Land tax a hot potato for Welsh politics

Earlier this month, the UK Government closed its consultation on the devolution of Stamp Duty to Wales, as recommended by the Silk Commission in its report last November Empowerment and Responsibility: Financial Powers to Strengthen Wales. Justifying the consultation the UK Government quoted perceived concerns within the Welsh property and construction industry.

 However, the Federation of Master Builders in Wales have declared that devolution of Stamp Duty is “vital” so that it can be tailored to the “needs of the Welsh construction and business sector”. Moreover, in its polling, Silk found clear pubic support for devolution of Stamp Duty.

 The reasons for the consultation, and the consequent ongoing delay – the UK Government originally said it would be responding to the Silk recommendations last Spring – are as much political as legal.

 Stamp Duty is payable on the purchase or other transfer of property or land, where the amount paid exceeds a certain amount. It is regarded as a relatively minor tax, but the impact of devolution for the property and construction market and wider Welsh economy is still significant. Of course, property is an economic and political hot potato for the Government which will be mindful of the effect of any decision it makes on its prospects at the next election.

 Yet Stamp Duty is an obvious candidate for devolution in Wales for a number of reasons.  It is already devolved in Scotland and is the largest class of devolved tax at sub-national level across OECD countries. So there is a clear precedent.  It also has a clear connection to existing devolved policies. Devolution would therefore support the Welsh Government’s ability to deliver on policy objectives and to become more accountable.

In practical terms therefore, Stamp Duty is an attractive target.  It is straightforward to administer because ownership is simple to establish and the geographical location of taxable land or property is fixed.

At time same time, however, it is ripe for reform. It is widely regarded as a poorly designed tax in need of an overhaul to make it fairer and more efficient. Therein lies the crux of the matter.

When Scotland introduces its devolved form of Stamp Duty, following the passing of the Land and Buildings Transaction Tax (Scotland) Act 2013, it will take a different form to the current tax model. Instead of the current highest percentage on the whole purchase price, it will operate like income tax with the same system of graduated calculation. This is mooted as a much fairer and more reasonable tax than the current form, with its huge jumps in tax liability as properties increase in value. The Welsh Government has welcomed the opportunity to consider reform of Stamp Duty following devolution and would almost certainly choose to follow the Scottish model.

The new model has obvious advantages. By operating to reduce tax liability it removes a significant obstacle to residential and commercial mobility, thus bringing an immediate boost to the property and construction market. There is no additional administrative burden to the new system, although revenue receipts would clearly be hit significantly and alternative money raising methods may need to be introduced to deal with that.

The main public concern being voiced about the devolution of Stamp Duty stems from fears of market distortion and cross-border issues that could potentially arise.  And certainly changes, either by way of rate changes or a wholesale redesign, would cause a divergence in tax regimes between Wales and England. This could lead to people and businesses choosing locations that are ‘otherwise economically sub-optimal’ in an effort to reduce their liability to Stamp Duty.

The Silk Commission research findings suggest that transaction costs (including tax liability) have a limited impact on domestic or business location decisions, but the report did sound a note of caution on the issue. The risk adverse solution here may therefore be for the UK Government and Welsh Ministers to agree a simultaneous reform and devolution.

The political ramifications of reform and devolution are perhaps more interesting. By allowing devolution of Stamp Duty before the next election, the UK Government puts itself under pressure to carry out similar reforms for England.  Yet, according to a Treasury spokesman quoted by the Daily Telegraph last week, it has no current plans to change Stamp Duty.

There may also be some political mileage in waiting to see how things pan out for the Scots. The new regime in Scotland is regarded by some as a pilot for the rest of the UK to study before adopting similar reforms.

Nick Clegg’s frustration with the Coalition’s inaction on this question is unhelpful for the property and construction industry in Wales.  Whatever is going on behind the political scenes, one thing is for sure.  There is no economic case for uncertainty in the realms of tax. Dilly-dallying needs to give way to affirmative action. Following the close of the latest consultation, the UK Government surely has all the information it could possibly need to move this matter forward in a timely manner. Let’s hope it does just that.