THE Scottish government’s plans to replace the council tax with a local income tax (LIT) seem doomed after Scotland’s public finance experts warned that the plans contain a £750m- a-year funding gap and should be ditched, writes Tom Gordon.

In the most damaging criticism yet of the plans, the Chartered Institute of Public Finance and Accountancy (Cipfa) and Society of Local Authority Chief Executives (Solace) said the figures do not add up.

Their report warns that as well as a funding shortfall there are questions over the policy’s legality. By removing local control over taxation, they warn ministers could “compromise” the existing agreement between councils and government on spending and fall foul of European legislation, which says local councils must have the ability to set local taxes.

They want ministers to extend the four-month consultation on LIT, which officially closed on Friday. They recommend a fairer council tax with more bands, possibly supplemented by a limited LIT.

Bob Ainsworth, the UK armed forces minister, last night said LIT would punish about 5,000 service personnel in Scotland whose council tax is largely paid by the Ministry of Defence. He had “extremely serious concerns” about the impact on morale.

Under government plans, the council tax will be scrapped in 2011 and replaced with a centrally set 3p rise on both the 20p and 40p rates of income tax. Ministers estimate that four out of five households will be better, or no worse, off as a result.

The consultation paper, issued in March, failed to say how much the new system will raise compared with council tax — described in the report as a “fundamental omission”.

Ministers later admitted that LIT will raise £281m a year less than council tax, but said that the gap could be bridged through efficient use of public funds. However, the Cipfa-Solace report says the true gap is £742m and it would take a tax rise of 4.5p to maintain present spending levels: “It is our view that the rate of 3p is insufficient to maintain current levels of service.”

The Scottish Chambers of Commerce branded LIT a tax on labour not wealth. It said that the tax would put Scottish firms “at a competitive disadvantage” to the rest of the UK, would frighten off inward investment and would be a “serious deterrent for high earners to work in Scotland”.

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