Vacant land tax must not add to current confusion

12 Nov 2018

CIOT Wales' Ritchie Tout on Welsh Government plans for a vacant land tax and the debate about housing supply. This first appeared in the Western Mail on Thursday 8 November 2018.

Finance Secretary Mark Drakeford has detailed the progress made to date in introducing a vacant land tax in Wales, a proposal that comes at an opportune moment when the wider and often dysfunctional operation of the housing market is the focus of much debate. However, the reality is that the powers devolved to the Welsh government cannot address fully the multi-faceted UK-wide issues around housing supply ‚ but there is still much the Welsh Government could do with the long-standing devolution of planning powers and the more recent devolution of fiscal powers available to it.

For many taxpayers and their advisers the prospect of yet another tax on land transactions is unwelcome because the taxes on land and property in the UK are already among the most complex to understand and apply. Taxpayers may find the range of taxes that apply in relation to UK land and property confusing: VAT, corporation tax and / or income tax and National Insurance contributions, Land Transaction Tax in Wales, capital gains tax, inheritance tax ‚ the list goes on. The myriad of taxes is, arguably, the source of much of the complexity. Numerous rules have been bolted onto an already complex system either to resolve specific technical issues, counter opportunities for abuse or in an effort to incentivise or disincentivise particular transactions. Rarely is the opportunity taken to look at the system as a whole. Will the Welsh proposal help or hinder?

A failure by Mr Drakeford to ensure that the tax is appropriately targeted, contains reasonable safeguards and is proportionate would result in significant problems for taxpayers and the tax authority.

Key questions that remain unanswered include at what stage the vacant land tax will be levied, and on whom. There may be multiple reasons why land, which has been identified as being suitable for development or granted planning permission, does not come forward, or is not developed as quickly as hoped. Framing the conditions for the charge will involve evaluating the reasons and considering the scope of any new tax, the need for exemptions or reliefs ‚ that inevitably add complexity ‚ and managing the interaction with other property-related taxes particularly council tax and business rates. When it comes to the charging structure, incentivising a change of behaviour will require a sufficient ‚ stick‚ or ‚ carrot‚ . An effective and efficient system of collection and compliance comes at a cost and that cost recovery will presumably need to be built into the vacant land tax charging scheme.

It is very welcome that in the Finance Secretary‚ s comments recently in the Western Mail, he has committed to ensure tax policy is developed in an open and transparent manner. Key is his observation that ‚ only through co-operation can we ensure we achieve our objectives without placing any unnecessary burden on responsible developers and land owners‚ . Taking the example of the two devolved taxes (LTT and LDT), the approach taken by the Welsh Government has been widely, and rightly, lauded.

The economic case for taxing land itself is very strong and there is a long history of arguments put forward in favour of, and against, a land value tax. Over the years numerous attempts have been made to specifically target the perceived excess profits accruing to property developers: Betterment Levy, Development Gains Tax and Development Land Tax, to name a few. Wales must learn the lessons from the failure of these taxes.

The failure of these taxes underlines the challenge. Sir Oliver Letwin‚ s Independent Review of Build Out published alongside the Westminster Budget recently recommends new planning rules for large sites in areas of high housing demand, including greater variety of housing, and new powers for planning authorities to close the gap between land that has planning permission (or has been allocated for housing), and actually completing housing developments. He argues that more distinctive settings, landscapes and streetscapes on larger sites can accelerate demand and hence improve overall build out rates

By Ritchie Tout, Vice Chair, Welsh Taxes Technical Committee Chartered Institute of Taxation