Welsh Tax Acts etc. (Power to Modify) Act 2022: explanatory memorandum - Part 1: Explanatory memorandum
Explanatory Memorandum incorporating the Regulatory Impact Assessment and Explanatory Notes.
A PDF download of this document will be available soon.
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1.1 The Welsh Tax Acts etc. (Power to Modify) Act 2022 (“the Act”) will introduce a power to enable future amendment of certain elements of tax legislation in Wales, when required. The Act confers a regulation-making power on the Welsh Ministers to enable them to modify the Welsh Tax Acts (and subordinate legislation made under them) in specific circumstances (for brevity, this document uses the label “the Welsh Tax Acts” to capture the Tax Collection and Management (Wales) Act 2016 (“the TCMA”), the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017 (the “LTTA”) and the Landfill Disposals Tax (Wales) Act 2017 (the “LDTA”) and the subordinate legislation made under those Acts). This regulation-making power will be subject to either a draft or made affirmative procedure, depending on the urgency of the regulations.
1.2 The Act seeks to balance providing the Welsh Ministers with a mechanism to respond to external events that impact on devolved taxes and the associated revenues whilst equally acknowledging the essential role of Senedd Cymru (“the Senedd”) in scrutinising the Welsh Government and the legislation it introduces.
2. Legislative competence
2.1 The Senedd has the legislative competence to make the provisions in the Welsh Tax Acts etc. (Power to Modify) Act 2022 pursuant to Part 4 of the Government of Wales Act 2006 ("GOWA 2006") as amended by the Wales Act 2017.
3. Purpose and intended effect of the legislation
Reason for the Act and explanation of its timing
3.1 Following the introduction of land transaction tax and landfill disposals tax in 2018, (known collectively as “the devolved taxes”) the Welsh Government has considered, with the assistance of its stakeholders, what the appropriate tools might be to ensure changes can be made to the Welsh Tax Acts at short notice in certain circumstances. This intervention is primarily needed to protect revenues available for essential Welsh public services. At present for example, every time there is a UK budget or fiscal event the Welsh Government takes the risk that there may be a change which impacts a devolved tax that results in a direct budgetary impact on Welsh Government resources and which the Welsh Ministers cannot react to in a timely manner.
3.2 The Welsh Ministers’ intended purpose in introducing this Act is to enable changes to be made to the Welsh Tax Acts by regulations where the Welsh Ministers consider that such changes are necessary or appropriate and where they are required to have effect immediately or shortly thereafter. Those changes will be permitted in order to respond to a number of external circumstances and where necessary in some cases retrospectively too. In summary:
- to ensure the devolved Welsh taxes are not imposed where to do so would be incompatible with any international obligations
- to protect against tax avoidance in relation to devolved Welsh taxes
- to respond to changes made by the UK government to ‘predecessor’ UK taxes (that is, one where we have an equivalent devolved tax - ‘predecessor taxes’ currently refers to Stamp Duty Land Tax and Landfill Tax – the UK equivalents for the taxes that are now devolved taxes in Wales) which affect, or may affect the amount paid into the Welsh Consolidated Fund (under section 118(1) Government of Wales Act 2006), and
- to respond to decisions of the courts/tribunals which affect or may affect the operation of the Welsh Tax Acts, or any regulations made under them.
3.3 The regulation making power will not be used to achieve routine policy changes to the devolved taxes. For such changes the Welsh Government will use powers that already exist in the Welsh Tax Acts or, where necessary, will introduce primary legislation. It is clear that the more significant the change is, the greater the need to make those changes in consultation with Welsh citizens and interested stakeholder groups, and in all cases with appropriate Senedd scrutiny.
3.4 The ability to make changes to tax legislation very quickly will enable the Welsh Ministers to respond rapidly and effectively to scenarios where immediate changes are desirable. An intervention of this kind may be appropriate where the Welsh Ministers need to promptly ‘close-down’ tax avoidance schemes or ensure compliance with international obligations, if required. In the case of tax avoidance, the Welsh Revenue Authority (WRA) already has a range of powers available to it and is actively using them to ensure everyone pays the right amount of tax and no-one gains an unfair advantage. In some cases, though, a legislative change may also be needed to provide further clarity or to tighten the application of the provisions in question. The ability to stop avoidance activity seeks to protect the revenues on which public services depend. As set out in paragraph 8.7 of the Regulatory Impact Assessment, the costs of not being able to halt avoidance activity as quickly as possible will depend on the activity targeted. It could amount to significant amounts of lost tax revenue.
3.5 To provide an example, our LTT revenues generated by large non-residential transactions are potentially vulnerable to aggressive and concerted avoidance attacks. In the period April to October 2021 there were 110 transactions where consideration given was more than £2 million. They have generated in total £52 million of revenues; 73% of the revenues generated by all non-residential transactions. It would only take a small number of the buyers in those transactions to seek to avoid the tax to significantly impact the revenues in a relatively short period of time. The Welsh Ministers need to have agile powers to stop such avoidance activity with near immediate effect should it occur.
3.6 The intended effect of the legislation is primarily to provide the Welsh Ministers with a proportionate mechanism to protect Welsh revenues if those revenues will be affected by external circumstances, for example, where the UK government introduces a change to a predecessor tax at short notice and with immediate effect, which could have implications for businesses, the property market, the environment and could also have a direct budgetary impact on the resources available to the Welsh Government through the block grant adjustment process.
3.7 The 2020 consultation paper: Tax Devolution: Enabling changes to the Welsh Tax Acts (“the 2020 consultation”) highlights the example of the introduction of the Stamp Duty Land Tax (SDLT) higher rates for additional dwellings in 2016 which increased the SDLT effort [footnote 1]. The higher rates in Wales raised around £60 million in 2018-19. The Welsh Government was only in a position to respond to this adjustment and introduce a similar regime via an amendment to the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017 (the “LTTA”) during its passage through the Senedd. Had this amendment not been possible, the block grant adjustment would have been far larger than the revenues from land transaction tax, resulting in a reduction to the overall resources available to the Welsh Government. In these types of scenarios, without the powers being introduced by the Act, the Welsh Government would either need to operate with a reduced budget or find alternative ways of raising such revenues to maintain existing resource levels.
3.8 Conversely, where the UK government makes changes which reduce UK tax revenues from SDLT, the block grant adjustment will decrease and the Welsh Government’s budget will increase. In these types of scenarios when tax reductions are made to UK predecessor taxes there may be a need to act quickly to reduce potentially undesirable distortions to markets which could harm businesses in Wales.
3.9 The above paragraphs outline a land transaction tax scenario, but the same principles (in relation to tax effort by a predecessor tax) will apply to all associated devolved taxes. Currently, there are two devolved taxes both with a predecessor tax: land transaction tax (“LTT”) which replaced UK SDLT, and landfill disposals tax (“LDT”) which replaced UK landfill tax.
3.10 The Wales Act 2014 amended the Government of Wales Act 2006 to provide for the establishment of devolved taxes and the disapplication of the predecessor UK taxes in Wales.
3.11 The Tax Collection and Management (Wales) Act 2016 established a clear and strong governance framework in Wales to support the effective collection and management of Welsh devolved taxes and also established the Welsh Revenue Authority (“WRA”). Following this legislation, the 2 devolved taxes were introduced in Wales in 2018 (The Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017 (the “LTTA”) and the Landfill Disposals Tax (Wales) Act 2017 (the “LDTA”)).
3.12 This Act is intended to provide an additional fiscal lever to respond to external circumstances which impact on our devolved taxes. Like every executive, the Welsh Government needs a proportionate and effective suite of tools to manage those tax powers strategically and effectively in order to protect taxpayers and the public finances. This Act will contribute to the drive for stable tax devolution by enabling the Welsh Government to protect its finances which are used to fund public services.
3.13 Tax devolution itself is a relatively recent constitutional change, with the devolved taxes only commencing operation 4 years ago. This Act is not the final word or the long term ‘answer’ to how we make urgent changes to our tax legislation, but rather a pragmatic step to take now as we move towards an architecture for making tax changes that is right for Wales.
Provisions of the Welsh Tax Acts etc. (Power to Modify) Act 2022
3.14 The Act confers a regulation making power on the Welsh Ministers to enable them to modify the Welsh Tax Acts (and subordinate legislation made under them) in specific circumstances. This is intended primarily to provide the Welsh Ministers with a proportionate mechanism to protect Welsh revenues if those revenues are affected by external circumstances. The specific parts of the Act and the reasons why they are considered necessary are set out below.
Section 1: Power to modify the Welsh Tax Acts
3.15 This section provides that the Welsh Ministers may by regulations (exercisable via either the draft or made affirmative procedure) modify the Welsh Tax Acts and regulations made under them. The exercise of the regulation making power is subject to four purpose tests which are intended to significantly constrain the use of the power. The purpose tests target those areas where it is anticipated that external events may require a response by the Welsh Ministers to protect the Welsh Government revenues and taxpayers. The Welsh Ministers must consider that the modification is either necessary or appropriate before using the power in response to that event and may only use the power for one or more of the following purposes:
- to ensure that landfill disposals tax and land transaction tax are not imposed where to do so would be incompatible with any international obligations
- to protect against tax avoidance in relation to landfill disposals tax and land transaction tax
- to respond to changes to ‘predecessor’ UK taxes (that is, stamp duty land tax or landfill tax) which affects or may affect the amount paid into the Welsh Consolidated Fund, and
- to respond to decisions of the courts/tribunals which affect or may affect the Welsh Tax Acts, or regulations made under them.
3.16 Any new devolved taxes created before the sunset clause applies (which will prohibit the Welsh Ministers from making further regulations using the power in section 1 - see paragraph 3.57-3.60) may be approved by the Senedd for inclusion in the list of Welsh Tax Acts. If this occurs, all 4 purpose tests would apply to the new devolved tax if there is a UK predecessor tax. If the new devolved tax does not have a predecessor tax, then only purpose tests (a), (b) and (d) will be relevant.
3.17 The following scenarios are intended solely to indicate the types of circumstances in which the regulation making power in section 1 could be used for each of the purpose tests. The examples do not identify any known issues in relation to the Welsh Tax Acts.
3.18 The intended effect is as follows:
Purpose (a): The Welsh Ministers may wish to make changes at short notice in order to ensure that the devolved taxes are not imposed where this would result in non-compliance with certain international obligations such as, for example, where a new trade deal or double taxation agreement is concluded with another country which has implications for the devolved taxes.
LTTA Part 5: Application of LTTA and TCMA to certain persons and bodies
3.19 Part 5 of the LTTA makes provision about the application of the LTTA and the Tax Collection and Management (Wales) Act 2016 to certain persons and bodies, including companies, partnerships and trusts.
3.20 It is possible that future treaty obligations could result in new entities, such as non-UK investment vehicles, requiring a similar treatment to similar UK entities (or be provided with specifically crafted rules) when buying property in the UK. Such changes could potentially meet the requirements of the purpose test in section 1(1)(a) where that equivalent treatment arose due to compliance with an international obligation.
LDTA Part 3: Taxable Disposals Made at Authorised Landfill Sites
3.21 Part 3 of the LDTA makes provision about how the tax is to be charged on taxable disposals at authorised landfill sites, including the persons on whom the tax is chargeable, the calculation of tax, reliefs, registration and accounting requirements, and payment, recovery and repayment of the tax.
3.22 There are a number of Parts of the LDTA which contain definitions arising from the UK’s past membership of the EU. An example is the definition of non-hazardous waste (requirement 5 of section 16(1) LDTA). It is possible that future trade agreements and treaties could contain requirements for common definitions between the contracting countries or entities, which do not correspond with the existing definitions. In this scenario, section 1(1)(a) could be used to ensure compliance with international obligations.
Purpose (b): The Welsh Ministers may make legislative changes to protect against avoidance activity that can then be stopped with immediate effect. This includes cases where the Welsh Revenue Authority and/or the Welsh Government consider that increased clarity in the legislation will put beyond doubt the intended application of the legislative provisions, and potentially benefit taxpayers by stopping the promotion of avoidance opportunities that do not actually exist. Such action has been taken by the UK government to protect tax regimes and taxpayers in the past and the Welsh Ministers wish to be able to take similar action.
LDTA Part 2: The Tax and Taxable Disposals
3.23 Part 2 of the LDTA provides the rules in relation to taxable disposals and exempt transactions, setting out the conditions that must be met for there to be a taxable disposal of waste to landfill. There are a number of concepts that are key to the operation of the tax, for example, disposal of the material as waste, and that the use of the material which is incidental to its disposal by way of landfill does not negate an intention to discard material. It is possible that changes using the power in the Act could be needed to counter avoidance activity by, perhaps, seeking to exploit a perceived lacuna in those definitions to seek to dispose of waste by landfill without incurring a tax charge. In these cases, the Welsh Ministers may use section 1(1)(b) to rectify the issue and prevent further avoidance.
LTTA Part 3: Calculation of tax and reliefs
3.24 Part 3 of the LTTA makes provision in relation to the calculation of tax, the bands and tax rates, and reliefs available (including the reliefs Targeted Anti-avoidance Rule). The rules relating to the specific reliefs are in Schedule 2 (so far as they apply to pre-completion transactions) and Schedules 6 to 22. Any perceived avoidance opportunities could be closed quickly by making changes using the regulation making power in this Act and the made affirmative procedure. This would prevent, at pace, new entrants into the avoidance arrangements seeking to exploit the reliefs.
Purpose (c): The Welsh Ministers may make changes in response to changes made by the UK government to predecessor UK taxes which will affect the Welsh block grant adjustment and therefore the revenues available for essential public services
LTTA Part 6: Returns and payments
3.25 Part 6 of the LTTA makes provision about when returns and payment of the tax are to be made including the deferral rules and procedures. The UK government could change their rules on notifiable transactions. For example, currently, freehold transactions with consideration of less than £40,000 are not a notifiable transaction in both SDLT and LTT. If the UK government were to increase that figure, that would represent a tax simplification for SDLT taxpayers as fewer transactions would result in a filing obligation. However, there would also be tax liability consequences too as an increase in the notification figure would, without other changes, result in tax not being paid under the respective higher residential rates rules. The change by the UK government may therefore result in a change to the amounts paid into the Consolidated Fund, thus triggering purpose test 1(1)(c). In this instance, the Welsh Ministers may choose to replicate the UK changes to reduce the filing obligations (subject to Senedd approval) but limit it so that it applies only to those transactions liable to the main residential rates of LTT.
LDTA Part 2: The Tax and Taxable Disposals
3.26 Part 2 of the LDTA provides the rules in relation to taxable disposals and exempt transactions, setting out the conditions that must be met for there to be a taxable disposal of waste to landfill. There are a number of concepts that are key to the operation of the tax, for example, disposal of the material as waste, and that the use of the material which is incidental to its disposal by way of landfill does not negate an intention to discard material.
3.27 It is possible that the UK government could make changes to the predecessor tax that result in a tightening of the definitions so that more activity came within the scope of their tax, perhaps even creating what would amount to an additional condition for LDT purposes. This could impact both on the amount paid into the Consolidated Fund (as the predecessor tax would be making a greater tax effort than previously), and could also impact on the environment as Wales became a cheaper place to dispose of waste. Accordingly, the Welsh Ministers may consider making regulations that meet the purpose test in section 1(1)(c) to lessen the impact on the Consolidated Fund. Whilst a number of regulation making powers are already provided to make such changes, they are subject to the draft affirmative procedure and cannot be made with retrospective effect (back to the date of an announcement by the Welsh Ministers). The powers within the Act will enable regulations to be made via the made affirmative procedure, and, where the relevant conditions are met, also allow regulations to have retrospective effect.
Purpose (d): The Welsh Ministers may make changes if a court or tribunal decision identified an issue that the Welsh Ministers considered could benefit from legislative change (including decisions relating to the UK predecessor taxes, other taxes, or other laws that affect the devolved taxes), or to provide greater clarification of the law.
LTTA Part 6: Returns and payments
3.28 Part 6 of the LTTA makes provision about when returns and payment of the tax are to be made including the deferral rules and procedures. A court decision could find that any aspect of the rules did not operate as the WRA and many advisers believed. Clarification of the rules may be necessary to ensure the LTT regime continues to operate in a cohesive manner. That clarification could be required with near immediate effect. For example, any finding that changes taxpayers existing filing obligations or what constitutes a notifiable transaction could undermine the effective self-assessment of LTT. The powers in this Act would enable any such clarification, if considered necessary or appropriate, through triggering the purpose test in section 1(1)(d) and this could be actioned at pace if considered urgent using the made affirmative procedure.
TCMA Part 5: Penalties
3.29 Part 5 makes provision for and in connection with the imposition of penalties in relation to devolved taxes. It is most likely that the need to use the power in the Act will arise for this Part as a result of court decisions. For example, a court decision could find that the meaning or application of ‘special circumstances’ or ‘reasonable excuse’ is narrower than originally was considered reasonable, so that either taxpayers will not be provided with penalty reductions in appropriate circumstances, or, conversely, that the reductions should be provided in many more situations so as to render the penalty regime ineffective. The use of the power within section 1(1)(d) in these types of circumstances would enable clarity of the law for taxpayers and WRA alike, ensuring that the rules operate effectively.
3.30 The purposes are limited to ensure that use of the power is restricted, recognising the balance between providing the Welsh Ministers with ability to respond to external events in a flexible and agile way, and the importance of Senedd scrutiny of the Welsh Ministers’ actions.
Section 2: Regulations under section 1 - supplementary
3.31 Section 2 provides that regulations may make changes to the devolved taxes including imposing changes to the amounts payable by taxpayers. Section 2 also permits regulations made using the power in section 1 to impose tax and impose or extend prospective penalties and those regulations may also have retrospective effect. However, section 2 sets out that a new penalty or a change to an existing penalty may not be imposed retrospectively.
3.32 The Welsh Ministers consider it is necessary for there to be the potential to make legislative changes retrospectively, where considered necessary or appropriate, on a case-by-case basis. This is because the ability to respond to external events that may impact the Welsh Government’s revenues mean that the legislation needs to have effect from a date earlier than the regulations are made. For example, in the case of avoidance activity it may be appropriate for the effect of the legislation to apply from a date when the Welsh Ministers announced that changes would be made to combat a particular avoidance activity. In relation to changes to the predecessor taxes, the Welsh Ministers may announce that changes will be made to the devolved taxes to increase or decrease the tax effort, and that it is desirable for those changes to have effect from an earlier date than the regulations are made when they comply with the rules on making retrospective changes.
3.33 Section 2 introduces a restriction which prevents regulations made by the Welsh Ministers which have retrospective effect from applying from a date further back than the date the legislative change was warned or announced, either by a ministerial oral or written statement. The restriction will only apply in cases where there is a ‘negative’ tax impact (that is, where there is any new liability or increased liability to land transaction tax or landfill disposals tax) on a taxpayer.
3.34 However, the restriction will still allow the Welsh Ministers to use the power to make changes with retrospective effect further back than the date of any announcement where that change reduces the tax charged. For example, if responding to a UK Budget change this would ensure that Welsh taxpayers can benefit from the reduction at the same time as taxpayers in England.
3.35 Section 2 also restricts the ability to reduce or withdraw an entitlement to a tax credit for LDT purposes retrospectively only as far back as the date of a ministerial announcement (either by an oral or written statement). These restrictions do not apply where the effect of the regulations is to increase or introduce a new tax credit into the LDT regime.
3.36 It is recognised that the use of retrospective legislation is controversial and accordingly section 3 places a duty upon the Welsh Ministers to publish a statement on the use of the power to make regulations with retrospective effect (see paragraph 3.42).
Tax Collection and Management (Wales) Act 2016
3.37 Section 2 sets out that regulations under section 1 may not modify the provisions of Part 2 of the Tax Collection and Management (Wales) Act 2016 (TCMA). The intended effect is to carve out the provisions which established the WRA. It is not anticipated that the Welsh Ministers would need to respond at short notice to changes to the establishment, membership and operation of a non-ministerial department of Welsh Government such as the WRA. These would be considered routine policy changes which may be addressed over a longer period of time likely through primary legislation.
3.38 Section 2 also prohibits regulations made using the power in section 1 from making changes to any rules that relate to the investigation of criminal offences. Sections of the Welsh Tax Acts provide the Welsh Ministers with powers to make amendments to certain UK legislation by regulations.
Amending tax rates and bands of devolved taxes
3.39 Section 2 also sets out that regulations under section 1 may not modify regulations specifying tax bands and tax rates for land transaction tax (sections 24(1) and paragraphs 27(4) and 28(1) of Schedule 6 to the Land Transaction Tax and Anti Avoidance of Devolved Taxes (Wales) Act 2017) and landfill disposals tax (sections 14(3), 14(6) and 46(4) of the Landfill Disposals Tax (Wales) Act 2017). The intended effect is to carve out the LTT and LDT rates and bands regulation making powers as these are already subject to the made affirmative procedure, and so immediate changes can already be made to these provisions. These powers have been used a number of times since the 2 devolved taxes started operating in April 2018 and are considered to be operating effectively. This also has the effect of further narrowing the scope of the made affirmative power in this Act to make changes to the Welsh Tax Acts.
Amending existing scrutiny procedure of Senedd Cymru in relation to the Welsh Tax Acts
3.40 Section 2 sets out that regulations under Section 1 may not alter any existing scrutiny procedure of Senedd Cymru relating to the making of a statutory instrument under any provision of the Welsh Tax Acts. This restriction will apply to all regulation making powers, whenever they were inserted into the Welsh Tax Acts. This will include those that exist already and any subsequently created by any means.
3.41 For example, regulations already subject to the draft affirmative procedure within the Welsh Tax Acts will not be able to be changed to be subject to the made affirmative procedure.
Section 3: Policy statement - regulations under Section 1 which have retrospective effect
3.42 Section 3 sets out a duty on the Welsh Ministers to publish a statement on their approach to the making of regulations which have retrospective effect. The statement must be published before the end of the period of three months beginning with the date of Royal Assent. An updated draft of that statement has been published at Stage 3 and a final version will be published in line with the statutory requirement.
3.43 Examples of when the Welsh Ministers may consider making regulations with retrospective effect include, but are not limited to:
- where a change is made by the UK government that has immediate effect and provides a tax, and therefore commercial, advantage to entities liable to the predecessor tax,
- where a change is made by the UK government that has immediate effect and increases amounts of tax raised by a predecessor tax which will have a material effect on the block grant adjustment,
- where avoidance needs to be halted,
- where a court decision means the legislation may not operate as intended by the Senedd when it was enacted, and
- where regulations have been made using powers in the Act (either by draft or made affirmative procedure) and the Welsh Ministers wish to amend the effect of the regulations, so that the changes have effect from the same date that the original regulations had effect.
3.44 The use of legislation with retrospective effect will normally be limited to cases where the impact of the regulations is to confer a benefit to Welsh taxpayers. To provide an example, if the Welsh Government wanted Welsh taxpayers to benefit from a reduction in their tax liability from the same date that a similar change was introduced in England (be that as a result of adopting the same or a different policy), or, where the tax’s compliance with international obligations is considered appropriate before the date the regulations were made.
3.45 Where liabilities are increased by retrospection, and taxpayers could have reasonably expected retrospective changes to be introduced, the Welsh Ministers may make regulations that increase a taxpayer’s liability. For example, where tax avoidance is identified, Ministers may announce that the scheme will be closed down through future regulations from the date of that announcement. However, where the regulations create or increase a liability to a devolved tax, they may only be made with retrospective effect to the date the Welsh Ministers have made an oral or Written Statement to the Senedd. The same restrictions also apply where the regulations reduce or withdraw an entitlement to a tax credit for LDT purposes.
Section 4: Procedure for regulations made under section 1
3.46 Section 4 sets out that the power to make regulations under Section 1 is exercisable by statutory instrument. The Act will permit the Welsh Ministers to make regulations using either the draft or made affirmative procedure. The Welsh Ministers will seek to use the draft affirmative procedure where possible, meaning the regulations can only come into effect once the Senedd has approved the making of them. The Welsh Ministers will use these regulations where there is less immediacy required and there is time for the Senedd to approve the regulations before they are made.
3.47 However, the Welsh Ministers may use the made affirmative procedure where they consider it necessary by reason of urgency (for example where the regulations will need to have effect immediately or shortly thereafter, and so before a draft affirmative set of regulations could be approved by the Senedd). This will ensure that changes may, where appropriate, come into force as soon as the regulations are made, whilst awaiting Senedd approval. That approval must be given within a maximum period of 60 days (calendar days beginning with the day on which the regulations are made, but excluding any periods during which the Senedd dissolved or in recess for more than 4 days) to enable those regulations to remain in effect. A full justification for the need to act urgently and introduce a change through made affirmative regulations will be set out in the Explanatory Memorandum to those regulations.
3.48 The regulations subject to the made affirmative procedure have provisional effect until either the Senedd vote or the regulations fall as a result of the Senedd vote not taking place within the required 60 day period. If the Senedd approves the regulations, they will then have permanent effect.
3.49 For both draft affirmative and made affirmative regulations, the intention is that the scrutiny period provided strikes the right balance between the desire to provide good scrutiny and to ensure that legislative certainty is provided to the changes contained in the regulations. The Welsh Ministers will propose a timescale before the vote that reflects both the date by which the regulations need to come into force by, the complexity of the issues involved and length of time needed to provide suitable scrutiny, and the desire for early certainty to be provided to taxpayers (and the number of taxpayers impacted).
3.50 To ensure sufficient time for Senedd scrutiny, any motion to approve regulations made under the made affirmative procedure cannot be considered and voted upon by the Senedd until 28 days has elapsed, from and including, the date of making the regulations. The 28-day period does not include any period during which Senedd Cymru is dissolved or is in recess for more than 4 days.
Section 5: Regulations ceasing to have effect - supplementary
3.51 Section 5 of the Act sets out what happens where regulations made under the made affirmative procedure cease to have effect as a result of having failed to obtain the Senedd’s approval. The failed regulations will have effect during the period from the date upon which they come into force until they are rejected or the expiry of the 60-day period. Any new tax liability or increased tax liability introduced by the failed regulations will be treated as if it never existed, and any withdrawal or reduction of an entitlement to a tax credit will also be treated as if it never arose. Similarly, any liability to a penalty or to an increased amount of a penalty which occurred as a result of the failed regulations and which was incurred whilst the failed regulations were still in force, will be treated as if it never arose.
3.52 Section 5 also makes provision for situations where actions may have been carried out as a direct result of the failed regulations. For example, where inspections of premises or examination of documents have taken place during the period when the regulations were valid. In those cases, any actions taken remain valid, despite the failed regulations.
3.53 In all cases the intention of section 5 is to ensure that the risk of using the made affirmative procedure is to be borne by the Welsh Government alone and not by Welsh taxpayers, who are to be protected against challenges relating to anything done, or not done, in reliance on the failed regulations during the period that the failed regulations were in force.
Section 6: Review of operation and effect of this Act
3.54 The Welsh Ministers will be placed under a duty to review the operation and effect of the Act and publish the conclusions of that review within 4 years of the date that the Act came into force (the day after the Act received Royal Assent). The review is to be a single obligation and no further review of the legislation is required.
3.55 Following the publication of the conclusions of the review and before the five-year anniversary of the Act coming into force, the Welsh Ministers will publish a statement confirming whether the regulations permitted by section 7 of the Act to extend the lifespan of the regulation making power (up to a maximum extension date of 30th April 2031) will be made or not.
3.56 The review must include an assessment by the Welsh Ministers of any alternative legislative mechanisms for making changes to the Welsh Tax Acts. Furthermore, as part of the review, the Welsh Ministers must consult both the Senedd and such other persons that the Welsh Ministers consider appropriate.
Section 7: Expiry of the power under section 1
3.57 The inclusion of a sunset clause will prohibit the Welsh Ministers from making further regulations using the power in section 1 five years after the date that the Act came into force. However, section 7 provides a single opportunity for the Welsh Ministers to make regulations, allowing the power within section 1 to continue in force up to 30th April 2031. Section 7 also provides that the regulations to delay the expiry of the power are exercisable by statutory instrument and are exercisable only once.
3.58 The regulations providing for the extension of time to the power provided by section 1 are subject to the draft affirmative procedure (a draft of the regulations must be laid before the Senedd and approved before they can have effect).
3.59 Furthermore, the regulations cannot be laid in draft before the conclusions of the review have been published. Nor can the Senedd approve the regulations after the initial five-year period has passed.
3.60 Finally, the expiry of the power provided in section 1 does not affect any of the regulations made by the Welsh Ministers before the expiry of the power. That is, those regulations will continue in force following expiry of the Welsh Ministers’ ability to make new regulations.
Implementation and delivery
3.61 The Act provides for implementation through enabling the Welsh Ministers to make subordinate legislation and this power is summarised in Table 1 of this Explanatory Memorandum.
3.62 As set out in paragraph 3.54-3.56 the Welsh Ministers will be placed under a duty to review the operation and effect of the Act and the use of the power to make regulations four years after the legislation has commenced.
3.63 This Act came into force on the day after the day on which it received Royal Assent.
3.64 The Act applies in relation to Wales.
Consultation on proposals to enable changes to the Welsh Tax Acts
4.1 The 2020 consultation paper: Tax Devolution in Wales - Enabling changes to the Welsh Tax Acts (“the 2020 consultation”) was a Welsh Government consultation developing devolved tax arrangements in Wales. The 2020 consultation sought views on whether the Welsh Ministers have the appropriate tools to ensure they can make changes to the Welsh Tax Acts at short notice in a number of circumstances. It set out the Welsh Government’s proposal to provide the Welsh Ministers with flexible and proportionate powers, to make changes to the Welsh Tax Acts, subject to appropriate Senedd scrutiny. The consultation proposed providing the Welsh Ministers with 3 powers to respond to external circumstances in which changes may need to be made immediately, or very quickly, to the Welsh Tax Acts.
4.2 The 2020 consultation also set out a proposal for a Senedd “lock”. This “lock” was intended to be applied to the use of the regulation making power in certain circumstances as a way of responding to concerns that the power was unusually broad. The “lock” required a Senedd vote to unlock the use of the power to make regulations. This would mean that the general principles of the regulations would be scrutinised before they were drafted.
4.3 Views on the 2020 consultation were invited as part of a consultation period which began on 16 July 2020 and ended on 15 October 2020. The consultation was publicised via Twitter and an email circulation list to over 90 individual Welsh Treasury stakeholders, and to key representative bodies.
4.4 The Welsh Government held several online stakeholder engagement events and webinars during the consultation period, including with the Chartered Institute of Taxation’s Welsh Technical Committee, and a wider technical briefing also hosted by the Chartered Institute of Taxation (attended by around 200 delegates). A working group session was also held with the Institute of Chartered Accountants in England and Wales, and with the UK government and devolved administrations.
4.5 The level of interest in the consultation was reasonable given this was a small, technical consultation. The responses came from 4 individuals, and from four organisations. Two of these were professional bodies, one an academic institution, and one a local government association. Responses came from respondents in Wales, or the Wales branch of UK-wide organisations.
4.6 The Consultation – summary of responses sets out that stakeholders were broadly supportive of the principle of using regulation making powers if specific external circumstances impact on the Welsh Tax Acts. They noted in particular the vulnerability of devolved taxes, and revenues, to tax changes made at the UK level to predecessor taxes. However, it was suggested that strict criteria, such as the Senedd lock, should be in place before the powers may be used. This was considered necessary as the use of the power was open ended and could be used to apply to unspecified unknown or undefined ‘other circumstances of exceptional need’.
4.7 Following further reflection, the Welsh Government determined that the use of the power ought to be restricted and that the practical operation of such a lock is challenging. Paragraph 3.15 of this Explanatory Memorandum sets out that the exercise of the regulation-making power will be subject to four purpose tests which are intended to constrain the use of the power. The modification must be considered either necessary or appropriate and can only be exercised to modify the Welsh Tax Acts (or related subordinate legislation) for the specified, limited purposes set out in the Act.
4.8 The original policy intention as set out in Chapter 3 of the 2020 consultation was that there should be three regulation-making powers to enable the Welsh Ministers to amend the Welsh Tax Acts (or subordinate legislation made under those Acts).
4.9 ‘Power 1’ was to enable the Welsh Ministers to make changes to legislation to stop avoidance or evasion activity, comply with international obligations where required, or deal with other circumstances of “exceptional need”. This was intended to cover unknown future situations (‘unknown unknowns’) but also to capture situations such as a need to make changes to legislation where there has been an adverse court decision.
4.10 In line with consultation responses, ‘evasion’ has been removed as it was considered unnecessary given that this would already be an offence under the existing law, and ‘other circumstances of exceptional need’ has now been removed, with the purposes for making the regulations specifically covering court and tribunal decisions only. It is considered not appropriate to use regulation making powers for any undefined or specified circumstances.
4.11 ‘Power 2’ was intended to provide the Welsh Ministers with a power to make changes where they consider it to be expedient in the public interest to do so. The power could therefore have been used to make changes of any type to any provision of the current Welsh Tax Acts and related subordinate legislation. It was intended, in particular, to provide the Welsh Ministers with a route to be able to make changes to the Welsh Tax Acts in response to changes made by the UK government at UK Budgets where there is an impact on the block grant adjustment and therefore on revenues available to the Welsh Government.
4.12 This power has now been narrowed to specifically only cover circumstances where the Welsh Ministers need to respond to changes to predecessor taxes which would impact the amount paid into the Welsh Consolidated Fund.
4.13 ‘Power 3’ enabled the Welsh Ministers to make draft affirmative regulations (the ‘subsequent regulations’) to amend the regulations created by the use of ‘Power 1’ or ‘Power 2’ (the ‘original’ regulations). On further analysis, however, it became apparent that there is an overlap between the original 2 powers (in that ‘Power 2’ is broad enough to cover everything that Power 1 would cover), and that it may be challenging to identify which power ought to be used for which purposes. The conclusion is that the separate amending powers being sought were really the same power, namely a power to amend the Welsh Tax Acts (or related subordinate legislation) in specific circumstances, and that a single regulation making power was all that was needed, subject to either a draft or made affirmative procedure depending on the urgency of the regulations.
Reasons for not consulting on a draft Bill
4.14 The provisions included in the Act align to the principles set out in the consultation published in July 2020 and the specific proposals have been refined in light of the responses received. A number of changes particularly to the operation of the procedures for making the regulations have also been developed subsequently following detailed consideration. These changes have been shared and expertise and input sought from key tax and accountancy representative bodies. Given the level of consultation responses and the length of the legislation, it was considered more appropriate and efficient to share and invite comment on the legislation from key stakeholders rather than publish a draft Bill as part of a full consultation.
Future consultation on regulations made under this Act
4.15 In many cases the Welsh Ministers will not invite comment on the intention to legislate using the powers provided by the Act, the nature of the change or on its timing prior to making regulations. However, subject to the risk of forestalling, consideration will be given on a case-by-case basis to engaging informally, and in confidence, with key stakeholders, before and during the drafting of regulations to establish whether the legislation will achieve its objective. In particular, where the regulations are to respond to changes made by the UK government to a predecessor tax, or the coming into force date does not need to be immediate, there may be opportunities for engagement. Details of any consultation, or detailed reasoning for not undertaking such consultation, will be set out in the Explanatory Memorandum accompanying any future regulations.
5. Power to make subordinate legislation
5.1 The Act contains provisions to make subordinate legislation. Table 1 sets out in relation to these:
- the person upon whom, or the body upon which, the power is conferred
- the form in which the power is to be exercised
- the appropriateness of the delegated power, and
- the applied procedure; that is, whether it is “made affirmative”, “affirmative”, “negative”, or “no procedure”, together with reasons why it is considered appropriate.
5.2 The Welsh Government will consult on the content of the subordinate legislation where it is considered appropriate to do so. The precise nature of consultation will be decided when the proposals.
Summary of powers to make subordinate legislation in the provisions of the Welsh Tax Acts etc. (Power to Modify) Act 2022
Section 1 (1a-d)
Power conferred on Welsh Ministers
Appropriateness of delegated power
The Welsh Ministers require the power to modify the Welsh Tax Acts and regulations made under those Acts. This power will only be used where the Welsh Minister consider that the modifications are necessary or appropriate for or in connection with any of the following purposes:
- ensuring that landfill disposals tax and land transaction tax are not imposed where to do so would be incompatible with any international obligations
- protecting against tax avoidance in relation to landfill disposals tax and land transaction tax;
- responding to a change to a predecessor tax which 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);
- responding to a decision of any court or tribunal which affects, or may affect, the operation of any of the Welsh Tax Acts or regulations made under those Acts.
Draft Affirmative or Made Affirmative
Reason for procedure
The draft affirmative procedure is prescribed where the Welsh Ministers identify there is a need to respond quickly to external circumstances.
The made affirmative procedure is prescribed in cases where the Welsh Ministers consider it necessary for reasons of urgency.
Power conferred on Welsh Ministers
Appropriateness of delegated power
The Welsh Ministers require the power to provide a single opportunity for the Senedd to approve regulations laid by the Welsh Ministers which will extend the power to make regulations for a further maximum extension date of 30th April 2031.
Reason for procedure
The draft affirmative procedure will allow the Senedd to scrutinise the need to extend the lifespan of the regulation making power for up to a further maximum extension date of 30th April 2031.
5.3 There are no powers to make directions or issue codes and guidance in the provisions of the Act.
1. “the SDLT effort” refers to the amount of tax that the predecessor tax to land transaction tax collects. If the effort is greater, the block grant adjustment will increase resulting in a larger reduction to the Welsh Government’s budget, reducing overall resources. If the SDLT effort decreases the opposite occurs, resulting in more resources for the Welsh Government overall.