Stormy waters on the horizon for the devolution of taxation

An annual Welsh Finance Bill is essential if we are to lay solid foundations for tax policy changes and raise the level of debate.

The devolution of taxation in Wales has got off to a good start. The legislation proceeded smoothly through the Welsh Assembly and the process was applauded by the participants for the openness and willingness to respond constructively to submissions on the proposals. These proposals being tax collection and management, the detailed proposals for a land transaction tax (LTT) and a landfill disposals tax (LDT).

However, stormy waters appear to be on the horizon.

At an early stage, there has been a clear determination to ensure that the tax system to be created would have uniquely Welsh features. As noted in the Tax Policy Framework, Welsh taxes should among other things raise revenue as fairly as possible, be clear, stable and simple, be developed through collaboration and involvement, and contribute directly to creating a more equal Wales.

The response to the introduction of a first-time buyer relief for SDLT (the equivalent of LTT for transactions in England) was both measured and innovative: raising the nil-rate band level for all residential purchasers avoided the complexity and administrative burden of introducing a relief targeted at purchasers who would need to show that they met a set of very specific criteria.

But the proposals for new taxes contain some very worrying features.

Take the Vacant Land Tax. It will require a degree of precision in the valuation that is likely to be difficult to achieve without undue costs of compliance. It is worth reflecting on why Betterment Levy, Development Gains Tax and Development Land Tax (to mention just three taxes aimed at capturing the development potential in the specified circumstances) have fallen by the wayside.

Furthermore, the social care levy report is arguably a poor place to start: the implicit mixture of arrogance and naivety is of concern to those who foresee major problems with the implementation.

With a long and porous land border with England, differences in the tax regimes in Wales and England will inevitably lead to many wishing to take advantage. Some opportunities will be relatively simple while others will, undoubtedly, be contrived.

At present, the Welsh tax legislation relating to LTT contains both targeted anti-avoidance measures and a General Anti-avoidance rule that differs from that England. Both are, as yet, untested. They will however, at the least, act as a deterrent – but how effective is yet to be seen.

A lesson from Scotland, where the tax devolution process started some years ago, is that there will inevitably be a need to respond to changes. The changes may be purely technical or they may be driven by policy imperatives (such as the possible introduction of a new relief or an extension to the scope of the charge). An example is the proposed reduction in the filing and payment period for SDLT from 30 days to 14 days (it should be noted that there is no suggestion that this will also be extended to LTT).

As regards technical issues, the tax legislation in both Wales and Scotland have many similarities to that in England (and Northern Ireland). Inevitably, the legislation is being regularly tested in the Courts (unsurprisingly, more frequently in England than is to be expected in Wales and Scotland). Where the outcome of litigation needs to be countered, corresponding changes in the legislation will follow. In Scotland, over the past year or so, it became clear that the interpretation of the legislation by Revenue Scotland differed from that of HMRC. This has in some cases driven a change to the legislation in Scotland. It is possible that a similar scenario may unfold in Wales.

In addition to the desire to introduce new taxes in Wales – such as the Vacant Land Tax, the Social Care Levy, the Disposable Plastic Tax and the Tourism Tax - there will be a need to manage those taxes already devolved and to respond to changes that may be necessary as a consequence of Brexit. It is likely that each of those possible taxes would necessitate a raft of powers for whatever body charged with managing, monitoring, collecting or enforcing them.

There is much to be said for introducing a more focused examination of the legislation as regards Welsh taxes. A Welsh Taxes Act (Finance Bill) would provide the flexibility to respond to technical developments and set the groundwork for any policy changes. It would also have the advantage of raising the level at which the debate takes place.

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