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Scottish Draft Budget 2020/21

Scottish Draft Budget 2020/21

The Scottish Government announced its tax and spending plans for 2020/21 - what do these mean for individuals and businesses?

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Alan Turner - Partner and Head of Tax for Scotland at KPMG

Partner, Head of Tax in Scotland

KPMG in the UK

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Our view

Jenny Stewart, Head of Infrastructure, Government and Healthcare in Scotland commented:

‘The context for the Scottish Government’s Budget has changed significantly since last year, with important implications for tax and spending decisions.

On the one hand, the economic outlook is looking much more subdued than at the time of the last Budget.  The Scottish Fiscal Commission’s forecasts published alongside the Budget are predicting economic growth in 2020 of only 1%  and 1.1% for 2021 – anaemic compared to long term trend of 2% per annum, but not surprising given latest annual growth figures of only 0.7%.  In addition, there is a hit of £207m in 2020/21 to adjust for weaker tax receipts than forecast in 2017/18. 

On the positive side for the Scottish Government, the UK Government announced in September 2019 an increase of 2.1% for day to day spending for the 2020/21 Scottish Budget; and they have also committed to increase funding for capital projects significantly, which will have a knock on positive impact on the Scottish Budget once the details of the UK Budget on 11 March are known. The Scottish Fiscal Commission estimates that the new tax measure to freeze the higher and top rate thresholds will raise an additional £52m, along with a further £70m from tax changes made in previous years e.g. introducing the five tax band system.

Total Scottish Government planned spending amounts to just over £40bn - with £34.8bn for day to day spending and £5.2bn for capital. This is a significant part of the overall £175bn Scottish economy.'

Alan Turner, Head of Tax in Scotland, commented:

'From a tax perspective three main changes were announced:

  1.  On income tax, while there are no changes to the rates of income tax, inflationary rises have been made to the basic and intermediate rate thresholds.  This means that Scottish taxpayers will pay up to £2.50 less income tax next year – a very modest saving;
  2. On Land and Buildings Transaction Tax, a new 2% band was introduced on non-residential leases entered into from 7 February 2020 where net present value of rental income exceeds £2m –  on this, the devil will be in the detail and care will need to be taken in drafting to ensure that only those leases intended to be caught are brought into the new regime; and
  3. On Business Rates, we welcome the introduction of an intermediate property rate, taking more businesses out of the higher rate.  Coupled with agreement over the Non-Domestic Rates Bill, this provides relief and certainty for many Scottish businesses.  

Overall, the tax changes are fairly limited – unsurprising given the backdrop to the timing of this Scottish Budget.  The forthcoming UK Budget means that a number of assumptions had to be made in preparing the statement – certainty will only be available when Sajid Javid stands up in Westminster on 11 March.

It remains to be seen what further changes may need to be made to the Draft Budget to get it agreed. 

As a minority administration, the Scottish Government will need the support of at least one other party in the Scottish Parliament.’

What you need to know

Kate Forbes, the Minister for Public Finance and Digital Economy, presented the Scottish Draft Budget 2020/21 on 6 February 2020.

Read our on a page for a summary of the main tax announcements.

Spending

The overall increase in the Budget has allowed additional real terms spending not surprisingly for health – under significant pressure, with such a high proportion of Health Boards in special measures; schools - where performance has been under so much scrutiny; policing – to maintain officer numbers; and for investment to accelerate the move towards zero carbon by 2045.

The key theme of the Budget was that the Scottish Government is looking to address the climate crisis head-on.  The largest levels of emissions are produced by transport; heating our buildings; and agriculture.  There were welcome initiatives in all these areas.  They included new funding to decarbonise heating in buildings; and an £83m Future Transport Fund to include funding for low emission and electric buses, bus prioritisation measures and investment in electric vehicle charging points.  It was also good to see additional funding for tree planting – essential in capturing more carbon; and a significant increase in funding for peat restoration – not just for this year; but a commitment to funding for 10 years.

Social security is also an area to watch.  With the devolution of new powers to Scottish Government, some £3.2bn of funding was transferred from UK Government.  Total planned spending is set at the higher figure of £3.8bn to cover the additional costs of introducing new benefits including the Scottish Child Payment and running costs for the new Social Security agency.  This is a new risk area for Scottish Government to manage.  Benefits and payments are demand and entitlement led – so any increase in costs in-year will have to be compensated for elsewhere in the Scottish Budget.

The Budget is also good news for public sector workers as they will see a 3% pay rise for those earning up to £80,000. Pay has been heavily constrained in the public sector since the financial crisis with a number of years of pay freezes and below inflation increases. This pay policy covers Scottish Government and associated Executive Agencies and Non-Departmental Public Bodies.  Core NHS and local government staff are negotiated separately.

As well as Budget winners, there were some Budget losers.  The roads budget saw a real terms cut – not surprising given the move to zero carbon; along with the Legal Aid Budget and the Culture Budget.  Local government is a contentious area – with local government identifying a further real terms cut in core funding, while Scottish Government points to additional spend in other budget areas which will be allocated to local authorities in ring-fenced areas eg on schools; and on district heating.  

This is a Draft Budget and, as a minority Government, negotiations with other parties will continue.  Local Government is a key area where opposition parties will be looking for more resources, along with increases to the police budget.  Any post negotiation increases, will need corresponding decreases elsewhere.

While today’s politicians can’t bind their successors, the more we can see long term planning and funding, the more helpful the Budget process is – particularly when it comes to infrastructure spend.  Another one year Budget makes it difficult for the rest of the public sector to plan.  Next year will be different. A comprehensive spending review will shortly be underway at UK Government level and give spending totals for the following 5 – 6 years.  That will provide more certainty for next year’s Budget.  We also know that there is expected to be another downward adjustment of £550m to make up for a shortfall of tax receipts in 2018/19. And it will be a budget set in the run up to the 2021 Scottish Parliamentary elections – so will be even more closely watched!

Income tax

The key proposals are:

  • No changes to the starter, basic, intermediate, higher and top rates of Scottish income tax;
  • The thresholds from which the basic and intermediate rates apply are to increase in line with inflation; and
  • The thresholds from which the higher and top rates apply will remain frozen.

What are the proposed Scottish bands and rates?

Income tax is a partially devolved tax.

Subject to certain exceptions, Scottish taxpayers are entitled to an tax free personal allowance set by the UK Parliament.  The standard personal allowance is currently expected to remain at £12,500 for 2020/21.

All UK resident individuals pay income tax on interest and dividends based on bands and rates set by the UK Parliament.  These will be announced at the UK Budget on 11 March 2020.

However, for Scottish taxpayers, all other income is subject to tax based on bands and rates set by the Scottish Parliament. 

The proposed bands of taxable income (i.e. income over any available personal allowance) and rates of income tax for 2020/21 are set out in the table below.

Band

Range*

Rate

Starter

Above £12,500 to £14,585

19%

Basic

Above £14,585 to £25,158

20%

Intermediate

Above £25,158 to £43,430

21%

Higher

Above £43,430 to £150,000

41%

Top

Above £150,000

46%

*The personal allowance is reduced by £1 for every £2 of income that exceeds £100,000, which lowers the thresholds at which the starter, basic, intermediate and higher rates apply.

How does it compare to last year?

Scottish taxpayers should pay less income tax than last year as a result of inflationary increases to the basic and intermediate rate thresholds.

Coupled with increases in the national insurance lower earnings limit (for employees) and lower profits limit (for the self-employed), and freezing of the upper earnings and upper profits limits from 6 April, they should also pay less NIC in 2020/21.

The table below illustrates the implications of the income tax announcements (1) on their own; and (2) together with the UK NIC changes announced on 30 January.  Note that these are illustrations which, where relevant, assume entitlement to a full personal allowance of £12,500.  Individuals’ personal circumstances will vary.

Income

Income tax changes alone

(2020/21 versus 2019/20)

Income tax plus NIC changes

(2020/21 versus 2019/20)

£20,000

- £0.36

- £104.52

£30,000

- £2.50

- £106.66

£40,000

- £2.50

- £106.66

£50,000

- £2.50

- £106.66

£60,000

- £2.50

- £106.66

£70,000

- £2.50

- £106.66

£120,000

- £2.50

- £106.66

£160,000

- £2.50

- £106.66

(NB: ‘+’ denotes an increase, and ‘-’ a decrease, in income tax or income tax plus NIC in 2020/21 compared to 2019/20.)

How does it compare to the rest of the UK?

This year the Scottish Draft Budget precedes the UK Budget.  This means that it is not possible to compare the income tax positions of Scottish taxpayers with those in the rest of the UK on the date on which the 2020/21 Scottish income tax rates are announced.

We will analyse this following the UK Budget on 11 March 2020.

Land and Buildings Transaction Tax (LBTT)

Bands and rates of LBTT will remain unchanged for residential and non-residential conveyances. 

However, changes were announced to introduce a new rate and band of LBTT applying to rent payable for non-residential leases.  LBTT is currently charged at 1% on the net present value (NPV) of rent payable over the life of a lease where the NPV exceeds £150,000.

The new rate will apply to transactions entered into from 7 February 2020 subject to transitional provisions (broadly if the lease is pursuant to a contract prior to 7 February 2020 the old rate bands should continue to apply).

The new bands and rates are set out below.

NPV of rent

Rate

Up to £150,000

0%

Above £150,000 to £2,000,000

1%

Above £2,000,000

2%

 

The Additional Dwelling Supplement (ADS), which broadly applies to the acquisition of additional dwellings by individuals and the acquisition of residential property by companies, will remain unchanged at 4%.  However, the Scottish Government has announced that they are undertaking work to consider a range of views in relation to the operation of the ADS following the Scottish Parliament’s Finance and Constitution Committee’s consideration of the ADS in 2019.

Consultations on draft legislation for relief from LBTT on the initial transfer of properties to a Property Authorised Investment Fund, and where units in Co-owned Authorised Contractual Schemes are exchanged, will be launched.

These were originally announced following an initial consultation in 2018, but deferred until there was greater clarity on the terms of the UK’s exit from the EU.

Business rates – a new intermediate property rate

Following the vote on the Non-Domestic Rates (Scotland) Bill, the uniform business rates system will be retained.

The basic property rate ‘poundage’ will increase to 49.8p and a new intermediate property rate of 51.1p. (i.e. the basic property rate ‘poundage’ plus 1.3p) will be introduced for properties with a rateable value between £51,000 and £95,000.

The higher property rate will be set at 52.4p

A new intermediate property rate of 51.1p (i.e. the basic property rate ‘poundage’ plus 1.3p) has been introduced for properties with a rateable value between £51,000 and £95,000.

Environmental taxes

Scottish Landfill Tax (SLfT)

The standard and lower rates of SLfT are proposed to increase in line with the Retail Prices Index.

Material sent to landfill

Proposed rates from 1 April 2020

Standard rate

£94.15

Lower rate

£3.00

 

The tax credit for contributions to the Scottish Landfill Communities Fund is proposed to remain capped at 5.6% of an operator’s total SLfT liability.

Aggregates Levy

The timeline for devolving responsibility for Aggregates Levy remains undetermined, pending the outcome of the UK Government’s review of the levy. 

An update on the status of that review might be given at the UK Budget on 11 March.

Air Departure Tax (ADT)

Implementation of ADT, the devolved replacement for Air Passenger Duty (APD), remains deferred.

The devolved tax will come into force only when an ADT exemption for flights leaving Highlands and Islands airports, which currently applies to APD, can be secured.

What happens next?

As in prior years, the Scottish Government requires the support of at least one opposition party in order to pass its Budget.

Additionally, the announcements will need to be considered in the context of those made in the upcoming UK Budget on 11 March.

The announcements should therefore be regarded as provisional.

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