Budget: Implications for Scotland’s construction sector

In his ‘Budget for recovery’, the Chancellor announced that an increase in corporation tax to 25% will take effect from 2023. He also revealed that businesses with profits of £50,000 or less, around 70% of actively trading companies, will continue to be taxed at 19% and a taper above £50,000 will be introduced so that only businesses with profits greater than £250,000 will be taxed at the full 25% rate.

At the same time, the reduced 5% VAT rate for the hospitality and leisure sector will continue for a further six months, before increasing to 12.5% for six months and then returning to the normal level of 20% in April 2022.

In a bid to start building the economy of the future, the Chancellor launched a new Recovery Loan Scheme which is open for the rest of this calendar year to businesses of all size and which comes with an 80% government guarantee.

A number of measures were announced to support growth across the UK including funding for three Growth Deals across Scotland (Ayrshire, Argyll and Bute, and Falkirk), and funding to support the North East of Scotland transition to a low carbon future.

Andrew Morrison, founder of AM Bid, said there were some examples of funding/expenditure that will find their way to opportunities for Scottish businesses.

He added: “The private housing sector is being further supported via mortgage guarantees for borrowers with a 5% deposit – more private housebuilding should also see more social housing being provided.

“Many of the announcements in the Budget will find their way into public sector contract opportunities. Given this, I would advise businesses to study the Budget statement and give early consideration to how they can take steps to grow back better. 

“For example, accessing specialist advice on how to bid successfully for public sector contracts will be very important for many businesses. 

“Securing public sector contracts helps sustain and create jobs.

“No doubt the Scottish business sector will now turn its attention to Holyrood to see how the Scottish Government plans to allocate the additional funding coming their way.”

Sir Vince Cable, of hydrogen infrastructure firm Element 2, welcomed the Chancellor’s commitment to invest in the Aberdeen Energy Transition Zone. 

He said: “The North East’s vision and ambition to create an energy transition zone, coupled with support from the UK and Scottish Governments, unlocks green energy potential.

“We are investing in prime locations in the North of Scotland, England and Ireland, and plan to deploy over 800 pumps onto the UK network by 2027 and over 2000 by 2030. This essential green infrastructure accelerates energy transition strategies.”

Association for Consultancy and Engineering (ACE) chairman Paul Reilly said: “Our members are at the heart of the digital transformation that will make the ‘better greener faster’ built environment investment the government aspires to a reality. The ‘super-deduction’ for business investment will support the investment in digital capability our firms needs to make. The increase in the apprentice fee will enable us to invest in the skills of young people so that they can be part of this revolution.”

David Alexander, joint chief executive officer of property lettings firm apropos, said the 5% deposit scheme was welcome but it also brought a potential ticking timebomb of negative equity, while the Corporation Tax hike was simply deferring a hit on property investment.

Mr Alexander said: “The proposal by the Chancellor to provide a government backed mortgage scheme for first time buyers with a 5% deposit sounds superficially appealing but is potentially very risky. Offering mortgages to individuals which lenders already regard as high risk has the potential to land people with future negative equity. The intention is undoubtedly well meant but the execution could result in many individuals acquiring unwanted and unsustainable debt in the years to come.

“Following the financial crash of 2008 additional stress tests and financial limits for mortgage approvals were introduced precisely to avoid another boom and bust in the housing market. This policy would appear to reverse this precautionary approach and introduce high value mortgages with little equity to support them. Even a slight dip in the market could result in negative values for many people thrusting them into a difficult financial position in a relatively short time. A further concern, however, is that this is a proposition which could threaten the stability of the UK housing market if there is a future dip in prices.”

He addd: “The announcement of a 6% increase in corporation tax (CT) is not unexpected and is tempered somewhat by not being implemented until April 2023 and only applying to companies with more than £50,000 annual profit. The tapering of the tax up to £250,000 when the full 25% is applied is also welcome in removing the largest liability from the smallest firms.

“But for those businesses with a large portfolio of properties and substantial profits this will be a concern. The two-year delay may also put off many large-scale property investors who will see the substantial hike in CT rates as unduly punitive when other international options are available. However, this is not quite the raid on the property market that many had expected, and I welcome the fact that he has not gone after capital gains tax (CGT) at the moment.”

David concluded: “The housing market has held up well during the pandemic and the Chancellor is clearly keen to maintain the momentum which has built over the last year. An approach which is sensible, measured, and cautious will not disrupt the property market and he has clearly left any major reorganisation of taxation of this sector on hold until calmer times.”

According to the Chartered Institute of Taxation, the income tax announcements confirm that from April, Scottish taxpayers earning more than £27,393 per year will pay more income tax than those in other parts of the UK. Below this amount, they will pay less, saving £21 per year.

However, the institute added that the Scottish Parliament agreed to its own income tax plans last week, and there is no reason to believe that these will change as a result of the announcements.

Alexander Garden, chair of the CIOT’s Scottish Technical Committee, said that From April 2022, the Chancellor’s decision to freeze the personal allowance until 2026 will apply to all Scottish income taxpayers. He said: “Scots who earn income from savings or dividends will also be impacted by the higher rate threshold freeze from April 2022, because income tax on these is set at a UK-wide level.

“It will be up to the Scottish Parliament to decide whether to replicate the Chancellor’s higher rate freeze in their own devolved income tax plans when they set their own Budget next year.”

Vishal Chopra, KPMG UK’s head of tax in Scotland, labelled the budget as a step in the right direction adding that it was structured around a three-part plan to support people and business, fix public finances and build the UK’s future economy.

Mr Chopra said that the lack of change to the rates of income tax, NIC, or headline rates of VAT was expected, while the freezing of income tax personal allowance and basic and higher rate thresholds will raise more than £319bn in additional tax revenues over this period.

He added that the budget announcement was silent on a number of key areas such as the reform of capital taxes which is widely expected to play a part in addressing the level of public borrowing. But, he said that further changes can be expected on Tax Day’ on 23 March when the Chancellor is to release a package of tax consultations.

Susie Simpson, head of private business at PwC Scotland, argued that the budget was “very much a continuing survival” one. Ms Simpson said the freezes on beer, wine and spirits duty, along with fuel were welcomed for a ‘beleaguered public’. At the same time, she argued many will be hoping to take advantage of the reduced rate of VAT for the hospitality and tourism sector when lockdown ends.

She added: “There was some careful and innovative thinking from Sunak in the form of a deferred corporation tax rise to 25% for the largest 10% of corporates from April 2023 but countered by a new, and potentially complex, marginal relief system to mitigate the impact on SMEs back to current rates in some cases.”

Dr Liz Camerone OBE, chief executive of the Scottish Chambers of Commerce, praised the budget saying that it would help Scottish firms plan with a level of confidence. She added that the extension of the VAT reduction for the hardest-hit sectors and investment incentives respond directly to its calls and will provide much-needed support to Scottish businesses.

However, Ms Cameron said: “Despite the widening of the self-employment support scheme, there are still too many businesses and individuals who have been unable to access any government support. They will require support too if they are to survive the difficult months ahead while the economy remains shuttered.”

Conversely, CBI Scotland heavily praised the new budget with director Tracy Black stating that the Chancellor had gone “above and beyond” to protect UK businesses and people’s livelihoods through the crisis.

She said: “Thousands of firms will be relieved to receive support to finish the job and get through the coming months. The Budget also has a clear eye to the future; to ensure finances are sustainable, while building confidence and investment in a lasting recovery.”