CIOT tells Senedd committee about its tax law scrutiny concerns

The Welsh Tax Acts Bill should allow changes to be made quickly to the devolved taxes to respond to changing external circumstances. It is controversial because the changes would be made through secondary, as opposed to primary, legislation. One of the reasons for this is that Wales does not, as yet, have an equivalent Finance Bill procedure for making changes to the Welsh tax Acts.

Primary, or secondary, legislation?

The Committee wants to understand the rationale for setting tax law through primary legislation. In particular it wishes to consider the arguments for changes to the Welsh tax Acts made via secondary legislation, the case for an annual finance Bill and process transparency.

Committee Chair Peredur Owen Griffiths (Plaid Cymru and photographed below thanks to the Senedd) asked John Cullinane why he thinks tax law should be set out in primary legislation, with secondary legislation only to be used for administrative matters. Cullinane said it is because primary legislation is, generally speaking, subject to more scrutiny and debate, and it is possible to amend it. Lakshmi Narain added that primary legislation has an in-built process under which many stakeholders and those affected are able to contribute.

Would primary legislation mechanisms, such as a dedicated fast-track or expedited Bill process, be a better way of making urgent changes to Welsh tax Acts than a proposal in this Bill? asked Griffiths. Cullinane understands that sometimes governments need to do things quickly but said CIOT’s instinctive reaction is that if the process is expedited, there is probably going to be less scrutiny. Narain added that from a ‘practical point of view’, the shorter the time period available the less likely it is that those who may be affected by any significant changes are going to be able to contribute to the process.

When should the Senedd consider CIOT’s idea for a finance Bill? asked Griffiths. Cullinane is not sure it is easy to specify an exact threshold of the volume of legislative change, but he said that the Welsh Treasury do not envisage asking for approval for substantive legislative change, even as often as once a year. This makes him comfortable it is below the level that it will be sensible to say there ought to be an annual finance Bill. He added: “I mean, arguably, even if there was going to be as few as one a year, why shouldn't that be scrutinised in the way that a Bill is? Certainly, if you're getting even two or three a year, I think it would then be sensible to allow the time for a proper process of scrutiny. Of course, at Westminster, I think this year's Finance Bill, which is generally viewed as a short one, is over 100 clauses. But then, to be quite honest, there isn't an awful lot or a satisfactory level of scrutiny of finance Bills at Westminster in recent times. So, I think a much lower number would be a reasonable threshold.”

Narain agreed with Cullinane and added that if you were ‘absolutely certain’ that there was going to be at least one change required each year, then that would be an argument in favour of having a finance Bill process in place. But if you are not sure, the key point is how quickly can you respond to changing circumstances. He said the process being suggested seems like a reasonable compromise, whereas introducing an expedited Act process does seem to be a ‘part way step towards saying, 'Well, we think you should have primary legislation, but we're going to actually cut corners,' and I'm not sure that's a satisfactory position to take’.

Griffiths moved on to ask how a legislative sunset clause or mandatory pre-authorisation could be used to ensure that a proposed legislative process for amending the Welsh tax Acts is appropriate. Cullinane said it would be an option to grant these new powers, but only for a limited period, subject to a possible renewal. And then at the time of renewal the legislators would have the opportunity to see how things have worked out before you granted that renewal. But he cautioned that more important than whether there is or isn't a sunset clause is that these things are kept under review, adding that in the UK Parliament there is a big tendency for the quantity of tax legislation just to grow and grow and grow because things are never reviewed after the event. Narain pointed out that it is much more important to ensure that you have a process that you are prepared to actually follow through with - either a mandatory review or a specific provision in the legislation that says, 'This terminates at a particular point.'
Into the unknown

Rhianon Passmore, Labour, is interested in the Bill being used to address potentially unknown future events. She asked for examples or potential scenarios where the use of these powers could be deemed controversial. Cullinane said it could be the case that the changes that are proposed to combat the avoidance might actually penalise, in some way, innocent taxpayers, and then the fact that there was an expedited process for getting these things through could be an unfair penalty.

Commenting on anti-avoidance legislation at UK level, Cullinane said a good practice that has emerged at Westminster is that sometimes ministers have announced, ‘As of midnight tonight, such-and-such a thing is going to prevented, and we’re going to backdate the legislation to today, so this abuse will not be possible any more'’, but then consulted about the exact wording of the counteraction. He said: “So, there are ways of mitigating that sort of controversy, and I think it's very reasonable that the Government wouldn't consult before acting against avoidance, because it's just giving people engaged in that activity advance notice, as it were.” Cullinane and Narain agreed that it is reasonable that secondary legislation would be an appropriate mechanism to make such significant changes to tax legislation.

Passmore asked how CIOT would define tax avoidance for the purpose of this Bill. Cullinane replied that it is very difficult to come up with a definition that guarantees that it is only really proper abuse that it is targeted and there is no way innocent individuals could be caught in the crossfire. He suggests you just have to accept that is a risk and try and mitigate it with the way the Government reacts, ‘because any tighter definitions are untried in a statutory context’.

Narain added that any mechanical definition is ‘almost certainly going to fail’ and you have to have a set of principles but ‘inevitably it is not going to be an easy thing to prepare’. He suggested the CIOT has found an effective way to deal with it, by working with other professional bodies to agree on Professional Conduct in Relation to Taxation rules which contain a series of standards.

On this theme, Narain said that the four purposes¹ that are set out in the proposed legislation are highlighting the key areas that the Welsh Government might need to respond quickly to. He thought trying to narrow it any further would be counterproductive.

Retrospective change

Mike Hedges, Labour, offered a couple of thoughts on tax matters outside the Welsh Government’s responsibilities. He suggested the answer to the problem of claiming money back that has been paid out in child benefit would be to ask everybody earning over £50,000 a year to complete a tax return, and therefore they would have to declare it. His second point was to ask why people need to do anything clever to reduce their tax return when all they have got to do is be paid via dividends, which is very difficult for people in the public sector but very easy in the private sector. Narain would not be drawn on much of that but observed that there are a number of moves in Making Tax Digital, with more information automatically being provided to HMRC. At some stage there will be a possibility that people will not be required to supply tax returns because all the information will have been accessed directly by HMRC from the original sources. But Narain added that, as with a lot of systems, the data is not sufficiently robust and accurate to be able to rely on it yet.

Hedges asked for views on the Bill enabling Welsh Ministers to make changes retrospective. Cullinane said: “The state shouldn't really change the ground rules against people's legitimate expectations, but, if a whole market had been operating one way and it was only held that another way was right because it was pushing some avoidance scheme, I do think it is reasonable for the state to be able to counteract that retrospectively. It’s never an area that makes people feel very comfortable, but I think it is a fact of life that you just can't be too purist about it.”

Hedges then mused on the explanatory memorandum note which stated that the Welsh Government would engage informally with key stakeholders on a case-by-case basis before and during the drafting of regulations to amend Welsh tax Acts. He asked if witnesses think that is appropriate, and whether they think that what comes out of that could be published. Cullinane said it is a reasonable thing to do in the circumstances and the outcome of that should be published later.

Scrutinising regulations

Peter Fox, Conservative, asked about use of draft and made affirmative procedures to approve regulations that amend the Welsh tax Acts and how effective these are in allowing stakeholders and the Senedd to conduct proper scrutiny? Cullinane said the ‘purist view’ would be that we'd prefer things to be in draft until they were actually properly democratically approved, but we'd have to acknowledge that there might be reasons why that might not be possible. Cullinane reflected that it is reasonable there should be alternatives and a lot goes down to how the Welsh Ministers use the powers and how they justify using them, or using one rather than another, in given circumstances. Narain added: “The concern I had, when looking at these things initially, was to say would 20 days, in the case of the draft affirmative, whether 20 days would provide stakeholders with sufficient time to be able to express their views in order to ensure that the Senedd has got the appropriate supporting evidence for any decision that it wishes to make. In the case of a made affirmative, it does seem to me that 60 days is adequate, and I can't envisage many instances in which those likely to be impacted wouldn't be able to express their views.”

The Welsh Government originally proposed a lock, or the use of a lock, prior to making regulations following a provisional affirmative procedure. This would require the Senedd to vote to unlock that procedure. Should this approach be incorporated in the Bill? asked Fox. Cullinane said it could defeat the object of enabling the Welsh Government to react quickly.

Cullinane and Narain were asked by Fox how important post-legislative reviews are to ensure measures are achieving their objectives, and how could reviews be implemented. Narain said: “in my many years of practice in tax, there have been so many provisions that have just have sat there on the statute book, and everything around it seems to change—business practices, commercial responses to it, interpretation, but there didn't seem to be very much of an appetite to want to actually look at the legislation again and say, 'Does it need to be revised in order to meet the objectives that were originally set for it?' And it just seems to me that having a process under which there is, at the very least, a review, even if we don't have a sunset clause, is absolutely essential to good policy making.”

In summary, Cullinane and Narain said they ‘totally understand’ why the Welsh Government would want this legislation.

The full session is here.

Notes

1. The Bill will give the Welsh Ministers ‘Henry VIII’ powers to modify the three existing Welsh Tax Acts which cover the tax collection framework, the Land Transaction Tax (LTT) and Landfill Disposals Tax (LDT).

The Bill specifies four limited circumstances where the Henry VIII powers could be used. These are:

• ensuring that LTT or LDT is not imposed where to do so would be incompatible with any international obligations;
• protecting against tax avoidance in relation to LTT or LDT;
• responding to a change to a predecessor tax that affects, or may affect, the amounts paid into the Welsh Consolidated Fund under section 118(1) of the Government of Wales Act 2006;
• responding to a decision of a court or tribunal that affects, or may affect, the operation of any of the Welsh tax Acts or regulations made under any of those Acts.

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By Hamant Verma, CIOT Senior External Relations Officer