How Scotland's tax gap is already hitting firms amid new warning from business chiefs

Business chiefs have warned the tax gap between Scotland and the rest of the UK is “exacerbating” the crippling recruitment challenges that are holding back economic growth and investment.

The Scottish and UK governments were both urged to set out their long-term tax plans last night amid fears ongoing uncertainty is having a “major impact” on firms across the country.

The plea was made as a new survey of hundreds of businesses found taxation had overtaken inflation as the leading area of concern.

The quarterly economic indicator survey for the Scottish Chambers of Commerce (SCC), which gathered the views of 410 firms between May and June, showed taxation occupied 52 per cent of concern, with inflation on 50 per cent.

Stephen Leckie, the SCC president, warned the difference in tax rate between the Scottish and UK governments may be contributing.

In Scotland, workers earning more than £28,867 pay more income tax than their counterparts south of the border, following changes from the Scottish Government, while a 45 per cent advanced rate was introduced for those earning between £75,000 and £125,140.

A Scottish taxpayer earning £50,000 a year pays an additional £1,542 in income tax compared to someone living elsewhere in the UK, while a taxpayer on £110,000 pays £4,096 more

The SCC survey found recruitment difficulties increased from 47 per cent to 55 per cent compared to the last quarter, with labour costs impacting upon three quarters of firms.

Mr Leckie said both governments must set out plans to address taxation concerns.

He said: “Taxation continues to concern firms, to the extent that the issue has overtaken inflation as the leading concern.

“This is having a major impact in attracting and retaining talent in Scotland, contributing to the significant labour challenges many businesses are already experiencing. Divergence on personal taxation has exacerbated the issue.

“Businesses will be looking to both the Scottish and UK government to set out long-term plans to address the current state of taxation which is impacting growth, investment and talent.”

The survey also showed “significant improvement” in cashflow and profits for firms, while investment trends remained “generally positive”, according to the report.

Mr Leckie added: “Our latest survey indicates generally improving business conditions across the economy, albeit significant challenges continue to persist which are limiting the ceiling on potential growth and investment.

“The impetus to deliver a credible plan for sustainable growth lies with both the Scottish and UK government. Now must be the moment to focus on long-term solutions to tackle poor productivity and create an environment for business investment to accelerate.”

Scottish Liberal Democrat MSP Willie Rennie said: “I can understand why businesses are concerned. 

“The SNP’s erratic tax policies, combined with the Conservatives’ mismanagement of the economy, has undermined the confidence and certainty we need to spark growth. 

“I want to see the Scottish and UK governments working together to develop a new approach that has a long-term plan for tax, smarter regulation and grows the skilled workforce.”

It comes as another economic study showed 69 per cent of investors were planning to establish or expand operations in the UK over the next year, and 26 per cent are planning to invest in Scotland - second only to London.

However, Ally Scott, EY Scotland’s managing partner, said: “We still hear frustrations from clients and the market that Scotland’s tightening economic policies, including the latest income tax hikes and issues around city and infrastructure quality, are causes for concern.

“While the potential impact of these goes far beyond FDI (foreign direct investment), the fact remains that access to talent is a major driver of attractiveness and investment.

“Action is also needed around the ease, transparency and efficiency of planning processes to make Scotland and its cities more globally accessible to help boost the incoming flow of people and capital.”

Deputy First Minister and Cabinet Secretary for Economy and Gaelic Kate Forbes said: “This latest report shows positive signs of growth in our economy, with higher investment, cashflow and confidence compared to the previous quarter.

“Scotland has the most progressive income tax system in the UK, protecting those who earn less and asking those who earn more to contribute more. This in turn allows for a more comprehensive set of services in Scotland compared to the rest of the UK, including free prescriptions and free university tuition.

“Recent HMRC research has shown that thousands more taxpayers moved to Scotland than left between 2017-18 and 2021-22. We will continue to monitor the impact of our tax policy to ensure it delivers for taxpayers and the wider economy ahead of the 2025-26 Scottish Budget.”

In March, a survey by the Institute of Directors raised concerns over the additional tax band announced at the Scottish budget in December 2023, meaning those earning more than £75,000 annually are taxed at a rate of 45 per cent, with 82 per cent highlighting the issue.

While 61 per cent of members said they had the right number of skilled people for current jobs, only half reported that they were confident of being able to recruit sufficient skilled staff in the next 12 months.