Comment: Big employers need Scots tax reassurances

Sometimes it’s hard to see what all the fuss is about. Construct a chart of the economic performance of Scotland and the UK over the past ten years and the lines move in close parallel to each other, when not in complete harness. There is no evidence of under-performance north of the Border.

Narrow the focus to the past four quarters – when the raucous battle over independence might have been expected to hit investment and growth – and the Yes campaign can fairly claim Scottish GDP performance, contrary to fears of slowing investment and lower inward investment, is continuing to move in step with the rest of the UK.

The latest Bank of Scotland Economic Update confirms this. Latest data for Gross Domestic Product in Scotland (third-quarter 2013) shows a 2.1 per cent gain over the same period 12 months previously. It has now been rising for six consecutive quarters. Manufacturing, construction and services are all on an uptrend. Headline unemployment is down, numbers employed are at a record and the recovery in Scotland as measured by Purchasing Managers Index survey data continued into January of this year. There is no sign – yet – that the independence referendum is blighting Scotland’s economic performance or prospects.

But much of this growth is due, not only to the endeavours of Scottish companies, but also to those tens of thousands of businesses registered elsewhere in the UK which have substantial operations in Scotland or significant trading volumes with Scottish customers and/or suppliers. Indeed, they may fairly be considered the forgotten legion in the independence battle.

I am grateful to accountants and business advisers BDO for the following figures. There are close to 343,000 private enterprises in Scotland, employing almost one million. Only 1.4 per cent employ more than 250, yet these account for more than half of employment and almost two-thirds of turnover.

Of those 2,270 large private companies, 82 per cent are owned outside of Scotland. They employ almost two-thirds of the large enterprise workforce (30 per cent of total Scottish private sector employment) and contribute more than three-quarters of turnover (50 per cent of private sector turnover).

The obvious point is that the views of businesses with Scottish operations but owned outside Scotland are critical to future economic stability. Any changes, whether to corporate or income taxes in Scotland, or key issues such as currency, are likely to have an impact on their decisions to invest in or retain Scottish operations.

“Regardless of the outcome of the referendum”, says BDO, “any future Scottish government needs to consider maintaining a competitive tax position for wealthy individuals and large companies owned outside Scotland.”

Now the SNP has made much of its intentions to create an attractive and competitive business environment, specifically by cutting corporation tax. The UK rate is set to drop to 21 per cent for large companies from April and will be 20 per cent for all from April next year.

However, competitive though this may be relative to many other industrialised economies, it is by no means the only factor in swaying investment decisions. The rates of income tax are arguably at least as important in attracting senior key executives to relocate to Scotland.

Given labour and capital are now highly mobile, Martin Bell, tax partner with BDO, stresses that “attracting inward investment is essential for any future Scottish government” and that the tax environment “is not only competitive but consistent and certain”. The UK, he points out, still has a relatively high rate of personal income tax. The top headline rate is 45 per cent. But this rises to 60 per cent for certain income brackets and, when combined with employer’s NIC at 13.8 per cent, the tax take can seem high. “Therefore, any further cut in corporation tax to make Scotland look attractive compared to our EU competitors needs to be combined with a reduction in income tax or NIC to really make a difference to inward investment and job creation.”

Corporation tax actually contributes less than 10 per cent of UK tax receipts, compared to more than 50 per cent from income tax and NIC. Corporation tax receipts for 2012-13 in Scotland amounted to £2.7 billion and the top earning 1 per cent of Scots paid close to the same amount – £2.1bn worth of tax.

The problem here is that a cut in corporation tax may come at the cost of higher income tax and NIC yields – which may discourage the very investment a corporation tax cut seeks to attract. Scotland, says Bell, “has relatively high employee costs and comparatively expensive property, and at present a UK tax regime which can be challenging. We need to ensure the attractiveness of Scotland as an investment destination is maintained and this must include not only a competitive corporate tax rate but also a wider tax regime that isn’t overly penal for large employers and entrepreneurs, and in which overseas investors can have confidence will be sustainable in the medium to long term.”

This problem may become acute in Scotland where a significant percentage of the population pays no income tax and where a relative few – around 200,000 – pays the higher rate. Raising further revenue from them to meet all or part of a cut in corporation tax would deter senior professionals from moving here and could spark an exodus.

And the broader point should not be overlooked. It is not just Scottish voters the Yes campaign needs to reassure about tax, PAYE and the regulatory regime for business but also those rUK companies that have investment in, or do business in, Scotland. The lofty aspiration may be a faster overall rate of growth. Ensuring that a gap between England and Scotland does not open up to our disadvantage is the more immediate policy imperative.