Taxation now biggest concern for Scottish businesses, survey shows

Firms face a tax ‘double whammy’ north of the Border, the Scottish Conservatives have warned

High taxation is now the biggest concern for businesses in Scotland ahead of a looming hike in National Insurance.

A Scottish Government analysis of the latest Business Insights and Conditions Survey (BICS) found 18 per cent of firms identified taxation as their main concern for April, followed by falling demand of goods and services at 13.8 per cent

“This is the first time in the series that taxation has been the top concern for businesses,” it said.

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The findings came as the Institute for Fiscal Studies warned the Scottish Government will find it “almost impossible” to avoid cuts to other services if they choose not to follow UK government welfare reforms outlined by Chancellor Rachel Reeves in her Spring Statement this week. David Phillips, head of devolved and local government finance at the IFS, told The Scotsman avoiding welfare cuts would mean the Scottish Government reducing budgets elsewhere.

BICS is a voluntary fortnightly UK-wide business survey by the Office for National Statistics which has been running since 2020. The findings for Scotland are based on weighted estimates.

Scottish Conservative finance spokesman Craig Hoy said businesses in Scotland face a tax “double whammy”.

Mr Hoy said: “It’s no wonder that Scottish firms now see tax as their major worry. The UK Labour government’s National Insurance tax hike has piled on costs and will lead to job cuts. And after their disastrous emergency budget, the IFS [Institute for Fiscal Studies] thinks more tax rises are on the way.

“Meanwhile, the SNP Government here have set the highest income tax in the UK, making it harder to attract the skilled workers essential for growth. They’ve also put Scottish firms at a disadvantage by failing to pass on rates relief.

“As a result, Scottish businesses face a double whammy as they have to contend with two high-tax, left-wing governments.”

A total of 10,570 businesses responded to the latest “wave” of the BICS, with 1,255 of these having a presence in Scotland, 1,126 of which had 10 or more employees.

Small to medium sized businesses - those with 10 to 249 employees - were more likely to be concerned about taxation than larger firms. Taxation was the main concern for 19.1 per cent of small to medium sized businesses, compared to 8.2 per cent of large businesses.

Employer National Insurance contributions will increase from April, following measures announced by Chancellor Rachel Reeves. Meanwhile, in Scotland, concerns have also been raised about the level of income tax paid by higher earners.

Last week, the chief executive of the Confederation of British Industry (CBI) urged SNP ministers to close the income tax gap between Scotland and England.

From April, anyone earning more than £30,318 will pay more income tax in Scotland than if they lived south of the Border. Someone earning £50,000 will pay £1,527 more, and a person earning £100,000 will pay £3,331 more.

The CBI’s Rain Newton-Smith told The Scotsman uncompetitive tax policies “are a handbrake on growth”.

She said: “Scottish business leaders say that closing the income tax gap between Scotland and the rest of the UK will remove the current hiring disadvantage and allow them to compete more equally in the race to recruit highly skilled staff. That can only benefit public services in the form of higher tax receipts north of the Border, leading to better public services.”

She also took aim at the UK Labour Government’s decision to hike National Insurance and increase the National Living Wage, which she said had “made it harder for firms to hire, invest and grow”.

A Scottish Government spokesman said its income tax policies “mean that the majority of taxpayers in Scotland pay less than they would elsewhere in the UK”.

He said: “We continue to closely monitor the impacts of income tax decisions using a range of evidence such as real time economic data and engagement with stakeholders, including the business community.

“Many levers to grow Scotland’s economy lie with the UK Government. The Scottish Government recognises that many businesses are concerned about the impact of the UK Government’s decision to raise employers’ National Insurance contributions.

“Scotland offers the most generous small business rates relief in the UK. Around half of properties in the retail, hospitality and leisure sectors will continue to be eligible for 100 per cent Small Business Bonus Scheme relief in the new financial year.”

A Treasury spokesperson said: “We are a pro-business government determined to improve the total business environment, and have already achieved a great deal in a short period of time.

“This includes protecting the smallest businesses from the employer National Insurance rise and late payments, and capping corporation tax.

“We delivered a once-in-a-Parliament budget to wipe the slate clean and are now focused on creating opportunities for businesses to compete and access the finance they need to scale, export and break into new markets."

After Ms Reeves delivered her Spring Statement in the House of Commons on Wednesday, Ms Robison vowed the Scottish Government will do “everything in its power” to avoid passing on UK benefit cuts, which are expected to save £4.8 billion.

Mr Phillips said: “What the Chancellor announced on public service spending across the UK as a whole is an average 1.2 per cent increase in day-to-day public service spending between 2025/26 and 2029/30. That’s averaging 1.2 per cent in real terms across the UK as a whole.

“The Scottish Government has got a higher level of public spending per person, but the way the Barnett Formula works is not to give the same percentage, but the same pound per person increase. So it will be less than a 1.2 per cent increase in Scotland, it might be a 0.9 per cent increase.

“If you start to use some of that money for benefits, it will be almost impossible to avoid cuts, if you want to meet the pressures on welfare. Some kinds of unprotected cuts will almost certainly be needed, even without finding £500 million for benefits.

“The Scottish Budget will increase, health and social care will probably absorb all of that and more. So even in the absence of this, you are looking at cuts in some areas.”

The issue had caused a spat between the administrations. Ms Robison has condemned what she described as “austerity in stilts” from the Spring Statement, claiming: “The UK government appears to be trying to balance its books on the backs of disabled people.”

Scotland Secretary Ian Murray has instead insisted there is no cut to the block grant.

Mr Phillips, who is also an associate director at the IFS, said: “Shona is right in saying the budget you are giving us means we have to make some cuts in some areas. The UK government is right saying they are increasing your overall funding, and are increasing it on what the last Westminster government was planning to give you.

“They should be trying to find as much as they can in way of productivity. There is a belated realisation in Scotland that productivity did fall during pandemic, there are issues particularly with hospitals and schools. But the real question is, when you have to find this amount of money, you can cut back on a range of unprotected services, or look at what the government is doing, what are we paying for, do we need to be more focused and do less in some areas.”

In addition to issues in the short term, Mr Phillips also warned the Scottish Government was facing long-term funding issues due to the “Barnett squeeze”. The University of Strathclyde’s Fraser of Allander Institute has predicted the Scottish Budget will be around £900 million worse off by 2029/30 than previously projected.

“Traditionally Scotland had a lot more money per person than England for historical reasons,” Mr Phillips said. “Because of that function of the Barnett [formula], because its pound per person increases, we think that funding is going to be slowly eroded.

“It’s not just the tough choices in this budget, it’s a feature of the funding system. It will slowly erode the extra funding that Scotland gets. In 2020, it got 30 per cent more spend per person. In the long run, that might fall to 15 per cent per person. That’s quite a big change. I don’t think the Scottish Government has grasped that and, if it has, it’s not tackled it.”

Ms Robison said: "Eradicating child poverty is the Scottish Government’s top priority. Our policies, like the Scottish Child Payment, are having to work harder than ever to counteract the impacts of UK government decisions.

“We will work through the detail of the Spring Statement, ahead of our medium-term financial strategy publishing later this year and the UK Spending Review in June."