Welsh Tax forum reveals more and wider gaps between Wales and England – and the need to keep businesses growing in Wales

The CLA’s tax specialist, Louise Speke, comments on the work of a Conservative opposition-led forum, which has just reported on its review of tax in Wales.
Senedd 3

As Welsh newsfeeds continue to report crisis in the public finances – at Welsh-national and local level - a forum on tax in Wales, led by the Shadow Minister for Finance, Peter Fox MS, has published its first “end-of-term” report. Mr Fox has consistently contributed to the Senedd Cross Party Group (CPG) on Rural Growth’s inquiry into the rural economy this year – for which CLA Cymru has provided the Secretariat.

Scope of Welsh taxation

The Welsh government has little scope to use tax as a fundraiser as few taxes have been devolved to Wales and remain controlled by HM Treasury and the Chancellor. To date the only taxes that have been devolved are landfill tax and land transaction tax (the Welsh equivalent of stamp duty land tax). Income tax was only partially devolved in 2019, so that the Welsh Government’s powers are limited to the ability to vary the three income tax rates (basic, higher and additional). This means that the UK Government continues to decide the personal allowance and the income tax bands thresholds. In effect, the UK income tax rates are reduced for Welsh taxpayers by 10p with the Welsh Government deciding the Welsh rates for each band, which can be 10p or a different rate. So far, the Welsh income tax rates have remained the same as the UK rates but whether this remains the case after the Wales Budget in December remains to be seen.

Although the Welsh government has the power to introduce new taxes, this is subject to the need to submit a formal request to the UK Government for devolution of the legislative competence for any new proposed tax.

Wales has always had control over local taxes, which includes non-domestic rates (business rates) and council tax.

The Policy Forum

This forum has been important for CLA members because we have been the principal rural business representative on the group. Largely dominated by academics and representatives from policy think-tanks, we played a continuous and vital role in keeping the forum’s feet on the ground and focused on the big-picture of the raft of fiscal measures affecting businesses in rural Wales - notably compared with similar operations in England. A double-edged irony felt throughout the year, has been the simple fact firstly that the priority for any Welsh Government is to ensure public services are sustained and the books balance. Secondly, the understanding that while the Welsh Government has some capacity to pursue its own fiscal policies, to a great degree all roads lead to the UK Treasury in Westminster.

Wales must remain a good place to do business

The review by the forum covered the gamut of measures under consideration by the Welsh Government. A key concern was the need for fairness between Wales and England, rural businesspeople already face more taxes in Wales – it’s important, of course, for the Welsh Government to keep businesses in – and growing – in Wales.

Forum Findings

Income tax

Although it is an important source of revenue, the structure and banding-levels of Income Tax have been strategically aligned to England, unlike Scotland which has wider powers to change income tax rates and bands. This means that Scotland now has 5 income tax bands, higher top rates of tax and lower thresholds at which these top rates are paid. The public finance crisis places income tax on Welsh policymakers’ agenda and so the forum considered whether the income tax banding structure in Wales should be altered to better reflect the income structure in Wales. Changing the higher income tax rates may not raise additional finance for the Welsh government as there are fewer higher and additional-rate payers in Wales than in England. The forum concluded that caution was needed before making changes to income tax rates in Wales to avoid the impact on those in receipt of benefits and the risk that people drawn into higher bands will move across the border due to lower taxes.

Business rates

The forum’s conclusions recognised that reform of business rates was a big concern. It described the business rates system as “outdated and regressive” and considered alternatives such as a vacant land tax.

In recent years, we have responded to Welsh government proposals to create a vacant land tax, although no progress has been made to introduce this as permission to proceed has not been given by the UK government. A vacant land tax is intended to end land-banking and stimulate development. Our concern consistently has been to ensure that landowners are not penalised by a tax on their land where speculative planning permission has been obtained by a third party. Here we have a (sub)-urban solution which creates problems in the rural context. The tax forum has accepted that there needs to be some way to encourage land use without obstructing investment, greater sensitivity about fairness and in the best interests of responsible rural development.

The forum concluded business rates should be overhauled and replaced by a more targeted system for different types of property/business. Agricultural land and buildings are not subject to business rates so we will remain vigilant on any proposed changes that would change this. One possible unpalatable ramification could be the need for government rigorously to maintain property registers. Inevitably, the forum discussed different ways that the Welsh Government could support business: the extension of business rates holidays, reinstating the 100% relief for hospitality, leisure and tourism businesses, one-year relief and tapered approach for start-ups, for example.

Council tax

The forum concluded that there is a variety of flaws with the current system of council tax. The high number of households receiving relief indicates that the current system is not fit for purpose. The forum noted that many relief schemes are not well communicated, but I would add that rural communities often receive a poorer deal on services than their urban counterparts do. I’m still concerned that alternatives proposed in this forum, such as land value tax (LVT), will be set at levels beyond rural communities’ control, and managed at levels that do not reflect the services provided and local authority reinvestment into rural Wales will not improve. Any council tax incentives to invest in energy efficiency must reflect the nature of many traditionally built rural properties.

Rural businesses are often sidelined when considering tax measures

The proposed visitor levy received a unanimous hands-down from the forum as the “wrong tool at the wrong time”. This levy, a locally collected ‘tax’ is described by the Welsh government as a revenue raiser, may have a negative impact on visitor numbers and consequently businesses. The Welsh government’s stubborn refusal to listen concerns about this levy that have been raised by the CLA and others shows that it has little understanding of its fiscal efficiency: the likely revenue against the cost to the economy - or how this new levy fits with other Welsh taxes as a proportionate, fair system.

The Welsh government’s leading light for all policy is its net-zero imperative. The “Green Growth” agenda impacts on rural business and we haven’t held back in making the arguments that all proposals should consider the impact on rural businesses. Take vehicle fuel duty, for example. Fuel duty is falling as more people switch to electric vehicles and will have to be replaced. The question is whether this should be at a local, regional, or national level. The Welsh Government is beginning to look at road-user pricing at a local authority level which could lead to a patchwork of measures. While many argue that road-pricing is a fair approach and would encourage more use of public transport, this cannot be said to be true of rural areas. With no or limited access to reliable public transport those in rural areas could be disproportionately impacted by road pricing. This will also be highly problematic for farms and rural businesses that have to rely on their vehicles. The criticism of the 20mph speed limit in some areas offers us some sense of the sensitivities here. In addition, the electric vehicle infrastructure is immature, particularly in Wales and the forum recognised that there is a need for the Welsh government to ensure that the infrastructure is in place to support the transition to a greener economy.

Equally, energy-saving work on rural buildings is subject to frustrating difficulties. We have a VAT zero-rate relief on energy-saving materials (until 2027); however rural SMEs can’t enjoy the construction industry’s capacity to segregate elements of a contract between zero – and regular – rate work, because of HMRC’s approach to this. Whilst this difficulty was recognised by the forum, this is something that can only be resolved on a national basis and in advance of the Autumn Statement we have called on the Chancellor to change the rules to make the zero-rate on energy-saving materials more accessible.

Overall, more can be done to better support rural businesses and encourage more green investment. Clearly, an opportunity exists to coordinate, plan, spearhead and incentivise rural decarbonisation and green growth alongside the heavy investment into forestry and land management.

Wales’ tax system could be less penal, better targeted and smarter

The Shadow Minister’s tax forum was never going to solve the Welsh Government’s financial crisis, a large part of which reflects that wider UK and international economic issues. Whilst the forum did not believe that further devolution of taxes will raise more money for the Welsh government and public services, it did believe that Welsh government tax policy could be less penal and smarter in how it treats businesses and supports the rural economy.

However low the prospects may be for the Welsh Conservatives to form a government in Wales, the forum has given the Welsh Conservatives much to consider when formulating its policy ahead of the publication of the next manifesto – and, in the meantime – to challenge the Welsh Government. Further work and research will be done into the areas discussed by the forum to fully explore the possibility of a variety of reforms and tax alternatives – and we, the CLA will be there to contribute. Particular consideration will need to be given to supporting the growth of small rural businesses, the lifeline of the (rural) Welsh Economy. The establishment of a variety of grants as well as an emphasis on future-proofing the Welsh economy, ensuring businesses and workers have the tools to develop the economy in a manner fit for the 21st century will be essential.

Key contact:

Louise Speke
Louise Speke Chief Tax Adviser, London