How nearly £300m could be wiped off the bill for the M4 Relief Road

It will be one of the biggest decisions ever made by the Welsh Government – whether or not to go-ahead with the M4 Relief Road south of Newport.

With a report from the independent inquiry into the so called black route having been submitted to senior civil servants, it is understood that it will be discussed at cabinet next week.

And if the inquiry report recommends the project should proceed and cabinet are in agreement, subject to a six week judicial review window and a free vote for AMs in the Senedd, it could be signed off by First Minister Carwyn Jones just before he stands down in December.

The project for 14 miles of a new six lane stretch of motorway would cost around £1.32bn, although there is not yet a final cost figure.

However, as its stands, on top of that the Welsh Government would also be liable for VAT payable to the contractor at 20%.

That would add a further £260m to the cost.

As with all major capital projects there is a contingency in the event of an overspend and in this case that is a further £151.6m, or just under 12% of the total bill.

So the project could come in less than the current forecast of £1.32bn.

But how could the Welsh Government ensure that while the project would have to pay VAT to the contractor over its three year construction period, it could be reclaimed from HMRC, so effectively being wiped out?

The legislation is quite clear in that government departments, and this includes the Welsh Government, cannot reclaim VAT.

But other public sector bodies, such as local authorities, Natural Resources Wales, Highways England, the police and the BBC can – under section 33 of the VAT Act 1994.

The Welsh Government is currently exploring ways of mitigating the impact of VAT if they give the go-ahead to the M4 Relief Road.

One way would be for the project not being procured – although funded – by the Welsh Government, but via local authorities who could use their current section 33 status to reclaim the VAT.

So could Cardiff and Newport councils, as they would see the motorway running through their boundaries, effectively oversee the project on behalf of the Welsh Government?

A funding mechanism could be devised for them either passing the reclaimed VAT back to the Welsh Government, or having their funding support from the Welsh Government cut accordingly.

Or could a way be found for the Welsh Government’s at arm’s length transport body Transport for Wales (TfW) being ‘re-engineered’, perhaps working in partnership with local authorities, to also be covered under the section?

If so, this approach could also be used to reclaim the VAT on the £734m next phase of TfW’s Metro project in south east Wales with electrification of the core Valley Lines into Cardiff.

Any VAT savings could then be ploughed into other rail project.

Another option could for be for a new statutory instrument being laid by the Treasury to add a new corporation to the list as the powers allow under the legislation.

This is a quite legitimate route as was the case with school academies in England, championed by the Conservatives, being given the same ability to reclaim VAT as local authority controlled schools.

One of Wales’ leading experts on VAT, Liz Maher, of Centurion VAT Specialists, said: “VAT is often mentioned as a cost barrier to the delivery of the M4 Black Route and while there are restrictions on VAT recovery for government departments there is a much wider VAT recovery relief that local authority bodies can access.

“Under section 33 of the VAT Act 1994 it ensures that VAT incurred on new construction would be paid, but then recovered by that body.”

The VAT director added: “There are many examples of where these wider VAT recovery rules have been amended to incorporate new public bodies to access this improved VAT recovery relief.

“Natural Resources Wales and the London Legacy Corporation established to deliver the promises made for a legacy for local communities after the London Olympics have all benefited from being added to this qualifying section.

“There have also been bodies such as the academy schools across England added to this relief provision as the school – when run by the local council – would have had the same VAT recovery benefit.The VAT rules were changed to enable this position to remain even though the school was then outside of local authority control.

“Where there is the political will to deliver projects clearly mechanisms already exist to ensure VAT costs are not used as a reason why a project should not proceed.”

From next year the Welsh Government will have an increased borrowing facility from the UK Government from £500m to £1bn.

And in his Budget last month the Chancellor announced a further of borrowing facility of £300m to the Welsh Government, specifically for the M4 Relief. With a £800m borrowing facility for the project, and a position where VAT is able to be reclaimed, then in