Welsh Finance Bill unlikely in the near future

21 Jan 2022

The Senedd Finance Committee began its scrutiny of the draft Welsh Budget 2022-23 late last year (Dec 22) and later looked at the Welsh Tax Acts etc. (Power to Modify) Bill), with Welsh Government Finance Minister Rebecca Evans and officials from the Welsh Government. We learn that plans for Welsh Vacant Land Tax are going nowhere, and Evans is not sold on a Welsh Finance Bill.

Evans, who is Finance Minister in the minority Labour administration, told Committee Chair Peredur Owen Griffiths MS (Plaid Cymru) that the Welsh Government has ‘well-established’ tax principles that are about ensuring that taxes in Wales are ‘simple, clear, fair’ and that they also enable the government to respond to its responsibilities under the Well-being of Future Generations (Wales) Act 2015.

Draft Welsh Budget

The Finance Minister (photographed below thanks to Senedd) told Griffiths that the draft budget delivers on Labour’s commitment not to raise Welsh rates of income tax for as long as the economic impacts of the pandemic last. She cited the commitment within the programme for government to maintain the one percentage point increase to the higher residential rates of Land Transaction Tax (LTT) that are paid on the purchase of additional properties, such as second homes and buy-to-let investments, and that will then provide additional funding to invest in housing priorities. She said the increase to the landfill disposals tax rate in line with inflation from April 2022 is consistent with the UK landfill rates ‘and, of course, it limits then the risk of waste tourism’.

Griffiths asked about the timescales for longer term tax changes and reform. The minister said that, alongside the draft budget, she had published the annual tax policy report which is ‘really important’ in providing the full picture as to what the draft budget means. It sets out the latest progress against the five-year tax policy work plan published in November. But specifically, the budget delivers on the Welsh Government’s programme for government commitments, including the launch of the 14-week consultation on the local variation of LTT on second homes and holiday lets. It also provides resources to prepare for a consultation in autumn 2022 on the arrangements for providing local authorities with the ability to raise a tourism levy, and that consultation then will focus on exploring potential impacts from the proposals, and any considerations to make when implementing a levy. It also includes resources to take forward research into growing Wales’ tax base, ‘including how we can attract and retain people to work, study and live here in Wales’.

The minister told Conservative Peter Fox MS that the extended retail, leisure and hospitality relief scheme, in combination with existing permanent relief schemes, will ensure that over 85,000 properties are supported in paying their rates bills in 2022-23. That brings the total since the start of the pandemic to the provision of over £2.2 billion of support for ratepayers through the reliefs and the grants schemes. How are you planning to transition businesses from that support back into normality? asked Fox. Rebecca Evans said the future will still include the small business rates relief scheme but the fact that businesses now in Wales are receiving rate relief in those hardest-hit sectors is really significant.

Fox asked about preparedness to look at the revaluation of non-domestic rates for 2022. The minister replied the Valuation Office Agency (VOA) is ‘well advanced’ in its work to deliver on the revaluation for 1 April 2023. That will be based on market information and trends as at the antecedent valuation date of 1 April 2021, ensuring that the new rating list will take account of the impact of COVID-19 on rateable values. Over this year, the VOA will confirm the updated rateable value list, and then the Welsh Government will consult on any other decisions that are required in relation to the revaluation, and also into ongoing improvements to the non-domestic rates system. The Welsh Government is interested in improving the appeals system, she said. In response to the 2017 revaluation, the Welsh Government established transitional relief to assist small businesses whose entitlement to small business rate relief was adversely affected, and that scheme was fully funded by the Welsh Government. Following the 2023 revaluation, the Welsh Government will review the impact on the tax base and consider whether transitional support is appropriate going forward.

The minister said the process for a vacant land tax is a ‘painful and disappointing process’. Evans met Lucy Frazer, UK Financial Secretary to the Treasury, late in 2021 to understand what further information is required in respect of the request to devolve powers for a vacant land tax. Evans then received a letter from Frazer, which, she complained, does not move the process forward in any kind of meaningful way. Evans said: “We've provided the information outlined in the agreed process, which the previous FST had indicated was sufficient to proceed. However, the UK Government is now requesting information that actually can't be known until the Senedd passes legislation to introduce any new tax under the powers that we’re seeking. So, we find ourselves in a bit of a catch-22 situation here. I think that the current arrangements aren't working, and it's my view now that they do need to be reviewed and reformed. And I'm not the only person who thinks that. The Chartered Institute of Taxation said in a press release, just yesterday (21 December), that, 'the process for introducing new taxes in Wales has been fraught with difficulty’ [and CIOT added] 'recent experiences with plans to introduce a Vacant Land Tax have highlighted these challenges and it is hard to dispute Welsh Ministers’ claims that the process for devolving new tax powers to Wales is not working and in need of reform’.”

Evans said that, in 2022, the Welsh Government wants to launch a reformed and strengthened budget improvement and impact advisory group. The purpose of the group is to engage with key stakeholders on improving the budget process and also the tax processes, to ensure that the outcomes are aligned to the delivery of the budget improvement plan. She said: “The new group will support those discussions about the wider impact considerations of the budget, seeking then to align to the broader socioeconomic, cultural and environmental priorities of creating a greener, stronger and fairer Wales.”

Asked by Labour’s Carolyn Thomas MS about gender impact of the budget, Evans said that personal learning accounts were the first area in which the Welsh Government had started the journey on gender budgeting, and in 2022 they will continue to engage a great deal with Iceland and with Canada, who are further along on their journey. “Things are still at a pilot stage, it's exciting, it's new, but then we need to see how we embed this over time in a more fundamental way.”

Asked by Griffiths which budget decision kept her up at night with anxiety, Evans said the challenges of public sector pay, just because the Welsh Government's budget is exposed - around 50 per cent of the budget is exposed to pay in one way or another.

Welsh Tax Acts

The Committee then went into a debate about the Welsh Tax Acts etc. (Power to Modify) Bill, which seeks to introduce the power to enable future amendments of certain elements of tax legislation in Wales when required.

This single purpose bill will enable changes to be made to the Welsh Tax Acts by regulations where Welsh Ministers consider that such changes are necessary or appropriate and where they are required to have effect immediately or shortly thereafter.

The minister, Rebecca Evans, gave an example of why this bill is necessary: “Land transaction tax revenues generated by large non-residential transactions are potentially vulnerable to aggressive and concerted tax avoidance. So, in the period April to October 2021, for example, there have been 110 transactions where consideration given was more than £2 million, and so they have generated, in total, £52 million of revenues, given the rates that there are, and those are 73 per cent of the revenues generated by all non-residential transactions. So, of course, then, it would only take a small [amount] of avoidance of tax to significantly impact on the revenues in a relatively short period of time. So, that really is just an example of why we would need to have agile powers to respond to and to stop such avoidance activity with near immediate effect if it should occur. And also, there might be times when Welsh Ministers want to pass on the benefit of tax reductions to Welsh businesses or citizens as soon as possible.”

Evans was keen to say the powers would not be used for Welsh Government-instigated policy changes, only to respond to specified external circumstances. If the bill failed, she would have to look to other tools to respond to the external events; for example, an emergency bill might be one way, she said. The Bill seeks to provide Welsh Ministers with similar powers and abilities to those of the UK Government in relation to its ability to make immediate changes to its tax legislation, she believes.

Evans does not consider the timing is right to introduce an annual primary legislative route, such as a budget or finance bill, through which changes to Welsh tax acts can be made. She added: “A key consideration for the Welsh tax acts specifically is the volume of secondary legislation that these acts have so far generated, so landfill disposal tax and land transaction tax; that level of legislation isn't significant. However, as we develop more devolved taxes, hopefully in future having powers for example for a vacant land tax being devolved… either those that have predecessor taxes or new Welsh taxes, the case I think for an annual finance bill may strengthen, but it's still my view that at the moment, the case isn't made. But that said, I think even if we did have an annual finance bill, we would still need the powers that are provided in this bill, which enable us as Welsh Ministers to respond to external events that wouldn't necessarily coincide with a Welsh Government finance bill cycle.”

Carolyn Thomas MS asked what in the bill limits ministerial discretion in areas such as imposing further penalties on increasing tax liabilities?  Evans said the bill limits ministerial discretion in several ways: “Firstly, we have to be satisfied that any changes that Ministers want to make fall within one of those four purpose tests. Secondly, Welsh Ministers have to be satisfied that the changes are necessary or appropriate to achieve one of those four purposes, and the sole reason for these limitations was to constrain the discretion of the Welsh Ministers to legislate in these areas. Aside from the discretion, I think there are additional checks and balances in the form of Senedd scrutiny of the regulations.”

Thomas asked why the Bill confers powers on Welsh Ministers to protect against tax avoidance when there is already the general anti-avoidance rule enacted in legislation. So, if that legislation already exists, why would this Bill confer powers on the Welsh Government to protect against tax avoidance? Evans explained that for both devolved taxes, there is always the risk that there will be individual or mass-marketed avoidance activity that the Welsh Government and the Welsh Revenue Authority might want to stop with immediate effect. That could be because there is a lacuna or gap in the legislation that facilitates the avoidance activity or, based on UK experience, a need for clarity to the legislation to make it clear that the law operates in a manner that doesn't permit the avoidance activity. So, the general anti-avoidance rule is an important anti-avoidance tool available to the WRA to counteract instances of tax avoidance. However, it can only be used after the fact, where a specific avoidance scheme has been used to gain a tax advantage, so it doesn't prevent future taxpayers from exploiting the same avoidance opportunity in the future, whether intentionally or not. So, the new power would enable Welsh Ministers to change the law and close down any perceived opportunities for avoidance before they could become widely exploited.

Evans argued that retrospective tax legislation in relation to tax avoidance has been made by the UK Government over a long period of time and there have been a number of principles that have been developed over that time. “So, I think it's right then that Welsh Government should also make a statement on its approach to making retrospective legislation in relation to taxation. That will give taxpayers and their advisers clarity on when and how we intend to use the power provided in the Bill retrospectively.”

It would make sense for the legislation to be reviewed after the powers have been used a number of times, or in a number of different scenarios, agreed Evans.

We have quite ‘live’ recent examples of how we've worked with the WRA at pace to implement tax changes successfully, such as when we introduced the LTT holiday in July of 2020 in response to the coronavirus impact on the housing market, said Evans.

The transcript of the full session is here.

By Hamant Verma, CIOT Senior External Relations Officer