Scots are already facing higher income rates tax rates next year under Scottish Government plans and there are now warnings that economic growth could suffer and future university graduates will struggle to find work in Scotland if the tax systems north and south of the Border “diverge”.
Accountancy firm Johnston Carmichael, in a submission to Holyrood’s finance committee, said a “fundamentally different approach” to taxation in Scotland from that so far suggested by political leaders is needed to avoid economic damage.
Other bodies such as ICAS (the Institute for Chartered Accountants in Scotland), and firms PWC and KPMG also raised concerns over “certainty” in the tax system in Scotland.
Opposition leaders in Scotland welcomed the interventions, which they said set out how “severe” the impact will be of Scotland paying higher taxes than elsewhere in the UK.
Holyrood’s finance committee is carrying out an inquiry into taxation in Scotland after Holyrood acquired new powers over income rates tax and bands as part of the post-referendum powers devolved under the Smith Commission proposals.
Susie Walker, a partner and head of tax at Johnston Carmichael, Scotland’s biggest independent firm of chartered accountants, set out “concerns over the prospect of a “divergence” in tax rates making Scotland a less “attractive location for business”.
She said: “Attracting and retaining individuals to work in Scotland will be a costly business if it becomes necessary to offer tax equalisation packages should the Scottish rates of income tax become higher than the rest of the UK.
“For some businesses where, for example, the workforce are skilled this cost will be significant and may give rise to businesses relocating elsewhere in the UK, or indeed outside the UK altogether.”
She added: “A number of our clients are flexible and ready to move should the costs of retaining a Scottish base become penal.”
Technology, life sciences and the oil and gas industries are the key areas that will be affected, she said.
“This will also have an impact on opportunities for Scottish graduates to continue to live and work in the UK and could have a long-term harmful impact on the economy in Scotland.”
Scots middle earners will face higher income tax rates then elsewhere in the UK next year under Scottish Government plans to freeze the threshold for the 40p higher rate, while this expands to £45,000 south of the Border, as part of the new finance powers going to Holyrood.
Labour and the Liberal Democrats are also calling for a hike in the basic rate of tax for the lowest earners.
Labour also backs a 50p top rate for high earners, which Ms Sturgeon previously supported. The First Minister ruled out making the change next year, in response to a civil service analysis warning the government might end up losing £30 million of tax as people earning more than the £150,000 threshold could move their money south of the Border. But she has said she personally backs the policy and pledged to review it on an annual basis.
Accountancy giant KPMG stated that the prospect of higher tax rates could deter people from elsewhere the UK from moving to Scotland.
Its submission stated: “This might affect the ability of employers to attract skilled workers to Scotland to support the growth of the Scottish economy, or increase costs for businesses and consumers as a result of such candidates requiring a ‘weighting allowances’ to compensate them for moving to a higher tax regime.”
ICAS also backed the principle of “certainty” in the tax regime and said “it would be helpful if a relatively long-term view could be taken with a minimum number of changes to the thresholds and rates.”.
David Glen, PWC’s head of tax in Scotland, said the ability of workers to simply leave if they are being taxed too much is a “constraint” on government’s scope to put up taxes, although it depends on confidence in the system.
“Greater transparency around policy making and the use of revenues enhances the confidence and reduced behavioural effects,” he added.
Scottish Conservative MSP Alex Johnstone said the SNP plans would make Scotland “the highest-taxed part of the UK”, adding: “That’s unacceptable, and these experts are illustrating just how severe an impact that will have.”
A Scottish Government spokeswoman said it is making taxation “fairer and more proportionate” to the ability to pay. She added; “Our income tax proposals for 2017-18 and beyond will protect lower income taxpayers – but also generate extra revenue of around £1.2bn by 2021-22 to invest in key public services.
“Similarly, we are proposing progressive reforms to local taxation which will, over the lifetime of this Parliament, raise an additional £500m to invest in raising educational attainment.”