A fairer local tax for Scotland – PwC response

PricewaterhouseCoopers LLP has added its views to others responding to the Scottish Government’s consultation document on the introduction of a local income tax in Scotland.

While recognising there are some benefits to a local income tax as set out in the consultation paper, there are likely to be problems in the operation of the PAYE system, the means by which tax is deducted at source from earnings, if a differential rate of tax is introduced.

As well as the tax collection issues and a number of other tax anomalies and difficulties that a local income tax would create, PricewaterhouseCoopers also highlights the risk that Scottish business would face a competitive disadvantage in the international marketplace if its headline rate of income tax was higher than the rest of the UK.

Rhona Irving, tax partner at PricewaterhouseCoopers LLP and head of the Scottish tax practice, commented:

“It still not clear how workable the proposals would be and we believe more research into the rate of tax that would be needed to replace the amount currently collected by council tax, is required. How Scotland would be perceived by the international business community if its headline rate of income tax was higher than the rest of the UK should also be considered.

“Many people are also concerned that the cost of collecting the tax will have an impact on business and will fall most heavily on the shoulders of the small businesses, the lifeblood of Scotland.”

A summary of the PricewaterhouseCoopers LLP key points in its response:

• Personal allowances and other tax deductions need to remain the same as those fixed centrally by Westminster to avoid introducing complexity and confusion into the tax system and pushing up the cost of cash collections.
• More research is required to determine if a flat rate of 3p in the pound is enough to replace the funds raised from council tax.
• While local income tax is based on ability to pay it may not be perceived as a fairer system if this does not reflect use of services.
• Income subject to local income tax should be calculated in the same way as income subject to national taxation.
• The tax will be paid by those with the closest connection to Scotland.  Anyone with an itinerant lifestyle such as lorry drivers, bus drivers, airline pilots, train drivers, commercial salesmen, seamen and fishermen, North Sea oil workers, engineers, trainers of various descriptions, sportsmen and entertainers and office workers who commute regularly to other parts of the UK are among the many categories of workers who will find it hard to decide if they are liable.
• HM Revenue & Customs is the only practical body that can provide the mechanism for the tax collection.
• Collection will require co-operation by employers south of the border as well as in Scotland. Developing software to meet the changes required could be expensive.
• The impact of a local income tax is unlikely to be significant for those already living and working in Scotland but could be a deterrent to immigrants coming to work in Scotland and to international business choosing a base of operations in the UK.
• More research into alternatives is required and the case for introducing a local income tax as an alternative to council tax has not been made in the consultation paper.

Contact details
Email: Valerie Smart
Tel: +44 (0)131 260 4497