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I ask James Messis to provide background on that.

I think that the dispute mechanism is robust and that it provides sufficient flexibility. It is also important to recognise the impact on ratepayers. Avoidance measures are fundamentally unfair and disadvantage people who engage in legitimate practice.

I ask James Messis to address your specific points about the dispute mechanism and what recourse there is in the event that an occupier disagrees with a local authority.

Good afternoon. The draft instrument under consideration is quite technical, but simply put, its intention is to assist councils from 1 April 2023 in tackling known non-domestic rates avoidance arrangements.

The measures that are set out in the regulations are unique in the UK. Tax avoidance in non-domestic rates takes place when a ratepayer seeks to reduce or avoid the liability on their property through activity that, although permissible within the existing legal framework, is not in keeping with the spirit of non-domestic rates law.

In 2017, the independent Barclay review of non-domestic rates recommended that a general anti-avoidance rule be created to make it harder for loopholes to be exploited. Subsequently, the Non-Domestic Rates (Scotland) Act 2020 provided powers that enable Scottish ministers to make regulations

“with a view to preventing or minimising advantages arising from non-domestic rates avoidance arrangements that are artificial”.

The relevant terms are defined in the 2020 act.

We committed to utilising those powers, including in the programme for government 2021-22 and the Bute house agreement. The draft regulations that are before the committee deliver on those commitments. They aim to strike the right balance between empowering councils to tackle rates avoidance and allowing property owners and occupiers to engage in business practices that are carried out for a reason other than simply tax avoidance.

The first target of the regulations is the artificial use of insolvency, particular leasing arrangements and shell companies. Within prescribed circumstances, councils will be able to make the owners, rather than the occupiers, of non-domestic properties liable for the payment of rates. In those circumstances, non-domestic rates relief awarded to the property would cease.

The regulations have a number of built-in safeguards to protect legitimate operators. First, the triggers for the transfer of rates liability are not actionable unless it is a non-domestic rates advantage, such as an outstanding non-domestic rates liability. Further, the circumstances in which a council may transfer the rates liability from the occupier to the owner of the property are carefully defined and include tenancies that are not on a commercial basis, insolvency in conjunction with other artificial indicators, and specific characteristics and behaviours of the occupier.

Councils must notify the property owner of any intention to transfer the rates liability to them and must provide an opportunity for the owner to make representations before a final determination is made. Only if there has been a similar offence within the past five years can there be a retroactive transfer of liability from the start of a given artificial lease agreement.

The second target of the draft regulations is rates avoidance through a reduction in rateable value by making deliberate physical changes to the state of a property solely for the purpose of reducing the rates liability. That can include intentional property destruction. The conditions for the use of the relevant power are set out in the regulations and are necessary to support the devolution to councils of the responsibility for empty property relief.

As is the case with the other provisions in the regulations, it is not intended to target legitimate enterprise. In all instances in which the council questions the appropriateness of any arrangement, the owner will have the opportunity to demonstrate its commercial rationale.

The draft regulations were subject to consultation with industry experts and practitioners, including assessors and local authorities, through the Institute of Revenues Rating and Revaluation. I thank everyone who engaged with Government officials on that.

Tax avoidance reduces public revenues and is unfair to the majority of ratepayers, who do not engage in such practices. The presence of avoidance behaviours can also undermine public confidence in the non-domestic rates system and lead to reduced rates of compliance. It is not just appropriate but necessary that we bring forward regulations to tackle tax avoidance where we can and ensure greater fairness and transparency in the non-domestic rates system. As such, the regulations support the principles of the Scottish Government’s “Framework for Tax” and align with the strategic objectives that the framework contains.

I hope that members agree with me and will support the draft instrument.

Sufficient flexibility is built into the regulations so that the local authority, as the effective tax authority, can engage with owners, and there is an opportunity for owners to engage following a local authority’s giving of a notice. I ask James Messis to expand on that slightly.

Local authorities are responsible for the administration. More generally—it is not specific to this matter—resource has been provided to local government in recent financial settlements for the reforms that have been implemented due to the Barclay review.

James, do you have anything to add?

On local authorities, as I touched on earlier, we are giving careful consideration to the issues that have been raised through the ADS review and, as I have conveyed to the committee, I will be in a position to set out our response in several weeks’ time.

More broadly, I reiterate my point that there is a role for the private rented sector to play. However, as we have touched on, a number of factors determine the supply of housing. Many of those are microeconomic factors outwith the control of this Parliament or, indeed, any single Government, whether that be as a consequence of the challenges that we face in the supply chain, the inflated costs of raw materials, issues around recruitment and retention in the construction sector, the availability of financial products following the mini-budget or rising interest rates. All those come to bear and have an impact.

It is important to recognise that the role of tax in shaping supply and demand in housing cannot be seen in isolation; it sits in a much broader set of factors. I would suggest that those factors, when combined, are significantly more impactful.

We make our tax policy decisions through the medium of our framework for tax, which we have discussed previously before the committee. That recognises a number of functions of tax. Yes, it is about raising revenue, economic stimulus, behavioural change and redistribution. We seek to implement tax policy changes in a way that is consistent with the six principles that we have set out—the four Adam Smith principles plus effectiveness and engagement. That is to contribute towards meeting our four strategic objectives: maintaining stability of revenues, responding to societal shift, national outcomes, and a wellbeing economy. That is the process by which we take all our decisions on tax.

We had stability with the rates within the LBTT system for a number of years. There was an increase in the nil threshold in response to the pandemic, but the position subsequently reverted to the previous position. The decision that we have taken on the additional dwelling supplement is consistent with the long-standing policy intent, which I have already stated to the convener.

On what the impact will be, the SFC has provided forecasts. In looking at the net impact on the budget in each year forecast to 2027-28, we see a net increase of £256 million next year, £219 million the following year, £190 million, £175 million and £165 million. That is additional revenue that we will have because we have taken policy decisions on thresholds for our core LBTT across residential and non-residential, and because of what we are doing with the ADS. That will provide funding to help us to meet a range of objectives, including our strategic housing investment to support the social rented sector as part of the wellbeing economy.

The policy cannot be seen simply in isolation. There is revenue raising, as well, and that revenue will ultimately be deployed in support of local services and our housing programme.

As part of any tax policy, we consider what the behavioural impacts will be with regard to revenue and, as I set out in relation to the framework for tax, how it relates to our wider objectives as a Government. Obviously, it is important to recognise that we are talking about a transactional tax. It does not impact on the existing PRS. Exemptions are in place—

Forgive me, but much of what you have touched on goes beyond my portfolio responsibilities and aligns more with those of Ms Robison and Mr Harvie. However, the answer to your questions about tax and investment in the context of finance and the economy is yes. I do not want to repeat myself, but our tax policy decisions are taken in the context of the budget cycle, the policy cycle and our strategic objectives as a Government. They are not taken in isolation. We are all familiar with and understand the clear policy intent behind the ADS, which is to do with the provision of support for first-time buyers.

Are there any specific points that you want me to touch on, beyond that?

I have to concede that that is a perfectly fair and reasonable point. It had been our intention to have progressed further on the ADS review. However, given the complexity of the ADS review and the importance of being able to provide certainty and get it right, we have taken a bit more time. As I said in my remarks to the convener earlier, we will be producing a response to the review shortly. I look forward to having opportunities for further engagement with the committee on what we produce at that point.