At the start of the new tax year, Nick Ramsay AM considers the implications of the Welsh Government’s taxation decisions for Welsh businesses.
A new tax year, and a fresh start for businesses across Wales. And yet for many, 2018/19 could prove to be a pivotal moment for Welsh businesses, with the Welsh Government assuming control over parts of the tax regime for the first time.
One tax in particular could prove pivotal, and the Welsh Government’s approach to Land Transaction Tax could be cataclysmic for the Welsh economy.
On the 1st April, Land Transaction Tax replaced Stamp Duty Land Tax (SDLT), which means that the tax income generated from the sale of property will go directly into Welsh coffers.
While the Welsh Labour Finance Secretary’s announcement of freeing buyers of domestic properties valued up to £180,000 from paying the tax gained substantial Welsh media traction, less has been written about his proposed increase of taxes on non-domestic and “mixed” properties, such as farmland.
Currently, Stamp Duty places a 5% tax on non-residential properties valued above £250,000, meaning that buyers pay nothing for the first £150,000 of the property, then 2% on the portion from £150,001 to £250,000 and, finally, 5% on the remaining amount. However, the Welsh Land Transaction Tax keeps the same rates as Stamp Duty up to properties worth £1,000,000 and then charges 6% on the portion above this.
While this seems like a small increase – and will generate a (small) profit of £2.6m based on property transactions between £1m and £5m – the adverse effects are substantial. When it was first announced in October 2017, Welsh Chartered Surveyors labelled the hike ‘crazy’ and described it as a “poorly thought out change, making Wales less commercially attractive and damaging the economy”.
The Welsh Government claimed it would lead to an increase in commercial activity.
Despite its confidence that this increase would not harm business, the Welsh Labour Government has not considered the added costs to future large-scale regeneration, educational and economic projects it may wish to support. Taking a sample of such Welsh projects in the last 10 years, such investment would attract much higher taxes which, in turn, would create a major barrier to investing in Wales and deflate both local and national economies.
- Aston Martin (£51.51m). Estimated Land Transaction Tax: £3,069,100
- Two Central Square, Cardiff (£56.5m). Estimated Land Transaction Tax: £3,374,500
- Friars Walk, Newport (£85.3m). Estimated Land Transaction Tax: £5,096,500
- Government Property Unit, Central Square, Cardiff (£117.2m). Estimated Land Transaction Tax: £7,010,500
Increasing the tax by just 1% would make these property investments 20% more expensive compared with Stamp Duty Land Tax and at least 32% more expensive than the Scottish property tax, Land and Buildings Transaction Tax. With limited availability of taxpayer funding, accusations of public sector waste, and the bottom line of significant investors at stake, such a difference would mean investors turn elsewhere, to cheaper projects, with important employment and regeneration opportunities ultimately lost to Wales.
By comparison, Scotland, which has similar markets to Wales, has bucked the trend of increasing tax on commercial property and has instead significantly reduced its own Land and Buildings Transactions Tax (LBTT). Scottish businesses now pay 3% tax on properties between £150,000 and £350,000 and 4.5% on properties over £450,000. However, rather than losing government revenue through this decision, Scotland has, in fact, increased both investment and its share of tax. For example, Revenue Scotland recorded its highest amount of revenue in this tax in December 2017 at £62m that month. Year-on-year, Revenue Scotland sees a £13.4m increase in its share of LBTT, so it is clear that, by making Scotland an attractive investment option, more taxes are raised.
Instead of embracing an exciting low tax alternative for the Welsh economy, the Welsh Labour Government continues to plod down the old, worn path of high taxation.
On top of this, the cumulative taxation businesses in Wales will face is enormous. From April, Wales will become the most expensive country in Great Britain to conduct business, due to its punitive increases on Non-Domestic Rates. Compared with lower multipliers in Scotland and England, all businesses in Wales will have to pay 51.4p in the pound on the rateable value of their property. This is the first time the 50p barrier has been broken in Wales since 2000, when the Welsh Government began to control the multiplier.
By doing so, the Welsh Labour Government has created an unnecessary obstacle to businesses in Wales and has stifled their expansion. This concern is borne out by the numbers of businesses by size currently in Wales. Measured against approximately 250,000 micro and small businesses currently in Wales, there are just 2,105 medium sized businesses and 1,675 large enterprises. Between 2014 and 2017, the number of medium sized enterprises increased by just 55. There is simply no option for small businesses to scale up, employ more people and increase Wales’ wealth, when the overheads are too high.
This stymied approach towards taxes raises further questions about the ability of the Welsh Government to adequately administer devolved taxation. The Welsh Labour Government seems to be stuck in the same mind-set when it comes to taxation, believing that higher taxes will create higher revenues. However, the opposite is almost invariably true; which was seen by the fact that the top 10% of earners in the UK now pay 59% of total income tax, compared with 35% in 1976, when taxes were up to 83% of income. It has been proved time and time again that higher taxation leads to lower returns, as the wealth creators and foreign investors simply move somewhere cheaper.
Those who are on lower wages also tend to suffer more because of the wider effects of tax rises. For example, UK Labour’s 2017 proposal to raise corporation tax to 26% was found by the Adam Smith Institute to cost as much as £15bn in lost wages and jobs, as well as a fall of over £12bn in the Treasury’s revenue. This led it to conclude that, “as tax rates are increased and companies invest less, because the after-tax rewards are lower, two things happen; company profits are lower, so there is less to tax, and also there are fewer jobs and those that remain are less well paid”.
What we are starting to see in Wales is a blinkered attitude to taxation, which will potentially cost Welsh business and, ultimately, peoples’ jobs dear. Inward investment from non-UK companies, the Welsh Government admits, is worth 31% of Welsh GVA – equivalent to £4,432 per head – which could be lost due to poorly thought out tax policies. How well this tax works for Wales will also be an indication of how the partial devolution of income tax is treated by the Welsh Government from 2019.
North of the border, despite witnessing first-hand the advantages of lower taxation, the Scottish Nationalists have rowed back.
Under Nicola Sturgeon, Scotland has seen a rise in property taxes, environmental taxes, business taxes, and now – for the first time, this week – income tax.
An extra 21% income tax band for earnings between £24,000 and £44,000 is being introduced, as well as an extra penny on both higher and top rates, meaning that 1.1m Scots will now pay more in income tax than those who earn the same as them in England and Wales.
This could be the future for Welsh taxpayers.
What Wales needs now, more than ever, is a fresh approach, by first understanding that investment leads to opportunities for jobs, regeneration and, ultimately higher tax returns for Governments.
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