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1. What action is the Welsh Government considering and why?
1.1 The Welsh Tax Acts etc. (Power to Modify) Act 2022 (‘the Act’) operates to provide the Welsh Ministers with power to amend the Welsh Tax Acts using draft or made affirmative regulations. This power ensures that changes can be made to the Welsh Tax Acts at short notice to respond to a number of external circumstances, such as:
- to ensure the devolved Welsh taxes are not imposed where to do so would be incompatible with international obligations
- to protect against tax avoidance in relation to devolved Welsh taxes
- to respond to tax policy 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 would impact the amount paid into the Welsh Consolidated Fund, and
- to respond to decisions of the courts/tribunals which affect or may affect the operation of the devolved Welsh Taxes, or any regulations made under them.
1.2 The primary intended effect of the Act is to provide Welsh Ministers with a proportionate mechanism to protect Welsh revenues raised through devolved taxes, and to avoid adverse implications for businesses, the property market and the environment.
1.3 The following section outlines how the development of this legislation has adhered to the 5 ways of working as identified within the Well-being of Future Generations (Wales) Act 2015.
The Welsh Government’s commitment
1.4 The Welsh Government’s tax policy priorities align with the commitments in the Programme for Government 2021-26, to continue to demonstrate its commitment to creating a more equal, fairer and socially just Wales. Devolved taxation can be a powerful lever for influencing behaviour change, as well as generating revenue to support public spending to meet the needs of Wales and enabling us to develop more progressive taxes. It also allows us to develop a more strategic approach to central and local taxation in Wales, ensuring it is better able to tackle the needs and priorities of citizens and businesses.
1.5 The Act contributes to the national wellbeing goal of ‘a prosperous Wales’, recognising the core role of taxation in funding public services. The ultimate objective of the Act is to provide Welsh Ministers with a proportionate mechanism to protect Welsh revenues raised through devolved taxes that are available for our essential public services in Wales, and to avoid adverse implications for businesses, the property market, and the environment. There is clear alignment between this objective and the 5 ways of working as set out in the Well-being of Future Generations Act 2015.
1.6 The proposal has been development in alignment with the Welsh Government’s principles for tax policy in Wales, set out in the Tax Policy Framework:
- Taxation should raise revenue to fund public services as fairly as possible.
- It should help deliver wider fiscal and policy objectives, in particular supporting jobs and economic growth.
- It should be simple, clear, progressive and stable, with legislative and administrative clarity and efficiency.
- Given the core role of taxation in funding public services, it will be critical to engage with taxpayers about the general and specific elements of Welsh taxes.
Prevention and the long term
1.7 The Act provides a ‘preventative’ measure to enable Welsh Ministers to respond agilely when a change is required to the Welsh Tax Acts at short notice. The Act is needed to protect revenues available for essential public services in Wales. At the moment, every time there is a UK budget cycle there is a risk that there may be a change which impacts on a devolved tax and has a direct budgetary impact on Welsh resources.
1.8 The Act aims to balance the need to address a gap in the short-term – that is the lack of an agile mechanism to respond to an urgent need to make a change to the Welsh Tax Acts - but also to meet long-term needs. The Act has a sunset clause that is triggered 5 years after the Act comes into force meaning that no further regulations may be made using the power (although the sunset clause can be delayed, subject to Senedd approval, to 30 April 2031). The Act provides for a statutory review that must include an assessment by the Welsh Ministers of alternative legislative mechanisms for making changes to the Welsh Tax Acts and regulations made under any of those Acts. The Act fits within a longer-term development of the fiscal framework and devolved taxes including broader tax strategy, and strengthening the relationships with the UK government and other devolved governments.
1.9 For example, the number of regulations generated as a result of this Act will be kept under review as part of future considerations as to what long term architecture is an appropriate legislative vehicle for Wales. That may, or may not, include an annual ‘Devolved Taxation’ Bill. However, it is not an either/or situation as it is considered that even if Wales has an annual Devolved Taxation Bill, a mechanism to respond to events outside of that Devolved Taxation Bill cycle will remain necessary to protect Welsh Government finances and Welsh taxpayers.
Collaboration and involvement
1.10 Following the devolution of land transaction tax and landfill disposals tax in 2018, the Welsh Government has considered, with our stakeholders and partners, what the right and appropriate tools might be to ensure we can make changes to the “Welsh Tax Acts” at short notice in certain circumstances. Collaboration on the development of this Act reflects the technical nature of the proposals. The 2020 policy consultation Tax Devolution in Wales - Enabling changes to the Welsh Tax Acts received a small but reasonable number of responses mostly from professional tax and accountancy bodies. Both the policy proposal and the Act are the result of the close working and sharing of ideas and expertise with stakeholders. Furthermore, the Policy Statement on the use of the power by the Welsh Ministers retrospectively has also been prepared in collaboration and consultation with tax expert stakeholders. The Welsh Revenue Authority (WRA) has also been a key partner involved in developing the proposal and planning its delivery. Finally, the evidence taken by the Finance and the Legislation, Justice and Constitution Committees, their reports and contributions through the Senedd Stages have significantly contributed to the provisions of the Act.
1.11 There is also ongoing wider stakeholder engagement on devolved taxation more generally. It is recognised that it is important to continue raising awareness of Welsh taxes, and we are focusing on major fiscal events, such as the Welsh Budget, to increase understanding of the implications of fiscal devolution for people and businesses.
1.12 We have strong working partnerships with the WRA and HMRC to enable quick and effective dissemination of key information through established operational channels. These include the Welsh Treasury annual conference and working with professional bodies. The Tax Engagement Group enables discussion of developments in tax policy with those who can represent the views of Welsh taxpayers. Further details of engagement activity on tax more generally is provided in Section 13 of the Welsh Government's Welsh Tax Policy Report 2021, published on 20 December 2021 (Welsh Tax Policy Report March 2021). This remains a priority as set out in the Welsh Government’s updated Tax Policy Framework.
1.13 The Act operates to provide the Welsh Ministers with the power to make secondary legislation in order to respond to a number of external circumstances. There are therefore limited impacts as a result of the Act directly. A separate impact assessment would be completed each time the powers are used to make regulations to effect changes to the Welsh Tax Acts. 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 dependent on the nature of the proposals and the time available.
1.14 Overall, devolved taxes raise revenue to fund public spending in Wales. Devolved taxation can be a powerful lever for influencing behaviour change, as well as generating revenue to support public spending to meet the needs of Wales and enabling us to develop more progressive taxes. It also allows us to develop a more strategic approach to taxation in Wales, ensuring it is better able to tackle the needs and priorities of citizens and businesses.
1.15 Alongside the costs and benefits presented in the Regulatory Impact Assessment, a number of other potential impacts have been considered and an integrated impact assessment carried out. A summary of the impact assessments is set out below.
1.16 Ministers are required to have due regard to the United Nations Convention on the Rights of the Child when exercising any of their functions. The results of this assessment demonstrate that there are no potential negative impacts on children and young people arising from the Act. The full impact assessment is available at Annex 1.
1.17 An Equalities and Human Rights impact assessment concluded that there are no specific impacts of the Act on people with protected characteristics under the Equality Act 2010. However, not implementing this legislation could result in future reduced revenue for the Welsh Government, which in turn would mean less resource to spend on public services in Wales. Arguably, any reduction in revenue is likely have a disproportionately large effect, or disbenefit, on lower income households in Wales, as those who benefit the most from public services tend to be those on below average income. Some protected groups are proportionally more likely to fall into this category. Therefore, introducing this Act and protecting public service spend could be seen as an indirect positive action for these groups. A full impact assessment is available on request.
1.18 The compatibility of the Act with the European Convention on Human Rights (ECHR) has been considered prior to the introduction of the Bill. That analysis has found that the Bill is unlikely to contain provisions that are incompatible with the ECHR. The Act does include provision for retrospective effect. It is recognised that legislation that affects past transactions or events, even if not technically retrospective, may engage the rights set out in Schedule 1 to the Human Rights Act 1998 (“the Convention rights”). The Welsh Government considers that the Act strikes an appropriate balance between the legislature’s role in scrutinising tax policy changes, the Rule of Law and the unique nature of tax policy changes and their immediate fiscal and economic impacts. There is a public interest in managing those changes to maintain revenue consistency and fund wider public services and avoid market volatility. The approach proposed is not unprecedented and we consider that the public interest arguments are clear.
1.19 A Data Protection Impact Assessment has been conducted and concluded the Act does not produce any new requirements relating to privacy or the sharing of information. There will be no impact as a consequence of this legislation.
1.20 Impact on the Welsh Language has been explored through a Welsh Language Impact Assessment and concluded that there are no specific impacts of the legislation on the use of Welsh Language or on Welsh Language communities. The Act supports the effective operation of the devolved taxes, which can in turn help to achieve our Welsh language policy aims directly. A full impact assessment is available on request.
1.21 Consideration of the impact of the duty on biodiversity, climate change and natural resources concluded that there would be no negative impact on these areas. A Strategic Environmental Assessment and an Impact Assessment on Carbon Budgets is not required.
1.22 The statutory Justice Impact Assessment (JIA) summarises the outcome of engagement with the Ministry of Justice, The assessment concluded that the proposals are likely to have no or minimal impact on the justice system. The impact assessment is available in Annex 2.
1.23 The rural proofing screening assessment concluded there is no negative impact as a result of this legislation.
1.24 A socio-economic impact assessment concluded there is no negative impact as a result of this Act. An indirect benefit of any future regulations enabled by the powers in this Act is the protection of Welsh revenues and consequently public services in Wales.
Costs and savings
1.25 The financial implications of the Act is set out in Part 2 of the Explanatory Memorandum, the Regulatory Impact Assessment, published as part of the Act documentation at introduction.
How have people most likely to be affected by the proposal been involved in developing it?
2.1 The Welsh Tax Acts etc. (Power to Modify) Act provides the Welsh Ministers with power to make changes to the “Welsh Tax Acts” by regulation when a specified external event occurs. People are generally only likely to be affected by the proposal if and when there is a specific issue in relation to the Welsh Tax Acts that Welsh Ministers choose to address through the introduction of regulations using the power in the Act. A separate impact assessment, including costings, would be completed each time the power is used to make regulations. The Welsh Government will consult on the content of the subordinate legislation where it is considered appropriate to do so. The precise nature of that consultation would be decided when the proposals for legislation are developed.
2.2 There are no direct impacts on people (including people with protected characteristics under the Equality Act 2010; children and their representatives, and Welsh speakers) as a result of the Act in isolation. This, and the technical nature of the consultation, is reflected in how the public and stakeholders have been involved in the development of this Act.
2.3 Prior to introduction of the legislation, a public consultation took place between 16 July and 15 October 2020, with the intention of gaining stakeholder views to inform further development of the legislation and to address any concerns. It was distributed to stakeholders electronically, via social media, and published on the Welsh Government website.
2.4 Virtual external engagement events were held with representatives of stakeholder organisations. The consultation received a small but reasonable number of responses mostly from professional tax and accountancy bodies. An analysis of the consultation responses was published on 20 December 2020. In autumn 2021, a stakeholder engagement session was held with key trusted stakeholders to provide an update on the policy changes that have been introduced since the 2020 consultation, and also to share sections of the draft legislation. We received continued support for the policy principles that underpin this legislation – in particular, of the current vulnerability of Welsh Ministers to be able to appropriately respond to tax policy changes made by UK government which impact on devolved taxes. Similarly, a draft of the policy statement on the use of the power to make regulations with retrospective effect was shared. The Welsh Revenue Authority has also been a key partner involved in developing the proposal and planning its delivery.
What are the most significant impacts, positive and negative?
2.5 The Welsh Ministers’ intended purpose of 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 required to have effect immediately or shortly thereafter. Those changes will be permitted in order to respond to a number of external circumstances, as set out in paragraph 1.1
2.6 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 cycle, the Welsh Government takes the risk that there may be a change which impacts on a devolved tax and has a direct budgetary impact on resources and which Welsh Ministers cannot react to in a timely manner. An intervention of this kind may also be appropriate where the Welsh Treasury and the Welsh Revenue Authority (WRA) need to promptly ‘close-down’ tax avoidance schemes or maintain compliance with international obligations. As set out at paragraph 1.5, this Act contributes positively to the national wellbeing goal of ‘a prosperous Wales’, recognising the core role of taxation in funding public services.
2.7 The Act will have minimal impact on people and communities, Welsh language and the environment. Any impact on people and communities would only be evident if and when there is a specific issue in relation to the Welsh Tax Acts that Welsh Ministers choose to address through the introduction of regulations using the power in this Act. In this instance, the type of impact is likely to be restricted to particular groups of individuals or corporate bodies, this could vary from those seeking to avoid tax, to taxpayers buying a new residential premises. A specific impact assessment which would include consideration of impacts of people and communities, the Welsh language and environment would be undertaken on any regulations introduced.
In light of the impacts identified, how will the proposal:
i. Maximise contribution to our well-being objectives and the 7 well-being goals
2.8 The Welsh Government set out in the 2020 Tax Devolution: Enabling changes to the Welsh Tax Acts consultation 3 key benefits in relation to the introduction of the Welsh Tax Acts:
- Improving the efficiency and effectiveness with which public resources are used in Wales
- Boosting the resources available for public bodies in Wales to invest in improving well-being, and
- Delivering enhanced fiscal levers for Welsh Ministers and using these levers to improve outcomes for the people of Wales.
2.9 These benefits are aligned to the requirements of the Well-being of Future Generations (Wales) Act 2015 which came into effect in April 2016. That Act seeks to improve social, environmental, economic and cultural well-being in Wales and help to create a country that we all want to live in, now and in the future.
ii. Improving the efficiency and effectiveness with which public resources are used in Wales
2.10 The Act is intended to provide an additional tool to quickly close down identified avoidance activity, ensuring that those liable for the Welsh devolved taxes pay the correct amount of tax. This will enable the Welsh Government to protect its finances used to fund public services. 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.
iii. Boosting the resources available for public bodies in Wales to invest in improving well-being
2.11 The Act supports the aim to have a tax collection and management system to meet Welsh priorities. It provides an additional tool to ensure Welsh Ministers can make changes to the Welsh Tax Acts in a flexible and proportionate way, particularly in response to the UK government making changes to predecessor taxes which may have impacts on the Welsh Government’s overall resources. This will enable the Welsh Government to protect its finances which are used to fund public services or provide tax reductions to taxpayers depending upon the circumstances.
iv. Delivering enhanced fiscal levers for the Welsh Ministers
2.12 The Act aims to provide Welsh Ministers with an additional fiscal lever to respond to external circumstances and make changes via secondary legislation (using either the draft or made affirmative procedure). This will include areas of the Welsh Tax Acts where currently the only option would be to either introduce primary legislation, with longer timescales, or emergency legislation (or in some cases the already existing draft affirmative powers but where the change is deemed to be necessary immediately).
2.13 A key feature of using the made affirmative procedure in some circumstances is that the effect of the changes can be brought in with immediate effect thereby protecting, increasing, or decreasing revenues dependent upon the Welsh Government’s policy. This will provide clarity to taxpayers and their representatives as the changes will be made to the legislation quickly. Enabling the Welsh Government to make immediate changes to the devolved taxes will also minimise the potential impact on the Welsh Government’s overall resources. Enabling legislative changes to have immediate effect also ensures taxpayers can benefit from those changes as quickly as possible. This gives Welsh Ministers better control over the devolved taxes revenues and therefore the Welsh budget. This is in line with the well-being goal to create a prosperous Wales, allowing Welsh Ministers to use enhanced fiscal levers to improve outcomes for the people of Wales as expeditiously as possible.
2.14 This enhanced fiscal lever will enable Welsh Ministers to have a greater degree of parity to the UK government, as the UK government already has the ability to make changes to existing taxes with immediate effect through the Provisional Collection of Taxes Act 1968, and, in relation to stamp duty land tax, via regulation making powers (Section 109 Finance Act 2003).
2.15 The Welsh Government has considered the positive and negative impacts of the Welsh Tax Acts (Power to Modify) Act and the processes that can be put in place to mitigate the negative impacts. On balance, our view is that our approach to implementing the Act supports our legitimate aim to help protect Welsh Government revenues.
How will the impact of the proposal be monitored and evaluated as it progresses and when it concludes?
2.16 The Act provides a power for Welsh Ministers to make regulations at a future time as and when required. This means that nothing will be implemented when the Act receives Royal Assent or is commenced. However, the effect of this Act and associated regulations may be assessed in a number of ways. A review by the Welsh Ministers is required to be completed, and the conclusions published, within four years of the Act receiving Royal Assent. However, by that date it is possible that the power may not have been used or may have been used very infrequently.
2.17 As part of that review the Welsh Ministers are required to include an assessment of alternative legislative mechanisms for making changes to the Welsh Tax Acts to those provided in this Act. This is important given the sunset clause that has been introduced during scrutiny of the Bill by the Senedd.
Annex 1: Children’s rights impact assessment
1. Describe and explain the impact of the proposal on children and young people
1.1 The Act provides for implementation through enabling the Welsh Ministers to make subordinate legislation. There are, therefore, no direct impacts as a result of the Act itself, and the Act in isolation is likely to have no impact on children and young people. The Welsh Government will consult on the content of any future subordinate legislation where it is considered appropriate to do so. The precise nature of consultation will be decided dependent on the nature of the proposals and time available. A separate impact assessment would be completed each time the power is used to make regulations to effect changes to the Welsh Tax Acts, including consideration of the impact on children and young people.
1.2 The primary intended effect of the legislation is to provide Welsh Ministers with a proportionate mechanism to protect Welsh revenues raised through devolved taxes, and to avoid adverse implications for businesses, the property market, the environment and the resources available to the Welsh Government. Devolved taxes raise revenue to fund public spending in Wales, including provision for services for children and young people.
1.3 Not implementing this legislation could result in future reduced revenue for the Welsh Government, which in turn would mean less resource to spend on public services in Wales (including, for example, schools, health services, early years provision). This Act by protecting public service spend is an indirect positive action for children and young people.
1.4 No negative impacts on children and young people have been identified as a result of this Act.
2. How does your piece of work support and promote children’s rights?
2.1 The Act itself does not impact on children and young people as its primary function is to provide a regulation-making power which may be used by the Welsh Ministers to respond to certain external events that impact on the Welsh Government Budget or Welsh taxpayers. The regulation-making power provided by the Act has the potential to indirectly positively support many of the articles within the UNCRC as the primary aim is to protect Welsh revenues which are used to fund public services benefitting children and young people. This could include, for example, schools and hospitals or early years provision.
Annex 2: Justice impact assessment
1.1 The Welsh Government’s assessment of the impacts of this Act on the justice system is that it has no or negligible potential impact.
1.2 This is because:
- The Act operates to provide the Welsh Ministers with power to make secondary legislation in order to respond to a number of external circumstances where a change to the Welsh Tax Acts, or regulations made under those Acts, is required to have effect immediately or very soon thereafter.
- There is therefore no impact on the justice system as a direct result of the Act.
- A separate regulatory impact assessment, including the impact of any secondary legislation on the justice system, if relevant, would be completed as and when the powers provided by the Act are used to make regulations to effect changes to the Welsh Tax Acts.
1.3 The Act enables such changes to be made by way of regulations made by Welsh Ministers, which may potentially, on rare occasion, include retrospective provision, depending on the legislative requirements of the situation. There is no impact on the justice system as a direct result of the Act.
1.4 The intended effect of the Act is to provide Welsh Ministers with a proportionate mechanism to protect Welsh revenues with immediate effect to avoid adverse implications for businesses, the property market, the environment and the resources available to the Welsh Government. Without this option, the Welsh Government could be in the scenario that it either needs to operate with a reduced budget or find alternative ways of raising such revenues to maintain existing resource levels.