DEREK MACKAY has been told that vital cash revenue could be lost to England if he fails to pass on UK tax breaks to Scots.

The warning to the Finance Secretary came after a top UK Government official suggested Scotland’s middle and high earners could seek to pay their taxes south of the Border to avoid rates set at Holyrood. 

It piles further pressure on Mr Mackay after Chancellor Philip Hammond unexpectedly raised the threshold at which people in England pay the 40p higher rate of tax to £50,000 from next April – a year earlier than planned.

Mr Mackay is due to unveil his Scottish Budget in December.

Andy King from the Office of Budget Responsibility (OBR),
Whitehall’s independent economic forecaster, told MPs that a growing divergence in the tax systems north and south of the Border could lead to the better-off in Scotland claiming their main address for tax purposes was in England.

Appearing before the Commons Treasury Committee, the OBR chief explained that to be “flagged as a Scottish taxpayer” a person had to be resident in Scotland for more than half the year.

“If you are a relatively high income individual with property in Scotland and one elsewhere in the UK, writing to HMRC to say I live more than half of the year in London rather than Scotland is not a difficult thing to do,” he explained.

Committee member Colin Clark, the Scottish Conservative MP 
for Gordon, suggested that growing tax divergence could lead to this scenario. “Yes, exactly,” replied Mr King.

Mr Clark then asked: “So there’s a risk for two economies so close as Scotland and the rest of the UK, if one has a higher tax rate and it’s particularly vulnerable, isn’t it, because one per cent of taxpayers are paying such a disproportionate part, you would not need many to say they had addresses somewhere else and you would see a marked effect?”

Mr King replied: “That’s absolutely right.”

In September, it was revealed Scotland’s tax revenue in 2016/17 was at least half a billion pounds lower than estimated: £550 million based on the Scottish Fiscal Commission’s forecasts and £700m lower than the OBR’s estimate.

The Scottish Fiscal Commission said the difference was down to “data issues”, with estimates based on samples of taxpayer records rather than real data.

However, Mr King suggested the gap could be down to “anticipatory behaviour”, with taxpayers already shifting their tax residency out of Scotland ahead of higher rates coming into effect north of the Border.

The OBR chief told the committee: “It’s a particularly significant risk for the Scottish Government because if someone changes their address, the Scottish Government loses all of that income tax. It does not leave the UK, so our UK-wide forecast is less vulnerable to this type of activity.”

Earlier this week in the Budget, Chancellor Philip Hammond unexpectedly raised the threshold at which people in England pay the 40p higher rate of tax to £50,000 from next April - a year earlier than planned. This is effectively a tax cut.

The Scottish Government, which now has devolved powers over tax rates, has decided not to match London’s raising of the higher rate threshold, arguing that its system is now more progressive than the UK Government’s.

But there is pressure from the Conservatives for Mr Mackay not to continue to diverge Scotland’s tax system from the UK’s when he delivers the Scottish Budget.

Middle earners in England are already said to be around £1,000 better off than their Scottish counterparts because of tax cuts.

Responding to Mr King’s remarks at the committee, Mr Clark later said: “This evidence today will pile more pressure on Nicola Sturgeon and the SNP to pass on UK tax breaks for hard-working Scots.

“If that does not happen, then clearly there is a risk that people who have the option to do so may choose to pay taxes south of the border instead. 

“And if the gulf In income tax rates between England and Scotland continues, then the wider Scottish economy could be seriously hamstrung in the longer term. Ultimately, this will mean a smaller tax-take for Holyrood and less money to spend on vital local services in Scotland.”

But Kirsty Blackman for the SNP said: “Whilst the Tories continue their obsession with cutting taxes for the richest in our society, the SNP have introduced the most progressive tax system in the UK.” 

She added: “The SNP will continue to stand up for hard-working Scots whilst the Tories continue their mission to drag Scotland out of the EU against our will, leaving households poorer and living standards diminished.”

Meanwhile, Ian Blackford, the SNP leader at Westminster, denied his party was running scared of the tax cuts row as neither he nor any of his Nationalist colleagues raised the Budget during Prime Minister’s Questions.

“Good grief no; absolutely not,” declared the Highland MP, insisting he and his colleagues had addressed the issue in the Commons and in media interviews.

He claimed “tax giveaways” were only possible because of the OBR’s raised growth forecast for next year. 

Asked what advice he would give Mr Mackay regarding Scottish middle earners, raise or lower their taxes, Mr Blackford replied: “I would encourage him to deliver a Budget which delivers on our priorities and responsibilities to protecting public services and looking after the interests of all our citizens in delivering a Budget that will allow us to sustain economic growth in Scotland.”

A Scottish Government spokesman said: “Due to the measures taken by the Scottish Government, GDP growth is at its highest annual rate since 2014 and above the rest of the UK. 

“The Finance Secretary will present the Scottish Government’s tax plans in the Scottish Budget later this year. 

“Following  the changes introduced earlier this year, more than two-thirds of taxpayers will pay less this year on given incomes this year compared to last year. “The changes also mean an additional £428 million is being invested in vital public services and the economy this year.”