Written evidence submitted by Rebecca Evans (Minister for Finance and Trefnydd at Welsh Government); Kate Forbes (Cabinet Secretary for Finance at Scottish Government); Conor Murphy Murphy (Minister of Finance at Northern Ireland Executive)


We welcome the UK Parliamentary Treasury Committee’s inquiry into tax after coronavirus.  Please find attached our written submission to the inquiry.


Devolved taxation requires special consideration by the Committee in its inquiry. Taxes administered by the democratically-elected governments of Wales, Scotland, and Northern Ireland are an increasingly important component of the UK tax system. Moreover, the interactions between the devolved and reserved parts of the UK tax system have significant financial and policy implications for the Devolved Administrations.


Our submission highlights some of the weaknesses in the current inter-governmental mechanisms for developing and implementing tax policy in the UK. Addressing these weaknesses and managing the distribution of responsibilities concerning taxation between the UK Government and the Devolved Administrations necessitates more effective inter-governmental mechanisms and governance structures than those currently in place.


We hope the UK Government will recognise the importance and mutual benefits of a shared approach to tax reform by engaging fully with the Devolved Administrations on both the principles and the detail of any changes to the tax system. We stand ready to reciprocate.


We are copying this letter to the Chief Secretary to the Treasury, the Secretary of State for Wales, the Secretary of State for Scotland and the Secretary of State for Northern Ireland.



Key Points



Full Response

  1. We welcome the opportunity to provide a submission to the UK Treasury Committee Inquiry on tax after coronavirus.

Tax Devolution in the UK

  1. The UK Government is no longer the sole tax policy-making authority in the UK and devolved taxes are an increasingly important part of the UK’s tax system


  1. Fiscal Frameworks set out the rules for determining the Scottish and Welsh Budgets, which are funded through several different components comprising of the Block Grant, net local and devolved tax revenues, and for Scotland, additional funding for devolved social security powers.

Tax Devolution in Wales

  1. The Wales Act 2014 and Wales Act 2017 devolved taxation and borrowing powers to the Welsh Government and Welsh Parliament. The first modern Welsh taxes – Land Transaction Tax (LTT) and Landfill Disposals Tax (LDT) – were introduced on 1 April 2018, collected and managed by the Welsh Revenue Authority (WRA). Since 6 April 2019, HMRC has been collecting Welsh Rates of Income Tax. Together with the local taxes, Council Tax and Non-Domestic Rates, which have been devolved since 1999, devolved taxes now raise some £5 billion for Welsh public services.


  1. Section 6 of the Wales Act 2014 amends Government of Wales Act 2006 to enable the creation of new devolved taxes by way of Her Majesty making an Order in Council. A recommendation to Her Majesty to make an Order in Council cannot be made until a draft of the statutory instrument containing the Order has been laid before and approved by each of the Houses of Parliament and the Welsh Parliament. These could be existing UK taxes, which the UK Government devolves to Wales, or taxes newly created by the Welsh Government in areas of devolved responsibility.


  1. The Welsh Government is investigating four new tax ideas: a Vacant Land Tax, a Disposable Plastics Tax, a Tourism Tax, and taxation as a way of funding social care. The Vacant Land Tax is being used to test the intergovernmental mechanism for introducing new taxes, while work continues on the other three ideas.


  1. The Welsh Government has worked with the UK Government and Senedd Cymru (the Welsh Parliament) to agree on the management process for devolving competence for a new tax. In January 2018, the Welsh Government and HM Treasury agreed on a process by which the Welsh Government will make, and the UK Government will consider, a proposal before consideration of a draft Order by the Houses of Parliament. The process is governed by a Joint Exchequer Committee, between the Welsh Government and UK Government and is supported by an official level group, comprising officials from both governments.

Tax Devolution in Scotland

  1. The Scottish Parliament currently has devolved responsibilities in relation to the following taxes:
    1. Scottish Income Tax (partially devolved) with powers to vary rates and bands for non-savings and non-dividend income, which is administered by HMRC;
    2. Scottish Land and Buildings Transaction Tax (LBTT) and Scottish Landfill Tax (SLfT) (fully devolved), which are collected by Revenue Scotland;
    3. Council Tax and Non-Domestic Rates (NDR), which are collected and administered by Local Authorities for local expenditure.


  1. In addition, the Scottish Parliament has the power to introduce two further taxes devolved to Scotland - Aggregates Levy and Air Departure Tax (Air Passenger Duty) which have not yet been implemented. And a portion of VAT revenues generated in Scotland is due to be assigned to the Scottish Budget, this is referred to as VAT Assignment, and implementation is contingent on an agreement between the UK and Scottish Governments regarding the methodology. At present, around 40% of Scottish Government expenditure is funded through devolved tax revenues. Once the implementation of the Smith Commission recommendations is complete, this proportion will increase to around 50%.


  1. The Scottish Parliament also has the power to create new local taxes, and Section 80B of the Scotland Act 1998 (as amended) allows the UK Parliament, with the consent of the Scottish Parliament, to devolve powers for a new national tax in Scotland.


  1. Since the devolution of tax powers to Scotland, the Scottish Government’s approach to tax policy has reflected Adam Smith’s four principles of taxation: certainty, proportionality to the ability to pay, convenience, efficiency, as well as a commitment to stakeholder engagement, and a firm approach to tackling tax avoidance.


  1. Tax powers in Scotland and Wales have been used to deliver a more progressive tax system, and to raise revenues that support our essential public services. For example, when designing and legislating for the LBTT regime, the Scottish Government moved away from the then slab tax approach in place for UK Stamp Duty Land Tax (SDLT), to ensure that the tax paid rises proportionately in line with the purchase price of the land or property; without significant distortion or jumps in tax liability. This approach was subsequently adopted by the UK Government in 2014, and by the Welsh Government when LTT was introduced in 2018.


Tax Devolution in Northern Ireland

  1. Northern Ireland hasn’t had a Commission report on additional fiscal powers, comparable to the Silk and Smith Commissions. The Northern Ireland Executive currently has a more limited suite of fiscal levers in comparison to the other Devolved Administration. Long-Haul Air Passenger Duty has been devolved in Northern Ireland since January 2013 which now has a zero-rate policy in place for direct flights departing from Northern Ireland.


  1. Going forward, however, the need for effective intergovernmental collaboration will also be important for the Northern Ireland Executive in a context where it assumes greater fiscal powers in the future.

Inter-Governmental Working in Relation to Taxation

  1. Given that the vast majority of tax powers remain reserved to the UK Government, in addition to fiscal and macro-economic policy levers, UK policy decisions have a significant impact on devolved tax powers and performance, net tax revenues (which affects the overall budget position), as well as wider impacts on devolved policy.


  1. The interplay between the devolved and reserved parts of the UK tax system has significant financial and policy implications for Devolved Administrations, for example:


    1. The UK Government's overall fiscal stance, and wider macroeconomic decision-making, remain a key determining factor for Devolved Administrations’ Budgets. For all three Administrations block grant allocations are determined as part of the UK Government’s Spending Review. The Welsh Government and Scottish Government Budgets are also impacted by UK Government tax policy decisions and revenue projections via the block grant adjustment process, as set out in their respective fiscal framework agreements.


    1. Changes to reserved taxes can result in unintended consequences due to interactions with areas of devolved tax competence, especially where taxes are levied on the same tax base, such as labour income. This can result in administrative complications, economic distortions, and may encourage tax planning and avoidance with negative revenue implications for the Devolved Governments. The UK Government may also not factor such negative, or positive, externalities of its tax policy changes into its decision-making process.


    1. Tax policy decisions made by the UK Government on areas where there is devolved competence can present challenges, particularly if the Devolved Governments in Scotland and Wales are required to legislate at short notice to protect revenues or prevent distortions in markets.


  1. Therefore, managing the distribution of responsibilities in relation to taxation between the UK Government and the Devolved Administrations necessitates more effective inter-governmental mechanisms and governance structures than those currently in place. The importance of this issue has also been raised recently by the Institute of Chartered Accountants of Scotland (ICAS), with a recommendation in their policy paper on the Future of Taxation in the UK, to encourage closer working between Westminster and Devolved Governments, to ensure that UK tax decisions take account of any consequences for devolved taxes[1].


  1. Some of the weaknesses in the existing structures were demonstrated as recently as the Summer Economic Update 2020, at which the UK Government announced (with immediate effect) a temporary increase in the starting threshold for Stamp Duty Land Tax (SDLT) to £500,000. The Devolved Administrations were not given any advance notice of the change and thus were not in a position to make an immediate decision on the appropriate response for Land and Buildings Transaction Tax (Scotland) and Land Transactions Tax (Wales), respectively. This resulted in unhelpful uncertainty for the housing markets in Scotland and Wales at a sensitive time and risked stalling property transaction activity, directly and indirectly, with impacts for tax revenues and the wider economy.


  1. Moreover, the agreed process for the devolution of further tax competence to Wales is not fit for purpose, and in practice bears a striking similarity to the previous process of Legislative Competence Orders. In March 2020, the Welsh Government formally requested devolution to Senedd Cymru of further tax competence relating to a ‘vacant land tax’. This formal request was in keeping with the process agreed between UK and Welsh Ministers for the devolution of new tax powers to Wales as provided by the Wales Act 2014.


  1. The Welsh Government’s formal request for tax competence is the first time the mechanism has been tested and the request follows over two years of work by Welsh Government to ensure HM Treasury had sufficient information to assess the Welsh Government’s proposals. The experience of moving through the process has been protracted and challenging, with HM Treasury continually requesting detail related to the specific operation of the proposed tax – a matter for Wales - rather than information related to devolving competence for legislation in a new area of taxation. On the 19 August 2020, the Financial Secretary to the Treasury responded by stating that yet more detail would be required before our formal request could be taken forward. This is compounded by the fact HM Treasury is able to move the goalposts as to what information is required at any point.


  1. Given the challenges encountered taking this particular, very narrow area of legislative competence through the mechanism, it is difficult to envision a scenario whereby, with the current UK Government approach, the Welsh Government could successfully make the case for further tax competence.


  1. In Scotland, the power to set rates and bands for Non-Savings Non-Dividend income is devolved to the Scottish Parliament and in Wales, the power to set rates is devolved to the Welsh Parliament. Decisions about the Personal Allowance, reliefs, and savings and dividend income remain reserved to the UK Government. The split of tax policy across a devolved and reserved landscape creates many complexities, and the interactions around income tax decisions by the UK Government has profound effects on tax policy decisions, revenues, and the economy in Scotland and Wales more widely.


  1. The impact of reserved tax policy changes on devolved revenues and devolved economies is significant. This is particularly apparent in areas such as VAT policy, wealth taxes (including Capital Gains Tax and Inheritance Tax), environmental taxes, and more recently in relation to the UK Government’s proposal to establish Freeports across the UK.


  1. We would like to see genuine improvements in the way the UK Government and Devolved Administrations work together, commensurate with the devolution settlements. We would seek reassurance that the impacts and consequences of reserved tax changes, including on revenues, will be mapped across the tax policy framework for the whole of the UK, including the Devolved Administrations, with appropriate systems for policy development, consultation and advance notice; all of which is in the clear mutual interest of all governments. We have made some progress at the working level, but we need a more robust approach. The introduction of a formalised Devolved Administrations impact assessment for tax decision-making at a UK level would be a sensible starting point, together with appropriate governance structures. This would allow new or significant changes to existing tax measures to be managed appropriately.


  1. The importance of early engagement between the UK Government’s and Devolved Administrations’ officials, to ensure that we can properly understand and prepare for any new measures, should not be underestimated. We also believe there are opportunities for greater sharing of data and analysis to support the development of taxation policy.


  1. With regards to governance, the Finance Ministers’ Quadrilateral should be strengthened and regularised, so that it can operate as an appropriate forum to support the development of tax policy across the UK, meeting more frequently and ensuring that all four governments can participate as equal partners.


  1. We hope the UK Government will recognise the importance of a shared approach to tax reform by engaging fully with the Devolved Administrations on both the principles and the detail of any changes to the tax system. We stand ready to reciprocate.



September 2020



[1] ICAS (May 2020) The Future of Taxation in the UK, pp. 7, available from: https://www.icas.com/news/the-future-of-taxation-in-the-uk