Tax complexity risks stifling Scotland’s growth
Our system is UK’s most complicated, something that should be fixed in the upcoming Budget, writes James Paterson
Consider this: there are certain taxes that require businesses to spend far more on complying with the rules than paying the tax itself. If this strikes you as absurd, you’d be absolutely right.
The UK’s 23,000-page tax code is notoriously complex – a feature that contributes to the country being placed 32nd out of 38 OECD countries for tax competitiveness.
Our tax system eats up business time, weakens certainty and creates cliff edges that distort investment, hiring and expansion decisions. Crucially, it distracts businesses from investing, innovating and growing.
This affects businesses across the UK, but nowhere is this complexity more apparent than in Scotland.
Take the example of the Scottish Rate of Income Tax. We now have six income tax bands – or seven including the zero rate – compared to four in the rest of the UK. We also have a higher top rate. Add the UK-wide 2% higher rates of tax on savings from April 2027 and current dividend tax rates, and the result is a major financial planning headache.
This complexity must be factored into decisions on where entrepreneurs invest, who they hire and how much they pay them - and even where they live.
Individual employees in Scotland can struggle to calculate whether additional hours, a promotion or a bonus will leave them better off. When the financial implications of progression are unclear, complexity risks discouraging ambition and holding back Scotland’s workforce.
Complying with tax rules costs UK businesses over £15bn a year, while the cost to the public purse of administering the system increased by 15% between 2019-20 and 2023-24.
Rather than focusing on simplicity, consistency and certainty, the new Labour administration appears to favour regionalism, giving mayors new powers over tax revenues.
While rebalancing growth is a worthwhile ambition, greater regionalisation could add further complexity. Businesses operating in Scotland could face rules at three levels – UK Government, Scottish Government and potentially each of Scotland’s 32 local authorities. This patchwork increases compliance costs, makes investment decisions harder and places a disproportionate burden on smaller businesses.
The Scottish and UK governments should collaborate to make tax simplification part of the growth agenda. Any transfer of powers should come with a clear test: will it simplify the overall system for businesses? Governments should assess the cumulative burden of new rules, consult businesses before implementation and align requirements across the UK wherever local variation isn’t essential.
A simpler tax system would encourage investment, boost productivity and employment, and support entrepreneurship. In our recent Budget submission to the UK Government, we proposed several recommendations to ease the burden.
First, corporation tax. Over time, the government should replace marginal rates and allowances with a single rate of 21%, below the EU average of 21.6%.
This would support investment by increasing competitiveness, reducing uncertainty, lowering compliance burdens and giving small businesses greater confidence over the tax implications of growth.
VAT is another headache. The current registration threshold can encourage businesses to slow growth as they approach it. We should replace this sharp threshold with a tapered model and make VAT payments automatic when customers pay, reducing errors and underpayment risk.
Next, simplify R&D claims. The regime was tightened to curb error and fraud, but is now overly onerous. Businesses with a good tax compliance history shouldn’t have to jump through so many hoops.
Making simplification a shared priority across the UK, Scottish and local governments could reduce barriers to investment and help businesses drive growth in every postcode.
James Paterson, Head of Tax at BDO Scotland