Scottish tax laws are ‘unnecessarily complicated’ says IFS

The Institute for Fiscal Studies (IFS) has labelled the Scottish government’s current tax laws, benefit powers, and future policies ‘unnecessary complicated’ in a report released today

In a report by the IFS, it has labelled Scotland’s devolved tax and benefit powers the most progressive in the UK as on average taxes are higher for high income households, and the benefit system is more generous for low income households but its five-band system of income tax but its tax laws are needlessly complex.

The reforms introduced have tended to complicate the tax system, introducing more rates and bands into income tax, business rates and Land and Buildings Transaction Tax (LBTT) as well as several new reliefs in business rates. These cosmetic and ineffective tweaks have been criticised before, as many have accused ministers of repeatedly shying away from long-overdue reforms.

The IFS report states: ‘A very similar and indeed slightly more progressive pattern of tax payments could have been achieved by applying a 21% rate above a new 0% income tax band, rather than having three separate rates of 19%, 20% and 21%.’

The Scottish government has gained more control over its tax laws and benefit powers, over recent years, to add to its power over council tax and business rates. Scotland’s devolved taxes account for 30% of all tax revenue, and devolved benefits account for almost 20% benefit and tax credit expenditure in Scotland.

Scotland’s devolved changes to income tax means someone earning £50,000 annually, will pay around £1,500 more in income tax this year than if they lived elsewhere in the UK. The average cost of these changes to households in the top 10% of the income distribution is around £1,700 a year, equivalent to just over 2% of after-tax income. Cuts in income tax for those on lower incomes are much smaller – at most £21 per year. Council tax was also increased between 2016-17 and 2020-21 after nine years of freezes has increased the tax rates that apply to properties in Bands E to H.

Low-income households gain much more from the Scottish government’s increases in benefits. These include a top-up to carer’s allowance, higher housing benefit for those in social housing, and extra payments for families with young children on means-tested benefits, and increased flexibility for payments of universal credit. Altogether this will boost the incomes of the poorest fifth of Scottish households by an average of almost 1.5% this year, with temporary pandemic payments coming on top and further permanent increases in the pipeline.

Stuart Adam, a senior research economist at the IFS and an author of the report, said: ‘The Scottish government’s tax and benefit policies follow a strikingly consistent pattern: both over time and relative to the rest of the UK, they involve giveaways at the bottom and tax rises at the top. Changes to income tax, social security benefits, council tax, business rates, and land and buildings transaction tax have all contributed to that pattern.’

The IFS report does state that if the Scottish government is given devolution of National Insurance, capital gains tax and the remainder of income tax, they would be able to reduce the scope for tax avoidance and be allowed to address inefficient and unfair differences in tax treatments between different forms of income.

The IFS has said that the Scottish government has ‘failed to grasp the nettle and introduce much-needed fundamental reforms’ specifically highlighting the update to property valuations that are now 30 years out of date. They also called out the government’s targeted business rates reduction which the IFS say will likely lead to higher commercial rents and their ideas to devolve VAT which would entail significant additional administration and compliance costs.

David Phillips, an associate director at IFS and co-author of the report, said: ‘The current Scottish government has called for the devolution of National Insurance, capital gains tax and the remainder of income tax. Doing this would mean Scottish income tax changes could apply to all income – reducing the scope for tax avoidance – and allow the Scottish government to address inefficient and unfair differences in how different types of income are currently taxed. Whether this opportunity would be grasped is another matter though: the current Scottish government has shied away from radical reform where powers are already devolved.’

The IFS concludes the report saying that ‘such radical reforms would create many losers as well as winners’ but with the election campaign and coming parliamentary term, we are likely to see more significant debates about whether further tax devolution will continue.

Ruby Flanagan |Reporter, Accountancy Daily

Ruby Flanagan is reporter on Accountancy Daily. Contact her on

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