the difference would be made up. First there would be 50m from a tax on second homes. A further 400m would be hauled in once the council tax benefit cash currently provided by Whitehall to councils was claimed by the Scottish Government (of which more later). The remaining 450m would, the theory goes, be met by a combination of efficiency savings and 'redirected spending'. Thus the sums add up, say SNP ministers.

The shift is undoubtedly the biggest change in Scotland's taxation system since the introduction of the unloved poll tax in the mid-Eighties. Consequently, it would lead to huge changes in the way every taxpayer in Scotland manages their finances. But will it work? And if it does, how will it change our lives?

The biggest difference is obvious: our homes will cease to be of interest to the taxman. Not surprisingly, estate agents have already weighed up its potential. For, at a time when Britain's turbo-powered housing market appears to have ground to a halt, Salmond's plan might just hand it a shot of adrenalin. The cost of running a home may soon plummet by anything up to 3,000 a year. Consequently, economists suggest the new tax might stimulate a fresh property boom, particularly at the lower end, as more people feel encouraged it is once again worth investing in a house.

It might also change the minds of many – particularly pensioners – who have decided to move in recent years because they can no longer keep up with their council-tax payments. David Albes, managing director of Stewart Saunders estate agents, said: "There's no doubt that the council tax weighs very heavily on people with modest incomes. It might mean there will be less pressure on people to move to cheaper accommodation."

Every year, hundreds of pensioners sell up large family homes, unwilling to pay the near-3,000 council tax bills which their homes accrue. Under the new system, many would no longer pay a penny.

"A local income tax would be a considerable help for pensioners and it might enable them to stay on in the family home rather than move to a smaller one," Albes adds, suggesting larger houses might prove harder to find in future.

Yet the housing market could conceivably be boosted by another type of house – those being sold by the super-rich who are heading for the border. Under the SNP's published plans, there will be no cap on the tax which means that wealthy bankers in Edinburgh earning 500,000 a year could be stung for anything up to 15,000.

"The people with real money will just move to Cumbria," says Allan Steele of Allan Steele Asset Management. "The Government should be doing all they can to keep these people; like it or not, these are the people who bring jobs with them. You shouldn't be scaring them off."

More likely, perhaps, is that the new tax will create a boom in the accountancy trade, as well-off earners across the country consult their financial advisers on how to ensure less of their wealth is classified as 'income'. Critics argue that thousands will simply move more of their income into investments, none of which would be taxable under the new system. For the self-employed, who self-assess their income tax, the potential methods for dodging the new tax are legion, business leaders warn.

Iain McMillan, director of the CBI in Scotland – and an avowed opponent of the new tax – puts it bluntly: "Council tax is less susceptible to tax evasion. There is a risk of tax leakage because of self-assessment."

McMillan is also fearful for the effect the LIT will have on businesses in general. They might have to build new wings onto their payroll departments to calculate how much money comes off different employees' pay. There have even been suggestions that companies such as BT – whose payroll department is south of the border – could claim that all their employees are therefore exempt from a Scottish tax because they receive their income from England.

The difficulty is that the SNP is heading into unknown territory, where one part of the UK sets up an entirely different taxation system to the rest. Steele adds: "It is difficult to see it working because we are only talking about one part of the country. For example, higher income tax payers currently get higher tax relief on their pensions. So would all Scots get higher tax relief on their pensions as a result of paying more income tax?"

Meanwhile, Whitehall sources argue HM Revenue and Customs – which would be required to administer the new tax – is perfectly within its rights to tell the SNP to take a hike. "There's a question about whether the Scottish Parliament has the power to do this. While local taxes are devolved, what is not clear is whether ministers are empowered to compel employers and HMRC to do what it says," McMillan adds.

The calculation being made by ministers is that – whatever the technical obstacles – they will be able to declare they have a democratic mandate for reform.

And it is then that an almighty battle between Holyrood and Westminster will reach its climax. As revealed in this newspaper last week, Work and Pensions Secretary James Purnell has declared that Whitehall will not hand over the 400m council tax benefit cash upon which the entire plan is financed. And without that cash, economists have warned that instead of 3p in the pound, the new tax would have to be levied at least 6p in order to balance the books. In a previous study, Professor David Bell, the adviser to Holyrood's Finance Committee, has found that, in this case, 40% of people in Scotland – not the SNP's 10% – would be worse off.

Playing Robin Hood can indeed make you popular, but only if you can convince people they are the deserving poor – and not the rich who are going to get hammered.