ICAEW warns new taxes could damage Welsh businesses

Leading accountancy body, ICAEW has expressed concern at any moves to devolve Corporation Tax to Wales and warned any new taxes could also damage business in the private sector.

In evidence to the Silk Commission – set up to review the present financial and constitutional arrangements in Wales –ICAEW director for Wales, David Lermon expresses concern about the dangers of additional burdens being placed on business in Wales.

Mr Lermon said that the ICAEW recognised the benefits that devolution has brought in terms of greater transparency of the policy making process which could be are tailored to Welsh circumstances.

But, he argued, the verdict on whether this has led to better outcomes, in terms of economic prosperity, educational attainment, a more sustainable environment and improved health and well-being was at present ‘not proven’.

“We believe that the new powers are a challenge as well an opportunity: more laws do not make for more effective government, a more cohesive society or a stronger economy – more appropriate laws do.

“We are strongly of the view that legislation should always be the last, not the first resort, and that the default position of the Welsh Government should be that regulatory frameworks which impact on businesses in Wales should only diverge from those in England where there is a clear and demonstrable benefit.

“In the same way, we strongly believe that the starting point for the consideration of further devolution of fiscal powers must be whether a strong case can be made that any changes will bring real benefits in terms of the functioning of the Welsh economy and political governance – and without destabilising arrangements elsewhere in the UK. From a business perspective, changes which add additional or distinct rules and regulations for Welsh businesses over and above those for their competitors operating in England should be avoided.”

Mr Lermon said that a key priority for ICAEW – and for business more generally – is the simplification of the tax system.

“The UK now has one of the most extensive and complex tax systems in the world and while the UK Government has committed itself to tax simplification, this is a highly challenging agenda. There must be a risk that changes to the tax regime in Wales or the other devolved territories will fundamentally undermine these efforts.”

“Moreover, as the Holtham Commission has noted, cross-border flows of people, business and capital are far more important in the case of England and Wales than they are in England and Scotland: fully 90% (2.7 million) of the Welsh population live within 50 miles of the Welsh border – with 48% (1.4million) living within 25 miles of the border: while no fewer than 4.9 million people live in England within 25 miles of the border and 13.8 million within 50 miles.”

The ICAEW warned that if there were differences in tax codes between Wales and England, consumers, employers and employees were likely to take action to reduce exposure to tax.

“At the same time, we do accept the argument that having a considerable measure of political and legislative devolution without the devolved administration having any powers to determine the level of overall spending, even at the margin, is certainly unusual and probably undesirable, since it discourages politicians from taking responsibility for the overall level of spending which they are authorising.

“Overall, given these considerations, we would be most sceptical of any proposal to transfer any powers of taxation related to business taxes. We note that Holtham excludes VAT, National Insurance, stamp duty on shares and the climate change levy, amongst others, from consideration on the basis that ‘devolving those taxes would either create unacceptable distortions or the cost of devolving and monitoring them would be excessive’. We endorse that view.

“However, while acknowledging the complexities of devolving responsibility for Corporation Tax, Holtham recommends that this be the subject of further consideration by the UK and Welsh Governments. We are extremely doubtful that devolution of Corporation Tax to Wales should be considered as part of the future financing of the Welsh Government.

“Holtham also considers that there is a case for further discussion of capital gains tax on property transactions, including those related to commercial premises. We doubt whether this change to a tax which, as Holtham recognises, raises only modest sums merits the downsides in terms of potential additional bureaucratic, and potentially financial, burdens on business.

“In terms of income tax, we believe that the case made by Holtham for the principle of some devolution of powers is stronger: but given the inter-dependence of the Welsh and English labour markets, we remain concerned that the application as opposed to the existence of tax varying powers could lead to outward migration of more highly skilled workers – who are of course under-represented within the Welsh economy – thus increasing the competitive disadvantage of indigenous Welsh businesses,” added David Lermon.

The key conclusions of ICAEW, which has more than 3,000 members in Wales, are

  • Recognition of the conclusive nature of last year’s referendum on enhanced legislative powers for the National Assembly and that in many ways the lack of fiscal devolution is an anomaly.
  • Deep concern to prevent any fiscal changes which may obstruct efforts to simplify the UK’s highly complicated tax system and/or which place additional burdens on Welsh businesses compared to their counterparts elsewhere in the UK.
  • Recognition that , given the proximity of much of the Welsh population to the border with England and the intensity of cross-border links, the potential for differences in the tax codes in the two countries to have unintended consequences must be considerable.
  • High degree of scepticism of the case for devolving Corporation Tax to Wales and belief that any powers to introduce new taxes would have to be exercised with extreme caution, given the fragile nature of the private sector economy in Wales.
  • Support for greater investment in infrastructure and to this end support for the Holtham Commission’s proposals on limited borrowing powers for the Welsh Government.
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