By Daniel Hunter

The Scottish Government has been urged to communicate its future tax vision to the country’s businesses in a new discussion paper published by Ernst & Young.

The report, titled Grasping the Thistle, is the first in a planned series of publications from the professional services firm that will examine Scotland’s fiscal future and the issues that have the potential to affect the country’s standing as a place to do business.

Almost 200 senior Scottish business figures polled as part of the paper called for evidence demonstrating that the administrative and financial costs of the options available to government — be it alterations to current tax systems or a completely separate system ushered in by any future constitutional settlement — would be economically justifiable.

Almost two thirds of those surveyed (64%) expressed doubts over the viability of establishing new systems in a fast, effective and cost-efficient way, although one respondent said: “confidence will grow from having more control in Scotland.”

Jim Bishop, the firm’s Scotland senior partner, said: “The countdown to the Scottish Government assuming direct responsibility for some tax-raising powers was initiated when the Scotland Act received Royal Assent in May.

“The business community has expressed doubts about the timescales in which the relevant tax systems need to be established. These stem from the difficulties associated with making considerable changes to tax policy established over the course of 300 years.

“Looking to the future, there are concerns that the cost of reconfiguring systems and adapting to a new regulatory environment could be enormous, given that business is run on a UK-wide basis in many cases.

“In publishing the report we are maintaining our commitment to facilitating and informing the debate on the future for Scotland’s businesses. It is our view that a constructive public discussion will be key to the country’s economic vitality and well-being, whatever changes lie around the corner.”

In addition to noting the challenges associated with implementing new systems, the report also raises the opportunities.

Colin Pearson, tax partner at Ernst & Young in Scotland, said: “Having opted to establish Revenue Scotland as a means of collecting some taxes already transferred to it, as well as those via any potential future powers, the Scottish Government would be unencumbered by the legacy systems of HM Revenue & Customs.

“These systems, like those in many large organisations, have struggled to keep pace with rapid leaps in technology and connectivity over the decades. A system designed from scratch could offer easier access and greater flexibility to businesses.

“Creating an efficient and relatively simple system would greatly enhance the credibility of the Scottish Government, boosting its efforts to secure the desired economic dividend from gaining control of taxes.”

While the Scottish Government’s aim of gaining the ability to set the rates of corporate taxes levied on Scottish companies was rejected by Westminster, therefore absent from the Scotland Act, the future of the corporate tax system in Scotland remains a live issue for businesses given the possibility of fiscal change.

Perhaps predictably, more than half (54%) of the business leaders questioned are supportive of lowering corporate tax rates to stimulate investment, albeit with emphasis placed on setting sustainably, rather than significantly, lower rates.

When asked how reductions in the corporate tax take should be funded, the respondents were overwhelmingly in favour of cuts to public spending, although increases to Income Tax and National Insurance were identified as ways of offsetting cuts elsewhere.

Advocating a measured approach, one respondent said: “Reducing corporate tax rates may attract companies to Scotland, but will initially result in lost revenue. Any rate reduction and increase in business activity would have to be carefully balanced to ensure collected revenues remained unchanged.”

Another commented: “A holistic approach to tax that takes all forms of incentivisation and supporting measures into consideration must be taken for Scotland to remain truly attractive to potential investors.”

Jim Bishop concluded: “We hope that the report provides an interesting steer to the Scottish Government as it considers future policy, as it is clear that businesses are in favour of a simplified and sustainable tax system, irrespective of the result of any referendum.

“Scotland’s corporate entities are required to implement long-term investment plans over a course of many years, if not decades. In order to inform their decision-making processes, the Scottish Government must present a clear, unambiguous vision, outlining the ways in which it would implement current and future tax powers.”

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