Committee give cautionary backing to Welsh Tax Acts (Power to Modify) Bill

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, yet, have a procedure equivalent to the UK Finance Bill for making changes to the Welsh Tax Acts.

As part of the committee’s inquiry on this Bill, it met with Lakshmi Narain, Chair of the CIOT’s Welsh Technical Committee, and John Cullinane, Director of Public Policy, CIOT, in February 2022, among other tax and economy experts. The CIOT and its Low Incomes Tax Reform Group (LITRG) also provided shared written evidence to the inquiry (the joint evidence is written as ‘CIOT’ in this blog for ease of reading).

In its report, the committee highlighted CIOT’s view that the default position is that tax legislation should be in primary legislation except in exceptional circumstances, and subject to proper democratic scrutiny by parliament, with secondary legislation ideally used only for administrative matters, and for the setting of rates. But the report also cited the CIOT as suggesting that there is currently a good case for a mechanism to enable amendments to be made in the manner set out in the Bill. This was predicated on the CIOT’s opinion that the ‘powers provide a reasonable balance between the competing needs of speed, scrutiny and responsiveness at this point in the development of Welsh devolved taxes’.

The report said the Welsh Government should give serious consideration to the next Welsh devolved tax being designed to fit within an annual finance bill process. This goes slightly further than the CIOT’s written evidence which recognised the challenges in introducing primary legislation to implement tax changes via an annual Welsh finance bill ‘as currently the volume of legislative change required is probably insufficient to justify an annual finance bill process in Wales’. The committee report says that the CIOT finds good reasons for a Welsh annual finance bill to be kept under review. The CIOT said legislative process should reflect the significance of the devolved tax system in raising revenue in Wales. The case for an annual Welsh finance bill will strengthen if devolved taxes provide an increased share of revenues to fund wider policy areas dealt with by the Welsh Parliament, the report quotes the CIOT as saying.

On stakeholder engagement on changes introduced via the Bill mechanism, the report notes CIOT’s feelings that consideration might be given to publishing the nature of any informal consultation after the regulations come into force in the interests of transparency. To aid transparency and comprehensibility of the law, particularly where regulations made under the power in the Bill are very complex or are due to come into force at short notice, the CIOT emphasised that it should be the norm to publish (ideally simultaneously) a consolidated version of the law as amended.

The committee regrets the lack of specific examples provided by the Welsh Government relating to how the regulation-making power delegated by this Bill would be used to amend the Welsh Tax Acts in practice.

This had led the committee to recommend that, prior to the debate on the general principles of the Bill, the Welsh Government provide examples of the specific circumstances in which it envisages the regulation-making power in section 1(1) being used to amend each part of the Tax Collection and Management (Wales) Act 2016 (other than Part 2), the Land Transaction Tax and Anti-Avoidance of Devolved Taxes (Wales) Act 2017 and the Landfill Disposals Tax (Wales) Act 2017.

It also advises the Welsh Government to review the wording of section 1(1), to ensure that the limitations placed on Welsh Ministers that any modifications must be ‘necessary or appropriate’ is meaningful, and that examples are provided to illustrate how this condition limits the delegated power in practice. And that the Welsh Government commits to including details of any consultation, or sets out detailed reasoning for not doing so, in the Explanatory Memorandum accompanying any future regulations made under section 1(1) of the Bill. ^A

On the appropriateness of making changes to tax laws retrospectively, witnesses such as CIOT voiced concerns about the proposal to give Welsh Ministers the power to apply tax law retrospectively and the uncertainty this may create. The CIOT accepted the need for retrospection to correct an obvious anomaly that is harming taxpayers or to correct deficiencies that emerge. But it also noted that retrospective effect in the Bill is not limited in its effect to the date of a prior announcement, suggesting that legislating retrospectively should give ‘due weight to taxpayers’ legitimate expectations’ and be ‘used with extreme care and justified in detail’.

In the report, the committee agrees with CIOT that ‘great care and a compelling case’ is required to legislate retrospectively, adding that issuing a clear warning to taxpayers and tax practitioners that the Welsh Government will legislate retrospectively is ‘crucial’. It led the committee to recommend that the Bill be amended so that the effect of section 2(1)(c), in respect of regulations made for the purpose set out in section 1(1)(c),^B is limited to no earlier than the effective date of the change to the predecessor tax.

The report recommends that the Bill be amended so that the effect of section 2(1)(c),^C in respect of regulations made for any of the purposes set out in section 1(1)(b) and (d), is limited to no earlier than the date of an announcement. It calls on the Welsh Government to specify that the date of that announcement is the date Welsh Ministers lay a written statement before the Senedd, and to require Welsh Ministers to bring forward an oral statement at the first plenary session after an announcement is made.

The report also recommends that the Bill be amended to require the policy statement on the use of the power to make regulations with retrospective effect in section 3^D to be laid before and approved by the Senedd, including any subsequent changes. The motion to approve the policy statement (and any subsequent changes) should not be moved until a responsible committee has reported.

On procedure for regulations, the politicians were warm to CIOT concerns that the ‘made affirmative’ procedure may limit scrutiny and therefore the opportunity to identify unintended consequences of the measure, suggesting that it would be ‘helpful to explore in what circumstances ministers envisage they may consider invoking this procedure’.

The report touched on post-legislative review, with the politicians interested in CIOT’s view that a lack of scrutiny places more weight on the importance of effective and routine post-legislative review of whether substantive measures are achieving their objectives at an acceptable cost, and states that the Senedd should hold the Welsh government to account accordingly.

The committee were also interested in the CIOT suggestion that consideration should be given to the inclusion of a ‘legislative sunset clause or mandatory reauthorisation’ to ensure changes to legislation made by the proposed power in the Bill remains appropriate. This would mean you do not get things remaining on the statute book ad infinitum, adding more complexity without the need for them ever having been reviewed.

Such views led the committee to recommend that the Bill be amended to place a duty on the Welsh Government to undertake a review of the operation and effect of the Act: two years after receiving Royal Assent; and on every fifth anniversary of receiving Royal Assent, with the findings of those reviews to be laid before the Senedd.

Additionally the report recommends that the Bill be amended to stipulate that the statutory reviews of the operation and effect of the Act by the Welsh Government include an assessment of the following: the nature and effectiveness of any regulations made under section 1(1) of the Act; the Act’s impact on taxpayers and devolved Welsh taxes; the continuing appropriateness of the regulation-making powers conferred on Welsh Ministers by the Act and the Welsh Tax Acts; and alternative legislative mechanisms for making changes to the Welsh Tax Acts and regulations made under them.

The Welsh Government’s pre-legislative consultation proposed the inclusion of a Senedd lock to restrict Welsh Ministers from exercising one of the proposed powers consulted on unless the Senedd agreed to unlock its use. But the CIOT’s view, that the reintroduction of a lock to restrict the use of the power in the Bill would defeat the object of enabling the Welsh Government to react quickly, was mentioned in the report. This has led the committee to recommend that the Finance Minister considers amending the Bill to include a minimum time period for scrutiny by the Senedd of regulations made under section 1(1).

The CIOT highlighted the interaction between the new power in the Bill to tackle tax avoidance and the existing power to counteract artificial tax avoidance arrangements under the General Anti-Avoidance Rule (GAAR) and noted the Welsh Government’s intention to use the power to close down any perceived opportunities for avoidance before they become widely exploited. The CIOT recognises the value of acting swiftly to close down artificial tax avoidance arrangements thereby helping to protect taxpayers who may otherwise participate in avoidance schemes without the full facts and knowledge of the law. CIOT told the committee: “We note also the SDLT experience where there has been a history of mass marketed avoidance schemes subsequently addressed through primary legislation although this has taken time.”

Separately, the Senedd members expressed disappointment with the lack of financial information presented in the Regulatory Impact Assessment. While the committee accept the difficulty in seeking to quantify the costs of future unknown changes to the Welsh Tax Acts, the nature of the Bill has resulted in the committee being unable to draw any meaningful conclusions on the financial implications of it.

Full list of recommendations in the report

Recommendation 1. The committee recommends that the Senedd agrees the general principles of the Welsh Tax Acts etc. (Power to Modify) Bill.

Recommendation 2. Prior to the debate on the general principles of the Bill, the Welsh Government provides examples of the specific circumstances in which it envisages the regulation-making power in section 1(1) being used to amend each part of the Tax Collection and Management (Wales) Act 2016 (other than Part 2), the Land Transaction Tax and Anti-Avoidance of Devolved Taxes (Wales) Act 2017 and the Landfill Disposals Tax (Wales) Act 2017.

Recommendation 3. the Welsh Government ensure that the limitations placed on Welsh Ministers that any modifications are ‘necessary or appropriate’ is meaningful, and that examples are provided to

illustrate how this condition limits the delegated power in practice.

Recommendation 4. The Welsh Government commits to including details of any consultation, or sets out detailed reasoning for not doing so, in the Explanatory Memorandum accompanying any future regulations made to the Bill.

Recommendation 5. The Bill amended so that the effect of section 2(1)(c), in respect of regulations made for the purpose set out in section 1(1)(c), is limited to no earlier than the effective date of the change to the predecessor tax.

Recommendation 6. The Committee recommends that the Bill be amended so that the effect of section 2(1)(c), in respect of regulations made for any of the purposes set out in section 1(1)(b) and (d), is limited to no earlier than the date of an announcement. And to specify that the date of that announcement is the date Welsh Ministers lay a written statement before the Senedd, and to require Welsh Ministers to bring forward an oral statement at the first plenary session after an announcement is made.

Recommendation 7. The Bill be amended to require the policy statement on the use of the power to make regulations with retrospective effect in section 3 to be laid before and approved by the Senedd, including any subsequent changes. The motion to approve the policy statement (and any subsequent changes) should not be moved until a responsible committee has reported.

Recommendation 8. The Minister must considers amending the Bill to include a minimum time period for scrutiny by the Senedd of regulations made under section 1(1).

Recommendation 9. The Bill be amended to place a duty on the Welsh Government to undertake a review of the operation and effect of the Act: two years after receiving Royal Assent; and on every fifth anniversary of receiving Royal Assent, with the findings of those reviews to be laid before the Senedd.

Recommendation 10. The Bill be amended to stipulate that the statutory reviews of the operation and effect of the Act by the Welsh Government include an assessment of the following: the nature and effectiveness of any regulations made under section 1(1) of the Act; the Act’s impact on taxpayers and devolved Welsh taxes; the continuing appropriateness of the regulation-making powers conferred on

Welsh Ministers by the Act and the Welsh Tax Acts; and alternative legislative mechanisms for making changes to the Welsh Tax Acts and regulations made under them.

Recommendation 11. the Welsh Government commits to providing full and robust Regulatory Impact Assessments for any future regulations made under the power proposed in the Bill

The April 2022 report is here.

Footnotes

A: Power to modify the Welsh Tax Acts etc

The Welsh Ministers may, by regulations, modify any of the Welsh Tax Acts and regulations made under any of those Acts if they consider that the modifications are necessary or appropriate for or in connection with any of the following purpose -

(a) ensuring that landfill disposals tax or land transaction tax is not imposed where to

do so would be incompatible with any international obligations;

(b) protecting against tax avoidance in relation to landfill disposals tax or land

transaction tax;

(c) responding to a change to a predecessor tax that affects, or may affect, the amounts

15 paid into the Welsh Consolidated Fund under section 118(1) of the Government of

Wales Act 2006 (c. 32);

(d) 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.

B: 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 (c. 32)

C: Regulations under section 1 may (among other things)— make provision that has retrospective effect, as long as the provision does not retrospectively impose or extend a liability to a penalty

D: Policy statement: regulations under section 1 that have retrospective effect

(1) The Welsh Ministers must publish a statement of their policy with respect to the exercise of the power under section 1 to make regulations that have retrospective effect.

(2) The Welsh Ministers must publish the statement before the end of the period of three months beginning with the date on which this Act receives Royal Assent.

(3) The Welsh Ministers may revise the statement, and if they do so, they must publish the revised statement.

Blog by Hamant Verma, CIOT Senior External Relations Officer

Do you agree with the recommendations in the Senedd Committee's report? Give your view to  [email protected]