The Welsh Government has experienced a significant drop in revenue from devolved taxes this financial year.
According to the Welsh Revenue Authority (WRA), proceeds from Land Transaction Tax (LTT) and Landfill Disposal Tax (LDT) fell by more than a quarter in 2023-24.
Revenue Decline Overview
The overall revenue collected from devolved taxes in Wales has seen a dramatic reduction. The total sum collected for the financial year 2023-24 amounted to £330.2 million, a stark decrease from the £418.6 million generated in the previous year. LTT, a major constituent of these revenues, dropped from £372.1 million to £269.8 million.
Of the £269.8 million raised through LTT, £202 million was from residential properties while £67.2 million came from commercial property deals. Additionally, Landfill Disposals Tax (LDT) revenue fell from £42 million to £29.7 million. This significant decline in revenues indicates a challenging financial environment for the Welsh Government.
Impact on Welsh Government Funding
The decrease in tax revenues has had a direct impact on the amount of cash remitted to the Welsh Government. The total amount remitted via the Welsh Consolidation Fund was £298 million, compared to £422 million in the previous year. The remaining balance for 2023-24 will be remitted in the current financial year.
This drop in revenue is particularly concerning because the Welsh Government uses these funds to support public spending. The situation is further complicated by the lack of a safety net in the funding settlement between the UK Treasury and the Welsh Government, which means there is no mechanism to offset year-on-year falls in tax receipts.
Factors Contributing to Revenue Decline
The chief executive of the Welsh Revenue Authority, Dyfed Alsop, attributed the decline in LTT transactions to a continued downturn in the housing market. This trend, which began in the last quarter of 2022-23, resulted in a decrease to just under 50,000 transactions.
For LDT, the decline was linked to a reduction in waste being disposed of at authorised landfill sites in Wales. In total, around 1.1 million tonnes of waste were recorded, down nearly 15% compared to the previous year’s figure of 1.2 million tonnes. This included a notable fall of over 30% in standard rate waste disposals, while lower rate waste disposals saw a slight increase.
Consultancy and Operational Costs
During the year, the WRA nearly doubled its expenditure on external consultancy services, going from £317,000 to £612,000. This rise was mainly due to extensive work undertaken on behalf of the Welsh Government regarding the potential introduction of a tourism tax in Wales.
Other consultancy costs covered specialist skills in network services, analysis of corporate culture, cyber security, and a review of the financial system. The WRA’s operational budget allocation for the year was £8.4 million, with staff costs amounting to £5.5 million.
The chief executive noted that efforts were ongoing to prepare for the introduction of a visitor levy in Wales. Stakeholder consultations have begun, including with accommodation providers and local authorities, to determine how this levy might be implemented effectively.
Operational Efficiency and Tax Compliance
Despite the challenges, the WRA reported high levels of tax compliance and operational efficiency. In its financial report for 2022-23, the authority noted that 99% of tax returns were filed on time, with 98% of transactions correctly filed on the first attempt.
Moreover, the WRA successfully recovered or protected £2.3 million of LTT as additional revenue. This was achieved through effective interventions after taxes were filed or paid incorrectly. These results indicate the success of the WRA’s strategies to ensure accurate tax filing and compliance.
Chief executive Dyfed Alsop stated, “It’s positive to see that the vast majority of people have continued to get tax right. This is a positive sign that our way of engaging and supporting people to file the right tax, first time, is continuing to be effective.”
Future Tax Variations and Economic Impact
The Welsh Government retains the power to vary the three bands of income tax by up to 10p. However, it has so far remained aligned with the UK Government on these bands.
The potential for future changes in tax policy could further impact revenue generation and economic stability in Wales. Policymakers will need to carefully consider the implications of any tax adjustments to avoid exacerbating current financial challenges.
With ongoing economic pressures, the Welsh Government faces critical decisions regarding tax policies and public spending priorities to manage and mitigate the impact of reduced revenues.
The significant decline in revenue from devolved taxes poses a substantial challenge for the Welsh Government.
As policymakers grapple with the implications, they must strategise to both stabilise and potentially increase future tax revenues without compromising economic growth.