Shepherd and Wedderburn: now the referendum votes are in, we need some joined-up thinking on tax

The Scottish electorate has voted ‘no’ to independence. However, the ‘no’ vote certainly doesn’t mean no constitutional change for Scotland, not least because of the UK government’s (and the Labour Party’s) pledge to further devolve power to Scotland.

Additionally, key provisions of the Scotland Act 2012 will come into force over the next two years giving the Scottish government additional powers and a referendum on the UK’s membership of the EU is proposed for 2017.

Changes in the legal and regulatory landscape will not change for Scottish businesses to the same degree that they would have done in in the event of a ‘yes’ vote.  Issues that were on the radar of many Scottish businesses in the lead up to the referendum and were causing some businesses to consider re-domiciling in the event of a ‘yes’ vote (including perceived uncertainty around currency and currency union, regulation and EU membership) will no longer be in such sharp focus.

Going forward, it is clear is that the increasing political pressure on the UK government will result in increased powers for the Scottish Parliament (and also potential constitutional reform in the regions) This has the potential to cause some movement of UK businesses between Scotland and England (the direction of travel perhaps depending on perceived advantages in terms of inward investment, growth and the tax landscape in one jurisdiction over the other).

Some Scottish businesses had incorporated English companies prior to the referendum with a view to re-domiciling as a hedge against a ‘yes’ vote, and it is possible that some businesses may still decide to relocate their registered offices to England so as to avoid any on-going uncertainty given the possibility of a Quebec-style “neverendum”.  However, it is worth bearing in mind that it is not possible, as things stand, for a company or limited liability partnership incorporated in Scotland to simply move its registered office to England (or vice versa).  Instead, a transfer of ownership or of assets and liabilities to a company incorporated in the desired jurisdiction would be required. This would have both practical and cost implications in respect of which legal advice should be obtained. Examples of issues which would have to be considered include third party consents which might be required for the transfer of contracts, and an analysis of the application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) in respect of transferring employees.

For certain types of corporate  – principally listed public companies – a scheme of arrangement, which requires a court process, is required in order to redomicile to another jurisdiction.  It remains to be seen whether legislation might now be introduced to streamline that process to make it possible for companies to re-domicile from Scotland to England (and vice versa) more quickly and easily, as some Scottish financial institutions were reportedly calling for prior to the referendum.

One particular financial devolved power to be aware of is a recent amendment to the Scotland  Act 2012 by which the Treasury has given increased borrowing powers to the Scottish government to borrow up to £2.2 billion, for capital expenditure purposes. The provision is not yet in force but if it does come onto the statute book, one means by which this could be achieved is by the issue of bonds in the capital markets. This raises the intriguing prospect of so-called Scottish “Braveheart” bonds being issued in the future, even though Scotland remains part of the UK, with an implicit UK guarantee.

Also on the horizon are changes to corporate taxes:  The Land and Buildings Transaction Tax, which replaces stamp duty land tax in Scotland, and the Scottish Landfill Tax will come into force next April, with the new tax rates expected to be announced very shortly.

The new Scottish rate of income tax will follow in April 2016, allowing the Scottish government to vary the rate of income tax on employment income and self-employed profits by up to 10% for Scottish taxpayers  – although in practice any differential in rates is likely to be much lower.  This will affect all employers with staff who are treated as Scottish taxpayers, as changes will be required to PAYE procedures.  Employers with tax equalisation policies will also need to seek advice.

It is likely that there will be further devolution of taxes to the Scottish government, with all the main political parties promising new Scottish tax powers.  It is to be hoped that all parties will continue to work towards a more effective and simpler tax system.

Louisa Knox, partner, Shepherd and Wedderburn