Concerns over Scottish local income tax proposals

31 July 2008

The Scottish Government is sticking to its plans to introduce a local income tax (LIT), despite fears from a number of quarters over whether the proposed tax would be workable.

The reform, as proposed by the Scottish National Party administration, would replace the property-based council tax with an additional 3p in the pound on basic rate income tax, levied on all taxpayers resident in Scotland, but excluding investment income. It would be set centrally and collected on behalf of the Scottish Government by HM Revenue & Customs.

The implications of LIT go much wider than Scotland. HMRC would require extra resources, and it is likely that many employers throughout the UK would have to adapt their payroll systems.

Consultation on the Scottish Government's paper, "A Fairer Local Tax for Scotland", closed on 18 July. Professional bodies involved with taxation and public finance – including the Institute of Chartered Accountants of Scotland – have raised concerns over the proposals.

These include doubts as to whether the Scotland Act 1998 grants sufficient powers to introduce the tax as set out by the SNP, and also concerns that differences between existing income tax and the LIT would create added complexity.

Some business organisations have expressed fears that the perception of Scotland as a place to live and work could be adversely affected if its headline rate of income tax was higher than elsewhere in the UK.

John Swinney, Secretary for Finance and Sustainable Growth in the Scottish Government, said: "Scotland needs a local tax system with fairness at its very foundation – based on the ability to pay." And added that LIT has the support of a majority of voters.