Ways and Means
Wednesday 6th September 2017
(7 years, 2 months ago)
Commons ChamberRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts
18:58 - The House divided: - Ayes: 317 / Noes: 276 - Question accordingly agreed to.
19:15 - The House divided: - Ayes: 320 / Noes: 287 - Question accordingly agreed to.
19:29 - The House divided: - Ayes: 320 / Noes: 249 - Question accordingly agreed to.
Mr Deputy Speaker (Mr Lindsay Hoyle)
Before I call the Financial Secretary to the Treasury to move the first Ways and Means motion, I make it clear to the House that motions 1 to 48 will be debated together.
The Financial Secretary to the Treasury (Mel Stride)
I beg to move,
That—
(a) provision (including provision having retrospective effect) may be made amending Part 3 of the Income Tax (Earnings and Pensions) Act 2003, and
(b) (notwithstanding anything to the contrary in the practice of the House relating to the matters that may be included in Finance Bills) provision may be made taking effect in a future year amending Chapter 6 of that Part (taxable benefits: cars etc).
The motions on the Order Paper provide the basis for the second Finance Bill of 2017. They will define the scope of the Bill and allow the Government to introduce it for further debate and consideration in the normal way. The motions ultimately represent a number of measures that will refine our tax system to make it fairer and more sustainable.
As the House will be aware, Finance Bill resolutions are typically the formal subject of the Budget debate and are considered at that point. That was the case earlier this year, when the Government introduced the first Finance Bill of 2017 after the spring Budget. The general election, however, meant that time to consider that Bill was curtailed. We proceeded on the basis of consensus, taking a number of important provisions, including the soft drinks industry levy, through to Royal Assent before Parliament was dissolved, but a large volume of legislation on other announcements at the spring Budget and earlier fiscal events was withdrawn. At that point, my predecessor clarified to the House that there was no change of policy and that the Government intended to legislate for the withdrawn measures at the first opportunity. The written statement I provided on 13 July again confirmed that intention.
These motions now pick up where we left off and legislate for the provisions that were introduced and withdrawn due to time constraints. The areas of tax legislation that they provide for will not be a surprise to right hon. and hon. Members, who passed resolutions corresponding to these tax changes after the spring Budget and debated them on Second Reading of the earlier Act.
In fact, Members who are aficionados of tax legislation—I note that a few usual suspects are here today—will find a lot of the Bill to be even older news. Before they were introduced after the spring Budget, many of the clauses had been published in draft and the policy design had been consulted on with tax professionals, businesses and the public. Such an open and consultative approach is an important part of the tax policy making process; it helps to ensure that legislation achieves its intended effect and means that those who will be affected know in advance what to expect.
Lady Hermon (North Down) (Ind)
I am grateful to the Minister for allowing me to make an early intervention. So that the House can understand the voting patterns later tonight, will he clarify whether the motions before us are covered by the deal done between the Democratic Unionist party and the Conservative party? That answer will be very informative to the House and, indeed, to our constituents.
Mel Stride
I assure the hon. Lady that the process at the conclusion of this debate will be exactly the same as the one we go through on any consideration of Ways and Means measures in respect of such fiscal matters.
An open and consultative approach is important to our tax policy making process, and our commitment to a single major fiscal event each year is a further valuable step to improving the process for making fiscal policy. Just as with most other major economies, people will no longer face a host of tax changes twice a year.
The transition to the new Budget timetable will, of course, mean that a further Finance Bill will be introduced following this autumn’s Budget. In line with our past practice, the Government will next week publish drafts of some clauses that we plan to introduce in the next Finance Bill. The transition means there are fewer clauses than in recent years, but pre-legislative scrutiny will again help consideration of the Bill.
On that subject, Members may notice that there has been a slight change to the motions on today’s Order Paper. The Government have withdrawn a motion covering changes to the definition of a taxable disposal within landfill tax. That motion and the corresponding clause will no longer be taken forward in the current Bill.
Mel Stride
The hon. Gentleman has brilliantly pre-empted my next comments. If only he were a little more patient, all would be revealed. Her Majesty’s Revenue and Customs has been consulting on related changes to the taxation of illegal waste disposals over the summer, and we will set out our proposals in this area on 13 September when draft clauses for the winter Bill are published.
Mr Jones
Is the Minister saying that those proposals will actually come forward? I will address this in my speech, but I have been in discussion with HMRC’s policy department, which has given certain commitments to making some serious changes in order to collect more landfill tax and stop avoidance.
Mel Stride
The hon. Gentleman is right about the importance of those measures, and they will go forward. The policy has not changed; it will just come forward at a different time with other measures in this area.
Mr Jim Cunningham (Coventry South) (Lab)
Does the Minister have the staff to do the job on addressing tax avoidance?
Mel Stride
Our record on addressing tax avoidance speaks for itself. HMRC has raised £160 billion from clamping down on avoidance, evasion and non-compliance since 2010, which is a vast improvement. Given that our current deficit is running at about a third of the 2010 level, this Government have brought in a huge amount of money. In terms of having the resources, we have invested £1.8 billion in HMRC since 2010 to focus exactly on tax avoidance.
Mr Kevan Jones
As the Minister knows, HMRC’s landfill tax figures show a £150 million tax gap. Will the future proposals be published for further reaction and consultation? What I hear from the industry is that some of the proposals it wants are being ignored by HMRC.
Mel Stride
All the measures relating to the motions we are debating will be out there and will be clear. They will be brought forward along with other measures later in this Session.
Moving back to the Bill at hand, the motions on the Order Paper give little mystery as to the provisions that we will be introducing. I look forward to debating them in more detail as the Bill progresses, and I will say more about the overall aims of the Bill on Second Reading. For the moment, I will provide a brief outline of some of the main measures.
The Bill that the motions provide the basis for will make significant changes to the corporation tax regime for large companies. Building on work that this Government have championed internationally and the recommendations of the OECD, the Bill will limit the extent to which big multinational corporations can reduce the tax they pay in the UK through excessive deductions for interest expense. That measure will address a significant area of corporate tax avoidance, and is forecast to raise £5.3 billion over the next five years by ensuring those corporations pay a fair contribution.
The Bill will also change the treatment of losses within corporation tax; it restricts the extent to which past losses can be set against taxable profits, ensuring that companies with profits over £5 million in a year must pay some corporation tax. At the same time, the Bill will provide for allowances recognising donations to grassroots sport and to museum and gallery exhibitions, and for new £1,000 allowances so that those earning small amounts from trading or property will not have to pay tax on this income. The changes to tackle avoidance of corporation tax by multinationals are part of a number of changes that take further steps in tackling tax avoidance and tax evasion.
Rachel Maclean (Redditch) (Con)
Does my right hon. Friend agree that Labour’s plans to raise corporate and personal taxation will damage real incomes and investment in the UK?
Mel Stride
My hon. Friend is relatively new to this House but she makes an important and insightful point, which is that, as we know, we should be under no illusions that under Labour’s plans corporation tax will rise. We have seen it fall from 28% to 19%, and it will continue down to 17%—
Mr Kevan Jones
On a point of order, Madam Deputy Speaker. I thought this debate was about the Government’s proposals. The Minister, following a set-up question from a Back Bencher, is now talking about what proposals Labour might have. Is that in order? Should we not be sticking to the—
Madam Deputy Speaker (Mrs Eleanor Laing)
Order. I thank the hon. Gentleman for his point of order. It is right that we must keep a careful eye on these matters, which of course I am doing. I am sure the Minister is, in the remarks he is making, using as an illustration other policies that may not be his policies. Of course, if he is replying to points raised in the debate, I will always encourage that, because it is important that every Member in this House has a say in the debate. [Interruption.]
Madam Deputy Speaker
The hon. Gentleman must not add more from a sedentary position to his point of order, so I will not take up that point, which in any case I cannot answer. The Minister has barely begun, and I am sure that in his wide-ranging speech he will cover everything he ought to cover and everything the House requires him to cover.
Mel Stride
Thank you, Madam Deputy Speaker. I could not have put that better myself. [Interruption.] And I will get on with it, too. I am not surprised that Labour Members are slightly shy about our discussing their tax plans, because they are not good for our country. Having a plan to raise corporation tax to 26%, with an increase for small companies as well, and to change the tax threshold to bring many, many more people into the higher rate of tax is not a way of incentivising jobs, wealth and economic growth, as the hon. Gentleman well knows.
Our changes to tackle avoidance of corporation tax by multinationals are part of a number of changes that take further steps in tackling tax avoidance and tax evasion. Others covered by these resolutions will introduce a penalty for those who enable tax avoidance, a penalty for transactions connected with VAT fraud and measures to tackle disguised remuneration tax-avoidance schemes.
The Government’s aim to make the tax system fairer is further supported by the Bill’s provisions on the taxation of those with non-domiciled status. A number of changes will be made, and these are forecast to raise £1.6 billion over the next five years. Most importantly, permanent non-dom status for people resident in the UK will be ended, so that they pay tax in the same way as everybody else. That major reform makes the tax system—
Mr Kevan Jones
I wish to make a point about tax avoidance and fraud. When it comes to landfill tax, will that extend to companies or public organisations which know that the price they are paying for the collection of their waste cannot possibly include the disposal rates of landfill tax? Or will it cover those accountants and others who are involved in a landfill tax company and know what is actually going on? Will that be covered by the definition of fraud and avoidance?
Mel Stride
I will ask the relevant Minister in the relevant Department to get back to the hon. Gentleman on that very specific point.
I was discussing a major reform that makes the tax system fairer and supports the public finances, increasing, but not jeopardising, the contribution that non-doms make to tax revenues. Other clauses will legislate for the changes—
Steve McCabe (Birmingham, Selly Oak) (Lab)
Will the Minister explain how long the Government have been working on this major concession and when he anticipates that there will actually be some change that means non-doms experience the same arrangements as ordinary taxpayers in this country?
Mel Stride
The answer to the hon. Gentleman’s question is that that is precisely what this Bill will be achieving. We will be putting an end to permanent non-dom status, so that those who are “deemed domicile” are treated on the same basis for taxation purposes as other residents in our country. Let me gently remind him that his party was in government for 13 years and very little happened then on the issues to which he now professes objection. So we should not be taking too many lessons from Labour on the issue of non-doms.
Charlie Elphicke (Dover) (Con)
Does my right hon. Friend recall, as I do, that for the best part of a decade the Labour party kept saying every year that it would do something about non-doms and then did nothing whatsoever because it was so into the prawn cocktail circuit and pandering to big business, and that Labour only ever took any action when it was humiliated by our previous Chancellor, George Osborne, when he was in opposition? Does my right hon. Friend also agree that this Government have been leading the way consistently on making sure that a fair share of tax is paid by non-doms and others?
Mel Stride
My hon. Friend is entirely right about that. We currently raise £7 billion a year from non-domiciled individuals, which is £1 billion more than was the case a decade ago. The provisions in this Bill will ensure that we raise a further £1.6 billion over the next five years, so this Government are serious about this issue and are acting on it.
Other clauses will legislate for the changes we have announced to the dividend allowance, reducing the differential between taxation of different individuals, and to the money purchase annual allowance for those who have accessed their pensions under the flexibilities that this Government have provided.
Finally, these resolutions provide for the Finance Bill to legislate for the Making Tax Digital programme.
Lady Hermon
I was provoked to my feet by the word “finally”. I am very concerned that a number of the resolutions before us include the words
“including provision having retrospective effect”.
I have waited patiently for the Minister, guided by Madam Deputy Speaker in his extensive contribution on this crucial piece of legislation—we are discussing the Budget and the Finance Bill, for goodness’ sake—to tell us why on earth so many provisions are having retrospective effect.
Mel Stride
The answer to the hon. Lady’s question is that many of these things relate to the fact that this Bill has been, in effect, interrupted; we now have a second Finance Bill because we had a general election some time ago, as a consequence of which not all of the measures that were going through Parliament at that time were proceeded with. The second point I would make to her is that the fact that some measures are retrospective does not mean that they have not been fully consulted on or that draft legislation has not been out there to inform the public and stakeholders.
Lady Hermon
I raise this point because where there is late payment of tax, for whatever reason, be it carelessness or inattention to a particular detail, penalties and fines will be imposed. When we are considering things having retrospective effect, we may well find that such provisions will not comply with our commitments under the European convention on human rights about the retrospective creation of fines and penalties. The Government will not want to hear that, but I just bring it to the Minister’s attention when we talk about the retrospective effect of any provisions in a Bill such as this, which involves fines and penalties.
Mel Stride
I thank the hon. Lady for her further thoughtful point, but I just return to my comments, which are that those who will be affected by the retrospective measures in this Bill will have had an opportunity to be fully apprised of them prior to their coming into force under an Act of Parliament.
In conclusion, the resolutions provide for the Finance Bill to legislate for Making Tax Digital. The Government are committed to creating a tax system fit for the digital age. Businesses increasingly interact with customers, manage their purchasing, organise their payroll and undertake a host of other functions online. It is the future for keeping their accounts and reporting their tax affairs. Moving to a digital system will help us to address the £9 billion annual cost of taxpayer errors. It is right that we act.
Kit Malthouse (North West Hampshire) (Con)
As one of the Conservative Members who was gently trying to persuade the Government to take a more staged approach to Making Tax Digital, may I take this opportunity to thank the Minister for his announcement in July of the changes to the scheme? Those changes have been greeted in particular by the small business community with some relief and gratitude, and I speak as a small business owner myself. The prolonged nature of introducing the full-throated Making Tax Digital programme means that business has time to adapt. Will he confirm that that means the Government have plenty of time to tweak the system for some of the perhaps unforeseen burdens that may still arise?
Mel Stride
I thank my hon. Friend for his kind remarks. By way of mutual appreciation, I thank him for his input around the discussions I held immediately prior to taking the decisions to which he alludes. He is right that we now have the time to ensure that the measures are sufficiently piloted, are robust and are not overly onerous on the businesses and individuals to whom they will apply, and that they work to make businesses more efficient and effective in themselves while reducing the tax gap further and raising much needed revenues.
I have heard the representations from businesses and from members of the House about the speed of the transition to Making Tax Digital. To ensure that businesses are ready, I announced a new timetable for the programme before the summer recess. In the first instance, from April 2019 participation will be required only for businesses that have to register for VAT and they will be required to provide only updates on their VAT liabilities, which they already report quarterly. We will extend mandatory participation further only once the programme has been shown to work well, and at the very earliest in April 2020. As my hon. Friend the Member for North West Hampshire (Kit Malthouse) suggested, I know that will be welcomed by Members from all parts of the House who have raised such concerns with me.
As I have outlined, the purpose of the resolutions we have tabled is to enable the introduction of a Finance Bill that will legislate for a number of tax changes announced before the general election. The changes the Bill will make are important. They will make a major contribution to the public finances, tackle tax avoidance and evasion and address areas of unfairness in the tax system. We will doubtless debate the principles of the changes fully on Second Reading and consider them in detail in Committee. Today is an opportunity to begin that process and take forward again the tax legislation curtailed at the end of the last Parliament. I commend the resolutions to the House.
Peter Dowd (Bootle) (Lab)
I noted the Minister’s comment that there is no change in policy. From that statement it is clear that the Government have learned absolutely nothing from the result of the general election, which is a terrible shame. The Opposition welcome the Government finally laying before the House the Ways and Means resolutions, which will comprise the so-called “summer” Finance Bill, but the clue is supposed to be in the name. I find it rather odd, as I am sure many of my parliamentary colleagues do, that we stand here in early September debating a summer Finance Bill that was expected to be introduced and passed before the summer recess. Alas, it was not.
I recall the Minister’s predecessor standing at the Dispatch Box only four and a half months ago assuring the House that if the Government were returned, they would immediately bring forward measures dropped from the previous Finance Bill due to lack of parliamentary time. However, they have an excuse for the procrastination: it is called chaos. We have a chaotic Government, chaotically stumbling from crisis to crisis, not knowing one part of their anatomy from another. After the election, we returned to a zombie Parliament where little in the way of business was put forward to be debated in the House. Mr Speaker referred today to the whole question of the scrutiny that we are supposed to be doing, but the Government are not putting anything forward for us to scrutinise.
Not only is the Prime Minister one of the walking dead, but she wants Parliament to join her. On a number of occasions, my colleagues and I wrote to the Treasury to ascertain the date for the Finance Bill. In addition, the issue was raised twice in business questions and the Chancellor was asked about it in Treasury questions, all to no avail and no answer. It was the fifth amendment approach to answering questions. It was only in the waning hours, as Members packed up before the House rose for summer recess, that the Government were forced to publish the date for the Bill’s return.
I know the Treasury lost two Ministers in the election—to rework Oscar Wilde’s observation, losing one Minister is a misfortune, but to lose both looks like carelessness—but surely the country cannot simply hang around because the Government are in meltdown. The Government are making an art form out of uncertainty. We have uncertainty about Brexit, uncertainty about the country’s finances, as the resolutions indicate, and now uncertainty about the Prime Minister’s job prospects. The only certainty we have is the inability of this vacuous, hapless Government to govern with any scintilla of competence or compassion.
The Government had five weeks after the general election to introduce measures dropped from the previous Finance Bill and bring certainty to taxpayers and businesses. Many of those businesses have already undertaken the administrative and financial burden of ensuring that they meet the stipulations of the measures included in the Ways and Means resolutions being debated today. The Minister could have brought forward the resolutions and published the Bill before the House rose for summer recess. That would have allowed Members and the businesses and taxpayers affected time to read through the proposals and examine them thoroughly. Instead, the Government have cynically restricted the debate by scheduling the Second Reading of the European Union (Withdrawal) Bill for tomorrow.
Next week, the Minister intends to push ahead with the Second Reading of the Finance Bill only four days after its publication, with the explanatory notes being published on the day of Second Reading. Once again, the Chancellor and the Treasury are deliberately shying away from the parliamentary scrutiny that we should be having on these resolutions. This is a time of great political and economic uncertainty, and the measures included in the resolutions do little to address the problems at hand. The global economy is on the move, while Britain under the Tories is being left behind. The resolutions are defined more by what is not in them than what is. There is nothing about investment, nothing about productivity and nothing about public services—much ado about nothing.
Charlie Elphicke
Will the shadow Minister give the House his view on the points made by his Back-Bench colleague the hon. Member for North Durham (Mr Jones) on the landfill tax question?
Peter Dowd
I would not proffer advice to my hon. Friend the Member for North Durham, because he is an expert on that issue, but I will listen clearly to what he says. Unlike the Government, I listen to my colleagues on the Back Benches.
We need only look across the channel to see that every European economy outgrew Britain in the GDP figures for the first quarter. Our productivity rate remains one of the worst in the G7 and is lower than it was 10 years ago. Real wages continue to fall behind inflation. More than ever, we need bold and radical solutions to stimulate growth, raise productivity and encourage investment in our economy. None of the resolutions before us will do that. Even the Archbishop of Canterbury has made that point. Rather than focusing on balancing the budget or tackling our growing debt to GDP ratio, we have a Chancellor who spent the summer in the witness protection programme, rearing his head only to brief against his boss when the coast was clear and the Prime Minister was abroad.
The measures before the House represent the Government’s failure to take the opportunity to begin seriously to tackle the challenges that our economy and country face. For example, it is clear that the Tories have no answers on how to raise productivity and no answers on how to tackle the growing inequality in pay. We are now experiencing the longest period of wage stagnation for 150 years, with nurses having to demonstrate in Parliament Square to make their point. The Tories have no answers when it comes to creating an economy that works for the many and not just for a privileged few.
Simon Hoare (North Dorset) (Con)
The hon. Gentleman’s former noble friend Lord Sugar, who knows a little about productivity and running a business, poured a huge amount of cold water on the prospectus that the Labour party put before the electorate a few months ago, which was clearly rejected by the largest number of businesses and business owners. Rather than the vaudeville that the hon. Gentleman seems to be going on about—it is like the Labour party conference speech that he might give, if he is given a platform—why does he not address the issues before the House?
Peter Dowd
I remind the hon. Gentleman that businesses are coming to Labour because of the mess that the Conservative party is making of Brexit.
Peter Dowd
I can name them.
None of the measures before the House address the growing black hole in the public finances, which is the direct result of the Government’s mismanagement and economic incompetence. As things stand, there is a £3 billion black hole in the public finances, made up of the Chancellor’s U-turn on the proposed increases to class 4 national insurance contributions for the self-employed on low and middle incomes; the unlawful employment tribunal fees the Government have been forced to repay; and, yes, the £1 billion bung to the Democratic Unionist party to buy its silence and compliance. Nor do the Government acknowledge the added cost to the taxpayer of delaying the implementation date for “Making Tax Digital”, which they were warned was problematic by all and sundry.
Make no mistake: this is no ordinary Finance Bill we are talking about. If passed, a number of its measures will create a charter championing tax avoidance and leaving billions of pounds of tax uncollected. Using smokescreens and false titles, the Treasury has hidden to the unsuspecting eye giant loopholes for offshore trusts in complicated tax measures. While claiming to end non-domicile status, the Chancellor is at the same time encouraging people to bend the rules and siphon off money overseas into tax haven trusts. He has excluded from one of the Bill’s key deeming measures non-doms who have inherited their status. The Government are on the side of tax dodgers, not taxpayers.
There is nothing in the measures before the House that will address the resource crisis that HMRC is facing as the Government plan to cut £83 million from its budget, along with the debacle that is its 10-year modernisation programme.
Rachel Maclean
Contrary to what the hon. Gentleman just said, the Government have raised more than £9 billion from non-doms. Those funds contribute to the Exchequer, enable us to fund public services and raise the country’s productivity rate.
Peter Dowd
The reality is that the Tories support tax dodgers. Full stop.
Several of the measures before the House will create even more work for the falling number of people employed by HMRC and put further strain on them. The Government’s actions will ensure that many of the so-called anti-avoidance measures trumpeted by the Minister will fail before they even begin.
Mr Jim Cunningham
My hon. Friend has just touched on how the Minister is going to implement these measures, which is what I asked about earlier. He will probably know that the Government are closing tax offices throughout the country, with a reduction in staff as a result. How can they honestly say they are going to implement legislation to go after tax dodgers?
Peter Dowd
My hon. Friend is absolutely right. The proposals for reorganisation will do nothing to help that—they are in a chaotic state.
Victoria Atkins (Louth and Horncastle) (Con)
I urge caution on the hon. Gentleman before he throws around wild accusations about the Government supporting tax dodgers. For what it is worth, in my previous life I used to prosecute massive tax fraudsters. I am very happy with the fact that I have helped fraud prosecutors to put a lot of nasty people into prison, so I take great offence at the hon. Gentleman’s attempt to cast all Conservative MPs in that way. The best way to deal with tax evasion and tax dodging is not to throw empty words across the Chamber but to work with the Government to reduce and stop something that we all want to see the end of: tax dodgers not paying their dues.
Peter Dowd
I hope the hon. Lady will be busier in her job.
I find it baffling that, at a time when the Government are introducing some of the most complex plans to make tax digital, and while there is so much uncertainty about how taxation and customs will work post-Brexit, they are choosing to fire HMRC staff rather than hire them. To put it simply, were the Government truly serious about wanting to close the tax gap, which costs the UK taxpayer a minimum of £36 billion every year, they would give it the resources it so desperately needs. Given the thousands of accountants and lawyers across the world whose sole occupation is to advise and enable tax avoidance, it will never be a fair fight.
The sieve-like measures on non-doms which I have mentioned are perforated even further by the plan to loosen the rules on business investment relief. That measure will allow non-doms to remit funds into the UK without paying the usual taxes. There is little evidence that such relief has been effective in encouraging greater investment in business, so expanding it is only a giveaway to non-doms. If any of us wish to invest, we have to pay the appropriate taxes. There should not be different rules for a privileged few, which maintains the Government’s view that the UK can only ever be attractive as a tax haven. The Government’s race to the bottom begins in earnest and enthusiastically.
Steve McCabe
On business investment relief, it was suggested a moment ago that we should work with the Government. Does my hon. Friend agree that they should publish details of which companies and businesses benefit from such investment, and what part of the country they are located in? That way, we will be able to see whether there is anything to work with.
Peter Dowd
My hon. Friend makes a good point; I hope the Government will listen carefully to what he says and, more importantly, act on it.
The devolution of corporation tax rates to Northern Ireland has been debated in the Chamber many times, and we do not seek to reopen the debate. Nevertheless, we have not debated and will not welcome the clear attempts by the Government to loosen the definition of a Northern Irish employer and water down the requirements for claiming the lower corporation tax rate in Northern Ireland. Under the measure before us, corporations would effectively use Northern Ireland as an onshore tax haven. They would set up small offices with a brass plate on the door, but bring in little of the real investment and jobs that Northern Ireland needs.
We see special treatment for corporations and non-doms, but the news is less good for workers at risk of losing their jobs. The proposed measures on termination payments, if they reflect what was before the House before the election, will target sacked workers as a source of revenue. If there is genuine evidence of the abuse of payments in lieu of notice, that needs to be acted on, but the Government have tacked on a power for the Treasury to reduce the tax exemption on termination payments without primary legislation. That would be a U-turn on their previous statements about dropping such plans. If there is no intention to use the power to reduce the exemption, then the measures should be amended so that it can only be uprated, not reduced. The Government also heartlessly want to enshrine the taxable status of “injury to feelings” compensation. Even when that reflects HMRC’s practice, why is it seen as a priority for legislation?
So there we have it: these motions will introduce a summer Finance Bill that stretches the meaning of summer and will leave taxpayers and businesses with months of uncertainty. It is a Bill that will do nothing seriously to tackle tax avoidance, with the Government claiming to take on non-doms while in the same breath legislating to protect the offshore trusts; a Bill that fails to address the growing black hole and the Conservatives’ mismanagement of our public finances; and a Bill that will protect the privileged few while doing nothing for the many.
This is a dark, miserable, barren winter Finance Bill with a wrathful nipping cold. We have waited a whole season for these resolutions, and they only reaffirm what we already knew: that the country can wait no longer for this disastrous and divided Conservative Government to step aside and make way for a Labour Government who will invest to grow our economy, balance our public finances and take on the tax dodgers—which the Conservatives won’t do.
Nicky Morgan (Loughborough) (Con)
This is the first time that I have spoken in a debate in which you have been in the Chair, Madam Deputy Speaker, so may I welcome you to your role? It is a real pleasure to see you in the Chair, and I thank you for calling me in this important debate.
First, let me welcome my right hon. Friend the Member for Central Devon (Mel Stride) to his new role as Financial Secretary to the Treasury. I know that he has already spoken at Question Time, but I think that this is his first formal debate. It is just about right to say that he has already been in that post for longer than I was before I was moved on to the Department for Education. As I shall explain shortly, and as we have already heard this afternoon, my right hon. Friend has already made a positive impact through his decision on the Making Tax Digital work. I look forward to working constructively with him and other Treasury Ministers over the next few months and years.
This is my first speech in the Chamber as the incoming Chair of the Treasury Committee, so it is right that I should pay tribute to my predecessor, the former Member for Chichester, the indefatigable Andrew Tyrie. During his seven years as Chairman, he took Select Committee scrutiny into new territory, successfully pressing for new powers over appointment hearings, securing fundamental reform of the Bank of England’s governance and accountability to Parliament, and conducting forensic cross-examination of Ministers, officials and senior figures in the financial services industry. His work on the Parliamentary Commission on Banking Standards led directly to vital reforms to restore public trust and personal accountability in our banking industry. I know that he will be a hard act to follow, but I will try my best to maintain his rigorous standards of scrutiny and to increase further the reputation and influence of the Treasury Committee.
It is unfortunate that we are having the debate before the Treasury Committee has been formally constituted. After a four-month hiatus, many of the incoming Select Committee Chairs are impatient for the normal business of Select Committee scrutiny to resume. I should note that until the other members of the Treasury Committee have formally been appointed, my remarks are made in a personal capacity.
The economic context for the resolutions is complex and uncertain, and some of it has already been highlighted. Employment is at record levels, but productivity is in the doldrums. Consumer spending and confidence seem resilient, but unsecured borrowing is rising rapidly. The deficit continues to fall, thanks to the efforts of the Chancellor and his predecessor, but the fiscal rules have had to be relaxed to insure against rising economic uncertainty. I am sure that over the coming months the Treasury Committee will consider this complex picture in detail, and we will want to hear from the Governor of the Bank of England and the Chancellor as part of that process. However, with the terms on which the UK will leave the EU as uncertain as they are, nobody can predict with confidence the path for our economy and public finances.
There is one thing that we can be certain about: the country’s economic success and fiscal credibility depend on the Government sustaining their commitment to economic openness—openness to trade, openness to investment and openness to migration. Leaving the European Union must not become a retreat into economic nationalism and isolationism. Global Britain must not just be a slogan.
Let me turn to the resolutions. In 2011, the Treasury Committee set out some principles of tax policy, and I expect that the new Committee will want to hold the Treasury to account for its adherence to them. In fact, I hope that we will be very interested in how future tax policy is made and the Treasury’s work on the overall tax base, given the changing nature of our economy and employment patterns.
Two of the principles identified in 2011 were that tax should provide certainty and stability, as was highlighted in an intervention by the hon. Member for North Down (Lady Hermon), who is not in the Chamber at the moment. It is alarming to see that 27 of the 48 Ways and Means resolutions are marked as
“including provision having retrospective effect”
because the principle of retrospective taxation undermines the certainty and stability of our tax system, so it should be deployed sparingly and only with good reason.
I acknowledge that in this case—the Minister has highlighted this—the Government have been quick to confirm their intentions. The previous Finance Bill was originally published in March, before the start of the tax year but, because many of its provisions were not passed before the June general election, they are coming back before the House in September. The shadow Minister complained that what is promised to be published in the summer comes forward in September. Well, it has always seemed rather strange to me that an autumn statement happens in December. There are always rather odd vagaries regarding when Government announcements are made, but perhaps that will be solved by our having just one major fiscal event in any one year.
The Financial Secretary stated in July that a number of the provisions from the original Bill would apply retrospectively to the start of this tax year when they were reintroduced in
“a Finance Bill as soon as possible after the summer recess”—[Official Report, 13 July 2017; Vol. 627, c. 11WS.]
It is therefore true to say that the retrospection in this case is not as bad as it might appear. The provisions were outlined before the start of the tax year and have been reiterated as soon as possible after the election.
As we heard from one of the former members of the Treasury Committee, my hon. Friend the Member for North West Hampshire (Kit Malthouse)—I am delighted to say that he has been re-elected—the Committee also had a strong interest in Making Tax Digital, to which resolutions 38 and 39 apply. It produced a valuable report on the subject in January, shortly before the Government announced their plans following a consultation. No one I have spoken to objects in principle to the idea of digital interaction with HMRC over tax, but widespread concerns were raised about the speed with which Making Tax Digital was being implemented and the fact that it would be mandatory for even the smallest businesses.
Mr Kevan Jones
Like the right hon. Lady, I think that the digital movement is an improvement, but has she come across examples—I have one in my constituency—of when there is a problem and small businesses particularly need to speak to somebody? Following the closure of tax offices, it takes a long time before one is actually able to speak to someone on the phone. Although the digital movement is welcome for many businesses, does she think we also need an element of personal interaction?
Nicky Morgan
The hon. Gentleman is absolutely right. We have agreed that people want more digital interactions. They are now much more used to them, and that is how people do their banking and lots of ordering. However, when there is a problem—we have seen this with the introduction of free childcare, which was the subject of the urgent question earlier today—people do need to speak to someone. That is particularly true for the smallest businesses, for which dealing with HMRC can be stressful and something they want resolved as quickly as possible. HMRC will want to consider whether that is done through face-to-face contact at offices, or by ensuring that there is a really good phone helpline system or another way of speaking online to people who are able to respond rapidly. I do not want to pre-empt what the Committee will look at, but as constituency Members of Parliament, we have all heard about cases when people have found getting hold of HMRC frustrating. HMRC is aware of that, and it has done a lot of work to improve customer service, but that is something that Members of Parliament could certainly look at further.
I welcome the deferral that the Financial Secretary announced on 13 July. It means that digital record-keeping and reporting for income tax and national insurance will not become mandatory until at least 2020. Although his statement kept open the possibility that Making Tax Digital would never be made mandatory for income tax and national insurance, resolution 38 suggests that that remains the Government’s medium to long-term ambition. His statement confirmed that the process will start with VAT in 2019. Most businesses already file their VAT returns quarterly and online, so it is sensible to start with a tax for which Making Tax Digital will not require such a significant change in businesses’ practice. Smaller businesses in particular will have breathed a huge sigh of relief when the concession was announced in July, so I thank the Minister for that.
Kit Malthouse
I congratulate my right hon. Friend on her election as the Chair of the Treasury Committee. Does she think it would be sensible for the Government—notwithstanding the fact that they are not planning at the moment to include income tax for sole traders in Making Tax Digital—to make provision for voluntary participation, so that they would see the popularity of the scheme if people did volunteer in numbers, as they did with the introduction of online self-assessment? The Government might find that 60% or 70% of businesses participate anyway within the timeframe they are proposing, so making participation mandatory would become relatively painless.
Nicky Morgan
I thank my hon. Friend very much for that suggestion. What he says has much merit, and it may well be something we want to explore in Committee. It would be fair to say that a common view among Conservative Members, and the reason why we are on this side of the House, is that we believe in encouraging, not compelling, people to do something that the Government and the state want them to do. If there are ways of encouraging and incentivising people to get online and to use this system, and if it becomes clear at some stage in the future that that is the way forward, many businesses and sole traders will already be online and used to using the system.
Deferring the change for some taxes for a couple of years or more will give everybody welcome time to prepare, but it will not solve all the problems. I therefore suspect that the new Committee will want to explore the costs and benefits fully, as its predecessor had started to do. There is definitely scope to scrutinise the Government’s published estimates for the administrative costs to business and for the supposed reduction in the tax gap as a consequence of businesses making fewer mistakes because they are reporting digitally and quarterly. But that, you will be pleased to hear, Madam Deputy Speaker, is for another day.
Meanwhile, the forthcoming Finance Bill, which the House will consider shortly, will pave the way for the implementation of Making Tax Digital. The Bill that was introduced before the election was called did little more than pave the way; nearly every paragraph in the relevant schedule contained a regulation-making power. This meant that the Bill would have delegated nearly all the key details to secondary legislation under the negative procedure. Compounded by the fact that the draft statutory instruments were not published for consultation, that does not make for good parliamentary scrutiny, and the House will return to the overall principle of the scrutiny of secondary legislation when we consider the European Union (Withdrawal) Bill tomorrow, before we even get to the Finance Bill.
At a more general level, I suspect that the new Committee will also want to scrutinise Budgets, Finance Bills and possibly even spring statements in a similar way to its predecessor. It is important that tax policy gets adequate parliamentary scrutiny, and I hope that the new Treasury Committee and Public Bill Committees will get more chance to scrutinise the Treasury’s proposals at autumn Budgets than the Select Committee did with the last spring Budget, given the circumstances of the general election.
Kirsty Blackman (Aberdeen North) (SNP)
Organisations have suggested that Finance Public Bill Committees should be able to hear evidence, which has not happened in the past. What is the right hon. Lady’s view on that? Will she consider looking at it?
Nicky Morgan
I might be guided by you on this, Madam Deputy Speaker, but I suspect that that is actually a matter for the House authorities, the usual channels and the Front Benches, although the House and Ministers will have heard the hon. Lady. Obviously, the more constructive evidence that can be given on legislation, the better legislation we have.
I will finish by saying that I look forward to seeing the Minister before the Treasury Committee. He might not be looking forward to it so much, but I promise that we will be firm but fair in our questioning of him. I wish him all the very best as he embarks on his first Finance Bill.
Kirsty Blackman (Aberdeen North) (SNP)
I appreciate the chance to take part in this Ways and Mean debate, which is one of the few not to follow a Budget—somebody told me it is the first since 1987, when I was 1.
From the shadow Front Bench, the hon. Member for Bootle (Peter Dowd) talked about some of the process issues and timelines involved in how we got to where we are now, and I want to briefly mention them. The spring Budget was presented to the House on 8 March. We are looking at introducing the Finance Bill, which takes up some of the measures from that spring Budget, now, which is a pretty long time from 8 March. We have seen some changes from what we expected to happen, and what the Office for Budget Responsibility suggested might happen is not necessarily what has happened in the intervening period, so it is a bit strange that, in the main, the measures we are looking at are almost exactly the same as the ones introduced in the Finance Bill back in March. I understand that there needs to be a consultation, but I am concerned about the length of this process and about whether the changes to legislation in this Finance Bill are wholly appropriate.
In my intervention on the Chair of the Treasury Committee, I mentioned the Public Bill Committee taking evidence. I have raised the issue before and I will not stop raising it. The Finance Bill Committee should take evidence from external organisations so that it is in the best possible position to make the best decisions. I have been on a Finance Bill Committee and found it a useful experience whereby Members on both sides of the House had an in-depth debate about the matters raised. Enabling the Committee to take evidence would only add value to the scrutiny provided both by the Opposition and by Back Benchers, particularly those from the Conservative party.
The Minister will probably be surprised to hear that I welcome some of the Government’s proposed Ways and Means resolutions, including the changes to the treatment of corporation tax with regard to museum and gallery exhibitions. However, I wish to raise the issue of the Value Added Tax (Refund of Tax to Museums and Galleries) (Amendment) Order 2017. The intention was that it be laid before the House in advance of the summer recess, but then the general election happened. The order has not been mentioned and I am concerned that some museums and galleries may lose out on the VAT that they had expected to get back. They expected it to be paid to them, but the amendment has not yet been laid before the House. I know that that is a slightly different matter from that in the Ways and Means resolutions, but it is related to it. I would appreciate it if the Minister or his team could look into the order.
I also welcome the changes to grassroots sports and to pensions and legal advice. It is particularly important that people have better access to legal advice, especially when they are not the accused and are entering legal situations. That is a scary prospect for a number of people, so it is incredibly positive that they will get easier access to appropriate legal advice.
The Scottish Government’s programme for government was announced yesterday and they are incredibly positive about changes to enable electric vehicles to become more prevalent on our roads and petrol and diesel vehicles to be phased out. I am therefore pleased that there are likely to be changes to electric vehicle charging points. I hope that this Government will continue to make changes to allow electric vehicles and their associated infrastructure to become more affordable.
I support the Government on a couple of other things. If the proposed changes in the Ways and Means resolutions on petroleum revenue tax are the same as those proposed in the previous Finance Bill, they are positive because the oil industry has asked for them. I am pleased that the Government have acted on that. I am also pleased that the Government will take action against people who have been found to be enabling tax avoidance schemes, not just those who participate in such schemes. That is really positive and I hope that it will achieve the Government’s intention and discourage people from being clever and coming up with tax avoidance schemes. My fingers are crossed and we will wait to see what happens.
Members would not expect me to be positive about all of the Government’s proposals. I am concerned that there is a lack of evidence for the Government’s desired outcome regarding some of the proposals. Resolution 13, on business investment relief, sends a mixed message. Whereas the Government’s changes under resolutions 24 and 26 intend to make it more difficult for non-doms to benefit from their tax status, resolution 13 will make it easier for them to do so in a way that their next-door neighbour may not. Now, I would be less concerned about that if the Government had provided appropriate evidence to show why the scheme is a good thing. They have made it clear that they want to increase the use of the scheme, but I have not seen any evidence to explain why. They have not shown me that the scheme is working as it was intended to work, nor that it is having a particularly positive impact on the businesses that are receiving funding from it. I understand that 200 to 400 people take part in the scheme every year, which means that a pretty significant amount of legislative effort and time is being put into making a change that enables a very small number of people to make this investment. I would be interested to see more of the Government’s figures.
I am concerned about resolution 41, which deals with errors in taxpayers’ documents. It specifically includes changes that may result in people who seek tax advice getting into trouble for having errors in their documents. The onus is now on an individual to ensure that the person from whom they seek tax advice is suitably qualified, which is rather difficult for people to understand. I have had people come into my surgeries and tell me that they have sought immigration advice from somebody they thought was a solicitor, but who turned out not to be a solicitor. I am concerned that some people who have tried their very best to stay on the right side of the law, to pay the amount of tax that they should pay and to fill in the forms appropriately with the help of an adviser will be caught by the measure accidentally. I would appreciate it if the Government could look at that.
I am interested to see how the Government will play another couple of issues, if they look exactly as they did in the Finance Bill. One is the changes to gaming duty. I understand that the Government are trying not to penalise casinos with the changes to the duty that casinos pay, and that they are trying to change the rules around remote gaming to make it clear how much tax the companies should pay. That is welcome. But when the Government are doing things such as increasing alcohol duty to discourage negative behaviour, it seems strange to me to allow casinos to pay less tax—or not to increase the amount of tax that they pay—because it will achieve the opposite of what the Government are trying to do in encouraging positive behaviour. I will be interested to see how that looks, and we will continue to scrutinise it.
We will also continue to look at the dividend nil rate. The Ways and Means resolution allows the Government to change things in either direction. If the dividend nil rate allowed people to have more dividends before they paid tax, I would be particularly concerned about it; but if it allowed people to have less in dividends before they paid tax, as was the situation in the previous Finance Bill, I would be much more positive about it.
Those are the main proposals that I have concerns about, but I would like to see the detail that the Government will produce. I am pleased that the Minister has made changes to digital reporting, which was in our manifesto. We have particular concerns about the smallest companies, especially those in particularly rural areas, who struggle to get access to the right digital infrastructure. Both Governments have made commitments about digitisation and access to superfast broadband, so having this slightly further down the line makes more sense. I am pleased that the Government listened and made changes, but we will be scrutinising the proposal and making sure that the business community is as happy with it as it can be.
Moving to digital reporting will make the process easier for people, but I reiterate that, as the hon. Member for Coventry South (Mr Cunningham) has said, the closure of tax offices is a concern, even when it comes to Making Tax Digital. Computer systems can be quite black and white, and they often give yes/no answers when the answer should actually be “maybe”. Especially in the initial period, people who are trying to fill in the forms may need to phone the tax office to ask for assistance about what to put in each box. I am not convinced that businesses can access enough support to find out about that.
The Government will expect me to raise the issue of VAT on police and fire services, because such a debate would not be complete without my raising it. We would very much like the Government to bring forward VAT changes for police and fire services in Scotland. They have done so for organisations such as the London Legacy Development Corporation—the legacy body from the Olympic Games—and for Highways England, both of which are national organisations in the same boat as the Scottish police and fire services.
Luke Graham (Ochil and South Perthshire) (Con)
On the point about VAT on Police Scotland, does the hon. Lady recognise that the SNP Administration in Edinburgh knew that they would incur VAT charges by centralising the police forces? They knew that would be one of the repercussions before that action was taken.
Kirsty Blackman
Such a policy was in the Conservative party manifesto for the Scottish Parliament election that year, so the centralisation of Scottish police and fire services was also supported by the Scottish Conservatives. Yes, we knew that that would be the case, but we do not think it is fair, and we have made the case that it is not fair on numerous occasions. Organisations such as Highways England and London Legacy do not have the same VAT treatment as the Scottish police and fire services, and that is why we are asking for such a change.
I know that this legislation has been cobbled together—it is just the bits that did not get through last time—but none of the changes the Government are making will combat the current increases in inflation, and the Government are not increasing wages so that ordinary people can afford such increases in the cost of living. In Scotland, we are lifting the 1% public sector pay cap, and I very much hope that the UK Government will take the same decision to lift the public sector pay cap in England and that when they do so—if they do so—they will ensure that that is fully funded.
I have one last thing to mention, particularly in relation to tax raising and tax avoidance, which is about customs officers and customs checks. I am slightly concerned that the UK Government are losing out on some of the revenue they could receive because they no longer use customs officers in the way they used to, but instead make them dedicate most of their time at borders to making sure that people are travelling legally rather than to ensuring that goods are being transported legally. I know that some stuff is in place—but not enough. I want the Government to be scrutinised more effectively on this, and for the Government to monitor what happens at ports more effectively to ensure that the appropriate tax is paid on things coming into and going out of the country. Making a change to ensure that they are checked appropriately and are therefore taxed appropriately can only bring in more revenue.
In summary, there are a number of good things in the Ways and Means resolutions, but I have concerns about several of them. I have significant concerns about some resolutions, such as resolution 13 on business investment relief, and I am also pretty concerned about resolution 4 on termination payments, because I have not seen any evidence to show that the issue is as significant as the Government are suggesting. The likelihood is that the SNP will vote against those resolutions if there is a vote. I appreciate that I have used up my time, and I am grateful to hon. Members for listening.
Luke Graham (Ochil and South Perthshire) (Con)
I want to build on what my right hon. Friend the Member for Loughborough (Nicky Morgan) said about resolutions 39 and 40 on Making Tax Digital. As the co-founder of a small accounting firm and as MP for Ochil and South Perthshire, it is clear to me that many small businesses had concerns about the initial proposals made before the recess. Although I certainly welcome some of the concessions that have been made, I hope that the Financial Secretary recognises some of the additional cost burdens that the reporting requirements will place on small businesses. The Federation of Small Businesses estimates that they amount to about £2,770.
As I have said, I welcome the Government’s concessions —especially excluding companies with revenues below £85,000, and pushing out the timeline for companies to have to enrol in a digital reporting scheme in future—but may I ask the Government to continue to consult widely with Members of the House and business bodies across the United Kingdom, including in Scotland? In addition, will they look to work with some of the new technology providers and cloud accountancy services providers, which could provide the Government with more efficient and effective ways of getting the information they seek without necessarily requiring a manual reporting submission quarterly?
My second point is about VAT and Police Scotland. In my intervention, I pointed out that it was a result of the actions of the SNP Administration in Edinburgh, but we may have some cross-party agreement on the fact that the outcome for Scotland is less beneficial, so colleagues and I will ask the Government to review the matter as part of the forthcoming Budget process.
Mr Kevan Jones (North Durham) (Lab)
I begin by welcoming you to the Chair, Madam Deputy Speaker. I know that you were in the Chair before the recess, but it is the first time that I have had the honour of speaking when you are in the Chair and I wish you all the best in the coming years.
I would like to speak rubbish—[Interruption.] Somebody asks, “What’s new?” I could not possibly comment on my contributions in the Chamber. I actually want to talk about landfill tax and why it has not been included in the resolutions. It is a serious matter, and the Financial Secretary alluded to the reason for its omission. I want to put some of my concerns on record.
In the 2016 Budget and after consultation last summer, provisions were earmarked to be included in the 2017 Finance Bill through secondary legislation to amend taxable disposal for landfill tax purposes. The Financial Secretary explained that many things had been disrupted because of the general election. We cannot change that and I accept that certain matters were taken out of the Budget in the wash-up, which is standard practice. However, the measure on landfill tax was not. It was included until last week. The Financial Secretary said that the consultation on landfill tax will be included, but will now be published in September.
I will explain why landfill tax is so important in the context of the tax avoidance and fraud agenda that the Government say they wish to progress. I am not making party political points: the position is not all the fault of the current Conservative Government; it is as a result of the way in which successive Governments have implemented landfill tax. However, there are things that we can and must do, because the problem is not just that people do not pay the tax that they should to the Exchequer; it is that, in some areas, avoidance funds organised crime and leads to huge costs for local authorities and the taxpayer in cleaning up some of the issues.
The Government estimate in a 2014-15 report that some £150 million a year is not being paid in landfill tax. The Environmental Services Association reckons that the figure is nearly £1 billion a year. From my work in looking at the sector, £150 million seems a conservative figure. If we take HMRC’s figure, that represents 12% of lost revenue, which is on a par with tobacco and alcohol tax avoidance. One would think that it was easier to track landfill tax avoidance than alcohol and tobacco tax avoidance—so it should be. I accept that issues affect tobacco and alcohol sales that sometimes make it difficult to claim tax. However, with landfill tax, we are talking about large consignments of domestic and commercial waste, and its destination should not be hard to track.
The system was introduced as an environmental measure. The policy that Labour and Conservative Governments have pursued to try to reduce the amount of rubbish going to landfill and increase recycling is right. I will come on to the policy in Scotland, which creates a problem in England. The Scots are now dumping their rubbish in England to avoid the SNP Government’s so-called PR stunt in introducing 100% recycling, which we all know is impossible.
At present there are two rates of landfill tax: the standard rate of £84.40, which is due to rise to £88.95 in the 2018 Budget, and the lower rate of £2.65, which is due to rise to £2.80 in 2018. Successive Governments have, I think rightly, increased landfill tax over time—to generate revenue, obviously, but also to try to encourage people to recycle more. There is nothing wrong with that, and I do not criticise it at all; the problem lies in how the tax is avoided. It is paid by those who collect and dispose of waste. Some operators own not just the collection system, but the hole in the ground where the waste will go. That leads to clear cases of fraud, in which what actually goes into the ground is not declared to HMRC or to anyone.
Another issue is the type of tax that landfill operators pay. Some claim that tax on inert waste should be paid at the lower rate and pay that rate, although the tax should, in fact, be paid at the higher rate. What has made the situation worse is the mistake that was made in 2015, when the Government basically gave the industry a licence to print money by making it responsible for determining what type of waste was involved by means of something called the loss on ignition test. If a pile of rubbish, or a sample of rubbish, has a loss on ignition of 10% or less, it is classified as being subject to the £2.65 rate; otherwise, it will be subject to the full standard rate. There is thus a clear incentive for operators to declare waste to be subject to the lower rate, which means that the tax avoidance amounts to a little over £80 per tonne.
I am told that, in most areas where that is going on, if inspectors are looking around, operators will have a sample box of rubbish. In the majority of cases, what actually goes into the landfill site could be anything, and the higher rate of tax that the operator should be paying is being completely avoided because HMRC has extracted itself from the process and left the decision to the industry. It may be said that the aim is to attack red tape, which would be fine if the people concerned were responsible and law-abiding.
Let me put it on record that I am not accusing everyone in the industry of this practice. Some are clearly behaving correctly. However, there are a great many rogues, and, in some cases, not rogues but criminals, who have become involved in the practice because they see it as a good way of doing two things: making easy cash, and laundering money through what is a very high-volume business, given the amount of cash that goes through it. I shall say more about that shortly, but giving the responsibility to landfill operators, with no checks, is basically saying, “You decide what tax you pay.”
Another aspect that concerns me, and should concern everyone, is the issue of what is going into landfill sites. What is being classed as inert waste, or as waste that will not catch fire or is not dangerous, is paid for at a certain tax rate. That is declared as going into landfill sites, but what is in fact going in could be very different. I have a simple question: what records do people check? Again, it is very much a matter of self-regulation: the operators fill them in, and a toothless tiger of an organisation called the Environment Agency does spot checks on them. I have been told that one operator deliberately sent in the previous year’s returns and they were just accepted. That is what this comes down to: a lack of co-ordination in the way the HMRC and other Government agencies are tackling the problem.
The other way of avoiding tax entirely is for someone to buy a hole in the ground, to set themselves up as a landfill tax operator and to go around advertising their wares by asking for tenders from organisations, and when the process gets to the weighbridge to determine the amount, to bypass it and just put the waste straight in—paying no tax at all, not even the lower rate. There are quite a few examples of that happening, but again there are no HMRC checks. I will come on to some proposals that I hope the Minister will consider.
Robert Jenrick (Newark) (Con)
The hon. Gentleman is making a valuable contribution. I want to emphasise a point he made at the beginning of his remarks: the rise of serious organised crime from this tax. In Nottinghamshire—which I know he knows very well, as a son of Worksop—there have been large-scale frauds where huge rubbish dumps have been put on private property, often with the agreement of the owner, who of course denies it to the police, and the Environment Agency provides absolutely no prosecutions. A number have fallen down; multimillion pound prosecutions have collapsed. It is becoming one of the easiest ways to conduct serious organised crime in this country.
Mr Jones
The problem is not only that the hon. Gentleman’s constituents have to live next door to those illegal dumps, but that there is the expense of clearing them up, which falls back on the taxpayer.
There is another widespread scam. This morning I tried to find the figure for the number of fires at waste transfer stations, but I could not. For the uninitiated, I will explain. Having been a chair of public health in Newcastle, I could bore on about waste: when waste is being transferred, it usually does not go straight to the actual site, but goes first to a waste transfer station where it is either sorted or graded into different things. The number of fires that occur at waste transfer stations is out of all proportion to the probability of that happening. The reason for that is that once there is just a pile of ash, there is nothing to dispose of. That is the problem, and, again, organised crime is involved in that.
We have had some instances in County Durham of the point raised by the hon. Member for Newark (Robert Jenrick). There are frauds such as those he describes—to be fair to Durham police, they have cracked down on some of the individuals concerned—but there are some people who have bought into this business. If we look back at what they did or how they got their money, we find serious questions about whether they should be allowed anywhere near the waste industry.
We all know why, for example, in the 1970s the mafia got control of waste in New York: because there is money to be made in it. It is the same in this country, but unfortunately we are not taking the robust approach needed to address that.
One of the issues is about who is responsible for that. The hon. Gentleman mentioned the Environment Agency. It is a good organisation in one respect; it is full of some very good and committed people, but they do not have the killer instinct to be enforcers. The agency needs to have a certain mindset and to take robust action, rather than just looking at the odd illegal site. It needs to closely monitor some of the existing organisations. Without that mindset and enforcement, this will never succeed.
This is also a matter that falls between the Environment Agency and HMRC. I give credit to Durham police for taking a lead in trying to get people together and for saying, “Look, wait a minute. We know that the people behind this are involved in x, y and z, which has mostly nothing to do with rubbish. It is to do with other serious organised crime.” The police have worked with HMRC and others and tried to concentrate on these issues.
I have a concern about HMRC’s approach to this problem, and the Minister might want to reflect on it. I shall not go into details because the case is ongoing, but when I raised one particular matter with HMRC, I was told that no enforcement action would be taken because the fraud was not worth more than £20 million a year. That seems like a lot of money to me. Another case that is ongoing at the moment involves fraud totalling £78 million a year. I wonder whether these decisions are the result of a lack of resources. I have spoken to a lot of the investigators in HMRC and I pay tribute to them for the work they do. Some of the people they are dealing with are very dangerous, and it is a complex matter to put these cases together. What we need in this country is a joined-up approach by HMRC, the Environment Agency and the police. I had a meeting earlier this year with the Minister for Security, the right hon. Member for Wyre and Preston North (Mr Wallace), to discuss where all this money goes. The amounts being generated are huge, and I have seen evidence that it is going into the drugs trade or other illicit organisations. That has an impact on society.
There are some things that could be done. As I have said, we need to adopt a joined-up approach—dare I say the Eliot Ness approach—and take a robust line on this. As the hon. Member for Newark has just said, the people who have to pay for the clear-up are the taxpayers. In many cases, that involves local authorities that are already under a lot of pressure. We need to adopt a hard-headed approach, and the Minister needs to look at the figure of £150 million. I think that the figure is way more than that.
Self-certification and the loss on ignition test just need to be binned. I know that there are pressures, and people have talked about cuts in HMRC—[Interruption.] Oh, there is more yet, don’t worry! The hon. Member for Chelmsford (Vicky Ford) is looking exasperated. What is needed is one single rate for landfill, whatever it is. That test is not enforceable; every shipment going into a landfill site would have to be tested. People have talked about leaving this up to the industry, and I am not besmirching the reputation or integrity of any particular party, but it is open to anyone who wants to do so to abuse the system. I therefore think that those tests need binning, and that we need one single rate.
People ask whether landfill sites could be monitored. Yes, we have the technology. I have raised the matter with the Minister’s policy people and asked whether we could have a system similar to those at weighbridges and slaughterhouses in which cameras can record how many vehicles are going into a site. In one case that I have examined, the owner was clearly not paying the landfill tax despite the fact that a ridiculous number of vehicles were going into the site. If we had people in Revenue and Customs checking these things, I think it would pay back very quickly.
The other thing is the checking of sites. The Environment Agency has responsibility for most of the checks, but I do not get the sense from HMRC that there is robust enforcement even when questions are asked. The right hon. Member for Loughborough (Nicky Morgan) raised the issue of retrospection. Can I suggest to the Minister, if he wants to get some back tax in, how he might do it? Once a landfill operator has finished with a site, it puts a cap on it, and that is the end of it. I have been told of an operator in the north-east that has done that, and I know from evidence I have seen that it did not pay the right tax. The question was raised with the Environment Agency and HMRC of how to make sure the right tax is paid. The easiest thing is to put a borehole through and check what is actually in there. If we did that on a few sites, I think we would find that what incurs the lower rates is not what is there. That is an important point.
In policy terms, as I have said to the Minister’s policy officer, we need to make the producers of the waste responsible for where it goes. At the rates that some waste collection organisations advertise, they could not possibly make a profit if they were paying landfill tax. The problem is that because local government and others are being squeezed, many local government organisations have got into bed with these operators because they charge the lowest rates, but they can do that only because they are either not paying landfill tax or paying it at the incorrect rate. The onus should be on large organisations to take responsibility for what happens to their waste; their responsibility should not end once the waste operator has taken it away. The rates being paid by quite a few public bodies in the north-east of England make one wonder how these organisations can be making any money, if they are paying landfill tax.
Operators are also making claims that are completely unachievable, such as 100% or 98% recycling of commercial waste, which is not possible. If that is the case and they are collecting at a certain price, what is happening to the 10% or 15% they cannot recycle? Its collection would be completely uneconomic if they were paying landfill tax. If HMRC had its eyes open and looked at some adverts, it would be thinking, “Wait a minute. There’s something wrong here.”
Bambos Charalambous (Enfield, Southgate) (Lab)
Does my hon. Friend agree that local authorities and the Local Government Association could play a greater role in monitoring the amount of waste going to landfill?
Mr Jones
Yes, I do, but the problem is that local authority budgets are under tremendous pressure, so they are going for the cheapest price. If somebody goes to them and says, “I can get rid of your waste for less”, what are they going to do? One council in Wales was trucking its waste up to the north-east. Can someone tell me, if the operator was paying the proper amount of landfill tax, how that could be economically viable? It cannot be. The onus is on local authorities to start asking questions about who they are contracting with.
There is also an issue with the individuals who can now operate licences. It does not take a genius to look at some operators who get involved in the industry and ask, “What is their experience? Where is the money suddenly coming from to set up a business?” This is fraud, but it is also an environmental concern.
Scotland has huge great policies about zero landfill waste and things like that, but the reason for that is very simple: the waste is coming over the border. Operators in Scotland are avoiding the cost of having to dispose of waste and of separating it at source, which the Scottish Government pride themselves on, by taking it to the north-east of England or anywhere else where things are cheaper. Parts of the UK are becoming Scotland’s rubbish tip because the Scottish Government have no control over where Scotland’s waste is going. There is some evidence that we may be making money through the landfill tax that is paid when it comes over the border, but I suggest that quite a lot of landfill tax is not being paid. That is the problem, and there are things that need to be done.
What the Minister would find if he spoke to the industry is that, behind closed doors, everyone knows that this is going on. It is no great secret. If he is going to come back with regulations later in September, I want them to be robust, because I have a niggling feeling that the policy people at HMRC see the problem as one that will go away of its own accord. In 15 or 20 years’ time, when we are no longer using landfill, we may not have large-scale problems, but we will have lost millions if not billions of pounds in the meantime and, as the hon. Member for Newark said earlier, many communities will have been blighted by unscrupulous operators. I ask the Minister to talk to the Minister for Security, because this is not just about waste, but about the cost to society as a whole.
When I asked the Minister whether the regulations would be published, I was not being provocative; I just want to see what they are and know what the process will be. The industry and others who have been involved should be able to react to them before they come into force. One simple thing that could stop a lot of fraud would be the ignition test, for example, so if the Minister lets me know when the regulations are coming up, I would be happy to meet him or even make some suggestions about the proposals.
I now want to change the subject entirely and talk about air travel. The resolutions include a commitment to look at air passenger duty. We have been promised reform for a long time—I looked it up this morning, and this matter has been raised at least since 2011. I do not want to be accused of raising problems relating to Scotland this afternoon, but air passenger duty is of great concern to the north-east due to the Scottish Government’s new air departure tax. That decision is entirely up to them as part of the devolution settlement, but the new tax will reduce air passenger duty in 2018, which will have an impact on regional airports such as Newcastle. As I say, that is no criticism of the Scottish Government, because they have the devolved responsibilities and can do that, but if they abolish air passenger duty altogether, that could have a devastating impact on those airports. Members from Northern Ireland have also made representations because the same situation applies there to Belfast International, Dublin City and City of Derry airports due to differential rates in the Republic of Ireland.
Why does that matter? The north-east of England is the poorest region in the UK with, sadly, the highest unemployment. Newcastle airport has been a success, for which I give credit to the local authorities that own it and their private sector partners. It sustains some 7,800 jobs, 3,200 of which are directly at the airport, but the knock-on effect throughout the region is also important. The airport brings some £57 million of tourism a year to the north-east, sustaining some 1,750 jobs.
London has four airports, so the economic impact of each is possibly not as great as the impact of an airport in a region such as mine. Regional airports provide connectivity for people who want to travel not only for leisure but for business—some £173 million of exports go through Newcastle airport each year, nearly £150 million of which go through just one airline. The Emirates flight from Newcastle to Dubai moves goods not just into the middle east but into the far east and Asia. The airport is important not only in carrying people but in supporting the region’s businesses.
At the 2015 general election the then Prime Minister, David Cameron, said that he would not allow regional airports such as Newcastle to be at a disadvantage if Scotland were to reduce the rate of APD. We all know what happened to a lot of David Cameron’s promises, so I will not hold the present Minister to that one, but it is important that the issue is addressed.
The Government could use APD more imaginatively. Obviously it was introduced for environmental reasons, but we all know that it is now a big cash cow for the Exchequer. If we had differential rates to try to encourage airlines to relocate to regional airports, it might help to reduce the overcapacity at airports in London and the south-east. It would also be a cheap way of regenerating regions such as the north-east.
The present rate of APD puts Newcastle airport at a disadvantage because, unlike London Heathrow, we have a relatively small number of business travellers. If we wanted to think creatively, we could introduce an incentive. I understand from the media that the new metro Mayor of Tees Valley made an election pledge to nationalise, reopen or somehow expand Teesside airport, which is a little ambitious. He may find that that election promise is difficult to translate into action. Again, if the APD rate goes down in Scotland and Newcastle airport is affected, trying to get any new flights to a place like Teesside will be virtually impossible. The issue is important to the north-east, and it is not just about passenger travel and tourism flights; it is about the broader economy. Our regional universities need access to international students, and a region where jobs have not boomed would be severely affected if the airport’s passengers leaked to Scotland.
Let me turn to small business and some of the issues raised earlier. I am not opposed to the use of new technology or to recognising that we have to change the way we do things. My party made mistakes when it was in Government by closing a lot of DWP offices and going directly to doing things by phone, which made it difficult for people to have interaction, and we are in danger of making the same mistake on tax offices.
A constituent who came to see me last year runs a one-person business. If she had a problem with her tax, she would drive to Durham tax office and meet somebody she knew, and they would explain the situation to her. I am not saying we should keep tax offices open just for that one person, but if we are going to go into the digital age—I have no problem with that, as it might be easier for some businesses—we need to ensure that we have either telephone access or dedicated processes whereby people can at least get assistance. I believe it was the right hon. Member for Loughborough who mentioned webchats, which are a way of doing this and are used by a lot of service providers. That needs to happen before any roll-out of the changes, because there is nothing more frustrating than not being able to get through. My constituent told me that when she eventually did get through, she got through to three different people. I do not know whether this could be done, but perhaps we could use a case-management approach, with individuals taking control of certain areas. People might think personal relationships between small businesses and their tax inspectors would be hostile, but in my experience they are not. If the relationship works well, it helps the business in terms of how it operates and it helps how HMRC can collect.
I now wish to discuss HMRC’s priorities. HMRC comes in for a lot of criticism, but it has a huge task to do. Even so, I sometimes wonder whether it gets its priorities wrong and I wish to give an example from my constituency. I have just spoken about the lack of enthusiasm for cracking down on landfill tax fraud, but an overzealous approach is taken to some small businesses. I have written to the Chancellor about a constituent of mine, Mr Marshall, who runs a bathroom business in Chester-le-Street. I have not yet received a reply, even though I have written twice—obviously, the Chancellor has been very busy. This is an example of where HMRC uses a sledgehammer to crack a nut. Mr Marshall and his family—it is a family business—have a showroom, where people can order and pay for a bathroom, and then they will organise everything that needs to be done. They do not employ anyone—they fit bathrooms, but they do not employ the plumbers, electricians and so on. Mr Marshall subcontracts the work to plumbers and electricians, and the client then pays them, as is common in the industry.
Last year, Mr Marshall had a visit from HMRC, which said that he is now responsible for the VAT payable by those individuals, even though he does not directly employ them, because they are small businesspeople. He freely admits to me that he does not use the same person every time; it depends on who is available. He is now being hit with a tax bill for some £24,000, which to a small, well-respected business is a little harsh. As I say, I have written to the Chancellor twice without receiving a reply. HMRC will not discuss this because it is under its veil of secrecy, as it always is, but I want to know why one person has taken it upon himself to deem that the VAT liability of these individuals—if there is one—should fall on someone who is procuring a service. If that is the case, and if I was regularly employing someone to do some work on my behalf and they went above the VAT threshold, would HMRC suggest that I, as the person employing them, should pay their VAT?
I would like the Minister to look at that case. As I said, I have tried writing to the Chancellor, without success. I am happy to email him the details and copies of the letters I have. I was going to say that such cases give HMRC a bad name, but that is not hard to do. No one likes to pay taxes, but the point is the disproportionality between a family business—this is not a multinational corporation—and the Googles of this world and the landfill operators that completely ignore the actual tax situation without any grievance falling upon them from HMRC. It is about proportionality in some of the enforcement. The new Chair of the Treasury Committee might want to look at how HMRC deals with small businesses. It is not only about the forms, but about what is facing my constituent. The process is time-consuming, but it can cause anxiety if someone suddenly has to find such an amount of money.
There is another issue I want to raise—I have moved on from rubbish; I am going to speak about cosmetic surgery. I tabled a parliamentary question a couple of weeks ago about the Government’s proposals for collecting VAT for cosmetic surgery. I have looked at the issue and got into the subject. I will not hasten to go through the whole issue of the regulation of cosmetic surgery, but it is another area I am pursuing.
Mr Jones
I think even the best plastic surgeon would struggle with me.
The question is whether VAT is payable on cosmetic procedures. The problem is that such procedures vary from facelifts and tummy tucks to boob jobs, fillers and that side of the industry. I came to the issue through a constituent. I will not talk about the regulation, because that does not apply to the taxation of cosmetic surgery, but I want some clarity from the Government on the rules about whether cosmetic surgery should be VAT-registered.
There is an organisation called the Hospital Group. In a previous life, it went into administration owing the taxman nearly £9 million in VAT because there was an argument about whether VAT should be levied on the surgical procedures. The bill started at £17 million and went down to £9 million before, lo and behold, the director folded the company. HMRC is left with £9 million that it has not recovered. That company owes money and tax to quite a few other organisations, including councils.
This is an interesting issue, because while people would not pay VAT on a medical procedure, these are not medical procedures. I am not for one minute suggesting that women who have had mastectomies should pay VAT if they need reconstructive surgery, but if a procedure is purely for cosmetic reasons, it should be VAT-chargeable, as I read the regulations, but HMRC does not seem to be enforcing that. There is an argument, which I have heard from the new owners of the Hospital Group, that these are medical procedures, as people are having them because of mental health issues. If that is the case, evidence needs to be provided.
Given the amount of money that the industry generates, I wonder whether the Government are losing revenue. In the one case that I know of, the Revenue is owed £9 million, although it is never going to get that because the company has gone into liquidation. How many similar cases are there? We should consider whether VAT is chargeable on not just surgery but other aspects of the cosmetic surgery industry—things such as fillers and other products that enhance one’s aesthetic beauty, on which I am sure my hon. Friend the Member for Ilford North (Wes Streeting) will be able to enlighten me. If VAT is not being charged, we must consider that, because this is a huge industry in this country. As I said, there are regulation issues for some organisations that need to be addressed, but my parliamentary question was whether there were any proposals to look at the tax aspects of this issue, and the answer was that there were not. Will the Minister let me know what the regulations are and how they are being enforced? It could be that the Revenue is losing out on quite a large amount of money.
My hon. Friend the Member for Bootle (Peter Dowd) talked about the general treatment of tax avoidance, and he obviously hit a raw nerve with some Conservative Members with his accusation that they were the party of tax avoiders. It is in all our interests to ensure that people pay their tax. We all moan about the level of tax that we pay, but ordinary people have no way of influencing what tax they pay—the money comes off their salaries or wages through pay-as-you-earn. What grates with and hurts them is that they see hard-working people paying their tax—there are no clever schemes for them to lower their tax bill—while large corporations and others use mechanisms to generate huge profits but not pay tax. They see sporting individuals and others using mechanisms such as the film schemes that were deliberately set up so that people could avoid their tax liabilities. To be fair to the Government, they have cracked down on some schemes, but that is what irks a lot of people. They have also had austerity and the wage freeze for the past seven years, and they see the injustice of that. We need fairness and to ensure that people pay the tax that others are entitled to expect. Look at the earnings of some of the BBC’s stars, which were published a few weeks ago. The idea that some people want to reduce their tax bill when their initial wages are paid for by taxation is just amazing.
Finally, I just want to—[Interruption.] If the Minister wants more, I can give him more. I am trying to be helpful. I have been very helpful to him and tried to work with his Department, because there are occasions on which we can co-operate to get things done. Making sure that everyone pays their tax and that the system is fair is in the public interest. The Minister was right when he said that we cannot have public services or anything else if people do not pay the right levels of taxation. The system has to be fair.
There is another issue that I think HMRC is already on to, but on which it might want to take a more proactive stance because it relates to organised crime. You might think I am strange, Madam Deputy Speaker, going from rubbish to airports to cosmetic surgery, but I am now going to talk about puppy farming. I met the Dogs Trust yesterday, which has produced a very good report—I do not know whether the Minister’s Department has seen it, but it should read it, as this is another area in which organised crime is getting involved in cruel practices—and it concerns not only breeding dogs in this country but importing them. Now the importations are from Poland and Lithuania, and the Dogs Trust study is of both cases.
There are some horrendous cases, and not just as concerns the cruelty of the trade. If honourable colleagues or the Minister would like to look at it, the report is called “Puppy Smuggling: A Tragedy Ignored”, and it is an investigation into the pet travel scheme. It is quite clear from talking to the trust and the local police that this is another new way of making lots of money without paying any tax. It is a cash business, Madam Deputy Speaker. A lot of these pups are advertised on the internet and the process involves cash transactions. It has been described by one HMRC official as the new cocaine or drugs angle for some types of organised crime, as large amounts of money can be made.
Again, this is a question of co-operation between HMRC and other agencies, for example when local authorities are in charge of enforcement. I give credit to the Government for making changes to the puppy farming regulations, but we are now seeing the importation of these animals from abroad, and we need action at the port and to ensure that when sales take place, the correct amount of tax is paid. If we want to stop the trade, one way of doing so would be to use the tax system, because large amounts are being produced in cash, and if HMRC can use the system to ask where the cash is coming from, the focus is suddenly on that question.
This example demonstrates the innovative way in which organised crime works. It will look for the easiest way of making untraceable cash—landfill tax was one, and now, tragically, as some of the stories in this report are terrible, so is the trade in pups, which should not be bred in such a way or kept in such conditions. As the Bill goes through the House, the Government might want to consider this matter.
Again, this comes back to enforcement and attitudes. I am not criticising individuals at HMRC, as I say, because they have a difficult job, but we need an attitude in favour of enforcement and, on occasion, we must consider how that happens through HMRC and how it is linked with the police and other enforcement agencies. One thing that is quite clear in the examples that the Dogs Trust has highlighted concerning the scandal of puppy farming and importation, as well as what has happened with landfill tax, is that these things are not just HMRC’s responsibility. There are other agencies. Durham police have very effectively come together with others to limit and crack down on these individuals, so I ask the Minister to consider taking a cross-government approach to some of these issues, if we can. On that point, I shall conclude my remarks.
Wes Streeting (Ilford North) (Lab)
It is a pleasure to follow my hon. Friend the Member for North Durham (Mr Jones), who gave a very comprehensive speech. I personally felt that there were some areas of the Ways and Means resolutions to which he did not do justice, but I am sure we will get a chance to return to those on another occasion.
“A revolutionary moment in the world’s history is a time for revolutions, not for patching”—
those were the words of William Beveridge 75 years ago in his landmark report that paved the way for the modern welfare state. There is no doubt that we live in a similarly revolutionary moment. We are still in the long tail of the biggest economic crash since the great depression and the consequences that follow. We are on the brink of leaving the most sophisticated political and economic alliance in the history of the world, with consequences for our economy, a wide breadth of public policy and our citizens. We are also at the beginnings of an industrial revolution of a pace and scale that the world has never seen. Against that backdrop, the resolutions we are debating and the summer Finance Bill firmly fall into the category of patching.
In the time I have today, I will: specifically address the patching provisions in the Ways and Means resolutions; talk about the issues that are not addressed by the summer Budget and the Ways and Means resolutions; and touch on areas of Government policy that run completely contrary to our national economic interest. Ultimately, the patching measures in the Ways and Means resolutions are pretty small and fairly inconsequential given the wider economic impact of Government policy if that policy continues on the course that the Government have set out.
I turn first to the issue of patching. We heard from the new Chair of the Treasury Committee, who I am absolutely delighted has been elected. I have no doubt that she will fill the enormous shoes of her predecessor. As I have been re-elected to the Committee from this side of the House, I very much look forward to working with her and other cross-party colleagues. As both she and the Minister set out today, the Treasury Committee raised a number of concerns following our evidence gathering. We listened to a wide range of evidence from tax specialists, representatives of small and medium-sized businesses and, indeed, those businesses themselves on the consequences for them of pursuing the Making Tax Digital policy as it was originally conceived.
As other hon. and right hon. Members have said, there is no doubt that there are many benefits for the Revenue and potentially for businesses against the wider backdrop and the move to digitalisation. But there was a serious concern for small and medium-sized businesses in particular about the impact, which—granted—could be unintended. None the less, it would be red tape and bureaucracy for small and medium-sized enterprises that cannot really afford the extra burden. It should be the intention of the Government in any case when pursuing policy to try to implement it in a way that is not burdensome for SMEs or large corporations. We should seek to legislate and regulate effectively, which does not necessarily always mean heavily.
There was a concern that the timing of Making Tax Digital, as it was originally conceived, would have created an unnecessary and unwarranted burden on SMEs. There are more than 5,000 SMEs in my constituency alone. Since being elected to the House two years ago, I have made it my mission to speak up in their interests. I was therefore pleased, during the summer Budget and when listening to the Minister this afternoon, to see that the concerns expressed by the Treasury Committee have been taken on board, that the deadline has been moved back and that there is still some degree of flexibility about when mandatory provisions will kick in. None the less, Ministers ought to take into account some further cautionary notes, particularly following the points made by my hon. Friend the Member for Bootle (Peter Dowd), the shadow Chief Secretary.
As the implementation timeline stands, we will be looking to implement Making Tax Digital for SMEs in spring 2019—an auspicious year because it happens to coincide with our departure from the European Union. If that departure is smooth, perhaps the Making Tax Digital process can be equally smooth, but I have yet to see any evidence that it will be, be that in Government position papers, the reaction in the Cabinet to different Government position papers, the reaction of colleagues on both sides of the House to the Government’s position, the reaction of all 27 EU member states to what the Government have put forward or the reaction of the European Commission. As far as I can see, there is currently no hope of a smooth exit from the European Union; in fact, we are in danger of crashing out of the European Union. If that is the case, and we are not able to provide stability and certainty to businesses at least over a transitional period while we exit the European Union, we will be adding Making Tax Digital on top of the new customs and border checks and the new compliance and regulatory regimes that businesses will be wresting with—if those are, indeed, in place by that time. Ministers need to keep an eye on wider events and to think about Making Tax Digital in that context. I hope that is something the Minister will reflect on.
There was an interesting exchange between my hon. Friend on the Labour Front Bench and Government Back Benchers over tax avoidance and non-doms. No one pretends the issue is easy. There is a booming business in tax avoidance; indeed, individuals and corporations pay huge sums to very clever accountants to minimise their tax liability. Of course, much of that is perfectly legal, but that does not make it right or ethical. What is often missed in the debate about tax avoidance, particularly when we listen to the protests of people who face a larger tax liability, is that, in the aftermath of the financial crash, with everything we have seen in terms of the impact of austerity on public service provision, the burden of taxation and wage stagnation—I will come to those wider, structural economic problems shortly—there is sometimes a real sense of detachment among those who have benefited enormously from the current economic order and those who have been at the sharp end.
Mr Kevan Jones
Does my hon. Friend also think that there is a mindset in some parts of the Government—perhaps not on the Treasury Bench today—that the trickle-down effect of encouraging wealthy individuals from abroad to come to settle in London will boost the economy? In fact, it sometimes fosters corruption in those people’s countries, and it also takes away flats and other valuable assets in the capital, which local people can then never hope to gain access to.
Wes Streeting
I strongly agree with my hon. Friend. This idea of trickle-down economics must surely be discredited now: it does not work. People are rather ill aware of the extent to which the benefits of economic growth have been unevenly distributed and disproportionately enjoyed by those at the very top. I do not have a great deal of time for special pleading by wealthy individuals and corporations about being asked to pay their fair share of tax, because not everyone is feeling the pinch, and it is entirely reasonable to look at what we can do to tighten loopholes in terms of tax avoidance.
That brings me to the specifics of Government policy. We have had some remarkable rhetoric from those on the Treasury Bench, even over the two years I have been a Member of Parliament. The former Prime Minister, David Cameron, lauded his global leadership on tax avoidance, but the rhetoric is rather divorced from the reality. Even with the measures set out today, there are still means available to non-doms that enable them to enjoy tax exemptions and concessions for many years that are not available to the average UK citizen. Let me give one example: non-doms are able to keep their assets out of the scope of tax if they are held in an overseas trust that was created before they were deemed as domicile. That strikes me as rather unfair and as fairly easy to solve. That is just one example, but there are lots on which Government could clamp down further. The political rhetoric is there, but I do not think the political will is being delivered by policy.
Ruth George (High Peak) (Lab)
Will my hon. Friend contrast that clamp-down on non-doms and the tax reduction policies with the clamp-down on people with disabilities? Work capability assessments of their employment and support allowance and personal independence payments are reducing their benefits from day one.
Wes Streeting
My hon. Friend makes a powerful point. She will already have seen in her casework as a new Member the impact of changes to Government welfare policy on some of the most disadvantaged people in our society.
If politics in this country and across the western world tells us anything at the moment, it is that large numbers of people feel completely left behind by the economic order and are expressing their frustration through the ballot box in a variety of ways, whether that be by voting to leave the European Union because they see it as central to a global economic order that has left them behind, or by electing Donald Trump because of his promises to the central rust belt of America, which I think he will struggle to deliver. I will talk in my concluding remarks about what the current economic order means for politics and why Government really do need to listen to the voice of the people.
It is interesting to note the enormous complacency among Government Members. Sure, they occupy the Treasury Bench and Downing Street, and Government Departments are staffed by Conservative Ministers enacting, by and large, Government policies, with the very expensive assistance of the Democratic Unionist party. However, the Conservatives lost their majority at the election, and the tragedy for Conservative colleagues who lost their seats is that the Government have not actually listened to the message of the people.
Of course, our side has some humility about the fact that we did not win the election either. Lots of new hon. Members who have been elected to this House rightly celebrate their achievements and those of their party activists, but we know that we have further to go to earn the trust of the British people. Looking at the Government’s policies, we know that we have a responsibility to earn that trust to deal with the economic malaise and entrenched economic inequality that is affecting our citizens and those in many other economies. I welcome the Government’s rhetoric on tax avoidance and taking on non-doms, but I just do not see it reflected substantially enough in Government policy. I strongly support the criticism set out by the shadow Chief Secretary, my hon. Friend the Member for Bootle.
There is a sad irony in the point that a number of right hon. and hon. Members have made about the provisions for retrospective changes to tax arrangements. It seems that the provisions for non-dom arrangements in particular rule out retrospective changes. The Government are saying clearly, “If you have a trust overseas before the rules kick in, don’t worry: we’re not going to touch that money.” Of course, the nature of so many of those trusts is that they are family trusts that are passed down and inherited. In effect, the Government are acknowledging that those trusts exist and that there is an unfairness, and they are setting out to do something about it hereafter, but they are not applying retrospective changes to non-doms in the same way that other measures will affect many others retrospectively.
Mr Kevan Jones
Does my hon. Friend share my concern that wealthy individuals are found wanting when, as usually happens, a secret deal is done with HMRC to pay a certain amount to cover the liability? That is not open to many of my constituents, who are not able to argue when they have a pay-as-you-earn problem. Does he think it is fair that such deals are agreed by HMRC? They should be published if we are going to get fairness into the system.
Wes Streeting
I wholeheartedly agree with my hon. Friend. We should be putting an end to sweetheart deals. We certainly should not, as he says, allow them to take place behind closed doors without the appropriate levels of transparency; such transparency means that we at least know what is being done. What makes me angry, and what makes the individual taxpayers and the businesses that I represent angry, is the fact that we know—particularly if we have been self-employed or run a business—that if we are late with our tax return or our payment of tax due, we will be subject to fines and penalties, which will continue to accrue as long as we delay payment. However, not only can wealthy individuals and corporations pay long after they are supposed to, but they get to determine their own rate of tax. That is outrageous.
The Government have, even during the short time for which I have been a Member of this place, introduced measures to try to deal with tax avoidance by individuals and corporations, but those measures always fall short. Let us take the diverted profits tax—the so-called Google tax. Google barely paid a penny. That illustrates the gulf between the rhetoric we hear from those on the Treasury Bench and the reality of the impact of policy on the tax liability of wealthy individuals and corporations, who can effectively determine their own tax rate. People see that hypocrisy at the heart of the system, and I do not think that the measures proposed by the Government today or previously do enough to allay the concerns that people are expressing.
Mr Jones
I agree with my hon. Friend. Does he think that part of the problem is the operation of HMRC and its arm’s-length relationship with the Treasury? He speaks eloquently about people’s disillusionment with politicians and their ability to affect things. Does he agree that it is perhaps now time for Treasury Ministers to have more direct control over the operational decisions of HMRC?
Wes Streeting
I certainly feel that HMRC is insufficiently accountable to taxpayers and citizens, and I think there are two routes to redressing the problem. One is, as my hon. Friend suggests, for Ministers to take a far tighter grip on what is going on at HMRC, to rein the Department in and make sure that its conduct is in line with the expectations of the people we are sent here to represent. The other, as my hon. Friend the shadow Chief Secretary suggested, is to make sure that HMRC is resourced effectively so that it can implement public policy as intended.
Hon. and right hon. Members who have tax offices in their constituencies complain all the time about the loss of jobs in their constituency. They are fighting for their constituents, as they should do and as we all do. However, the closure of HMRC tax offices and the loss of HMRC jobs should be a concern not just for them, but for all of us. If we do not have the tax inspectors out there in the field clamping down on tax evasion, which is illegal, identifying areas of tax avoidance and, ideally, making recommendations to Government about improvements to the system, we will continue to have repeated debates in this place about how we clamp down on illegal tax evasion and aggressive tax avoidance.
Another way in which we can improve the scrutiny of HMRC is through the Treasury Committee. There is provision for a sub-committee of the Treasury Committee to look in detail at HMRC’s work, and when the Committee meets we ought to consider that. The question is always about time and resources. We are lucky to have on the Committee a hard-working and dedicated team of Clerks, who produce reports and briefing packs at a rate of knots on some of the most complicated areas of public policy. Of course, we have a heavy agenda because of the issues facing our financial system, in particular, which have preoccupied the Committee in its work. I think it is fair to say that our new Chair and Members have ambitions to look across the breadth of economic policy and Government spending policy. From our constituents’ experiences on the phone to HMRC—if they are able to get through—right through to our issues about the resourcing of HMRC, there is a serious and significant piece of work to be done on HMRC’s performance, the adequacy of its resourcing, the scope of its powers and its focus as a public body acting in the interest of all taxpayers.
Mr Jones
My hon. Friend raises a good point about staff. The problem we have had in all Departments during the years of austerity is that the easy target is to get rid of so-called civil servant pen pushers. The actual effect of that is starkly focused in the case of HMRC, because when we start to get rid of staff whose job is to collect tax, not only do we lose those individuals’ expertise and their years of experience, but it costs the taxpayer, in that staff are no longer available to enforce the tax regulations. I have highlighted the issue of landfill tax fraud, for example. Does my hon. Friend agree that the Government should look at this as a case of “invest to save”? In other words, if they invested in civil servants to do something, the Government would be able to prove that they were getting more in revenue than it was costing to employ those civil servants.
Wes Streeting
I wholeheartedly agree with my hon. Friend. The irony of some of the swingeing cuts of the past seven years is that although on a scorecard the cuts to civil service jobs represent significant savings, when we look at the roles and responsibilities of some of those civil servants, it does not take a rocket scientist to work out that cutting the number of tax inspectors may well mean that the Government will lose on tax yields and will lose revenue. There is a cost saving on the one hand, but on the other hand there is a direct cost to the Government in lost income.
I had the same experience in local government. Before I was elected to the House, I was the deputy leader of the London Borough of Redbridge. There is a continuing debate in local authorities about, for example, enforcement officers. There are huge pressures on local government budgets, and staff job losses can represent some of the biggest savings because staff are the biggest cost. If a council cuts its pool of parking enforcement officers, that will certainly help it to balance the budget when it comes to the budget council meeting, but it can end up losing revenue if enforcement officers are not out slapping penalties on cars. In addition to the loss of revenue, there are also worse outcomes for citizens, because such a policy encourages the bad practices that make our communities in the case of parking, or our society in terms of effective tax revenues, a lot worse off.
I hope that Ministers will turn to some of these issues when the Budget is next before us, because as well as being pretty thin on substance, the summer Budget did not deliver against the challenges of the time. At the opening of my speech, I quoted William Beveridge’s words about this being “a time for revolutions”. I have been struck by the interim report of the IPPR commission on economic justice, which has been launched today. In a succinct and effective way, the IPPR has summed up a number of the issues involving the great central planks of Government economic policy that have caused me great frustration, but it has also captured the sense of injustice felt by many of our constituents.
We could go on about this ad nauseam: I have sat in the Chamber many times listening to Conservative Members talking about their economic record, but I could spend much of the time available to me this afternoon cataloguing the broken promises of Conservative Chancellors. In fact, we could spend quite a lot of time talking about the broken promises of just one Conservative Chancellor. Our SNP colleague, the hon. Member for Glasgow East (David Linden), is new to the House and was not here to listen to George Osborne’s commitments, so I had better tell him about them. We were told in 2010 that the Conservatives would eliminate the structural deficit in one term, and they attacked the Labour party for lacking ambition and for not having a serious economic policy when we promised merely to halve the deficit over the course of a Parliament.
Mr Jones
Does my hon. Friend also remember that not only did George Osborne’s first Budget in 2010 help crash the economy, but the economically incompetent and hamfisted way in which the cuts were made—for example, cutting budgets in-year meant that it cost councils and others more to lay people off than it saved through redundancies—sucked demand out of the economy just at the time it was turning round?
Wes Streeting
That was one of my greatest frustrations as a Labour party member, looking in on debates in the House during the 2010-15 Parliament. We could be proud of Labour’s record in government from 1997 to the financial crash. There was unprecedented growth; we ran a budget surplus for four years—that has happened in only seven of the past 58 years; we lifted half a million children and more than 900,000 pensioners out of poverty, and we rebuilt public services. Yet we were told after the 2010 general election that Labour presided over reckless spending, but George Osborne was the shadow Chancellor who, up to the crash, committed to match Labour spending pound for pound.
How on earth in 2010 to 2015 we allowed revisionist history to take hold of Labour’s economic record will continue to confound me, but we must take that on. As my hon. Friend the Member for North Durham said, when we left office, the economy was growing and the initial impact of the early Osborne Budgets was to choke growth, scare away investment and suck money out of the economy through the cuts that were imposed. That did not make economic sense or even enable the then Chancellor to deliver his promises.
Mr Jones
Does my hon. Friend also agree that not only did what he describe happen, but if we had followed the Conservative party’s policy of deregulation of the banking and financial sector—the Conservatives never called for more regulation; they wanted less—and if we had accepted the suggestion of David Cameron and George Osborne at the time of the Northern Rock crisis to let it crash, we would have been in a much worse situation than we were?
Wes Streeting
I wholeheartedly agree. I am proud of the contribution that UK financial services make—not just the City of London, but other economic centres, for example, in Edinburgh and Leeds.
Wes Streeting
Of course, we cannot forget Glasgow. We have several powerful financial centres in the UK. They can contribute enormously to our revenues as well as creating jobs and making the UK an attractive place to do business. However, we should never forget that the crash was a banking crisis, and the thought of politicians—not just the UK Government of the day, but Governments throughout the world—was not that they had spent too much or invested too much in schools, hospitals, teachers, dinner ladies, nurses and doctors, but that the regulatory regime that oversaw financial services was inadequate for the practices of the time. A corrosive greed took hold on Wall Street and in the City and the vast majority of people paid the price.
David Linden (Glasgow East) (SNP)
The hon. Gentleman is being generous with his time. He mentioned powerful financial centres, including Glasgow and Edinburgh. Does he agree with my colleagues and me that the Government’s reckless approach to Brexit is deeply damaging and will cause grave effects in cities such as Glasgow and Edinburgh?
Wes Streeting
I certainly agree with the hon. Gentleman. I shall come to his point, in the context of the motions and the extent to which they are insufficient to deal with the structural economic problems and the economic outlook faced by the country.
Madam Deputy Speaker (Mrs Eleanor Laing)
Order. Before the hon. Gentleman gives way again, I must tell him that I have been paying careful attention to what he is saying, and while I accept his explanation that he is about to discuss the motions, there are 48 of them on the Order Paper, so a fairly wide field of matters is under discussion. The hon. Gentleman has been dealing with subjects that are not relevant to the motions. He has been on his feet for 31 minutes, and I have given him quite a lot of leeway, but I am sure he will appreciate that, while it is interesting to consider the economic history of the last decade or so—and we are all fascinated —he really ought to speak to some of the motions, of which there are many before us this afternoon.
Wes Streeting
Of course, Madam Deputy Speaker, my entire speech relates directly to the Ways and Means motions, but what I will do with the time that I have left is be careful to ensure that my critique is centrally about the extent to which the motions fail to address the structural challenges facing our economy. I will now give way to my hon. Friend the Member for High Peak (Ruth George).
Ruth George
The Finance Bill proposes to extend the reliefs available to people with non-domiciled tax status, who are some of the wealthiest people in the country. [Interruption.] Motion 13 does that. It contrasts with the actions taken in 2012, when the then Chancellor set up the business investment relief scheme, which itself contrasted with a VAT increase that not only dampened down the economy but caused the tax burden to fall disproportionately on the shoulders of those with lower incomes while reliefs were given to the very wealthy.
Wes Streeting
I wholeheartedly agree with my hon. Friend. Let me make two points about what she has said. In the Budget and the Ways and Means motions, and in previous Budgets and resolutions, the Government have chosen to pursue particular regressive forms of taxation. There is no doubt that VAT is a regressive form of taxation, in that it is paid by everyone, both individuals and businesses, regardless of income. If I went into a shop and bought an item that was subject to VAT, I would pay the same rate as someone with a much lower income buying the same item.
If a Government’s objective is to increase their tax revenues—and, of course, we understand why that would be an objective, given the context of the Budget and the revenue-generation measures in the Ways and Means motions—they should pursue revenue generators that are based on progressive taxation, and ensure that those with the broadest shoulders bear the greatest burden. We have heard those words, or a variation of those words, many times from the Treasury Bench, from successive Chancellors and in successive Budgets, but, as I have said previously, the rhetoric fails to match the reality.
As my hon. Friend has referred again to the issue of non-doms, let me again highlight the extent to which the motions fall short of what is required. Of course we welcome the Government’s measures on non-doms, but I have already criticised them for not addressing, in the Ways and Means motions, the ability of non-doms to keep their assets out of scope if they are held in an overseas trust that was created before they were deemed to be domiciled. We may also want to consider the issue of definition, because the definition of who can be deemed to be in that category seems misleading. It does give the impression that a UK-born non-dom will be deemed if they are now UK-resident, but, inexplicably, it only covers those whose parents were not non-doms, letting non-doms off the hook if their parents were also non-doms. That is very common.
Mr Kevan Jones
Does my hon. Friend agree that there is something archaic in people being able to pass down their tax advantages to their children in that way? The average taxpayer on pay-as-you-earn has no chance of having access to such measures, and they certainly cannot pass on their status to their children or get any advantage for their children in the tax system.
Wes Streeting
I wholeheartedly agree with my hon. Friend, and I am proud to be a member of the Labour party, because it is inherent in the founding principles of our party that we are here to represent the interests of labour. It should be a principle in the approach to taxation and funding our public services that a hard day’s work should result in a fair day’s pay and that the wealth people earn through hard work should be rewarded. There are many people covered under the Ways and Means resolutions we are discussing—particularly those on inheritance and people who enjoy non-dom status—who through chance or luck or birth have found themselves wealthy. It was not through hard work; they have just been lucky.
I understand the parental instinct that means parents or grandparents want to hand on assets of value, both financial and sentimental, to their successors. I understand that even more as someone who might benefit in the future—although, given my family background and the rising cost of social care, probably not in the way that many high-profile politicians have experienced in recent years. However, there is a problem in that people feel that the link between hard work and the rewards of hard work, and prosperity, have been loosened and weakened. Meanwhile, there are plenty of people out there who through luck, chance or circumstance have accumulated vast amounts of wealth and are seemingly untouchable by the tax collectors.
That situation is deeply regrettable, because it has a corrosive impact on the public finances and our ability to fund public services that benefit everyone, and it is also having a corrosive impact on politics itself. People feel that we gather in this place and work in the interests of a privileged few who have sharp elbows and access to Ministers and the corridors of power, while the vast majority of people, many of whom might have never even thought to email their MP, do not feel that they have a voice, and instead always feel that they are at the sharp end of things. We hear Ministers talking about the tough choices facing the Government, and of course they do face tough choices—if we had won the election we would have faced tough choices; we make no bones about that. However, tough times require fair choices: we should be operating fairly in the best of times, but when times are particularly tough we have to have social and economic justice at the heart of our programme.
Mr Jones
Does my hon. Friend agree that the privileged individuals are also the ones who will have choices come Brexit? If the Government get Brexit wrong for the economy of this country, the average person will not be able to move their wealth or savings offshore, so they will be the ones who suffer. The people my hon. Friend is referring to, however, will be able to move their capital anywhere in the world.
Wes Streeting
My hon. Friend’s critique is absolutely right once again. I hope the Minister will respond in detail to the points we are raising about the technical aspects of the Ways and Means resolutions, because I think we have given them a forensic examination and a serious and substantial critique, and the Government ought to respond to that.
I want to pick up on the issue of tax avoidance in Northern Ireland and the provisions in the Finance Bill in this area. The Government seem to be using the Bill to introduce measures that will loosen the definition of a Northern Ireland employer for SMEs, which will basically enable people to establish a business in Northern Ireland and claim the lower rate. Opposition Front Benchers have argued that this will lead to brass-plating, with companies setting up a nominal office in the Northern Ireland jurisdiction to take advantage of lower taxes. My hon. Friend the Member for Bootle, the shadow Chief Secretary to the Treasury, described that situation as an onshore tax haven. We should not be in the business of allowing such a practice.
Forgive my cynicism, but it seems that since the Government lost their majority, they have lost a hell of a lot of revenue in potential tax receipts and in Government expenditure going to Northern Ireland. I am sure that is merely coincidental and has nothing to do with the Democratic Unionist party deal, but in cash terms—that is, the outlay on infrastructure and public services—most UK taxpayers saw the deal between the Conservatives and the DUP as being expensive enough. By the way, I do not begrudge the people of Northern Ireland the investment in infrastructure, education and health that they need. In fact, I do not begrudge them one penny. I do, however, begrudge the unfairness of Northern Ireland being given preferential treatment over England, Wales and Scotland for no other reason than that the Prime Minister took a gamble. She has paid a heavy personal political price for that, but I am less bothered about that. I am really bothered about the fact that the taxpayers we represent in England, Wales and Scotland are paying a heavy financial price for the Government bribing the DUP into a deal.
This measure in particular really does trouble me. We have already had constituents writing to us about the cash outlay to Northern Ireland, and it seems that a lot of hidden benefits are now being given to it, including adjustments to the tax regime. That will not be good for maintaining a strong and cohesive United Kingdom—it does not play well with our constituents in England, Wales and Scotland when they see one part of the United Kingdom being given preferential treatment over the others. I am sorry to disappoint Scottish National party Members present today, but I am a strong Unionist. I strongly support the United Kingdom, but it has to be a partnership of equals. The way in which the Government are now treating Northern Ireland is particularly uneven, as we can see in the Ways and Means resolutions before us this afternoon. I am very disappointed by that.
Resolution 13 allows provisions to be made to expand the scope of business investment relief, which allows non-doms to remit funds to the UK tax-free if they are investing in certain categories of UK business. We have a serious structural problem in our economy when it comes to investment. As I have said, we have one of the world’s largest financial sectors, yet we have a lower rate of investment than most of our major competitors. Public and private investment accounts for about 5% of our GDP, which is below the average for developed economies, and that figure has been falling not only under this Government but for the past 30 years. That is a structural economic problem that we need to deal with. Corporate investment has fallen below the rate of depreciation, which means that our capital stock is falling, and investment in research and development is now lower than that of our major competitors.
There are a lot of causes of that, including the way in which the banking system is insufficiently focused on business lending. That has been picked up by the Treasury Committee and by Members throughout the House in recent years. Also, private equity markets are increasingly focusing on short-term returns, which is not leading to the kind of investment that we wish to see. If the Ways and Means resolutions had set out provisions to stimulate, support or benefit business investment in general terms, I would certainly have supported them. It seems, however, that resolution 13 is not about business investment in the broadest sense but about a special category of business investment that benefits non-doms. I do not understand how this measure sits with the rhetoric from the Minister about other Ways and Means resolutions that are meant to target non-doms.
The shadow Chief Secretary to the Treasury and other colleagues on the Opposition Front Bench will well remember that during the general election, which caught everyone unawares, including Ministers, a raft of Government measures in a wide range of Bills were dropped in the wash-up process. I was closely involved in the Higher Education and Research Bill and saw the consequences for that Bill. It was interesting that the changes to the business investment scheme in the March Budget resolutions were withdrawn in the wash-up process. The Government knew that there was no way we would have allowed the measure through and that we would have been prepared to talk it out—something we never hope to do, because we want to engage constructively with the Government, but only so long as they enable time for appropriate and thorough scrutiny of policy. That measure seemed particularly unfair. If the Government are serious about stimulating business investment and attracting foreign investment, I think there are better ways to do it than with a measure that benefits a particular category of individual. I am not sure it will generate the increased business investment that Ministers want, and it seems particularly unfair.
I understand the pressures around business taxation—it is sometimes all too tempting to turn to corporation tax as the answer to every public policy spending commitment one wishes to make—but whenever we suggest modest increases in corporation taxation, the Government’s reaction is to attack Labour as anti-business. It is important to remember that under Labour we had some of the most competitive corporation tax rates in the OECD and that we have maintained that commitment in every election manifesto since in order to keep the UK competitive, but I come back to the basic issue of fairness and making sure that people pay their fair share.
Mr Jones
Does my hon. Friend agree that the Government’s fixation with corporation tax being as low as possible, and the belief that somehow that will give us a competitive advantage, is blown out of the water by the very successful economies, such as Germany and others, that have corporation tax rates a lot higher than those in the UK?
Wes Streeting
I wholeheartedly agree—again—with my hon. Friend. It is almost as if he wrote my speech. I only wish I could have written his. I have learned a great deal this afternoon about landfill taxation policy and its importance, and I look forward to studying his speech later as we prepare to grill Ministers on the Treasury Committee.
I turn to resolution 4, relating to clause 14 of the pre-election Finance Bill, which introduced amendments to tighten the income tax treatment of termination payments. I made a point early in my remarks about the sense of unfairness and injustice that people feel about the way the rules are rigged. Many people fear, particularly in the current political and economic climate, and in the context of the Brexit process, that attempts will be made to erode workers’ rights. I was particularly concerned to learn, therefore, when I studied resolution 4, that the measure narrowed the scope of tax relief on redundancy and termination payments, removed any exemption for payments in lieu of notice, enshrined it in statute that injury to feelings—a main aspect of compensation in discrimination cases—was excluded from the tax-free scope of payments for injuries, and gave the Treasury the power to vary the tax-free amount.
Lloyd Russell-Moyle (Brighton, Kemptown) (Lab/Co-op)
Does my hon. Friend agree that this is perhaps a return to the nasty party, in the sense that this measure will mean that people who may have suffered discrimination as a result of being LGBT or a woman may now be taxed on the compensation they received after being dismissed? That is a real indictment of what is meant to be a modern Conservative party.
Wes Streeting
Absolutely. I welcome my hon. Friend to the Chamber. I am unsure whether it is a return to the nasty party or more of a doubling down on being the nasty party. Indeed, I am unsure for how many more debates we can see the nastiness of the Conservative party reflected in public policy. On this or any other measure, if the Government’s intention is to clamp down on the abuse of a particular tax measure, provision, break or exemption, we will welcome that where the problem is genuine, but the Opposition believe that this measure targets termination payments more widely. It therefore follows that there is an obvious concern that workers who are losing their jobs are seen by the Government as a source of increased revenue.
What an outrage it is if the Government are seeking a power to reduce the £30,000 tax-free amount for termination payments without the requirement for primary legislation. That runs contrary to assurances that the Government had abandoned their plans to reduce that exemption, which was consulted on in 2015. Those of us who were in the 2015 Parliament will remember that one of the first measures with which we were confronted was the Bill that became the Trade Union Act 2016, which was an appalling attack on the rights of people at work. The Government consulted on this proposal then, but dropped their plans because they were strongly resisted both by the people and by the organisations that champion the rights of and protections for ordinary working people. Now, early on in the 2017 Parliament, the plans are back, but buried in these motions, with the Government presumably hoping that we would not notice. I bet the Government did not count on such scrutiny of their Ways and Means measures.
Ruth George
Many workers are obviously losing their jobs as a result of the continued austerity programme. Does my hon. Friend agree that it is ironic that those who are losing their jobs at HMRC due to the rationalisation may well be hit by this increase in taxation on their compensation when they could be helping us to increase our tax revenue from those who should be taxed?
Wes Streeting
I am grateful to my hon. Friend, who brings to the House enormous expertise and experience from her work championing the rights of working people at the Union of Shop, Distributive and Allied Workers, as part of the trade union movement. We should listen carefully to what she has to say.
On behalf of their members—ordinary working people—trade unions made it clear when the Government consulted that the measure should not be pursued. I think everyone in the Opposition thought that the Government had listened and dropped the provision, but we now see motion 4 on the Order Paper, and it is not fair to workers. We might have thought that the Government would learn from the embarrassing debacle over the summer about what happens when they try to clamp down on people’s access to justice and fair treatment. The Government have form here, and I am disappointed and only too sorry that they do not seem to have learned their lesson or listened to people.
I want to begin to draw my remarks to a close by—
Madam Deputy Speaker (Mrs Eleanor Laing)
Order. We cannot have such expressions from around the Chamber. The hon. Gentleman has only spoken for one hour and five minutes. There are 48 motions, and I dare say that he still has more to say. As long as he sticks rigorously to speaking about the 48 motions, it is perfectly in order for him to go on speaking. However, now that he has surpassed the time taken by the previous speaker, I am sure that the incentive for him to speak for much longer is not great.
Wes Streeting
Madam Deputy Speaker, I can assure you and hon. Members on both sides of the House that my intention is certainly not to surpass the speaking time of my hon. Friend the Member for North Durham. My intention is merely to make sure that Government economic policy and the Ways and Means motions are given a thorough and forensic examination.
As I said at the beginning of my speech, revolutionary times call for a revolutionary response. What we see in today’s provisions is tinkering around the edges. Although the Whips’ briefings often give Conservative Members the ammunition—
Wes Streeting
There is no one here—even Conservative Members have given up defending the Government’s Ways and Means motions. We have the poor Minister, his Whip and his poor Parliamentary Private Secretary in the Chamber, but there we are. I thank everyone else for paying attention this afternoon. The serious point is that the Ways and Means motions do not actually address the fundamental structural weaknesses in our economy.
I will now draw heavily from today’s report by the Institute for Public Policy Research, which I commend to the House and which I hope people will read. The fact is that the UK has the most geographically unbalanced economy in Europe. Although I am proud to be a London and Essex MP, I understand why colleagues from other regions and nations of the UK want a more balanced approach to regional economic and infrastructure investment, which is in the interests not only of their constituents but of my constituents. If we are to build a stronger, more resilient, more prosperous and fairer economy, it has to be one that is fairly balanced across the UK.
As Conservative Members tell us, we have a high employment rate and unemployment has been kept low, which I acknowledge and welcome, but Ministers and Conservative Members must have some humility about the fact that the high employment rate has been accompanied by an increasingly insecure and casualised labour market. Fifteen per cent. of the workforce are now self-employed, and many of those self-employed people will be hit by the Ways and Means motions, particularly those relating to Making Tax Digital.
We welcome self-employment. I have been self-employed, and I admire people who pluck up the courage to take the plunge and the risk of starting their own business, but there are many people who are not self-employed in the conventional sense—the sense that is to be encouraged and welcomed—but are in enforced self-employment, driven either by businesses seeking to duck their employer responsibilities or, worse still, by a punitive welfare regime in which people seek to declare themselves as self-employed so that they do not lose their tax credits while they scramble to find a real job. That is not properly understood.
Of course, there is also an unequal distribution of economic wealth. Between 1979 and 2012, only 10% of overall income growth went to the bottom half of the income distribution; almost 40% went to the richest tenth of households. Small wonder that we see this outcry from significant parts of our population, concentrated in certain parts of the country in particular, who are not just angry about the injustice they feel but are completely aware that it is a genuine injustice. It is not just a feeling of resentment—an irrational emotional response—as they are being left behind.
Let us be honest about the fact that we have, as the IPPR says,
“both world-leading businesses and world-lagging productivity.”
We have a lower rate of investment than most of our major competitors, as I have already said. Yes, we have a trade surplus in services, but our overall current account deficit as a percentage of GDP is the largest of all the G7 countries. The extent of manufacturing in our economy should make Ministers blush.
In the past seven years, the Government have been far too reliant on monetary policy levers. They have been over-reliant on quantitative easing, over-reliant on extremely low interest rates and over-reliant on growth that is fuelled by record consumer spending and consumer debt. We are building a new debt crisis in this country—it is a consumer debt crisis, and it is here. All it will take is a marginal interest rate increase for people to be unable to service their debt, and they are barely able to service that as it is. There are real questions to be answered about irresponsible lending, and the Treasury Committee needs to examine that.
These structural weaknesses in our economy ought to be at the forefront of the motions, but they are not. That would be irresponsible in the best of times, but let us look at what we face down the track. We are going to see deeper globalisation, and a shift of economic power to the south and to the east, with a requirement on us to become far more competitive, particularly in seizing opportunities in the service economy. We face enormous and fundamental technological change. The rate of such change is now vastly outstripping the rate at which regulators, government and businesses are able to respond to it. I am not someone who sees the rise of the robots as the beginning of human serfdom in the age of the machine; as with globalisation, there are huge opportunities here to deal with enormous inequality and with big issues facing the planet, such as climate change. Automation presents huge possibilities, but let us learn the lesson from globalisation. This is not something that we can slow or stop; it is happening, and it is a process. We must make sure that this new industrial revolution, the fourth one, works in the interests of everyone, rather than a select few. Otherwise, we will end up back where we are with Brexit, which is the biggest risk facing our country.
When we think about what could happen in the next couple of years as the UK leaves the EU or comes crashing out, we see that the idea that these Ways and Means motions would make any bit of difference is fanciful—it is not serious. When we look at policy coming from the Treasury and the Department for Business, Energy and Industrial Strategy, we see that it is insufficient to meet the challenges of the time. Worse, it seems that far from pursuing policies that will address these big challenges, the Government are pursuing an approach that would make things even worse, relegating the economy to a second-order issue. As George Osborne said from the Government Back Benches after he left office as Chancellor, in a debate about our relationship with the EU,
“the Government have chosen…not to make the economy the priority”.—[Official Report, 1 February 2017; Vol. 620, c. 1034.]
Can you imagine that? Can you imagine a Government not making the economy the priority? As I have said throughout this debate, that would be inexcusable in the best of times, but it is absolutely outrageous in the worst of times.
In conclusion, I hope that the Government not only take on board the detailed critique that has been made of their Ways and Means motions, but reflect on the structural weaknesses in our economy, the challenges that lie ahead and how they can meet them. Let us think about the biggest political event this country has seen in post-war history: the decision to leave the EU. We know that the referendum was lost because of a coalition of voters. I accept that there were a lot of committed Eurosceptics who always wanted out come what may, but the referendum was won thanks to the votes of millions of people who simply felt left behind, who felt unheard and who wanted to send a clear message. They are the people who have been at the sharp end of globalisation; they are the victims of economic inequality and social injustice. When we campaigned in areas where people turned out in droves to vote leave and we told people they may be voting to make themselves poorer, time and again we heard the same reply: “Things cannot get worse than this.” The thing I fear more than anything else about the economic outlook in this Parliament is that things can, and indeed may well, get worse. It would be a tragedy if the very people whose voices cried out to demand change, and who expect that change, were once again the ones who bore the brunt of short-term economic thinking, and of a politics and economics that works in the interests of the privileged few.
I did my democratic duty in honouring the referendum by voting to trigger article 50. What I will not do during this Parliament is pretend that I think the right decision has been made or that the warnings we gave will not come to pass. It is my responsibility, and the responsibility of us all, to protect the interests of our nation and our constituents. If we want to deal with what we are seeing across western democracies—the consequences of people abandoning their faith in mainstream politics—and we want to see off that trend and process, the only way to change course is to change our country. There is no shortcut to achieving change. It has to be meaningful, serious and a lot better than the measures the Government have presented this afternoon.
Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)
On a point of order, Madam Deputy Speaker. Following the point of order made by the right hon. Member for New Forest East (Dr Lewis) earlier today about the establishment of Select Committees, it has come to my attention that every party has a list of names of members of Select Committees. Will you and Mr Speaker use your good offices to encourage the Government to table a motion tonight with those names—if there are any gaps, they can be filled at a later time—so that the Committees of this House can scrutinise this Government as swiftly as possible, hopefully starting next Monday?
Madam Deputy Speaker (Mrs Eleanor Laing)
I appreciate the point that the hon. Lady is making. In her position as the Chair of one of the senior Committees of the House, she is right to draw the matter to the House’s attention. She refers to the point of order made earlier this afternoon by the right hon. Member for New Forest East (Dr Lewis), to which Mr Speaker gave a very thorough answer, making it very clear that he is of the opinion that it is in the best interests of the House that the Committees are established as soon as possible. My understanding from what he said is that the Leader of the House is in agreement with him. I take it from the general demeanour of the Chamber now, and earlier this afternoon during the point of order from the right hon. Member for New Forest, that the House agrees that it would be in the best interests of our democratic system that the Select Committees are established as soon as possible.
I have every confidence in the Leader of the House. Obviously she is not present in the Chamber at the moment, because nobody knew until a moment ago that the hon. Lady was going to raise this point of order. I am giving a rather lengthy reply in the hope that the Leader of the House will arrive in the Chamber, but I cannot enter into the long speech tradition that has been established this afternoon, as it is not my duty to speak for more than a few seconds on such a matter, and I think that this is all I can do. The point has been noted by those on the Treasury Bench, and I would expect the Leader of the House, who would have the best interests of the House at the front of her mind in all she does, to take note of what the hon. Lady said and the Chamber’s reaction to it.
Ruth George (High Peak) (Lab)
I pay tribute to the remarks made by the two preceding speakers, my hon. Friends the Members for North Durham (Mr Jones) and for Ilford North (Wes Streeting). I promise that having been in this House for only a short time, I cannot yet seek to match them for speaking stamina. I am sure that the rest of the House will not be too disappointed by that.
I would like to address how the Bill fits with the Government’s stated priorities. Earlier this year, the Prime Minister, writing in The Sun, promised
“to build a stronger, fairer Britain that works for everyone, not just the privileged few. A Britain…that works for ordinary working people.”
If those words are not mere rhetoric, they need to be backed up by legislation, and where better to put that legislation than in a Finance Bill? It is an opportunity for the Government to make our tax system and our society fairer. I am concerned, though, that the Bill will not only not make Britain fairer, but make our society more unequal.
I wish to concentrate on the effect of motion 4, which is on termination payments, and of motion 13, which is on business investment relief. Business investment relief applies only to non-domiciled UK taxpayers—120,000 people who are some of the wealthiest in our society. They are already able to choose whether their income is only taxed when it is brought into the UK. That gives a huge advantage to those who spend most of their lives outside our country, and whose income can be held in offshore accounts, trusts and shares.
Although, as my hon. Friend the Member for Ilford North said, I worked for the past 20 years or so for a trade union for working people, prior to that I worked as a tax accountant. On leaving school, I went to work in London for an international tax accountancy firm that specialised in advising non-domiciled individuals. These people were enormously wealthy, and included some well-known names. Even if their income was earned in the UK, if their earnings went directly into a non-UK account, they were not subject to UK taxation. In recent years, we have seen how that sort of manipulation of high incomes still goes on. It enables the very wealthiest people to pay a minimal contribution to the UK, even if they are deemed resident here. It is not the fault of this Government, but non-domiciled status was essentially created to avoid UK taxation.
For many people who travel globally, the system is not actually adaptable. For all their enormous wealth and jet-set lifestyles, I used to feel sorry for our non-domiciled clients when I was a teenager in a junior tax accountancy position. They were able to spend only a set number of days in the UK, and the enormous tax consequences of their overstaying that time limit meant that they felt they needed to adhere to it strictly, regardless of their own personal needs or wishes. Our accountancy firm used to keep a schedule in the front of each client’s file, setting out the number of days that they had set foot in the UK that tax year. The clients used to have to plan their personal and business engagements around the limits. When they got close to the limit, it was my job to write to inform them to be careful with their travel arrangements until 5 April, when the tax year came to an end and a new limit began. That is no way for people to have to live their lives or for a country to run its tax system.
The Government say they are cracking down on non-domiciled status, but, as I said to my hon. Friend the Member for Ilford North, it seems to be different from their crackdown on benefits for disabled people living on the breadline. Will the Minister confirm that non-domiciled individuals will see their status change only if they have not complied in 15 out of 20 years? Disabled people would love to have 15 years to show how their disability affects their lives and how it changes over time, but they are assessed on one day, at one particular time when they have managed to attend an assessment centre, and they are penalised immediately if they cannot do so. If there is a change in circumstance for non-domiciled residents, instead of their hugely beneficial tax status being changed immediately, the Government have given them two years in which to transfer their money to an offshore trust to again avoid paying any tax on it.
As if the tax benefits of non-domiciled status were not already generous enough, in 2012 the then Chancellor introduced business investment relief. I am sure that had nothing to do with the number of people of non-domiciled status with whom he spent his holidays on yachts, but it was certainly welcomed by their investment advisers. Firms such as Sapphire were pleased to advertise the benefits of business investment relief to their clients. The article on its website says:
“Unfortunately for the vast majority of us, when we earn money we have to pay tax…However, for those individuals who are resident in the UK but are considered non-domiciled this basic rule does not have to apply…From 6 April 2012, the government introduced the very attractive Business Investment Relief…Put simply, if you are resident in the UK but are…a “non-dom”…and you want to bring your overseas money into the UK to make an investment and NOT pay tax in the process—then Business Investment Relief is your answer…the UK Government is effectively giving non-doms a subsidy…on their investments”—
then it was 50%, now it is 45%. The company says:
“But wait—it gets better—you can also use the other reliefs when making an investment using offshore monies remitted to the UK”—
such as the enterprise investment scheme or the seed enterprise investment scheme, which will also potentially save 40% on an income tax bill. The advice that is given sets out how great the tax advantages are. An investment of £500,000 by someone with non-domiciled status would attract tax relief of £400,000.
Sapphire advertises how wide the opportunities are under business investment relief, saying:
“the rules for what makes up a qualifying company…are very wide. Quoted companies are excluded, but virtually any other company…carrying out a business may qualify…investment into property development or property with a rent is allowable.”
Do we really need more overseas investors increasing our property prices? It does not even have to be an arm’s length or transparent investment, as money
“can be invested in a company in which the investor is or associates are involved in”.
If someone wants to dispose of that investment and is worried about capital gains tax, they are advised:
“When the investment is sold, if there is a gain it will be subject to UK Capital Gains Tax—but the original funds can be taken back offshore again (within a 45 day or 90 day time period) in order to avoid being taxed”.
It is no wonder that despite all the rhetoric about cracking down on non-doms, their number has increased since 2010. The Government now want to make business investment relief even more generous through this Bill. This time, I quote the reputable KPMG, which sets out the benefits of the Government’s proposals, which have
“the objective of making the BIR scheme more attractive to non-UK domiciled investors…BIR will be extended to include investments made in a new qualifying entity, a ‘hybrid company’…not exclusively a trading company or a stakeholder company…but…a hybrid of the two”—
just in case someone could not fit their investment into one or other of them. It goes on:
“At the same time…the period during which an eligible trading company must start to trade,”
or
“an eligible stakeholder company must start to hold investments…will be increased to five years…Where a company becomes non-operational and a BIR investment ceases to qualify, the grace period during which action must be taken…will be increased to two years”
to manage the risk of a tax change more effectively. It also states:
“Another extension to BIR sees acquisitions of existing shares already in issue potentially qualifying for BIR… there will be no requirement for shares to have been newly issued…Rules which withdraw BIR will be narrowed”.
An already exceedingly generous scheme will be widened and extended in scope to enable more companies to be invested in and to enable more people to make those investments, be it in a trading company or a property. May I ask the Minister how that squares with the Prime Minister’s promise that we will create a fairer society by breaking down the barriers of privilege and making Britain a great meritocracy?
The treatment of non-domiciled taxpayers in the Bill contrasts with the treatment of ordinary working people. The Government’s huge cuts to public services have largely been on the back of those ordinary working people, none more so than the hundreds of thousands in the public sector who have lost their jobs.
Under the Government’s continued austerity programme, thousands more hard-working public servants will lose their employment. In many cases, they have given the majority of their working life to their job and will find it extremely hard to get another. As the state pension age increases, people made redundant later in their working life have to try to get by on their payment for termination of their employment for as long as possible. It is an extremely worrying time for them.
Two hospitals in my constituency are earmarked for ward closures, with dozens of experienced NHS staff worried about whether they will still have a job. To those hard-working hospital staff, who continue to give excellent care to their patients for which they are renowned, the Bill brings added uncertainty. The Government want Parliament to give them the power to vary the £30,000 tax-free limit for payments on termination of employment, but people will see less of that payment if that tax limit is reduced. The long-standing limit, which gives ordinary hard-working people the ability to make the most of the final payment from their job at a time when they need it most, is under threat. I hope the Minister can assure me that the Government will at no point seek to reduce the £30,000 tax-free limit on termination payments.
In another example of hitting hard-working people when they are down, the Bill seeks to tax the compensation for injury to feelings caused by a proven case of discrimination at work. Does the Minister realise what an employee has to go through to receive a compensation award for discrimination? Not only do they originally suffer that serious and long-lasting discrimination at work, but they also have to have made a complaint unsuccessfully through their employer’s procedures, having their claims refuted and exacerbating the hurt and distress. They then have to go through the whole process and complaint yet again, this time through an employment tribunal procedure. The process takes years of emotional distress and it is not surprising that only a handful of cases get through this arduous process.
Only 144 individuals were awarded compensation for discrimination in the past year, including 72 cases of disability discrimination, 33 cases of sex discrimination and nine cases of sexual orientation discrimination. Bearing in mind the small number of cases, this is not an effective revenue-raising measure. Until now, claimants have had to pay an employment tribunal fee of £1,250 to take a case of discrimination to an employment tribunal. Now that those fees have been ruled unlawful, does the Minister agree that victims of sustained and damaging discrimination will feel that taxation of their compensation payment will simply add financial insult to their injury? It is a worrying principle for the Government to commence taxing compensation—a measure to give redress from unfairness—which inflicts further unfairness on those who have already suffered enough.
I am relatively new to the House, but the Bill shows me and our wider electorate that, in spite of changing Ministers, the Government have not changed their spots. They are seeking to rush through these important measures with very little parliamentary scrutiny. These measures give even more to the wealthiest and take even more from hard-working people at the times they need it most. The Prime Minister has been long on rhetoric for tackling privilege and helping ordinary working people, but the Government speak a very different story in their actions in this Bill. Before the final Bill comes to the House, I urge the Minister to address the imbalance between rhetoric and action. He can either ensure that the Bill addresses the issues that his leader claims to seek to address or the Government can be straight with voters and say that their actions actually encourage privilege and knock working people when they are down.
Bambos Charalambous (Enfield, Southgate) (Lab)
Although any attempts to clamp down on tax avoidance schemes are welcome, I do not feel that the proposed measures go far enough or that HMRC has the capacity to go after corporations that have in the past paid less tax than their cleaners.
By 2021, HMRC is projected to have lost 34% of its staff since 2010, including those in departments dealing with the very largest corporations. That is a huge number, and with the big accountancy firms willing to take on former HMRC employees for their knowledge and expertise, is it any wonder that the tax-avoiding corporations are one step ahead of the game?
The Bill makes no reference to dealing with offshore tax havens, which, as we all know, are a popular device for avoiding tax wherever the profits have been made. That scam has been estimated to be worth £13,000 billion worldwide in avoided tax. Some of those profits will have been made in the UK, and some in other countries, including many developing countries. Oxfam has estimated that the cost of tax avoidance to developing countries is £78 billion. That money could go a long way to providing schools, healthcare and clean water, and it could actually save lives.
What is required is greater transparency and a mandatory requirement for public, country-by-country reporting on where profits have been made, so that multinational companies pay their fair share of tax along with everybody else and make a contribution to society in the countries in which they operate. It is estimated that unpaid tax could be worth as much as 16% of Government revenue in some developing countries. It cannot be right that multinational companies should be able to choose where they pay tax or whether to pay it at all.
In the UK alone, tax avoidance was estimated to be approximately £11.4 billion for the last fiscal year. It is scandalous that some of the corporations using tax avoidance measures in the UK benefit from having been granted lucrative Government contracts. At a time when public sector workers have to go to food banks to survive, it is hard to imagine a more insulting parody of fairness than greedy corporations directly profiting from the public purse, using every trick in the book to avoid paying tax.
At a time when there is massive underfunding of the NHS and schools, as well as of local authorities for the services they provide, we cannot allow half-measures to prevail. More needs to be done to secure the money for our much needed cash-strapped public services. Everyone knows that further investment in HMRC is needed to recover these large sums and that any additional staff who are brought in would, in effect, pay for themselves within weeks. More needs to be done, but action is needed right now, because these measures do not go far enough.
Steve McCabe (Birmingham, Selly Oak) (Lab)
I am grateful for the opportunity to make a brief contribution to this debate.
I cannot help but feel that the Government seem a little embarrassed by this whole Budget, this whole set of measures and the state of the economy. Presumably, that is why there were so few people on the Government side to make a contribution today. We did have a fleeting, cameo appearance from the Chancellor earlier, but he is still taking his vow of silence. I understand that, because I used to work with unemployed people and people who feared losing their jobs, and I know about that sense of needing to keep your head down sometimes.
In the time available, I want to pick up a couple of the issues that have come up in the debate and to try to understand where the Government are at the moment. To be honest, the Minister gave very little detail in his opening remarks—it was not so much broad brush as “Don’t blink or you’ll miss it.”
I particularly want to ask about the proposal that has come up again to tax people’s redundancy pay and termination payments. My understanding was that there had been a discussion on this and that the Government had conceded, so I am not quite clear why we are back looking at what looks like virtually the same proposal. I want to ask a straightforward question: if this proposal is the right thing to do—I have grave doubts about the way we are proceeding—should Parliament not decide that? Is it really right that HMRC should be given the power to make the decision? I think that that is Parliament abdicating its responsibility, but more importantly it is another grab by Government to transfer power elsewhere so that they do not have to be accountable or scrutinised. We really should look again at whether that is appropriate.
I have a very simple request on business investment relief. It behoves the Government to place in the House of Commons Library details of where that business investment is going. We need to know which businesses and companies are benefiting; how evenly it is being spread around the country; and which regions and nations are seeing benefits. Otherwise it looks like another attempt to give someone a tax cut on the side. As long as people have that suspicion and do not have the evidence or an explanation, is it any wonder that they will adopt that view?
I intervened on the Minister earlier on the issue of non-domiciles. He was quick to tell me that I had nothing to say on the subject because Labour was in power before the present Government and the coalition. It is true that past Governments have struggled on the question of non-domiciles, but my memory is that the Conservative party could not have been clearer about its position in 2010. In fact, the former Chancellor was absolutely crystal clear about what it was going to do when it came to power. The question we have to ask is, having had all this time to work it out, how come there are so many exemptions, exclusions and difficulties in tackling a problem which, according to the Conservative party, has been at the centre of its own thinking for seven years? How is it so difficult? If the object of the exercise is not to try to avoid doing it—it was quick to say that that was not the case and that it was the party that would deliver—how come there are so many exclusions, exemptions and get-out routes for the people involved?
On the wider question of tax avoidance, the Conservative party seems to wonder why people do not believe, trust or have faith in it. Is it normal that those lobby groups and people who have spent time arguing against tax provisions to limit the amount of tax paid by individuals and organisations should then be given the power to scrutinise whether what individuals are doing is right and appropriate? That does not sound right to me, and when I try to explain it to my constituents it does not sound right to them either. They have a straightforward understanding of the rules: the Government set the rules, they are laid out in black and white, and we are expected to pay. However, when it comes to other people being expected to pay, the very same lobby groups and organisations that advise and assist them and lobby against paying are given the power to scrutinise what they are doing. That is why people do not have faith in what is going on.
I want to turn to the air passenger duty measure. The Minister was quick to use his crystal ball when tackled on corporation tax earlier. He quickly moved the issue away from what the Government are doing to what he foresaw a future Labour Government doing. I wonder whether he will go back to his crystal ball and reflect on two things. First, on the air passenger duty arrangements we are being asked to approve, what are the Government doing about the changes happening elsewhere in the country? When the Scottish Government set their rate for air departure tax, that could have a phenomenal impact on the airline industry and every regional airport and regional economy in this country. What is the point of the Government setting a rate in complete isolation from what is happening about 600 miles up the road? What is the value in that? Why do they not look at that and give us a coherent response?
Secondly, I am interested to know from the Minister’s crystal ball what is going to happen with corporation tax. Once Northern Ireland has to make a decision about corporation tax—presumably in relation to the Irish Republic—it cannot but have a knock-on effect on corporation tax rates in the rest of the country. How come there has not been a single comment about that from the Government? Will it be a case of them waking up after the event, as they have done at every stage in the economic management of the country so far, and telling us that they are going to think about it?
Anneliese Dodds (Oxford East) (Lab/Co-op)
Sadly, today’s debate on the Ways and Means resolutions has confirmed in the field of taxation something that many of us feared about the Government’s general approach to public policy: no genuine attempt is being made to face up to the enormous challenges facing our country, from our yawning productivity and investment gaps to the haemorrhage of public funds caused by tax dodging and, as many have noted, the uncertainty caused by the Government’s shambolic approach to Brexit.
We end this debate with new revelations, hot off the press, that the Government have been pleading with businesses to publicly back their Brexit negotiating strategy—pleas that have been met with “fury” and “incredulity” from business. Against that backdrop, rather than the wide-ranging changes that are required, we have a clutch of measures that I would describe as piecemeal, although I have to say that I liked the epithets used by my hon. Friend the Member for Ilford North (Wes Streeting), who described them as thin and patchy. Many of the measures are, sadly, ill thought through, and they could have a range of negative consequences.
The process is also flawed. Despite repeated calls from tax experts for more detailed scrutiny of tax measures, the House is being rushed into Second Reading of the Bill containing these measures just next week. I accept the Minister’s comments that all these measures were published previously. However, several of them have been pulled, some at very short notice. As my hon. Friend the Member for North Durham (Mr Jones) set out—at length, I must say—some of those measures were important ones.
Such is the lack of coherence in this package of measures that some might describe the current coalition of chaos as rudderless, but I would say that is unfair, because the resolutions show that the Government’s shaky ship tends to list in one direction: towards the protection of the most privileged. As so many of my hon. Friends have mentioned, we see that first of all in the Government’s approach to non-dom status. That anomalous and old-fashioned status was created by William Pitt the younger, and it provides for some of the very richest in society privileges of which British mere mortals cannot avail themselves. Rather than fundamental abolition or reform, here we have the introduction of more and more complex rules.
We heard repeatedly today from the Government that they are closing the front door to tax avoidance from non-doms, but, as others have mentioned, that front door will close at a glacially slow pace. It will be open for another 15 years. In any case, while the Government maintain that they will—albeit very slowly—close the front door to tax avoidance, some of the measures proposed here open up new, hidden back doors through which non-doms can shift their tax responsibilities.
Many Labour Members have talked about the mechanism of business investment relief, which will be extended substantially beyond its initial remit. We have asked repeatedly for evidence of its efficacy, but evidence came there paltry little, and only very late in the day. It was only last Friday that we received a statistical commentary providing some very basic figures on the use of business investment relief, and the figures that we were initially given were rounded up to the nearest hundred. That is surely rather unusual when we are talking about fewer than 450 new individuals taking up that relief in 2014-15. In fact, according to my calculations, less than 1% of non-doms currently appear to be taking it up.
Furthermore, as many others have mentioned, the Government have provided no indication of which sectors or businesses are benefiting from this relief. Without that information, it is unclear why the Government have chosen to extend its remit. As my hon. Friend the Member for High Peak (Ruth George) mentioned, we also need to know why the Government are now enabling non-doms to buy shares traded in secondary markets, not just new shares, under the remit of the relief. How exactly will that benefit the real economy and generate the investment that we desperately need?
The new measures have been proposed in a context where, according to a statistical release we have only just received, more than 54,600 non-doms have been in the UK for seven of the past nine years, but only 5,100 seem to have admitted remitting income to the UK. Having said that, the exact number of non-doms in Britain seems to go up or down by 200 depending on which table is looked at in the statistical release, so we should perhaps take some of the figures with a pinch of salt. I must say that I struggle to understand how exactly all the remaining non-doms are surviving and living here. It is all very well trumpeting the funds obtained through the non-dom charges—we heard the same again today—but for high net worth individuals claiming non-dom status, those charges might be dwarfed by the taxes they would have paid if they were treated like ordinary Brits. Furthermore, while the Financial Secretary claimed that the proposals would end permanent non-dom status, that, as many Labour Members have mentioned, is not the case for those whose parents are non-doms.
It is difficult to avoid the conclusion of firms aiding individuals to attain non-dom status, such as the Tax Advisory Partnership, that non-dom status is, in its words, “generally advantageous to taxpayers”, although not of course to British ones. The firm also notes that
“trust planning is a valuable option for many non-doms”,
yet the Government’s new measures protect income that is already locked into trusts. As my hon. Friend the Member for Ilford North said, this is big business for the many firms engaged in enabling people to avoid tax.
I am very sorry that rather than promoting investment in our country, the non-dom system seems for many just to be a mechanism for tax avoidance. Now more than ever, we really need more business investment in Britain. Several Labour Members made the case for that today. I have looked at the figures provided by the OECD: last year, the increase in investment in Britain was half the G7 average, a third of the OECD average and a sixth of the EU average. Labour Members have heard nothing in this debate to convince us that the Government’s measures presented in the resolutions will provide the investment that our country desperately needs.
Generally, we find that while the Government may talk the talk on tax avoidance, the measures they produce are frequently watered down and insipid in practice. Just as with their measures on non-doms, we find that their commitment to crack down on those enabling aggressive tax avoidance fails to include the really strong deterrents called for by experts. Indeed, the Government initially proposed such measures, but they have now been watered down.
As several Labour Members have said, the treatment in these measures of non-doms and enablers of tax avoidance contrasts with the treatment of people who have been discriminated against in employment cases or made redundant. I must say that I share the concerns of my hon. Friend the Member for Birmingham, Selly Oak (Steve McCabe) about the fact that the Financial Secretary did not mention those issues in his opening speech, and I very much hope that he will cover them in his concluding remarks. They are incredibly important for many people in Britain, particularly as we see more employment cases being brought and more people being made redundant. Take the issue of injury to feelings payments becoming taxable. I have looked at the figures and seen that we are not necessarily talking about very large awards. In 2014, the median award for injury to feelings across all categories of discrimination was £6,600. Over the three years to 2014, median awards for discrimination on the basis of sexual orientation actually diminished to just £1,000, and awards on the basis of other characteristics have generally come in at about the £6,000 mark.
I must say that I find it churlish of the Government to focus on the people who, after all, as my hon. Friend the Member for High Peak detailed, have been forced to pursue their case at many different levels, often at considerable expense to themselves and causing considerable concern to themselves and their families. When they are found genuinely to have had a case—because their age, race, religion, sexual orientation, disability or pregnancy has been used against them—they then find out at that stage that any award is taxable. We find penny pinching that is focused on discriminated-against workers and those made redundant rather than an attempt to tackle large-scale tax avoidance head-on.
Colleagues have asked many other questions, to which we have not received adequate responses. One of the most important issues, which many colleagues mentioned, is the resourcing of HMRC, particularly with new cuts on the horizon through the removal of local offices. I am concerned that we find no commitment by the Government to grasp the nettle and properly resource HMRC so that it can feasibly assess whether high net worth individuals and multinational corporations will comply with the new rules.
I remind the Financial Secretary that there are still 10,000 fewer HMRC staff than in 2010—a 16% cut, despite the Government’s professed concern about tax avoidance. In that context it is no surprise that, as the hon. Member for Aberdeen North (Kirsty Blackman) said, proposed new powers for HMRC to enter premises and inspect goods, as well as to search vehicles or vessels, have not been repeated in the resolutions despite discussion of them before the election. In this matter as in others, an ideological commitment to reducing the size of HMRC can lead to a focus on punishing smaller businesses that have transgressed minor rules, while some of the biggest players escape their liabilities. As my hon. Friend the Member for Ilford North said, the principle of proportionality is already under pressure. That could become an even bigger problem with additional cuts.
The matter is also deeply concerning in the context of Making Tax Digital. We welcome the fact that the Government have ceded to pressure and that they are climbing down on making tax digital to an accelerated timetable, but I am worried that the Financial Secretary said that electronic reporting would be extended only when it had been shown to work well. I remember similar discussions on the introduction of digital reporting for services that suddenly had to pay VAT when the system changed to operating on the basis of where the buyer rather than the seller was. The Government said then that all the arrangements would be in place; businesses would know how to pay their VAT, and there would not be concerns about testing the system—the so-called VAT MOSS system. Many Opposition colleagues will remember it as the VAT mess system, because that is what we got.
Cuts to HMRC resources are incredibly important. One Conservative Member shouted, “With digitalisation, we don’t need HMRC staff.” In some cases, we need those staff precisely to help people through the digital process. Those staff were not there for VAT mess, and I am worried that they will not be there for elements of Making Tax Digital if the Government go ahead with their plans.
Ways and Means resolutions may be technical, as the Chancellor said in his brief intervention in the discussion, but they offer an opportunity to deal with some of the fundamental problems with the British economy. Fiscal matters are incredibly important—Opposition Members accept that, and that is why so many of us have been present, intervened in the debate and posed questions. Sadly, instead of the genuine engagement that we should have had with many of our concerns, they have not been dealt with seriously. Overall, the measures imply that the very best-off people are likely to be rewarded, with little left for everyone else.
Mel Stride
The debate has been engaging and I thank all Members for their contributions. I will touch briefly on the points that have been raised. As I said in my opening speech, there will of course be further opportunities to debate the principles behind the Finance Bill, not least on Second Reading next week.
The measures to be included in the Finance Bill have been consulted upon widely and scrutinised by the public, key stakeholders, tax professionals and, to some extent, the House. The shadow Chief Secretary, the hon. Member for Bootle (Peter Dowd), said that the Bill was being rushed through. I remind him that we have already debated the Second Reading of a Bill which, substantially, contained nearly all the measures that we will debate in the weeks and months ahead.
The Bill will raise some £16 billion over the next five years, but, far from what the hon. Members for Bootle and for Oxford East (Anneliese Dodds) would have us believe, much of that revenue will be raised from large multinational corporations—and, yes, from non-domiciled individuals. On the issue of the taxation of non-domiciled individuals, let me make it clear that we are abolishing permanent non-dom status. It is this Government who have presented proposals, consulted on them widely, and delivered a fair and balanced package. During the debate I heard Opposition Members criticise offshore trusts. Let me be clear again: if funds are taken out of trusts, they will be taxed in the normal way. In recent years, we have reached important international agreements on the automatic exchange of information to ensure that we can effectively monitor those movements.
Overall, we have developed a balanced policy that promotes fairness in the tax system and, importantly, protects vital revenues for our public services. Those non-doms bring in about £9 billion per year in tax revenues, which is up from £8 billion about a decade ago. We expect, in addition to those revenues, to raise a further £1.5 billion over the next five years as a direct result of this Finance Bill.
The Bill introduces important changes in corporation tax, implementing rules agreed internationally and recommended by the OECD. They will ensure that big companies pay corporation tax when they make large profits, no matter what their past losses might have been, and will prevent them from using artificial borrowing to avoid the tax that they owe. I remind the House that those matters have been the subject over some years of intense international work—international work that the Government have been instrumental in driving forward. These changes represent real results, which Labour Members never seemed to get around to when they were in office.
The hon. Member for Bootle also criticised measures relating to termination payments. The £30,000 tax-free allowance will still be available and statutory redundancy will be tax-free. However, we must face the fact that, while it may be a particularly easy argument to prosecute that we are somehow beating up those who are losing their jobs, the reality is that that situation is being used as a vehicle for tax avoidance, and when the Government find tax avoidance, we will clamp down on it.
Let me now deal with the points raised by the hon. Member for Bootle about the Government’s record on tax avoidance and evasion, and the work of HMRC. He suggested that somehow HMRC was not doing enough. I remind the House that in 2016-17, HMRC brought in £574.9 billion in tax revenue, and that was the seventh record year in a row. It generated £29.9 billion of compliance revenue in one year, and in 2016-17 it prosecuted 886 criminals for tax avoidance and evasion, more than double the number six years ago. The hon. Member for Oxford East criticised our commitments to HMRC. Since 2010 we have invested £1.8 billion in HMRC for the purpose of clamping down on tax avoidance and evasion, and we have brought in £160 billion by clamping down on avoidance since that date.
Members have rightly made much of the need to narrow the tax gap. The Government are committed to that as well, but many have failed to recognise that the gap now stands at 6.5%. That is one of the lowest figures in the world, and it is lower than the figure that applied every year in which Labour was in office. We can pride ourselves on having one of the most robust and transparent tax gap estimates in the world, with the methodology scrutinised by the International Monetary Fund and the National Audit Office.
The hon. Member for Bootle suggested that Labour would do more than any other party to tackle the tax gap, but let us judge Labour on its record. The latest tax gap is 6.5%. In 2004-05, after two terms of a Labour Government, it was around 9%. That is not a record to shout about. The tax gap for corporation tax in particular is 7.6%, but a decade earlier, under Labour, it was around double that figure. For large businesses, the tax gap for corporation tax we that inherited was 11.1%; now it has almost halved to 5.8%. And let us look at the receipts: onshore corporation tax revenues last year hit a record of around £50 billion. In 2004-05, after two terms of a Labour Government, they were almost £20 billion lower.
I want now to turn to some of the other contributions to the debate. My right hon. Friend the Member for Loughborough (Nicky Morgan) made some very pertinent points, and I congratulate her on her election to her new position as Chairman of the Treasury Committee—I look forward in due course to appearing before her, with a mixture of excitement and some trepidation, I have to say. I also thank her for her comments about Making Tax Digital. The work of her Committee’s predecessor certainly informed my previous judgment on that matter. She made some important points about the UK being truly open for business. I also subscribe to those points, and the Government are determined to ensure that that remains the case. She made important points on certainty and stability in our tax regime, too, and she will have noted the answer I gave to the hon. Member for North Down (Lady Hermon) in respect of retrospective legislation.
When I was listening to the speech made by the hon. Member for Aberdeen North (Kirsty Blackman), I thought for a moment that I was in a dream where she was not a member of the SNP, but a Conservative—a fellow traveller. She is always welcome on this side of the House. She welcomed the measures for tax deduction of employee legal costs and for electric vehicle charging point tax reductions. She also welcomed our measures on petroleum revenue tax and to clamp down on enablers of aggressive tax avoidance, as well as the changes we have made to the MTD regime. The hon. Lady raised some points about VAT refunds for museums, and I will be happy to look into them and come back to her in due course.
My hon. Friend the Member for Ochil and South Perthshire (Luke Graham) made some important points on MTD. I can say to him that the Government will certainly consult very widely as we go forward with this approach.
As for the hon. Member for North Durham (Mr Jones), who has a flicker of a smirk about his face on the Back Bench there, what can I say? He started his speech by telling us he was going to speak rubbish, and I think it is fair to say that he amply met his objective, not in terms of the content of what he said—he was as eloquent and erudite as always—but in terms of his apparent inability to speak to the matters in question, because of course landfill tax, important though it is, will not form part of the current Bill. He then mentioned APD, for which I was grateful, because that is in the Bill, but I fail to see how I could get puppies in by any possible stretch of the imagination.
The hon. Member for Ilford North (Wes Streeting) gave a thoughtful speech, although I have to say that there were limited areas of agreement between us. I was pleased that he welcomed our changes to MTD. He stressed the importance of the wealthiest paying their share of tax. He is right, but he will know that the top 1% of earners in this country pay 27% of all tax, that the most wealthy 3,000 pay as much tax as the poorest 9 million, and that income inequality is at its lowest level for 30 years.
Mel Stride
I will not on this occasion, as I have very little time—I apologise.
The hon. Gentleman mentioned non-dom trusts. I have made it clear that funds remitted out of non-dom trusts will be taxable. He also, however, flirted with the idea of politicians getting directly involved in the tax affairs of individuals, which would be a dangerous road to go down. I do not want politicians interfering in people’s tax affairs; I want to protect tax confidentiality. He also talked about the resourcing of HMRC which, as I have said, has received £1.8 billion since 2010, and is bringing in record levels by clamping down on tax avoidance.
The hon. Member for High Peak (Ruth George) mentioned termination payments and said that she hoped we would not be reducing the £30,000 allowance. That is certainly not our intention at present, and if there were any move to change the figure, it would have to be the subject of a statutory instrument subject to the affirmative procedure, meaning that it would come back to the House for approval or otherwise.
The hon. Member for Enfield, Southgate (Bambos Charalambous) made the point that we need to raise money to pay for public services—he is absolutely right. That is why we are clamping down on tax avoidance and pursuing our policies. The hon. Member for Birmingham, Selly Oak (Steve McCabe) also mentioned termination payments, and I refer him to my earlier remarks about that. He talked about business investment relief, which will be available and made more flexible for those who have non-domiciled status. That should not be criticised. This is money coming into our country to invest in businesses, in British jobs, in wealth creation and in creating the taxes that, in turn, will fund the public services on which we all depend.
While we consider the action being taken in this Finance Bill, let us not forget what we inherited from the Labour party and the important actions that we have taken. Foreigners did not pay capital gains tax when they sold houses in the UK, but we stopped that in April 2015. Private equity managers could pay minimal rates of tax on their performance fees, but we stopped that in the summer Budget of 2015. Thousands of the richest homeowners did not pay stamp duty, but we stopped that in 2013. On corporation tax, banks did not pay tax on all their profits, but we stopped that in December 2011. Investment companies could cut their tax bill by flipping the currency that their accounts were in; we stopped that in 2011. On income and inheritance tax, people avoided paying tax by calling the salary from their own company a loan; we stopped that in 2013. Non-doms could avoid paying UK tax by splitting their employment contracts; we stopped that in 2014. Hedge fund managers could use partnerships to avoid paying tax on their income; we stopped that in 2014. People could claim inheritance tax relief twice on some assets; we stopped that in 2013. On the economy more generally, and perhaps most importantly of all, the Labour party wanted us to go on bankrupting Britain, but we stopped that in 2010.
That record on tax avoidance and fairness shows that this Government have delivered, and we will continue to deliver with this Bill. Opposition Members have accused the Government of using smoke and mirrors, but the record shows that it is they who talk tough but take little action. The upcoming Finance Bill continues our work to deliver a fair and competitive tax system. It implements measures that will raise £16 billion for our public services. It clamps down on avoidance and evasion, and addresses the challenges that the Labour party chose to duck. I commend the motions to the House.
Question put and agreed to.
Resolved,
That—
(a) provision (including provision having retrospective effect) may be made amending Part 3 of the Income Tax (Earnings and Pensions) Act 2003, and
(b) (notwithstanding anything to the contrary in the practice of the House relating to the matters that may be included in Finance Bills) provision may be made taking effect in a future year amending Chapter 6 of that Part (taxable benefits: cars etc).
The Deputy Speaker put forthwith the Questions necessary to dispose of the remaining Ways and Means motions (Standing Order No. 51(3)).
2. Pensions advice
Resolved,
That provision (including provision having retrospective effect) may be made for an employment-related exemption from income tax in connection with pensions-related advice or information.
3. Income tax treatment of certain legal expenses etc
Resolved,
That provision (including provision having retrospective effect) may be made about—
(a) the deductions from earnings that are allowed under section 346 of the Income Tax (Earnings and Pensions) Act 2003,
(b) the exceptions from the application of Chapter 3 of Part 6 of that Act provided for in sections 409 and 410 of that Act, and
(c) the payments that are deductible payments for the purposes of Part 8 of that Act by virtue of section 558 of that Act.
4. Termination payments etc
Question put,
That (notwithstanding anything to the contrary in the practice of the House relating to the matters that may be included in Finance Bills) provision may be made taking effect in a future year about the tax treatment of payments or benefits received in connection with the termination of an employment or a change in the duties in, or earnings from, an employment.
Part of gross gaming yield | Rate |
The first £2,423,500 | 15% |
The next £1,670,500 | 20% |
The next £2,925,500 | 30% |
The next £6,175,500 | 40% |
The remainder | 50%”. |
Finance Bill
Tuesday 12th September 2017
(7 years, 2 months ago)
Commons ChamberRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts
19:57 - The House divided: - Ayes: 320 / Noes: 299 - Question accordingly agreed to.
Mr Kevan Jones (North Durham) (Lab)
On a point of order, Mr Deputy Speaker. We are seeing an historic event tonight: a Government actually filibustering their own Finance Bill! I think that should have a plaque somewhere in this Chamber. I am told through the usual channels that the Conservative Whips told their Members to book hotel accommodation tonight because the Labour party was apparently going to talk the Bill long, even though Labour Members were assured by our own Whips that we would not. They have got to keep it going until 10 o’clock, so their Members can be reimbursed by the Independent Parliamentary Standards Authority. With 25 more speakers to go, and the Whips doing their best to cut down contributions, I wonder, Mr Deputy Speaker, whether you could institute a time limit to save Government Members from the incompetence of their own Whips Office. [Interruption.]
Mr Deputy Speaker (Mr Lindsay Hoyle)
Hang on a minute. I thank the Government Whips, who have turned out in force, for their advice. I do not know what fear you have put among them, Mr Jones. However, if they were really interested in filibustering, they would have asked you speak. The fact that they did not has probably saved the House. As you well know, that is not a point of order but you have put your point on the record.
Jack Brereton
On the points made by the hon. Member for High Peak (Ruth George) in her intervention, we are simplifying the tax system to ensure that work pays for people who are in work. Under Labour, people were better off on benefits and that is not right. People should be better off when they are in work. Some of Labour’s claims are not true. We on the Conservative Benches believe that the only way for people to get out of poverty and deprivation is through work.
We must monitor closely the increases in consumer debt and insolvency in constituencies such as mine. It is much lower than the 150% it was under Labour during the financial crisis, but with low interest rates making borrowing cheaper we have seen rises from 130% to 135% of income in recent years. As Conservatives in government, we must continue to ensure that lenders are not allowed to take the high levels of risk seen under Labour. Lenders need to continue to be more careful, and to ensure that mortgages and other consumer borrowing remains affordable.
It is vital that we do all we can to ensure a decent level of security for our constituents and their families in later life. Measures introduced under the Conservative leadership, such as pension auto-enrolment, have made sure that millions more are now saving enough to support themselves in retirement. It is now even more important that savers of working age access the advice they need to manage their pension investments to maximise their income once they draw their pension. Clause 3 will therefore be welcomed by my constituents. In 2017-18, the state pension is more than £1,200 higher than in 2010. For those reaching state pension age after April 2016, the new state pension introduces a single flat rate of £159.55 per week. That means many people will receive much more than under the old system, and it is much fairer.
We have some incredible employers in my constituency. I was very privileged to visit Goodwin International and Wedgwood over the summer. Such businesses are at the cutting edge in their field. Whether it be in high-tech manufacturing, precision engineering or the creative ceramics industry, businesses are enjoying blossoming success with the fruits of better skilled jobs.
I am particularly pleased with the provisions on business investment relief, which will help businesses to continue to bring more investment to the UK and encourage more foreign investment in British companies, with investors no longer being dissuaded by excessive taxes. It is especially important that more of this investment enters areas such as Stoke-on-Trent, where we have an appetite for development, huge potential to grow and prosper and an ability to improve jobs. The provisions will expand the types of investment that can be made in UK businesses under the business investment relief scheme and so encourage greater foreign investment. It builds on the more than £1.5 billion invested under the scheme since its introduction in April 2012 and makes it easier and more attractive to bring in foreign investment that would otherwise go elsewhere.
Although I can identify examples in my constituency of the progress made nationally, we still need to go further in Stoke-on-Trent, which has suffered from years of lacklustre representation by Labour MPs who failed to deliver for the area even when their own party was in government. I have made it clear that the battle now is over skills and creating higher skilled and better paid jobs for my constituents, and critical to this is helping local businesses to grow these opportunities. We have colossal potential in Stoke-on-Trent to do this and to expand further the successes of Conservatives in government and Conservative MPs locally.
Stoke-on-Trent has been named the second-best place in the country to start a business and one of the best places nationally for business survival. Nationally, there are 1 million more businesses now than in 2010. The Government have helped business create jobs through cuts to corporation tax, which has fallen from 28% to 19% since 2010 and is set to fall further to 17%, and through the re-evaluation of business rates, which has taken 600,000 small firms out tax altogether. This is in direct contrast to Labour’s often stated policy of taxing businesses and jobs to pay for its £58 billion spending black hole. These uncosted promises could be paid for only through higher taxes and debt for our constituents, and that is why I will be supporting the Bill tonight.
Ms Nusrat Ghani (Wealden) (Con)
It is an honour to follow the passionate and detailed speech made by my hon. Friend the Member for Stoke-on-Trent South (Jack Brereton).
I am not sure, Mr Deputy Speaker, if, like me, you were reminded on reading the Bill of the reason you sought elected office: the desire to provide security and opportunity for our constituents. The Government have a proud record of 3 million extra jobs, Labour’s deficit cut by two thirds, and some of the strongest growth figures in the G7. The economy is in good shape thanks to the sound and responsible policies implemented over the past seven years, and we are delivering a strong economy with strong public services.
The Bill delivers an alternative to Labour’s black hole. It is about a fair taxation system that delivers for ordinary working families, that does not place a stranglehold on individual entrepreneurialism or burden people with tax bills they cannot afford, that is fair and robust, and that tackles tax avoidance and evasion. We have a good record on taxes, too. We have reduced corporation tax from 28% to 19%, meaning that SMEs, which are so important to our economy, including Wealden’s economy, can keep more of their own money. This has generated more income for the Treasury: corporation tax receipts have increased from £37 billion to £50 billion.
One nation Conservatism is perfectly explained by the raising of the personal allowance, which has given 30 million people a tax cut of £1,000 and lifted 1.3 million out of income tax entirely. In combination with the national living wage and the freezing of fuel duty for the seventh consecutive year, this means that ordinary families are better off thanks to a Conservative Government.
By contrast, over 13 years in government, Labour failed to deliver on tax avoidance. The tax gap—the difference between the taxes owed and the taxes received—stood at 10%, and it allowed the Mayfair loophole to go unchallenged, which let hedge fund billionaires off the hook to the tune of millions of pounds. Labour was weak on tax avoidance in the Finance Bill that the House debated before the general election, demanding that the measures we are discussing today be stripped from the wash-up Bill. Labour cannot be trusted on tax avoidance. Its Members occasionally talk the talk, but they will never walk the walk.
Where Labour failed, we are delivering. The Bill contains important measures to crack down on individuals and corporations when they do not pay what they owe. Tax avoidance by larger companies and wealthy individuals not only short-changes the Treasury, but short-changes the SMEs that drive the economy, and that is a message we are sending very clearly today.
Like every other Member in the Chamber, I have many small businesses in my constituency. It is our job to stand up for those businesses in this place. They are not able to use complex tax schemes and clever accounting to shuffle their money around the world, reducing their tax bills to near zero; instead, they pay their fair share. By 2020, the contribution that SMEs make to the economy will be more than £200 billion and, importantly, they will be employing more than 15 million people.
The Bill will deliver on our promises and commitments, helping to level the playing field. It will ensure that our public finances are in order, allowing us to invest more in our public services and better preparing our economy. Above all, supporting it is the responsible thing to do, and that is why I shall support the Bill tonight.
James Cartlidge (South Suffolk) (Con)
I thought I would take a leaf out of the shadow Chancellor’s book by bringing a red book into the Chamber to wave around in his style. It is a copy of “The Middle Way”, by Harold Macmillan, written in 1938. I brought it here because I think that what is significant about the Bill is not any of the individual measures, which we all accept are very technical—they are not particularly headline-grabbing or, dare I say, sexy—but the context. This is a serious point. I think many people feel that they are still living in a time when capitalism itself—in which I believe very strongly—is being questioned. It worries them that it is not seen to be fair, and they fear that our economic system is not rewarding everyone evenly.
Here we are, eight years after the credit crunch and its major impact. Macmillan wrote his book in 1938, nine years after the Wall Street crash, but, then as now, the impact of the crash was still being felt by society, and there was a drive towards populism. I believe that such a move to populism can be resisted only through sensible measures from centre parties that address the injustices of capitalism while still ultimately supporting its success and its growth.
We are very fortunate, in that when Macmillan wrote that book there was high unemployment and a deep depression. The situation was very different, but it was comparable in the sense that people on both the left and the right were turning to much more extreme alternatives. Interestingly, Macmillan’s answer was a national living wage. His answer was nationalisation. His answer was making all kinds of what we might typify as socialist interventions in the economy. Since 2008, we have nationalised the banks. A Conservative Government have introduced a range of measures that could be seen as potentially hitting—dare I say—our voters.
I think that the most classic example, for which I had argued myself, is the introduction of measures relating to buy-to-let landlords. We have seen a huge surge in that area of home ownership, with people owning multiple portfolios. I know that those measures have not been popular with the few. If we were the party of the few and not the many, we would never have introduced them, but we had the guts to do so because we felt that that was right at a time when first-time buyers were struggling ever harder to get on to the property ladder.
I think that this is the key point. The sense of injustice that is out there now, and which leads people to question our economy, is about asset wealth. Yes, wages have been under pressure since the crash, but when we came out of the crash, what did we do? In order to escape the worst effects of the depression, we pumped huge amounts into the economy. Inflating assets again, the help-to-buy scheme and quantitative easing—all those measures were right at the time, and in many ways continue to be.
Kirsty Blackman
The hon. Gentleman has been talking for three minutes, but I do not think that he has mentioned the Finance Bill yet. Are we going to have a discussion about it at some point?
James Cartlidge
That was a charming intervention by the hon. Lady—is that the best she can do? I am talking about our current economic context, which is why we have introduced this Finance Bill, and I was coming on to say that its measures could be seen by some as an attack on large corporations. The measure on dividends—I have to say that I still receive dividends—will be unpopular with some of our voters, who are some of the richest people in society, but we feel at this time that we have to strike a balance, and I support the balance we are striking. We are bringing in permanent non-dom status, but at the same time we will be encouraging non-doms to invest in this country, incentivising them to use money held legally abroad so that it comes here.
To me, that is the most important aspect of this Finance Bill: it acknowledges that there is still for the wider public what Ted Heath called the unacceptable face of capitalism—those people who are seen to be abusing the system with avoidance, evasion and all the other tactics. It is right that we are tough on those, and we have been incredibly successful in that, but the difference between us and the Labour party is that we act from a standpoint of fundamentally believing in capitalism. We believe in free enterprise, and in the idea of people standing on their own two feet, being brave, taking risks and creating businesses. We understand that in order to protect that system, just like Macmillan said, sometimes we have to take measures that can be seen to be even potentially anti-business, but the alternative is throwing the baby out with the bathwater wholesale by a party which now is fundamentally against our economic system.
There may be people who are unhappy with some of these measures, such as on dividends or the buy-to-let taxes I mentioned, but the alternative is a case of out of the frying pan and into the fire—into the arms of a Labour party whose leadership, at least, is fundamentally against the capitalist system. When those people attack with vigour the measures such as those we have taken on tax avoidance, saying we could go so much further, they do so because fundamentally they do not believe in the entire system. I do, and I think these measures are sensible. They help us to strike a difficult balance at this difficult economic time, and that is why we should support the Bill.
Alex Burghart (Brentwood and Ongar) (Con)
A number of measures in the Bill will be very broadly supported by my constituents as they uphold some of the values that Members have raised, such as the importance of fairness in our economy. My constituents believe in hard work and fair play, and many measures in the Bill support those values. In particular, we intend to get more money out of non-doms and will raise money for the Exchequer so that we can put it into our prized public services.
That issue matters very much to me. For many years I worked at the Centre for Social Justice, an independent think-tank that was established to alleviate poverty and to look at its root causes. One thing we saw time and again was that where there are workless households, there is despair. That despair rubs off on children, diminishes parents’ mental health, and gradually eliminates people’s ability to get back into work—it gets them trapped in a vicious cycle.
That is why it is so important that this Government over the past seven years have built a recovery around work. We now have record employment in this country. That has become a phrase that we just knock off, but we fail to realise the human value of the fact that we now have more people in work than ever before. I know we are political opponents, but I would appreciate it if just once I could hear an Opposition Member welcome the fact that we have the lowest unemployment in our history. I will happily take an intervention if someone wants to welcome it now.
Jonathan Reynolds
We say that all the time. We always welcome it, but we just wish it was possible for the debate to include a consideration of the situation in a huge number of households where people are in work, as child poverty rates are rising and households are in poverty. Why does the Conservative party say nothing about that phenomenon, which is a huge part of life in Britain today?
Alex Burghart
I listened to the opening remarks in today’s debate and I did not hear anyone from the Opposition welcoming record employment, so I am glad to hear the hon. Gentleman do so now. If I gave him the opportunity, I am sure that he would also want to welcome the fact that inequality is decreasing and that a whole generation will benefit from growing up in households with work. It is a gift that keeps on giving. The number of children in workless households has decreased by a third since 2010, and the number of households in which no one has ever worked has fallen by 40% since the previous Labour Government were in office. In fact, we are nearly back at the all-time low that was reached under the Major Government. The gift of work enables families to get on with their lives and enables children to grow up in a home where they have the example of people in work. Those opportunities cannot be taken lightly.
I am pleased that the Government on whose Benches I sit continue to feed the economy, but we are not doing that by spending money that we do not have or by borrowing money from future generations. Instead, we are spending and living within our means. I am extremely pleased to see that essential value embodied in the Bill, which is why I shall be supporting it tonight.
Rachel Maclean (Redditch) (Con)
It is a pleasure to be called to speak in this critical debate. I, too, support this Finance Bill, because it is important and relates to taxation, which underpins the foundations of democracy and good government. Due to the time constraints, I will discuss only two key points that the electorate expect the Government to deliver on for the people of this country, and the first is fairness.
Opposition Members make much of our record and talk about tax avoidance, but they rarely did anything in their 13 years in government. I am proud to be a member of a party that considers such values paramount. We are tackling the abuses that the public rightly find disgusting. Small businesses cannot afford to wriggle through the loopholes that Opposition Members built into the legislation when they were in government. It has been left to a Conservative Government to end permanent non-dom status for the first time. We have seen the extraordinary spectacle of Opposition Members being on the side of the richest non-doms, and let it not be forgotten that Labour allowed the Mayfair loophole to persist, with hedge- fund billionaires paying just 10% tax on their earnings. They were happy to sit back and let tax avoiders shirk their responsibilities to pay for our NHS and other public services. Instead, a Conservative Government have tackled the issue of raising the revenue that we need, and which Opposition Members regularly call for, to fund our schools, hospitals and other public services.
I welcome the Bill because it also deals with the redistributive nature of taxation. We are building, and will continue to build, a redistributive tax system that is fairest to those on low incomes, and I am proud to say that the richest 1% are set to pay 27% of all income tax and that the richest 5% will pay 38%. It is right that we ask the richest to pay more tax. All Members ought to be familiar with the Laffer curve. It is not a dry economic theory; it is a fact that results in more money going into the Exchequer’s coffers to pay for schools and hospitals. It is ironic that we hear so much from Opposition Members about inequality when this Government have delivered the lowest levels of income inequality for 30 years.
Competence is the other element that people look for in a Government, and I want to draw Members’ attention to a city that is close to Redditch. Birmingham is our nation’s great second city and close to the hearts of Redditch residents, many of whom work there, play there or used to live there, and we can see there the record of the Labour party in government. It is a city in which a bin strike has been ongoing for months, with no sign of resolution. Huge, stinking piles of rotting rubbish are an eyesore on the streets, rats roam unhindered through the stench, and cockroaches and other pests scuttle all over the pavement. What a fate to inflict on the poor residents of Birmingham, who are trying to go about their daily lives and run their businesses. I never see a Labour Member for Birmingham, our great second city, speaking about this issue. If the Labour party cannot run a bin service, the public rightly question how it can possibly run a country.
The electorate deserve an approach to running the economy that delivers opportunity by growing businesses and backing jobs. We understand that by lowering taxation on small businesses we can encourage more entrepreneurs to take the giant risks to their livelihood that starting a business involves—I know all about those risks having lived through that cycle myself.
We are supporting the small businesses that make up 99.3% of all private sector businesses, many of which are in Redditch and doing extremely well. My constituents in Redditch will welcome these measures, which are fair to businesses and fair to the lowest paid, and will raise more taxation to fund public services in Redditch and the rest of the country. I look forward to voting in favour of the Bill tonight.
Bim Afolami (Hitchin and Harpenden) (Con)
It is a pleasure to follow so many important, thoughtful and eloquent speeches from both sides of the House. I will refer to some of them, but start by considering where the British economy is today and by recognising, as my hon. Friend the Member for Brentwood and Ongar (Alex Burghart) has just made clear, that a lot of our discussions in this debate on productivity, on trying to increase median earnings, on trying to raise wages and on getting more money into people’s pockets are predicated on the lowest unemployment rate since 1975. They are predicated on the Conservative Government since 2010 finally taking action to address the deficit and the debt. We should not forget that fact, and we should realise that we stand on the shoulders of successful Conservative economic policy as we enter this debate.
This Finance Bill, as many of my hon. Friends and other hon. Members have already made clear, addresses many important issues and should be welcomed on both sides of the House. In particular, it addresses fairness. In what ways does it address fairness? It clamps down on aggressive tax avoidance and tax evasion. In particular, it makes sure that large multinationals pay their fair share of tax, which enables us to keep taxes on SMEs and ordinary individuals lower.
What is the Conservative Government’s record in this area? The tax gap is now only about 6.5%. For those Members who are unaware, the tax gap, to which many Conservative Members have already referred, contrasts the amount that a fiscal measure should yield to the Exchequer with what it actually yields. Our tax gap is one of the lowest in the OECD and is this country’s lowest for many, many years.
This Finance Bill ends permanent non-dom status for the first time—that definitely never happened under a Labour Government. There are a couple of other more technical measures on interest deductibility for certain companies and on offsetting losses for large multinationals. The Bill makes it harder for certain large businesses—by all means, not all—not to pay their fair share.
It is important that we consider what the Conservative approach to the economy has been. My right hon. Friend the Member for Wokingham (John Redwood) made a powerful speech at the beginning of the debate in which he eloquently set out how, as Conservatives, we believe in a higher tax take, not higher tax rates for individuals. The higher tax take is what is significant. Following up on what my hon. Friend the Member for North West Hampshire (Kit Malthouse) said, high tax rates on certain people or companies just to make ourselves feel better can often yield lower tax revenues for the Exchequer, which presumably is not a wise economic policy, although it seems to be the one pursued by Labour.
As we have heard many times, including just now from my hon. Friend the Member for Redditch (Rachel Maclean), the top 1% pay between 27% and 28% of all income tax, which is one of the highest levels this country has ever seen. The corporation tax rate has been reduced significantly since the Conservatives came into government in 2010. In the financial year 2009-10, this tax yielded £37 billion, whereas in the financial year 2016-17, it raised £50 billion. That is the impact of Conservative economic policy, and we should not forget that our approach is about raising the tax take, rather than raising tax rates.
We should also consider where fiscal policy is now and how we should think about it in the future. It is important that the Government seek to be a little more flexible in some of their actions on fiscal policy. It is important for business confidence that they present the positive, forward-thinking growth agenda for the 21st century that we all want to see. We need to expand opportunities and incentives for people to invest in this country and for people who run businesses, or who want to set them up in Britain, to expand them and grow. My hon. Friend the Member for North West Hampshire spoke eloquently and at length about the importance of this country’s difficulty in growing medium-sized companies into large ones. Let us be more ambitious in fiscal policy so that we can encourage more of that activity.
We all want to see Britain lead the world in every sector, be it tech, manufacturing or finance. I welcome the announcement at the March Budget about the Treasury looking at how to tax tech multinationals, which are currently not taxed as much as they might be, and working internationally to do so. By doing that, we can reduce some of the taxes that hurt SMEs, such as business rates and comparatively high payroll taxes. If we can think and work internationally with our global partners on how we tax big multinational internet businesses, we might be able to bring down the level of tax for individuals and SMEs in this country.
Conservative Members have made it clear that we want to make Britain an even more exciting, attractive place in which to invest, and my hon. Friend the Member for Newark (Robert Jenrick) made an incredibly powerful speech about the importance of simplifying the tax code. I urge the Minister and the Government to look again and more seriously at that. Many Members have referred to the fact that the Finance Bill is heavy and thick. I am sure the Minister has drafted it with absolute care and dedication, but is it not a shame that it is so thick and that we cannot have a simpler tax code? I urge the Government to look again at more proactive ways in which we can simplify our tax system to make it easier for everybody, both individuals and businesses, from across the world and within this country.
Let me finish by making a few remarks on a subject that has been raised many times in this debate, productivity, which is the missing piece in our economic miracle over the past few years in this country. So many incredibly intelligent people, economists from across the country and across government, have examined the issue, yet our productivity has stubbornly been stuck below that of some of our leading European partners. We all know some of the ingredients—they include skills, infrastructure and, in certain respects, the tax system—but one thing that is not considered enough is business confidence in our fiscal policy and economic future. I urge the Government to present a more positive vision: show us how we are going to become a 21st-century economy in a more productive way. Let us show the world that we are the place to be for leaders in tech, finance, manufacturing and all the other areas of our economy. If we can do that more effectively, we will improve the capital investment from all over the world that inevitably aids productivity.
I fear that I may be wearing away Members’ patience, so I shall finish. The Government have made significant strides in sorting out the country’s economy; the Finance Bill builds on that work, I am proud to support it, and I commend it to the House.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
The British economic model is “broken” and in need of “fundamental reform”. Those are not my words, but the findings of the interim report of the Institute for Public Policy Research’s economic justice commission, which comprises, among others, the Archbishop of Canterbury, the global managing partner of McKinsey and the policy chairman of the City of London corporation. The report spells out in painful detail the situation that most Members see in our constituencies every week: the link between economic growth and higher living standards is broken; young people with no prospect of attaining the quality of life enjoyed by their parents; a UK with a fundamental imbalance between the south-east and everywhere else; a labour market characterised by insecurity and low pay; and inequality growing, with a third of children living in poverty, and that proportion going up.
Jonathan Reynolds
I feel I have heard quite a lot from the Conservative party, so if the hon. Gentleman will forgive me, I shall proceed.
Today’s proceedings, along with the ways and means discussion last week, have been characterised by deeply held concerns about the state of our economy. There have been many fine and noteworthy contributions in what has been a wide-ranging debate, taking us from Venezuela to the application of the Laffer curve to corporation tax. I feel that Conservative Members will find it quite difficult to cope when I point out that the average rate of corporation tax in OECD countries is 25%, or that in Germany, the strongest economy in Europe, it is between 30% and 33%—and it is even higher in America. The hon. Member for South Thanet (Craig Mackinlay), who is no longer present, even questioned the very basis of taxing companies at all, but it is a reasonably held position that companies benefit from good infrastructure, a skilled workforce and a proven legal system, and it is reasonable to balance the impact of taxation between individuals and corporate entities. I feel duty-bound to point out that the tax gap fell every year between 2005 and 2010—from 8.5% to 7%.
I wish to pay tribute to two particular contributions—
Jonathan Reynolds
I will not give way; I have listened to the Conservative party for more than eight hours.
The first contribution to which I pay tribute is the maiden speech of my hon. Friend the Member for Liverpool, Walton (Dan Carden). It was at times funny and moving, and it captured the character of his constituency extremely well, but it also had a serious and thoughtful message about the changing nature of work, automation, and the fundamental lack of opportunity faced by young people today. He described Liverpool as one of the great cities of the world, which it undoubtedly is—perhaps not quite as much as Manchester, but we can take that outside—and he proved he will be a fine representative for it. With 85.7% of the vote at the election, I imagine we will have the chance to hear from him for some time to come.
It was also a pleasure to hear the maiden speech of the hon. Member for Moray (Douglas Ross). He was extremely articulate and gracious about his predecessors, and that came across very well. I have visited his constituency: I have been to Elgin and to Cullen, and I have tried Cullen skink, a dish every bit as tasty as his maiden speech. I congratulate him on such an assured debut.
Despite the party political nature of much of the debate, we have heard serious concerns about ailing productivity. We have heard worries about the lack of certainty in the Brexit negotiations and what that means for the public finances. We have heard Members reference the challenging demographic and technological changes that face our nation, and yet we have a Bill before us that has nothing to say about any of that.
When I was talking to residents in my constituency during the EU referendum, leave voters raised specific concerns about immigration and sovereignty, but more than anything else it was a sense of recurrent anger and of post-industrial decline that they had witnessed and lived through that animated so many of them. My constituents told me that they were voting leave because of zero-hours contracts, because they could not get on the housing ladder, or because they had lost their job due to austerity and now had to work for less pay and poorer conditions. For me, those people were voting not to leave the EU, but to try to leave the UK. All of us, whichever side of that referendum or this House we are on, must be concerned about that. We should want to tackle that disconnection and alienation—not just paint a rosy picture of statistics and how we want to see them for our own political benefit.
I will let the House into a secret: I am jealous—I really am—of the Ministers on the Front Bench. I am jealous of the power that they have to put this right. I am jealous of the opportunity that they have to do good. However, instead of using that opportunity and that power, this Government do not even appear to see the problems. The Finance Bill before us today seems to be legislating for a completely different set of economic circumstances. It is not difficult to see why there may be frustration among those who look at these measures and feel that they are being left behind and among those who look at this Government and ask: why is there always one rule for the people at the top, and another for everyone else?
We have had an absurd set of interventions about student debt, pretending that the Leader of the Opposition had said something, which evidently he had not. It says to me that the Conservative party is still in denial about what happened in the general election—how it lost a majority despite being so far ahead in the polls. If Members think that it was down to something that they are wilfully misinterpreting, I am afraid that they will face further difficulties ahead.
The backdrop to last week’s ways and means debate was a rally of nurses outside Parliament, rightly asking for redress for the 14% real terms pay cut they have endured since 2010. Yet while that was happening, this Government were proposing a resolution, which expanded business investment relief for non-doms. It was a stark reminder of where this Government’s priorities lie: look after the people at the top, and the rest of us will supposedly benefit from the trickle down. It is just that on the Labour Benches, we see it the other way round.
Only this Government could pretend to flirt with the public and say that they were ending the public sector pay gap, and then, on the day that the consumer prices index comes out at 2.9%, announce rises well below that. If we end up, as is looking likely, with people like those nurses taking industrial action in protest at their treatment, public sympathy will not be on the Government’s side.
As a country, we are on the cusp of huge change driven by deeper globalisation, environmental change, technology, and, most pressingly, our exit from the European Union. Brexit is now the defining issue of our generation and it brings with it significant challenges and uncertainty. Our worry is that we are approaching Brexit not from a position of economic strength, but as a rudderless ship, already taking on water and listing badly off course. The Government are failing to plan ahead for our future outside of the EU and this Bill is another demonstration of that.
I want to refer specifically to the Government’s provisions around HMRC. The Conservative party certainly talks a good game on tax avoidance, but the Government have yet to explain how HMRC will better battle tax avoidance while accommodating another £83 million of cuts. Surely this is the time that we should be investing in HMRC, not taking resources away.
One of the most pressing areas is the future of our customs system. This Bill sees the introduction of a fulfilment house registration scheme to deter VAT abuse by overseas businesses. However, experts are already suggesting that abuse may escalate faster than HMRC can keep up, particularly given the ever growing popularity of online business. More urgently, the legislation makes no reference to how this will change once we have left the EU. The scope of these measures will be altered hugely should our customs arrangements with the EU change, which they almost certainly will. There are huge implications for policing our own customs border, and for getting an IT system ready to manage customs and excise once we leave the EU, but this Government cannot even tell us what the likely transition arrangements will be, let alone start preparing for them. Surely the worst possible place to start is from a situation in which we have already lost 5,000 staff from HMRC. Time and again, we find ourselves in a situation where it is hard not to conclude that this is a Government without any substantive agenda, other than hanging on to office at all costs.
This Finance Bill, now finally coming to the end of its Second Reading after months of delay, was sadly not worth the wait. It is a damning reflection of the Tories’ priorities—fiddling on the deck of the rudderless ship as it cruises straight towards the rocks. We need answers on investment, productivity, fairness and prosperity, but we have a Government who are not even willing to ask the right questions. Listening to some of the contributions today—we heard some presidential quotes in the maiden speeches—I was reminded of a line from President Obama’s first campaign, when he said
“it’s not the magnitude of our problems that concerns me the most. It’s the smallness of our politics.”
Our message to the Government is that we will vote against this Bill tonight because it is not worthy of the challenges this country faces. The British people have had enough of an austerity policy that has comprehensively failed, and they are desperate for something better. If this Government cannot bring themselves to face up to the challenge of building a post-Brexit country that is fairer, more competitive and more prosperous, they should get out of the way for the people who can.
The Economic Secretary to the Treasury (Stephen Barclay)
The debate has been wide-ranging, covering virtually every aspect of the Bill. That is right and proper for a Bill of such importance. We have heard a number of impressive contributions, including two maiden speeches.
The hon. Member for Liverpool, Walton (Dan Carden) made a powerful and assured maiden speech in which he rightly talked about the cultural richness of Liverpool. His reference to his 85.7% share of the vote at the election is a good example of the improved performance and productivity to which all MPs can aspire. There are not too many Members who can say to the hon. Member for Bootle (Peter Dowd) that his election result was on the low side at 84%.
My hon. Friend the Member for Moray (Douglas Ross) gave an excellent maiden speech. He spoke of the successful business growth in his constituency and his ambition for the area, particularly for its local growth deal. I am sure that colleagues in Government will work closely with him on that. I am even surer that the Father of the House will very much look forward to sharing a dram of the whisky to which my hon. Friend referred.
I will respond to the detailed points raised by Members shortly, but I first want to be clear about the purpose of the Bill, which is underpinned by principles that I hope we all share: that tax should be competitive and fair, and that it should be paid where it is due. In the weeks ahead, we will have the opportunity to scrutinise the detailed provisions in Committee. The majority of the Bill has already been subject to significant scrutiny following announcements made last year or even earlier. Consultation has been widespread. Together with the pre-election Finance Bill, the measures have had almost nine hours of debate before today.
The Opposition suggest that our strategy to keep tax competitive in some way undermines our absolute commitment to world-class public services and that lower taxes somehow mean less investment in hospitals, schools and our emergency services. But the Government know that it is only through a strong, growing and dynamic economy that we can afford the vital public services our country needs. When we help business to do well, to invest and to create jobs, we are building our tax base to secure that funding for the long term. Competitive taxes protect revenues. Look at what happened when we reduced our level of corporation tax. The private sector created 3.4 million new jobs with an additional £18 billion in corporation tax. In contrast, raising taxes—as the Opposition threaten—to what the Institute for Fiscal Studies describes as their “highest ever peacetime level” would put the brakes on our economy, drive investment elsewhere, reduce employment and, ultimately, diminish our ability to raise the funds our public services need.
Let me deal with some of the specific points raised during the debate. The hon. Member for Aberdeen North (Kirsty Blackman) once again raised the issue of termination payments. These reforms are about providing clarity in the legislation and ensuring that there are no loopholes that people can use to avoid tax. They will not affect statutory termination payments or payments arising as a result of employment tribunals. They will not reduce the £30,000 tax-free allowance that exists to protect the less well-off when they are made redundant. We have no plans to change the £30,000 allowance. In any case, that would require an affirmative statutory instrument under this Bill.
The hon. Lady raised with the Financial Secretary the issue of whether a statutory instrument on tax relief for museums and galleries had been tabled, and I am happy to reassure her that it has, as he thought, been tabled today, so it is before the House.
The hon. Member for High Peak (Ruth George) raised the issue of non-doms. Let me be clear: this Bill abolishes permanent non-domiciled status. When people live in the UK permanently, it is right that they should pay UK tax. Non-doms already contribute over £9 billion a year to the Exchequer, and we expect the Bill to raise a further £1.6 billion over the next five years. So this Finance Bill will deliver fairness and protect revenue. This is a balanced approach, and one that has been subject to extensive consultation.
During the debate, Opposition Members criticised the provisions for offshore trusts. Let. be clear again: if funds are taken out of trusts, they will become liable for tax. As the Financial Secretary set out in the debate last week, our international agreements on the exchange of information will provide a critical boost to enforcement.
A number of Members, including my hon. Friends the Members for Newark (Robert Jenrick) and for Harborough (Neil O'Brien), raised the issue of avoidance and evasion. The Bill implements a large number of measures to tackle tax avoidance and evasion. It prevents businesses from claiming excessive tax deductions, by updating the rules around how companies claim deductions for interest expenses. It continues our crackdown on artificial disguised remuneration schemes, and it introduces a new penalty for those who enable tax avoidance.
It is this Government who are tackling tax avoidance and evasion head-on. It is this Government who have announced more than 75 measures to tackle tax evasion and avoidance since 2010. We have seen HMRC more than double the annual number of prosecutions for avoidance and evasion in that time. That is how we have secured almost £160 billion in extra tax revenue. We secured over £8 billion in extra tax from the largest and most complex UK businesses in 2016 alone. In 2015-16, we secured £900 million in tax from the wealthiest, which would otherwise have gone unpaid—more than doubling the amount secured in 2011-12.
We now have over 100 countries around the world that are exchanging financial account information so that we can track down offshore money. We have published one of the first public registers of beneficial ownership in the world.
In 2016-17, HMRC brought in £574.9 billion in tax revenue—the seventh record year in a row. We have seen the tax gap drop to a level unprecedented under the Labour Government—a level that is among the lowest in the world. There is only one party in this House that can point to a record like that on tax avoidance and evasion, and it is not the Labour party.
Members raised a wide range of points in the debate. In a powerful speech, my right hon. Friend the Member for Wokingham (John Redwood) highlighted the importance of the mobility of high net worth individuals. He also recognised the £9 billion tax contribution of non-doms and the fact that our tax take has gone up under the corporation tax changes—a hugely important point to note.
My right hon. Friend the Member for Forest of Dean (Mr Harper) brought the attention of the House to the importance of productivity if we are to deliver the sustainability we want to see in higher wages. My hon. Friend the Member for Braintree (James Cleverly), who is a doughty champion of small and medium-sized businesses, correctly highlighted the importance of the sector, including microbusiness.
The hon. Member for Dundee East (Stewart Hosie) welcomed the provisions in clauses 3 and 4, as well as the extension of a number of reliefs. He raised concerns about retrospection, but the Bill will simply ensure that measures come into effect from their originally intended commencement date.
The hon. Member for Walthamstow (Stella Creasy) spoke about her concerns at the level of debt, which is really why she should support the Bill.
My hon. Friend the Member for Berwickshire, Roxburgh and Selkirk (John Lamont) highlighted the significant fall in unemployment in his constituency and the importance of growth in driving those jobs. My hon. Friend the Member for Gordon (Colin Clark) spoke about the importance of investment and about the distinction between investment and spending.
My hon. Friend the Member for South Thanet (Craig Mackinlay) welcomed the Bill and brought his professional insight to the debate as an accountant. He flagged a number of issues that colleagues in the Treasury will be keen to discuss with him.
My hon. Friend the Member for Wealden (Ms Ghani) spoke of the progress that the Government have made in tackling areas of abuse. My hon. Friend the Member for South Suffolk (James Cartlidge), who is always a strong defender of capitalism, spoke about its importance. My hon. Friend the Member for North West Hampshire (Kit Malthouse) welcomed the constructive way that the Government had listened to his campaign on Making Tax Digital. In his role on the Treasury Committee, there will be scope for further discussions with him on other areas where he brings his expertise, and we very much welcome that. My hon. Friend the Member for Brentwood and Ongar (Alex Burghart) highlighted the record of job creation under this Government. My hon. Friend the Member for Redditch (Rachel Maclean) spoke of her pride in the Government tackling abuses. My hon. Friend the Member for Hitchin and Harpenden (Bim Afolami) talked about the difference between the tax rate and the tax take.
This Bill will deliver through supporting families, supporting the less well-off, supporting our public services, and ensuring a stable and dynamic economy. It will deliver by raising new finances to finance new infrastructure and technical education, putting productivity first. It will deliver by raising new revenues from those who would otherwise avoid or evade tax altogether. This Bill lies at the heart of a plan to go on building a prosperous nation.
The Opposition profess to be tough on tax avoidance and evasion, to want to tighten up the rules for non-doms, and to want to clamp down on the tax gap. The Bill before the House does exactly that. So let the question tonight be not simply whether this Bill should proceed but whether Labour Members really do wish to deliver on these principles rather than succumb to the easy place of opposition for opposition’s sake—whether they wish to stand up to the avoiders and the evaders, or themselves to avoid and evade their responsibility. I commend this Bill to the House.
Question put, that the Bill be now read a Second time.
Proceedings | Time for conclusion of proceedings |
|---|---|
Proceedings committed under paragraph (1)(a) (termination payments etc) | 2 hours from commencement of proceedings on the Bill |
Proceedings committed under paragraph (1)(b) (business investment relief) | 4 hours from commencement of proceedings on the Bill |
Proceedings committed under paragraph (1)(c) (trading profits taxable at the Northern Ireland rate) | 6 hours from commencement of proceedings on the Bill |
Finance Bill
Wednesday 11th October 2017
(7 years, 1 month ago)
Commons ChamberRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Committee of the whole House Amendments as at 11 October 2017 - (11 Oct 2017)
15:00 - The Committee divided: - Ayes: 269 / Noes: 311 - Question accordingly negatived.
15:20 - The Committee divided: - Ayes: 272 / Noes: 312 - Question accordingly negatived.
15:36 - The Committee divided: - Ayes: 281 / Noes: 312 - Question accordingly negatived.
16:16 - The Committee divided: - Ayes: 274 / Noes: 309 - Question accordingly negatived.
16:51 - The Committee divided: - Ayes: 231 / Noes: 308 - Question accordingly negatived.
Peter Dowd (Bootle) (Lab)
I beg to move amendment 1, page 12, leave out lines 8 to 12.
This amendment removes the power for the Treasury to amend the meaning of “basic pay” for the purposes of calculating “post-employment notice pay” by regulations.
The Second Deputy Chairman of Ways and Means (Dame Rosie Winterton)
With this it will be convenient to discuss the following:
Amendment 12, page 13, line 27, at end insert—
“402F Review of impact of termination payments on low income workers
(1) Within two months of Royal Assent being given to the Finance (No. 2) Act 2017, the Chancellor of the Exchequer shall commission a review of the impact of the provisions of sections 402A to 402E on low income workers.
(2) A report of this review must be laid before the House of Commons before the start of the tax year 2018–19.”
This amendment requires the Chancellor of the Exchequer to carry out a review of how the changes to termination payments will affect low income workers before these provisions come into effect.
Amendment 2, page 14, line 15, leave out “different” and insert “higher”.
This amendment removes the power for the Treasury to reduce the £30,000 threshold in connection with the taxation of termination payments by regulations.
Amendment 3, page 14, leave out lines 20 to 23.
This amendment is consequential upon Amendment 2.
Amendment 4, page 14, leave out lines 27 and 28 and insert—
‘(2) “Injury” in subsection (1) includes—
(a) psychiatric injury, and
(b) injured feelings.””
This amendment explicitly includes (rather than excludes) injured feelings within the definition of “injury” for the purposes of payments which are excluded from the provisions of Chapter 3 of Part 6 of the Income Tax (Earnings and Pensions) Act 2003 (payments and benefits on termination of employment).
Clause stand part.
Peter Dowd
To be fired from a job is perhaps one of the most difficult experiences for an employee. There are very few people in this Chamber, let alone in the country, who have never had to go through the awkward, bitterly disappointing and scary experience of losing, or potentially losing, a job. This is the daily reality for thousands of people, and it goes to the heart of clause 5.
I ask the Committee to imagine how thousands of people across the country at BAE are feeling at this moment after yesterday’s announcement of job losses. How are those workers feeling in Warton, Samlesbury, Portsmouth, Guildford and RAF Leeming, and in the Chief Secretary’s own county of Norfolk at RAF Marham? Added to the worry, concern, anxiety and hopelessness of redundancy now comes a potential tax bill to pay for the Government’s hapless management of the economy. Will the writ of clause 5 stretch across the Irish sea? What about the threat to the jobs of those at Bombardier in Northern Ireland, and the thousands of other associated jobs over there?
Lucy Frazer (South East Cambridgeshire) (Con)
The hon. Gentleman rightly points out the devastating consequences for people who lose their jobs—he refers to particular instances at the moment—but does he also recognise that this Government have created 3 million more jobs, which is helping our economy and those people?
Peter Dowd
This is not relevant to the debate, but a significant number of those jobs are incredibly low paid, and people have not had pay rises for many years. What the hon. and learned Lady says might well be the case, but the reality is that it is not about the quantity; it is about the quality—[Interruption.] Of course it is.
How insensitive and out of touch must this Government be to put clause 5 before Members today of all days? The Prime Minister has vowed that she will do anything and everything she can to help those affected at Bombardier and BAE, so perhaps the Minister would like to withdraw this provision here and now and put the Prime Minister’s warm words into action.
Mr Mark Harper (Forest of Dean) (Con)
I agree with the hon. Gentleman about the concerns that those workers will be facing, but he knows perfectly well that the Government’s proposals in this Bill are designed to deal with abuse. He knows that there are no plans to change the rules in a way that would affect people on lower incomes who are not doing anything wrong, and the Minister made that clear on Second Reading. The hon. Gentleman’s scaremongering is making the concerns of those workers worse, rather than reassuring them, which is what he ought to be doing in this House of Commons.
Peter Dowd
The only people who are scaremongering are this Government who are threatening to tax people’s redundancy payments—that is the scaremongering in this House.
Perhaps the Minister would like to withdraw this proposal. I will happily give way to him if he wants to reconsider his decision—he might have discussed it with the Prime Minister. In some instances, a job loss can be even worse if individuals lose their employment because of base and nasty discrimination, whether because of their age, gender, race, religion or sexuality.
The amendments speak directly to the question of how much money an employee who has lost their job should receive in tax-free redundancy pay, and how much an employee who is discriminated against should receive in tax-free compensation from an employment tribunal.
The Financial Secretary to the Treasury (Mel Stride)
Is the hon. Gentleman not aware that when a tribunal has granted an award on the grounds of discrimination, that is automatically exempt from tax, despite what this clause may or may not be doing?
Peter Dowd
I agree with that particular point.
We know the Government’s overall stated aim is to crack down on what they say is significant avoidance related to non-contractual payments in lieu of notice. To do this, there is a complex set of formulas to mandate what will be considered as notice pay, even when that is not actually given in lieu of notice. Amendment 1 addresses our concern that the Government are giving themselves the power to change the meaning of basic pay for the purpose of calculating notice pay. That could significantly change the basis of the calculations, so the Minister should set out more clearly the intention of this measure.
Kelvin Hopkins (Luton North) (Lab)
I agree with everything my hon. Friend says, of course. Does he agree that a lump sum on termination of employment could be considered as potential income over a period of years, and should not be considered just as a lump sum to be taxed within one year?
Peter Dowd
Again, that goes to the heart of the issue. The Government are trying to focus on a particular moment in time, rather than taking into account the fact that a person might be out of employment for a long time.
We see a running theme of this Government in this Bill and so many of their other actions: they are removing powers from Parliament and giving them to Ministers. But other elements have been tacked on to the clause that are seemingly unconnected to the stated aims about payments in lieu of notice. It is clear that the Government are laying the ground so that workers who have already lost their jobs should pay tax on more of their termination payments. Is that the message that the Government are now sending to the likes of the BAE workers? Is it the message they want to send to the victims of redundancy? There can be no other explanation for this clause. It gives the Treasury powers through delegated legislation to raise or lower the tax-free threshold.
Changes to the tax-free allowance for termination payments were first mooted by the Office of Tax Simplification in 2013 when it cited such payments as an employee benefit that would merit further study. I find it rather peculiar that a payment to an employee who has just lost their job is considered as an employee benefit—how bizarre. It is as though a termination payment were some sort of added extra and a huge inconvenience for employers, when in fact that worker has just lost their job and this may well be the last payslip they receive for a long time. The Government have promised not to reduce the threshold, so it comes as a bitter pill that the Bill will allow them to do just that.
If there is no intention to reduce the threshold, Conservative Members should have no hesitation in voting for amendment 2, which would allow the threshold only to be increased through delegated legislation, removing the power to decrease the amount. I wait with bated breath for the Minister to keep the Government’s word and accept our amendment.
In the previous debate, the Minister went to great lengths to claim that the Government’s plans to give themselves the power to water down the tax-free threshold on termination payments, and to exclude injury to feelings from tax-free compensation payments, had nothing to do with attacks on those who have just lost their jobs. No, instead that is apparently part of some ambitious strategy that the Government have to tackle tax avoidance.
The Minister is so concerned about tax avoidance that he has claimed that
“when the Government find tax avoidance, we will clamp down on it.”—[Official Report, 6 September 2017; Vol. 628, c. 253.]
Such a bold assertion makes me wonder if the Minister has even read his own Finance Bill. Has he read clause 15, which we will debate later, through which his Government are loosening the rules to allow more non-doms to receive tax breaks if they use money from offshore tax havens to invest in the UK?
Alex Burghart (Brentwood and Ongar) (Con)
Is the hon. Gentleman not aware that clause 15 will bring more money into this country, which is presumably a good thing, and something we can all agree on?
Peter Dowd
We will deal with that a little later. The hon. Gentleman may want to pay attention to my hon. Friend the Member for Oxford East (Anneliese Dodds), who will expose that fallacy.
Kelvin Hopkins
Is it not the case that the Government are squeezing money out of people who cannot escape from taxation—namely, less well-off people who lose their jobs—rather than chasing the big money people who evade and avoid taxes?
Peter Dowd
My hon. Friend, as ever, puts it in a nutshell. That is the case.
Has the Minister read clauses 29 to 32 and schedules 8 and 9? With those measures, the Government are deliberately signposting a loophole to ensure that non-doms can set up offshore trusts that are exempt from planned changes to non-domiciled status. That exemption completely undermines the Government’s planned changes. The fact is that this Government are not interested in tackling the scourge of tax avoidance and evasion, which costs the UK economy billions every year. They have no interest in ensuring that those who invest foreign money in the UK do so in a transparent and open manner.
Rachel Maclean (Redditch) (Con)
Does the hon. Gentleman accept that under this Government we have made the largest strides to close the tax gap that we have seen in recent years, which means that we are collecting more from rich people and tax avoiders than ever before?
Peter Dowd
That will be dealt with later, but it is not the case for many multinationals. The papers are strewn with examples of the Government’s sweetheart deals with multinationals, so the hon. Lady cannot tell me that that is the case.
Mel Stride
I thank the hon. Gentleman for generously giving way. The latest figure for the tax gap is 6.5%, which he will know is lower than that in any year under the last Labour Government. It was over 8% in the financial year 2005. He will also know that our record on avoidance and evasion is that we have raised £160 billion since 2010. What amount did his party achieve by clamping down on avoidance, evasion and non-compliance when it was in office?
Peter Dowd
It does not include profit shifting from multinationals. I am quite happy to defend the record of the last Labour Government, but I am more interested in this Government and what the next Labour Government will do in this regard.
The Government are only interested in doing what they have always been interested in since the party was founded: dramatically curbing the rights of workers and transferring their money to those who least need it. That is, outrageously, what clause 5 will do. Why else would the Government give themselves the power to lower the tax-free threshold for statutory redundancy payment? Why else would the Government feel the need to further harm discrimination victims? If, as they say, there is a need for clarity in the definition of “injury”, why do they not accept amendment 4, which would make it clear that victims of discrimination should not have compensation for harm taxed as if it were earnings? We only need to look at the comments of the Chief Secretary to the Treasury, who wrote an astounding report in 2012 comparing the work practices of Germany and the United Kingdom.
Lucy Frazer
The hon. Gentleman is being very generous in taking interventions. He suggests that the Conservative party is not looking after those on lower incomes. Does he not accept that it was our party that increased the tax threshold for lower income workers and also introduced the living wage?
Peter Dowd
When we take into account cuts to working tax credits and changes to benefits, that does not stack up, I am afraid. The hon. and learned Lady should know that.
In 2012, the Chief Secretary set out how some employers in Germany were exempt from pesky regulations, such as on unfair dismissal, or social security contributions, and opined that the UK Government should follow suit. She argued that the best way to fight unemployment, particularly among the over-60s and the under-20s, was by encouraging more shift work, work on Sundays and late-night work and, yet again, getting rid of protection against unfair dismissal. Is it any wonder that this Government are hellbent on giving themselves the power to cut the amount that a worker can receive tax-free after they are dismissed?
Rachel Maclean
Why is the hon. Gentleman discussing removing the power of unfair dismissal when that is neither covered by the Bill nor proposed by the Government?
Peter Dowd
Because it goes to the heart of this Government’s attitude—[Interruption.] Narrative; that is a very good word. Should anyone in the Chamber be surprised that the same Government brought in the illegal and deeply unfair employment tribunal fees? It is part of the theme and the narrative. They are now set, once again, to try to limit the amount that workers who are discriminated against in the workplace can receive. The clause is simply another step that this Government have taken in the past seven years to distort and debase hard-won employment rights. If it remains in the Bill unamended, it will give the Government even more power to wreak havoc and misery on the lives of some of the most vulnerable people in our society.
Mr Harper
I will deal with the amendments and some of the issues introduced by the hon. Member for Bootle (Peter Dowd).
Let me cover first the jobs position. The only criticism I have of my hon. and learned Friend the Member for South East Cambridgeshire (Lucy Frazer), who raised this matter, is that, of course, jobs are created not by the Government but by businesses operating under the conditions that are created by the Government. It is important we remember that, because we should not take it for granted. The jobs performance of many countries in the European Union has been pitiful by comparison. Not that long ago, this country created more jobs than the rest of the European Union put together. That is not a trivial point; it makes a difference to millions of people across the country.
The hon. Member for Bootle ought not to sneer at the number of jobs. He is also wrong about the quality of those jobs. Figures from the Office for National Statistics clearly show that most of the jobs that have been created are permanent, full-time and skilled managerial or professional jobs. They are not rubbish jobs, as he calls them in that slightly sneering way. They are good-quality jobs and are providing good livelihoods for people across our country.
Kelvin Hopkins
The right hon. Gentleman suggests that Governments effectively have no role in creating jobs. The reality is that macroeconomic policies have an enormous effect on the creation of jobs. Those countries that have chosen foolishly to join the euro and now have a massively overvalued currency, in effect, have lost millions of jobs in some cases. We have fortunately not been part of the euro, and currency flexibility is a crucial part of that; that is Government policy.
Mr Harper
I completely agree, but the hon. Gentleman misquotes me. I did not say that Government have no role. I said that Government do not create the jobs, but I explicitly said that Government create the conditions within which businesses operate and can create jobs. He is absolutely right about that, and I do not necessarily demur from what he said. The euro and the straitjacket of monetary policy across Europe has led to appalling situations in some countries where unemployment rates are very high, which I do not think is sustainable. That is why our economic performance is incredibly strong. We should not throw that away.
Catherine West (Hornsey and Wood Green) (Lab)
Could the right hon. Gentleman explain how, when he was Chief Whip, Thames Water failed to pay taxation between 2010 and 2014?
Mr Harper
I have not got any idea. I was not Chief Whip between 2010 and 2014. Individual taxpayer matters are for Her Majesty’s Revenue and Customs, and Ministers do not get involved in individual taxpayer decisions. As the Financial Secretary to the Treasury and several other hon. Members have pointed out, we have reduced the scope for businesses to avoid and evade paying taxes. We have closed that gap and are collecting more revenue that we can spend on our important public services, which I want to turn to.
The hon. Member for Bootle mentioned multinationals. He will know that there is nothing we can do unilaterally to collect money from multinationals that operate in different countries. That has to be part of an international process. He will know that David Cameron’s Conservative Government led that process and set up the initiatives. It is not very exciting, Mrs Winterton, but we are part of what I think is called the base erosion and profit-shifting programme. I am a non-practising chartered accountant, and I am afraid that we talk about such exciting things over coffee, but it is important because it relates to a set of international rules for treating where companies earn income consistently so that we tax them where they are genuinely doing their economic work. This Government cannot do that unilaterally; we have to co-operate. This Government have been leading and shaping that work across the world, not following others or trying to avoid it. Not only do we not have anything to be ashamed of, we have a lot to be proud of, which is shown in the revenue that we have been collecting.
Moving on to the substance of clause 5 and the amendments, I want to return to the point I made when intervening on the hon. Member for Bootle. There is nothing in the proposals that should alarm anybody—particularly those on lower incomes—who is playing by the rules. That issue came up when there were votes on the Ways and Means motions, and the Minister made the Government’s intentions clear and they are not what the hon. Gentleman suggested. Anybody worrying about their job at Bombardier, BAE Systems, about which we heard yesterday, or any other company should know that the Government have not proposed to alter the £30,000 tax-free limit at all. If the Government were to bring forward such a proposal, it would be governed by a statutory instrument under the affirmative procedure, meaning that the matter would come to the House and that Ministers would have to make the case at the Dispatch Box and persuade the House to back a change. There is no such proposal. The hon. Gentleman knows that it is not true and in saying that it is he is scaremongering and worrying people when they have no reason to be worried. He should be ashamed of himself.
As the Minister set out on Second Reading, clause 5 is necessary because the rules are unclear and complex and there is some abuse. Some 85% of termination payments are below the £30,000 threshold and will not be affected, but we must make sure that people do not abuse rules that are there for a good reason: to ensure that employees who lose their jobs are properly compensated and have some money to help them as they look for another job. There is no proposal to change that; this is about dealing with abuse.
On amendment 4 and “injured feelings”, there is a clear reason why it is foolish. Were it agreed to, it would introduce a large loophole into the process that would absolutely be abused. If someone wanted to offer some tax-free payments on loss of office, the payment could be labelled as “injured feelings”, rather than as something in the contract, and they could avoid paying tax and national insurance on it. The Minister should be congratulated on thinking things through and ensuring that people cannot dream up loopholes. Dealing with tax evasion is not just about acting after it has happened; it is about smartly drafting legislation so that loopholes are not left open in the first place.
Charlie Elphicke (Dover) (Con)
My right hon. Friend is making an incredibly powerful argument. I was just considering his remarks on tax avoidance, loopholes and, indeed, Thames Water, which was mentioned by the hon. Member for Hornsey and Wood Green (Catherine West), and it is important to remember that industrial-scale tax avoidance arose under the previous Labour Government, who did nothing at all to stop this egregious practice. This Government have been passionate, trenchant and active in righting that wrong.
Mr Harper
My hon. Friend is right. We hear a lot from the Opposition about clamping down on evasion and aggressive tax avoidance, and I give them credit for talking about it a lot. Unfortunately, they did not do anything about it when they were in government. The Minister and this Government talk about it a little bit, but we spend most of our time dealing with it and collecting the money, which is the right balance.
Catherine West
The list definitely dates from 2010—if I am not mistaken, that was when the Tory Government came to power—and includes Google, the Vodafone sweetheart deal, and Amazon. Government Members should concede that, despite some gradual improvements, we are still not where we ought to be and that this group of amendments includes things that taxpayers would like to see this House take much more seriously.
Mr Harper
There are a couple of things in what the hon. Lady says. She is absolutely right that we need to do more to ensure that multinational companies pay tax in the appropriate jurisdiction, but we cannot do that unilaterally. We have to work with other countries, because we need international agreement on where a company’s profits are earned. The media sometimes does not understand this, but companies pay tax on profits, not revenues, so the whole argument is about where the profits land and that has to be addressed internationally. This Government are leading that international work, not following it—[Interruption.] It is no good the hon. Member for Oxford East (Anneliese Dodds) shaking her head. UK tax professionals have been leading this work and continue to drive it forward. We have a proud record.
Anneliese Dodds (Oxford East) (Lab/Co-op)
I have seen some of this from the inside, within the European Union. For example, I have seen measures against trusts and measures to introduce country-by-country reporting blocked by Conservative MEPs, and I frequently saw measures to attempt to introduce international co-ordination blocked by Conservative-related politicians.
Mr Harper
No. First, it cannot just be done at European Union level—[Interruption.] No, we have to do it globally, because many of the companies involved are US companies. The base erosion—[Interruption.] I do not know why the Opposition Front-Bench team are laughing. The base erosion and profit sharing programme comes from the OECD.
Mr Harper
I cannot take an intervention when I am still dealing with the first one. The base erosion and profit sharing programme is a global initiative, and we are leading on that work.
As for the point of the hon. Member for Oxford East about the EU, if I remember rightly, the reason why the Government blocked the French-driven proposals for country-by-country reporting was that they were part of an EU plan to try to drive up the total amount of tax that we take from business, not to ensure that companies pay tax in the right way. We are not an anti-tax country. That move was part of an EU plan to avoid countries being able to have competitive tax regimes and to avoid businesses locating in the United Kingdom. The French wanted to stop that because many of their businesses and smartest people now work in London or other parts of the UK, but the change was not in our national interest and I believe that that was why we blocked it. However, we need to continue the international work, and I am pleased that we have been leading on it.
My final point is about workers’ rights. I understand that the hon. Member for Bootle has to do this stuff to please people on his side, but he is absolutely wrong. This Government have absolutely no agenda of the sort that he mentioned. When talking about our leaving the European Union, my right hon. Friend the Prime Minister has made it clear that we want to protect workers’ rights. We stand four-square behind the rights that are in place, and we will be legislating for them in the European Union (Withdrawal) Bill, which I am sure will provide many hours of joy and fun in Committee. You may even be in the Chair, Dame Rosie, to listen to some of those exciting debates. We are going to protect workers’ rights, and there is nothing at all in the proposals to concern somebody who is worried about losing their job. This is about cracking down on people who have been abusing the provisions that protect legitimate workers who lose their jobs, using them as an excuse to get tax-free cash out of the system and cheat the taxpayer. That is what the proposals are about and that is why I hope that the Committee rejects all the amendments and supports clause 5.
Kirsty Blackman (Aberdeen North) (SNP)
It is good to be back in the House after a bit of a recess and to be here again talking about the Finance Bill. It is our second such Bill this year—our second of three—so we are here for the long haul. I want to discuss termination payments and the relevant amendments tabled by the Scottish National party and Labour. The Government have been clear that they are just closing a loophole, but the Budget suggested that the measure will generate an extra £430 million a year. That is £430 million a year that these workers will not be getting when they receive their termination payments. However the Government want to dress it up, this is additional tax on these people who are losing their jobs and receiving termination payments. These people are in a vulnerable situation, as they are receiving a termination payment and are no longer in employment and they will be taxed more as a result.
Kelvin Hopkins
The hon. Lady may remember that the tax expert Richard Murphy calculated at one point that the genuine tax gap—not the one that the Government give us—was £119 billion a year. That has no doubt come down slightly, but there is a long way to go before we collect that tax. That figure overwhelms the amount of money that the Government will squeeze out of workers who are losing their jobs.
Kirsty Blackman
I absolutely agree and I think that the tax gap is probably significantly larger than the Government are suggesting. On that note, small countries are very good at having a very small tax gap—a wee plug for Scottish independence there.
We have a couple of other specific concerns about termination payments. We are still not clear about people who have faced termination as a result of injury, injury to feelings or psychiatric injury. We do not want them to receive less as a result of this change. I heard what the Minister said about those people who have been involved in discrimination cases when the decision has been in their favour, but we want to ensure that people who are trying to move on from a situation after termination but who have been injured or have suffered an injury to feelings or a psychiatric injury are not disadvantaged by this change in the rules.
I will not speak for much longer, but let me say one more thing. The Government’s explanatory notes say that the Government are looking to ensure that all payments in lieu of notice, not just contractual payments in lieu of notice, are taxable earnings. That way of putting it is what most concerns me, because it is clear that workers will be impacted by this change when it comes in. I expect that this change will be proposed by the Government and accepted, so I would very much like a commitment from the Minister that, if it comes in in the next tax year, the Treasury will do an impact assessment one or two years in to see the specific impact on that group of low-income workers who the Government suggest are in the minority. I would like to see its impact, and if it proves to be particularly negative, I want the Treasury to take mitigating steps to change it.
James Cleverly (Braintree) (Con)
“The narrative”—those were the words used by the Opposition Front-Bench spokesman in response to the measure. We should remind ourselves that the narrative is that we are discussing employment-related tax treatments against a backdrop of a significant increase in employment and a significant decrease in unemployment. That goes to the heart of this whole debate. Employment is something that we all want to see expanding through the UK economy. Having started and run a small business and having recruited people to that business, I know that no employer recruits someone with the intention of kicking them out. I hope that that goes without saying, but I have said it nevertheless.
Rachel Maclean
Does my hon. Friend agree that a small business owner with just a couple of staff has to go through a lot of stress in the whole process of making someone redundant? We should not forget that small business owners are people as well, often quite low paid because they are sacrificing salary. That can lead to mental health issues, stress and anxiety.
James Cleverly
My hon. Friend is absolutely right. I will respond to her point in a few moments, but it is a very important one and we must not overlook it.
We have had a jobs boom over the past few years, in stark contrast to many other developed economies around the world and across Europe, which has struggled. In particular, in the UK, which is dominated by small and medium-sized enterprises and, indeed, microbusinesses, which often have only one or two principals and one or two employees, it is important that we continue to give confidence to those businesses, many of which do not have a large administrative back-office function. That is often the case, as it was in the business that I started. I was doing the client interaction and sales, and a colleague of mine was doing the journalism side of the business, but we were also the accountants and the HR department. To give confidence to small and microbusinesses that they can employ people, it is incredibly important that everything to do with employment is as simple and transparent as possible.
At the moment, the tax treatments around severance payments are very competitive. Depending on the combination of events, the payment can be taxed any one of a number of ways. Although I did not speak about this set of clauses on Second Reading, I did welcome the Bill, and I welcome this general move to simplify, to clarify and to give small businesses in particular—although of course this affects businesses of all kinds—the confidence to employ people, knowing that the HR and financial treatment around that employment will be as simple as possible.
The Opposition spokesman kept talking as though severance payments were not taxed at the moment, and of course they are. They are taxed—
James Cleverly
Above the £30,000 threshold, there are tax treatments. Through the Bill, the Government are seeking to make the treatment of the figure above £30,000 most important and straightforward—[Interruption.] I absolutely welcome that.
James Cleverly
Yes, but at the moment it is £30,000, and that is what it says here—[Interruption.]
The Second Deputy Chairman of Ways and Means (Dame Rosie Winterton)
Order. There are too many sedentary interventions, and it makes it rather difficult for the Hansard writers, as well as everyone else.
James Cleverly
I am happy to take interventions, but I have never been a particularly good lip reader, so the Opposition will have to help me out on that one.
The Opposition suggested that somehow there would be some terrible Government sleight of hand to try to diddle people out of their money at a point at which they have lost their job, but it has been made absolutely clear by the Minister and in the speech made by my right hon. Friend the Member for Forest of Dean (Mr Harper) that there will be transparency in any changes. None are proposed, but if they were, they would follow the affirmative procedure, which would mean a Minister at the Dispatch Box, in front of the House, being quizzed and questioned by the House. They would have to be voted on by the House. So the idea that there would be some sort of back-office sleight of hand in this is inaccurate.
At a time when we have, unfortunately, heard news of proposed job losses in one of our key businesses, the Opposition’s approach is unwise. I understand why their Front Benchers have done this—they want to attack the Bill—and I am sure that if I were in their shoes, I would find whatever means I could to try to criticise the Bill. The simple truth is that there are no such proposals and nothing in the Bill to imply that there would be, but it is right that the Government maintain the opportunity to be flexible in the future.
Peter Dowd
Does the hon. Gentleman agree that in the light of the shake-up in these organisations and the dreadful stress that these people are under, introducing this clause at this time is completely inappropriate and heartless? The Government can bring it back another time if they wish.
James Cleverly
The hon. Gentleman will be unsurprised to hear that I do not agree with him. The Bill is where the proposal is and the passage of the Bill has been timetabled in the way that it has. The idea that we delay changing the tax treatments of severance payments to a point in time when no one in British society is in the process of losing their job is farcical, as I am sure that, on reflection, he will recognise.
As has been said, the £30,000 threshold means that 85% of termination payments are completely unaffected. I am sure we have all heard anecdotes about businesses seeking to manipulate the definitions of the various elements of severance payments specifically to avoid the tax that is owed. Surely, Opposition Members would wish to make sure, as Government Members would, that tax is applied fairly, dispassionately and transparently, and that it affects all people equally. Once again, a disproportionate burden would otherwise fall on small businesses, which do not have that administrative back-office function and cannot play manipulative games to avoid tax. They are the ones that have to pay the full tax, as is right.
Some companies may have clever back-office accountants looking at ways in which to massage the definitions of the various elements of a severance payment to minimise the tax—tax that is due to the Treasury and that we want and need to fund public services. Surely, the Labour party is not suggesting we should turn a blind eye when a clever set of accountants can massage figures, making sure that the burden falls wholly and solely on small businesses, which do not have the opportunity to employ people to do that kind of smoke-and-mirrors work? I cannot imagine that is what Labour would want to do.
Amendment 4 proposes including the words “injured feelings”. Again, I am sure that this is being proposed with the best intentions, but the Labour party must realise that putting into a Bill a definition that is so vague and open to abuse is just inviting unscrupulous businesses to use it as a means of avoiding the tax that should be fairly paid upon a severance.
Kirsty Blackman
I am guessing that the hon. Gentleman is unaware—perhaps he is not—that “injury to feelings” is a legal term. It is used within that profession, and it is recognised and understood. Therefore, it is completely reasonable to include it in an amendment.
James Cleverly
I thank the hon. Lady for informing me of that. I am more than happy to look in more detail at that definition, because I do not have it at my fingertips, but putting it in the Bill would present to unscrupulous employers something that looks like an invitation to use this as a back-door route to avoid the tax that should rightly be paid upon severance. It would be unwise for that to go through, because it would send exactly the opposite signal to what we are trying to achieve with the relevant clauses elsewhere in the Bill, which is to say, “If you play by the rules, fine.” The vast majority of people who receive severance pay have no need to concern themselves and neither do the vast majority of businesses. The only individuals who should be a little distressed by what is going through in the Bill are the very small number of companies that have abused the severance payment structures to avoid paying the tax that is fair. I have little sympathy for those companies. If they play by the rules, we are on their side. If they seek to bend or break the rules, I have no sympathy whatsoever.
Kit Malthouse (North West Hampshire) (Con)
I am seeking to ensure my hon. Friend understands that this does not benefit the companies; this is of benefit to individuals who take advantage. There is no tax benefit to the companies because it is income tax that is payable. [Interruption.] Well, there is national insurance—employers’ NI.
James Cleverly
I thank my hon. Friend for that intervention. There is little direct financial benefit to the company—
James Cleverly
Although, as I am reminded, there is an NI implication. Again, I have heard a number of anecdotes about conversations with departing employees from not the most honourable of companies in which things have been said such as, “If this complaint were to gently disappear, I am sure we can squeeze a little more money into your severance payment, using this route or that one.” This is one of the areas where simplicity and clarity are important, because companies may be using massaging methods to try to get a bit more money into the pocket of a departing employee, so that employee does not to have recourse to the law where inappropriate behaviour has taken place. Dangling some cash in front of them may be being used as an enticement not to take a constructive dismissal case, for example, and that is exactly the kind of thing we want to avoid.
In conclusion, I will be generous in spirit and assume that these amendments are just poorly thought through, rather than anything that is attempting to be more damaging. They would undermine the core direction of travel of the Bill, so I will not support them.
Ellie Reeves (Lewisham West and Penge) (Lab)
I am grateful for the opportunity to speak in this debate. Before entering this place, I was an employment rights lawyer for more than a decade, so this issue is very important to me. I represented dismissed and discriminated against employees for many years, and saw at first hand the devastating effect that the way they had been treated had on their lives. The Bill clearly seeks to narrow the scope of termination payments. Of course tax avoidance should be clamped down on, but the Government’s own consultation did not reveal evidence of widespread abuse. The hon. Member for Dover (Charlie Elphicke) said that there was tax avoidance on an industrial scale in this area, but that simply is not borne out by the evidence or indeed my experiences as an employment rights lawyer.
Charlie Elphicke
The hon. Lady is a making a strong and passionate case. My concern was industrial-scale tax avoidance, because big corporates were allowed to game the tax system without any action being taken to stop them doing that, largely because of the Brownite prawn cocktail circuit that was pursued in the early 2000s. In the last Parliament, I fought a campaign to get a lot of the law in this area tightened, and I am glad to say that a lot of that was taken forward.
Ellie Reeves
This is not about big corporates; I am talking about adequately compensating people who have been sacked or discriminated against at work. In my experience, a sacked worker’s priority is to receive a fair settlement, not to avoid tax. It seems to me to be another example of the Government hounding people when they are at their most vulnerable, when instead they should be helping and supporting them.
The introduction of measures that will allow the Government to reduce the £30,000 tax-free threshold via the backdoor of delegated legislation could lead to profound effects on people’s lives without there being any proper scrutiny in Parliament. That is even more important given the fact that the threshold has not been increased since 1988; had it risen in line with prices, it would be £71,000 today. Amendment 2 would mean the threshold could only be increased, not decreased.
Catherine West
Does my hon. Friend agree that it is curious that, between 2010 and 2014, such a large company as Thames Water paid zero corporation tax, yet here we are talking about sums of £30,000? It is estimated that there is £6 trillion in tax havens, yet we are quibbling the amounts that go to individuals who have had a difficult time in the workplace.
Ellie Reeves
I absolutely agree. The clause will penalise people who have lost their jobs and people who have been discriminated against—
Ellie Reeves
May I deal with the intervention I am currently dealing with first?
People who have lost their jobs and been discriminated against often get small amounts of money in the wider scheme of things, but it makes a huge difference to their lives while they are looking for another job, getting back on their feet and getting their confidence back after the treatment they have been through.
Rachel Maclean
The hon. Lady is talking about people who have lost their jobs who have been discriminated against. All our hearts would go out to someone in that situation, but is she aware that the tax-free threshold for people who have been discriminated against is not affected by the provisions in the Bill? Such awards will be wholly tax-free under the Bill, so does she agree that discrimination is not relevant to the debate?
Ellie Reeves
Discrimination is relevant to the debate, because the Bill would introduce legislation that would tax injury-to-feeling awards on termination. Discrimination can of course have a devastating effect on a worker’s life and career, yet the Government seem to treat victims of discrimination as a way to top up the Government coffers.
Ellie Reeves
I have already given way several times; I wish to make some progress.
Consider the example of a mother who has been discriminated against and dismissed for taking maternity leave. Rather than enjoying her time at home with her baby, she feels stressed and anxious about the future and her capacity to provide for her family.
Rachel Maclean
The hon. Lady is being extremely generous in giving way. I just wish to put on the record that discrimination awards will not be affected by the Bill. I have a copy of the Bill here: there is full exemption for compensation awarded by an employment tribunal relating to discrimination awards. She is talking about a case of a mother who is discriminated against, and none of us would wish to see that—I am a mother myself and I have employed mothers—but that is not what the Bill is about.
Ellie Reeves
The hon. Lady is talking about discrimination awards in employment tribunals; I am talking about discrimination awards as part of termination payments. They are two distinct things. As I understand it, the Bill would tax as earnings discrimination awards as part of termination settlements. For example, were someone to settle with their employer rather than go to tribunal, any injury-to-feelings element of the settlement that was above the £30,000 threshold would be taxed. That is a significant change for people who suffer discrimination. It might affect the mum who settles with her employer following her dismissal after having a child, or the disabled worker whose employer would rather sack them and make a termination payment than make adjustments for them. Such people will be worse off because that element of their award will be taxable.
It cannot be right that, rather than supporting victims of discrimination, the Government seem to want to use them as a source of revenue. These people need protections, not to be used to provide a revenue stream, so I urge all Members to vote for the Labour amendments.
Neil O'Brien (Harborough) (Con)
The shadow Minister said that the measures in the Bill are part of a wider pattern of Government behaviour. Indeed they are: they follow in the footsteps of the 75 different measures we have already taken to clamp down on tax avoidance and the £160 billion we have already raised for our public services by doing so. They follow in the footsteps of the changes we have made to capital gains tax, which have increased the amount we have raised and ended the disgraceful situation in which hedge fund bosses were famously paying less tax than their cleaners. They follow in the footsteps of the changes we have made to corporation tax to prevent international avoidance—the so-called Google tax. They follow the changes we have made to the taxation of non-doms to create more balance and end the situation whereby people could be here for 25 years and still claim to be non-doms. So the Bill is part of a wider pattern of behaviour: it is part of an ongoing war on tax avoidance that the Government are waging.
On the specifics of the amendments, it seems to me that the Opposition are incredibly well intentioned. We all want the same things—we all want to drive down tax avoidance—but the problem with amendment 1 is that, in the real world, the Treasury is constantly engaged in a war of attrition with people who are constantly trying to create new loopholes and ways to avoid tax. As quickly as the Treasury closes one loophole, there are people trying to create others.
Neil O'Brien
I shall make some progress.
Realistically, we cannot will the end of reducing tax avoidance without willing the means. The idea that, every time the Treasury needs to make a small change to a definition to clamp down on a new form of avoidance, we should have to come back with not just new statutory instruments but new primary legislation would really put sand in the wheels of the war on tax evasion and slow down our ability to tackle this serious problem.
Amendment 4 brings a more serious problem. If it is accepted, there will be people in the tax-avoidance industry rubbing their little hands together because the Opposition will have created, completely unwittingly, a huge new loophole, which will be used to abuse the system and avoid tax.
Neil O'Brien
I am just about to conclude.
The measures in clause 5 are good, and they are part of a wider pattern of behaviour: a war on tax avoidance that we have waged in order to get more money for schools, hospitals and police in my constituency and others. They are part of a wider economic policy that has delivered not just record employment—the highest since 1975—and record tax cuts for those at the bottom end, but a record increase in the national living wage that will give us one of the highest living wages in the entire developed world. It is a pattern of behaviour that sees us making those who need to pay their tax pay it, so that we can have an economy that works for everybody.
Kelvin Hopkins
I will speak only very briefly in support of the Labour amendments as most of what I would say has been said by my hon. Friends. The reality is that, in this country, we have a revenue problem, not an expenditure problem. The Government are constantly imposing austerity measures on ordinary people and on public services, and we see the result of that in the health service, local government and education. We need to get more money into the Treasury, which means dealing with tax avoidance and tax evasion among the corporates—the big money people—not squeezing the relatively small amounts of income given to people who lose their jobs.
Catherine West
Does my hon. Friend agree that it is a pity that, since the start of the new Government, Mr Pickles, who was formerly a Member in this House and is now in the other place—[Interruption.] To the best of my knowledge, he has not been replaced as the anti-corruption tsar. Indeed, unless the House has been informed otherwise, that particular thread of Government policy seems to be lost.
Kelvin Hopkins
My hon. Friend makes an interesting point.
The reality is that many Government Members have close associations with the City and with big money. I do not want to accuse anyone individually, but that is the reality. Many have been in hedge funds and wherever. The biggest scandal of all took place within Her Majesty’s Revenue and Customs. A few years ago, Dave Hartnett, who was the boss of HMRC, was involved in sweetheart deals with the corporates, losing countless billions for the Treasury. He was not doing anything illegal, but cosy deals with corporates is not exactly public service. When he finally left HMRC, he set himself up as a consultant, advising the same corporates on how to avoid taxes. That is an absolute scandal. We should be stopping such practices.
Tax officers should be public servants who are driven by the public service ethos. At the grassroots level, the ordinary members of staff are driven in that way. Many of them are members of the Public and Commercial Services Union, with which I am associated. The PCS has argued for many years that we should have more tax officers, and that they should be better paid and better appreciated for the work that they do. I would like to think that, instead of closing tax offices and squeezing the number of tax officials, this Government would increase their number. PCS has told me on many occasions that every tax officer collects many times their own salary, so every time we appoint another tax officer, we get more than their salary coming back. That is what we should be doing. It has been a scandal for many years. Even before this dreadful Conservative Government, we were not collecting sufficient tax. We were allowing tax evasion and tax avoidance to go unchallenged. I want to see a world in which people, particularly those with plenty of money, pay their taxes at the highest level. I am not talking about ordinary working people.
Finally, it was recently suggested that quantitative easing, which is not strictly relevant to this amendment, is benefiting the better-off and not the ordinary people. It would be good if some of that QE could find its way into the Treasury coffers and help the spend on public services. That would be a better way of generating more jobs, more demand and better services in our economy.
Rachel Maclean
This is indeed an important Bill. I look forward to serving on the Public Bill Committee and to helping it to become law.
We have heard a number of things about narrative and the tone from the Opposition. I say to the hon. Member for Luton North (Kelvin Hopkins) that I have nothing to do with hedge funds or with rich people in the City—unless we are talking about the city of Birmingham and about my friends who are rich in happiness and goodwill, if not money.
There is always a fine balance to strike when seeking to legislate on these matters. Generally speaking, we have a good regime of employment law in this country, notwithstanding some of the questions about the gig economy, which we are currently examining in the Business, Energy and Industrial Strategy Committee. Although the gig economy is outside the scope of this debate, it does need further scrutiny.
I am worried about Labour’s amendments. This Bill provides protections. It protects the public purse against those who seek to avoid and evade tax. The Opposition have raised some examples, and they were right to do so. This Bill does not condone those people or support their actions at all.
We know that, in most cases, the British taxpayer agrees with the system of taxation, but when that system is seen as unfair, it does lose the consent of ordinary workers. It is usually people with deep pockets and the resources to take advantage of the loopholes who cause deep anxiety among the British public. Therefore, I welcome the measures that we have set out in the Bill as they will end such practice.
The Opposition’s answer to the issue of taxation and revenue is to raise taxes on everyone. That is not the Conservative view. We prefer to keep taxes on the low paid and on small businesses low—that is what we have done already—and, at the same time, to crack down on the tax avoiders. Ultimately, that brings in more tax, and underpins a thriving economy.
There are measures in this Bill that will end some exploitative practices of big businesses and of a minority of individuals in this country. That will help the Government to collect the tax that is due to them from big businesses as well as from overseas investors and rich non-doms. We cannot allow a minority of businesses to tarnish the reputation of UK plc and our small and medium-sized businesses. However, we must remember that 99% of businesses in this country are SMEs. They are not this caricature of rich, greedy hedge fund people which, frankly, I do not recognise, but we hear about from the Opposition. They are ordinary men and women up and down this country, advancing their dream of a better life by setting up a small business. In so doing, they are creating jobs for other people. I worry about the tone of this debate as it sends out a message from this Chamber. We need to send out a message that encourages people to take that risk and start businesses. That is why we need to strike the right balance.
I speak from experience. Before I entered this House, I spent 25 years working in small businesses. I ran my own business and I was a human resources director in other businesses. I have worked for some small midlands manufacturing companies, advising them on employment issues. I have seen the stress and worry that employers go through when they are dealing with a termination. Of course, termination has an impact on the employee, but let us not forget that these employers are trying to do their best under difficult circumstances. Without doubt, there are some unscrupulous employers, but I have seen small business owners lose sleep and suffer from stress and anxiety. Sometimes, despite the best efforts of management, a job does not work out. We are dealing with a trust relationship after all. We are talking about the vagaries of human nature, and, as my hon. Friend the Member for Braintree (James Cleverly) observed, small businesses often do not have access to qualified HR advice and employment lawyers as they are too expensive and beyond their budget.
Some of Labour’s amendments, particularly those on the injury-to-feelings issue, cloud the whole legislative landscape for small business owners, making it extremely difficult for them to know what to do in a stressful situation. That is why I do not support these amendments. The provisions are purely about preventing the manipulation of the rules.
Kelvin Hopkins
Just on that point about small businesses, I agree with the hon. Lady that they are immensely valuable to the economy and we must support them. However, would the Government not do better to stop banks such as RBS squeezing the life out of small businesses by very, very unfair financial practices, which has certainly happened to businesses in my constituency?
Rachel Maclean
I thank the hon. Gentleman for his intervention. I am sure that members of the Treasury team are doing everything they can on those points, and I welcome the work that they are doing in that regard. I have also seen small businesses in my constituency being affected by such practices. I do not condone them at all. We all want a country where good work is rewarded, and where employers and employees can work together. No system of legislation is perfect, but this Bill does strike the right balance. It is sensible and well thought out and we will continue to scrutinise it in Committee. Therefore, I will not vote for Labour’s amendments.
Eddie Hughes (Walsall North) (Con)
I often think, when I get to my feet in the Chamber, that my job is not really to talk to the people in the Chamber. I am sure that there are many clever people in here—far better educated than me—who know all the complex details of the Bill and the nuances of the financial implications. But my job is to represent the people of Willenhall and Bloxwich in Walsall North. If they were to tune into the Parliament channel at the moment, they might be slightly perplexed as to what was going on, so I thought I would try to assist them by considering amendment 1 particularly.
I would tell my constituents that £30,000 of a termination payment is currently untaxed and this Government have no plans to change that. Opposition Members might say, “Come on—what are you playing at? You’re putting something in here so you can do something sneaky in the future.” My answer is that there is actually a statutory instrument that requires an affirmative procedure. The people of Walsall would say, “What the hell is that?” And I would tell them it means that if the Minister wants to do something in future, he needs to come back to the Chamber to get the approval of this House and he also needs the approval of the House of Lords.
My constituents would then say, “That sounds pretty reasonable, but can we trust you? Surely you’re looking to take more tax off us in the future.” I would say, “Are you kidding? Look at this party. What have we done for you? We have increased the level above which you will pay tax from £6,500 to £11,500—almost doubling it. This country has the highest level of employment it has ever had and there are more women in jobs than ever before. And which party gave you the minimum wage? Not only was it the Conservative party”—[Interruption.] My apologies—small technical problem. Okay, I would say, “Which party subsequently increased the minimum wage to the level that we are at now—a massive increase on the original introduction level?” [Hon. Members: “Ah!”] And I would tell my constituents that this party has the aspiration to increase the minimum wage even further in the future.
Peter Dowd
Was it not the hon. Gentleman’s party that voted against the minimum wage?
Eddie Hughes
I think I remember the hon. Gentleman saying, “Let’s not talk about the past. Let’s talk about what this Labour Government might do for you in the future.” Well, there is not going to be a Labour Government. There is going to be a Conservative Government who will continue to increase the minimum wage. If my constituents are going to trust anybody in the House, it should be the Conservatives. We have no intention of taking more tax off people. If we did, we would have to come back to the House to get approval anyway.
Ms Nusrat Ghani (Wealden) (Con)
Thank you Madam Deputy Speaker—sorry, I mean Dame Rosie. I have just been thrown by that magnificent speech by my hon. Friend the Member for Walsall North (Eddie Hughes). His constituents must be very proud of him.
Let us ground ourselves for a moment. I am proud of this Government’s record on tax avoidance. Since 2010, our policies clamping down on tax avoidance and evasion have collected more than £140 billion, ensuring that our tax system is just and that everyone pays their fair share. Clause 5 makes the tax system fairer, which should be the ambition of all responsible political parties. A fairer tax system means that we can fund our vital public services without increasing taxes or passing more debt on to future generations. It is not rocket science; these are the basic rules for responsible government. To that end, I welcome the clauses we are discussing today, especially clause 5. They tighten the rules and close loopholes that have been exploited for too long, denying the Treasury what it is owed and short-changing the vast majority of individuals and small and medium-sized enterprises that pay their fair share.
I cannot be the only Member of Parliament who represents a constituency whose jobs, prosperity and opportunities are dependent on small businesses thriving, and I take every opportunity to stand up in the Chamber and back small businesses across Wealden. But back to clause 5. The tax rules on termination payments are currently unclear and confusing. Clause 5 tightens and clarifies the rules governing the tax due on these payments. The changes make the rules fairer, minimising the potential for manipulation by some larger employers, which often give the most generous pay-offs.
Colin Clark (Gordon) (Con)
The oil downturn has had an enormous effect in my constituency and that of the hon. Member for Aberdeen North (Kirsty Blackman). Like my hon. Friend the Member for Redditch (Rachel Maclean), I am a business owner. There are already too many barriers to employment. The Bill seeks to give clarity and the amendment would add to the complexity of employment. We do not want further barriers to employment. Does my hon. Friend the Member for Wealden (Ms Ghani) agree that we want clarity, which will ultimately help employment and small businesses?
Ms Ghani
My hon. Friend is spot on. We want absolute clarity. As I continue with my speech, the Committee will realise that the changes in clause 5 will barely have an impact on most people in our constituencies.
The changes are not asking someone who has been made redundant to pay more tax. The first £30,000 of the termination payment remains exempt from tax as well as national insurance contributions. As a result, the changes in clause 5 will not have an impact on 85% of people who receive termination payments. If we have constituencies where 90% of businesses are SMEs, our figure will probably be even higher than 85%. On average, 25% receive a payment of more than £54,000, so they are not exactly the least well-off in society. Those who are not following the rules and are not manipulating the loopholes will pay no additional tax. It is simply about clarifying the fine details.
Mel Stride
What a pleasure it is to serve under your chairmanship, Dame Rosie, and to respond to the first of what I am sure will be a series of lively and exciting debates on the Finance Bill. Before I respond to some of the more detailed points raised, as well as the amendments, let me remind the Committee of the overall purpose of clause 5.
The clause is designed to tighten and clarify the tax treatment of termination payments to make the rules fairer and to prevent manipulation. Our tax treatment of termination payments is one of the most generous in the world. That is something of which we can be proud and something that this clause does not change, but the current rules can also be unclear and complicated, as many hon. Members have suggested. Some payments are taxed as earnings, others are taxed only above £30,000 and others are completely exempt from income tax and national insurance contributions. Most employers use the rules as intended, but the complexity in the system leaves it open to manipulation. Indeed, a small minority of individuals and employers, particularly those with the most generous pay-offs—this is an important point—have thought to manipulate the rules by categorising large pay-offs as termination payments, rather than earnings.
Kelvin Hopkins
My hon. Friend the Member for Lewisham West and Penge (Ellie Reeves) made the point that the tax-free amount has not been indexed for many years. Had it been indexed properly, it would now be £71,000, not £30,000. Would not that be a way of avoiding any of these difficulties, as the lump sum would be so much bigger?
Mel Stride
This is one of the most generous thresholds in the world. In fact, there is no threshold at all in Germany and the United States of America, because none of these payments is treated as being tax-exempt.
Such categorisation means that payments qualify for the £30,000 tax exemption and an unlimited employer national insurance contributions exemption. The situation is clearly unfair for the vast majority of employees, who are unable to manipulate their payments in this way. Clause 5 makes changes to prevent such manipulation in the future, while still ensuring that the vast majority pay no income tax on their payment. The first £30,000 of all termination payments will remain exempt from tax.
The hon. Member for Bootle (Peter Dowd) made a general point about the Conservative party’s treatment of workers, and I make no apologies for the way this Government have stood up for workers up and down our country. We are committed to enhancing workers’ rights. We introduced the national living wage, and we doubled fines for firms that break the rules in that respect. We appointed the first director of labour market enforcement, and we are committed, as we have constantly said, and as our Prime Minister has made clear, to protecting workers’ rights as we leave the European Union.
Nearly 85% of payments are below £30,000, so retaining the threshold will ensure that the vast majority of people going through the difficult experience of being made redundant will still pay no tax whatever. That means that the UK continues to have one of the most generous tax exemptions for termination payments, and I have mentioned Germany and the United States having no tax exemption at all.
Clause 5 tightens the tax rules for termination payments to prevent manipulation—a point made by my right hon. Friend the Member for Forest of Dean (Mr Harper) in an excellent contribution. He highlighted our overall record on bringing in taxes where attempts are made to avoid tax, and I referred to the £160 billion raised since 2010. He referred to our being at the forefront of the OECD base erosion and profit shifting project, and we have also brought in the diverted profits tax to clamp down on the kind of behaviour he referred to.
Let us not lose sight of the purpose of bringing in tax, which is to raise public finances so that we can employ doctors, nurses, paramedics, police and soldiers and pay for all those great public services that all of us hold so dear. That is why I am so proud of this Government’s record on clamping down on tax avoidance more generally.
The Office of Tax Simplification has said:
“the well-advised can often end up better off than the unadvised, as they are more able to structure their employment contract (or, indeed, their termination payment) to achieve the better tax treatment.”
The hon. Member for Bootle said in this House only last month:
“If there is genuine evidence of the abuse of payments in lieu of notice, that needs to be acted on”—[Official Report, 6 September 2017; Vol. 628, c. 206.]
It is fair to say that, while the hon. Gentleman is a very amiable fellow, he is not right about everything, but on this point he is actually very right. This clause is to deal with the very abuse about which he has previously expressed concern. We will prevent employers from categorising large pay-offs as tax-free payments, rather than earnings. Instead, employers will now be required to tax what the employee would have earned if they had worked their notice period in full. All payments in lieu of notice will now also be taxable as earnings to equalise the treatment of those with and without a contractual right to such a payment.
Finally, clause 5 clarifies that there is a total tax exemption for payments on account of injury or disability of an employee. In 2014, the Office of Tax Simplification raised the possibility of removing this exemption. It recognised that that would be a draconian approach, but it noted that interpretation is
“often a problem area for employers and their advisers.”
However, we have not pursued that approach. Instead, we have provided certainty by confirming the current position established by case law in statute. The total exemption relates to termination payments provided on account of a physical or psychiatric injury that prevents the employee from carrying on the duties of the employment, which hopefully addresses the point raised by the hon. Member for Aberdeen North (Kirsty Blackman). Therefore, employees with evidence of an identified medical condition will pay no tax on related termination payments.
Some Members raised concerns in previous debates that the Government would be taxing compensation paid to employees where it is proven that they have been discriminated against. Once again, I am happy to reassure them. All compensation for awards for proven discrimination during work will continue to remain completely exempt from tax. There was an interesting interaction between my hon. Friend the Member for Reddich (Rachel Maclean) and the hon. Member for Lewisham West and Penge (Ellie Reeves) on this point. We accept that, where there is a tribunal award in respect of injury to feelings, it is treated in exactly the same way as when an employer accepts that discrimination has actually occurred. All the clause seeks is to confirm the long-standing position that genuine compensation payments are tax exempt, while ensuring there is no loophole that can be used to reduce the tax that is owed.
Let me now turn to the amendments. As the hon. Member for Bootle set out, amendment 1 would remove the power to amend the meaning of basic pay for the purposes of calculating post-employment notice pay by regulation. When we consulted on this measure, we listened to responses that asked us to make the basic pay definition more simple. It now excludes overtime, bonuses, commission and tips. However, we introduced this power to allow the Government to act quickly and to remain flexible if there is manipulation in the future. Any amendment to the meaning of basic pay would be subject to a statutory instrument under the affirmative procedure, so the House would have to expressly approve any change to the meaning. I therefore urge the House to resist the amendment.
Amendment 2 and consequential amendment 3, also tabled by the Labour party, would remove the power to reduce the £30,000 threshold by regulation. Some Members have raised concerns during the debate that the Government intend to reduce this tax-free amount. We have no intention to do so. If we were to do so, we would, as my hon. Friend the Member for Braintree (James Cleverly) pointed out in his excellent speech, be required to do so by an affirmative statutory instrument. However, I repeat that we have no intention of reducing this tax-free amount. I therefore urge the House to resist the amendment.
Amendment 4 would include injured feelings within the definition of injury. As I outlined earlier, clause 5 confirms that termination payments provided on account of physical or psychiatric injury will be completely tax exempt—an important point raised by the hon. Member for Aberdeen North. However, the clause also confirms the established position that injury to feelings is not covered by this definition. The reason for this restriction is clear: without it, there would be a large loophole—as identified by my hon. Friend the Member for Braintree and my right hon. Friend the Member for Forest of Dean—allowing payments to be routinely reclassified on account of injury to feelings, and without medical evidence, simply in order for people to pay no tax. These things are hard to prove or disprove, and would be difficult for HMRC to police. However, it remains the case that payments on account of an injury to feelings, like any normal termination payment, will qualify for the £30,000 tax exemption. I therefore likewise urge the House to resist the amendment.
Kirsty Blackman
The Minister is concerned that some people might be exploiting a loophole, but as a result he has decided to disadvantage everybody who is subject to termination as a result of injury to feelings, rather than giving them the benefit of the doubt, which seems pretty unfair to me.
Mel Stride
The problem is that one cannot escape the possibility that the employer and the employee, who could both gain from reduced tax, will work together to suggest that there has been an injury to feelings, even when in fact there has not been. How does one prove whether or not there has been an injury to feelings? That is why there is a loophole.
Amendment 12, tabled by the hon. Member for Aberdeen North, would require a review of how these changes will affect low-income workers. That is unnecessary because only 85% of the payments are below £30,000. As I have explained, the provisions do not affect awards for discrimination at work, for example. We have also maintained the £30,000 income tax exemption. We have considered the impact on low-income workers throughout, and we will continue to do so.
In conclusion, the Government recognise that losing a job is a challenging time, but we must remain vigilant to opportunities for the tax rules to be manipulated. That is why clause 5 sets out a fair and proportionate set of changes that will continue to protect the vast majority of employees. The first £30,000 of a termination payment will remain tax-free, as will the whole of the compensation payment for discrimination during employment. However, where there were opportunities for manipulation, the loopholes must be closed, and they now will be. I therefore urge hon. Members to reject the amendments and agree to clause 5.
Peter Dowd
The Government seem to have taken a scattergun rather than forensic approach to this matter, affecting everyone regardless of the circumstances. Time after time they go for easy targets. If they have no intention of revising thresholds downwards, what is the point? Why are they wasting the Committee’s time? The key point is whether people who have been made redundant should have further worries about their financial future vis-à-vis redundancy, and that sets a hare running, whether the Government like it or not.
Kirsty Blackman
I beg to move amendment 13, page 22, line 21, leave out
“on or after 6 April 2017”
and insert
“on or after the date on which the Chancellor of the Exchequer lays before the House of Commons a report of the review undertaken under section 809VP of ITA 2007”.
This amendment would provide that the changes in Clause 15 do not have effect until after the Chancellor of the Exchequer has laid before the House of Commons the review provided for in NC3.
The Temporary Chair (Mr George Howarth)
With this it will be convenient to discuss the following:
Clause stand part.
New clause 1—Review of conditions under which business investment relief is available—
‘(1) Chapter A1 of Part 14 of ITA 2007 (remittance basis) is amended as follows.
(2) After section 809VO (investments made from mixed funds), insert—
“809VP Review of conditions under which business investment relief is available
(1) Within six months of the coming into force of section 15 of the Finance (No. 2) Act 2017, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the conditions under which business investment relief is available.
(2) For the purposes of this section “the conditions” means—
(a) Condition A as defined in section 809VD,
(b) Condition B as defined in section 809VF.
(3) The review shall make an estimate of the value of the reliefs granted as a result of the conditions in respect of each tax year for which the relief has been available.
(4) The review shall make an estimate of the change in the value of the reliefs granted as a result of—
(a) changes to the conditions relating to eligible hybrid companies,
(b) changes to the periods specified in sections 809VD and 809VH,
(c) changes to the grace period in section 809VJ.
(5) The review shall make an assessment of the effectiveness of the conditions in relation to the stated policy aims of the Government in relation to business investment relief.
(6) The review shall prepare an analysis of the characteristics of beneficiaries of reliefs having particular regard to—
(a) income distribution,
(b) gender and other protected characteristics under the Equality Act 2010,
(c) domicile (including deemed domicile).
(7) A report of the review under this section shall be laid before the House of Commons within one calendar month of its completion.””.
This new clause requires HMRC to carry out a review of the conditions under which business investment relief is available, including estimates of the value of the reliefs (before and after the changes proposed in this Bill) and an analysis of the characteristics of those using the relief, including their domicile status.
New clause 3—Review of the efficacy of the conditions for business investment relief—
‘(1) Chapter A1 of Part 14 of ITA 2007 (remittance basis) is amended as follows.
(2) After section 809VO (investments made from mixed funds), insert—
“809VP Review of efficacy of the conditions for business investment relief
(1) Within two months of Royal Assent to the Finance (No. 2) Act 2017, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the impact of the conditions for business investment relief in encouraging investment in the UK.
(2) The review shall make an estimate of additional investment as a result of the condition for business investment relief—
(a) prior to Royal Assent being given to the Finance (No. 2) Act 2017, and
(b) if the changes to those conditions in section 15 of the Finance (No. 2) Act were brought into force.
(3) The Chancellor of the Exchequer shall lay the report of this review before the House of Commons.””.
This new clause requires HMRC to carry out a review of efficacy of the conditions under which business investment relief is available and the Chancellor to lay it before the House of Commons.
Kirsty Blackman
I appreciate having the opportunity to speak in this second part of our debate on the Finance Bill.
The matter in hand now has been discussed a number of times over the past few months, specifically around business investment relief. Some aspects of it were discussed while tackling the Ways and Means resolutions and on Second Reading. We are still not clear what impact this will have; the Government have still not told us. An overview of tax legislation was produced at the tail end of last year, when the Bill was first in draft form. It said there was likely to be a negligible impact on the public finances, but that does not explain what is actually going to happen. It also says that between 200 and 400 individuals a year benefit from business investment relief, but again that does not really explain the impact of this relief.
We do know, however, that everybody who benefits from the relief is a non-dom. The Government claim that they are changing the way non-doms are considered and are making it less easy for them to get away with dodging taxes, but this serves to increase the ability of non-doms to get away with not paying tax. The Government suggest this is about increasing investment, but they have not been able to produce any evidence of how much investment has been created as a result of business investment relief.
I am concerned about the amount of time and energy that the House is spending on this matter. It is spending a significant amount of time: we put this measure in place, presumably, at some point in the past few years, yet only 200 to 400 individuals have taken it up. Despite the fact that the numbers are so small, however, we are again debating the matter; this is the third time that we have done so this year, when there are many very important other items on the agenda.
Craig Mackinlay (South Thanet) (Con)
The amount of investment that has come to the UK from non-doms is £1.6 billion since 2012. I hope that is of some assistance to the hon. Lady.
Kirsty Blackman
Is that through business investment relief or from non-doms in general? We asked for those figures before, at the last stage of this discussion, and they were not forthcoming from the Front Bench. It would be nice to have those figures in writing from the ministerial team.
The hon. Member for Walsall North (Eddie Hughes) talked about why we should trust the Tories and what he would tell his constituents about that. He included things such as the living wage and increasing employment, both of which have happened, but the living wage is not a living wage, because people cannot actually live on the current living wage. If he made that proposition to his constituents, what he would actually have to say is that their wages have not gone up in a decade, that household debt is spiralling and that their savings are going down. If the Tories are doing such a good job, why are people poorer as a result?
One of our concerns is that we are facing a hard Brexit that will significantly damage the economy, but measures such as this one, which is projected to bring in only a small amount of investment from non-doms, will not undo the damage created by a hard Brexit; this will not undo the 5% reduction in GDP that Scotland is set to experience as a result of Brexit.
Vicky Ford (Chelmsford) (Con)
As I understand it, business investment relief ensures that overseas funds can be invested in the UK. It has resulted in £1.6 billion being invested in the UK—not a small amount of money. Of course it affects overseas people because it is overseas money that we want to be invested here. I do not understand the hon. Lady’s complaint about the relief only affecting overseas people—of course it does, because it is to introduce them.
Kirsty Blackman
My complaint was about the fact that people are being allowed to not pay tax on stuff they are doing in this country. My complaint is that the background note provided by the Treasury does not mention anything to do with £1.6 billion and that the overview of tax legislation put forward in December last year does not mention £1.6 billion. Despite our asking the Government for that figure on a number of occasions, this is the first time it has been forthcoming. I am very pleased that it is and that we can have a reasonable discussion about whether we should increase the ability of people from other countries to come under this.
I did not want to talk for a very long time, because we have already had a number of votes and two hours of debate on the Bill. As I said, the House has spent an incredible amount of time on this, and it probably should not have. The Labour party has tabled a new clause along similar lines to the new clause tabled by the Scottish National party.
Ms Ghani
I am concerned that we must not put inaccuracies on record. The HMRC figures published in August 2017 show that over £1.6 billion has been invested in UK businesses under the BIR scheme. We must not say that figures are not available when they are; we just have to go to the right place to find them.
Kirsty Blackman
I am very glad that those figures are there, but sadly, when we asked about them in September during our discussion on the Bill, after their production, they were not mentioned. I appreciate that they are being brought up now—that is great—but they were not brought up then.
As I said, I do not want to take up much of the Committee’s time discussing this matter. We have asked the Government to provide us with more data. We have also asked them to provide data on what effect they think this change will have on the amount of investment coming in. We would very much like to see that.
Anneliese Dodds
I will get straight to the point. Members will not be surprised to hear that many of my concerns have already been raised by the hon. Member for Aberdeen North (Kirsty Blackman). Labour Members have expressed a number of concerns many times about the extension and scope of business investment relief, to no avail. We find it very concerning that in a context where the current Government have borrowed more than any Labour Government ever have, our Treasury is intentionally depriving itself of revenue. That might be acceptable if the deprivation served to boost our economy, but we have no evidence of any positive impact from business investment relief.
Government Members have stated that they know the raw figure for how much has been invested through this relief. That is correct. We kept calling for that, and finally, at the last minute before we started debating the Bill after the summer recess, we got some figures. They were rounded up to the nearest hundred, and when we are talking of only about 400 people, it is rather strange not to have more granularity.
That is just the figure for the overall amount that has gone through this relief. We have not been told which sectors the investment directed through this relief goes into. We have no clarity about whether, for example, funds invested through this relief might have contributed to the overheating of the British property market in high-cost areas, and we have not received any assurances that the funds going through this relief will help to promote the increase in business and human capital formation that we so desperately need, given Britain’s falling productivity.
The Government’s impact assessment published when this relief was brought in said that it would have a negligible impact on economic development. This is not a relief that has a proven beneficial impact. Until the Government accept our proposals and agree at least to review the operation of the relief, I will remain unpersuaded that its extension does anything other than offer yet another concession to non-doms and provide even greater scope for tax advisers to indicate how UK taxes can be avoided. That is why the new clauses call for a review.
Mr Harper
The hon. Lady made a relevant point in the previous debate that I did not mention at the time. Some of the things that we had to deal with early in the last but one Parliament involved multinational tax arrangements that were put in place under the previous Labour Government. We did our best to get at least some money from those multinationals. It was not enough, but we did at least move things in the right direction. Profit shifting can only be dealt with internationally by agreement. If we do not do that, we will not make any progress. As I said in the previous debate, we are leading that international effort, which did not happen under the Labour Government.
Anneliese Dodds
I am sorry, but it is not the case that Governments are completely unable to do anything unilaterally to prevent profit shifting. They can, for example, decide whether to execute secret sweetheart deals with large multinationals through their tax authorities, or they can decide to be transparent.
James Cartlidge (South Suffolk) (Con)
Is the hon. Lady seriously suggesting that, under a Labour Government, HMRC would never negotiate with a company over its tax bill?
Anneliese Dodds
I referred to secret sweetheart deals, of which the experience in this country has been negative. The problem is with transparency. It is important to have an open tax system that allows for discussion, but many commentators would suggest that the relationship between some of the tax authorities and some of the companies they deal with is too cosy. The problems here are not to the same extent as those in many other countries, but we need to do something when the revenue from companies, particularly those focusing on intangibles, is going down.
One way to do that is to work with other nations, but we have again seen many negative developments in that area. The right hon. Member for Forest of Dean suggested that that was uniquely down to measures promoting a particular rate of tax, but that does not bear witness to what occurred. For example, the Government pushed strongly to prevent trusts from being included in registers of beneficial ownership. That is not about tax rates; it is about transparency. Again, when Conservative MEPs voted against country-by-country reporting, that was not about tax rates; it was about transparency.
Many of the most significant developments to remove harmful tax arrangements, particularly those exploited by multinational companies, occurred under Dawn Primarolo, who was a Labour representative when she chaired the multinational code of conduct group in which dozens of harmful tax practices were identified and removed. Labour therefore has a clear and strong record in dealing with these matters.
The Opposition will do everything we can to remove the gaping loopholes that still exist in the Bill, to toughen measures against aggressive tax avoidance and to prevent the burden being placed on some of the biggest casualties of austerity: those workers who have been made redundant. I hope that the Government will pay heed. In the interests of the British economy, they need to.
Bambos Charalambous (Enfield, Southgate) (Lab)
One of the strange anomalies in our tax system over the years has been the framework constructed to enable non-doms to avoid paying tax in the United Kingdom. The outdated concept of tax exemption for non-doms, which I understand dates back to 1799, is not fit for purpose in the 21st century. It takes no account of the mobility of the rich and their ability to shift wealth across jurisdictions at the click of a button and of the fact that some non-doms can use tax havens to channel their income overseas so that they can avoid paying tax.
Let us be clear that the idea that the place of birth of a wealthy individual’s parents should affect how much tax they pay in the United Kingdom is nonsensical. The fact that the UK Government should play along with that by setting various inducements in the form of remittance charges of between £30,000 and £90,000 or via business investment relief is also very concerning, as is the potential lack of scrutiny into the non-doms’ affairs and background.
In 2014-15, 84,500 non-doms living in the UK paid the UK Government £9 billion in tax, or a total of £105,000 each. Considering the size of the wealth of some non-doms this is very good business indeed, as some offshore money is brought in to the UK for investment purposes and taxed at these knockdown rates but much of it will remain outside UK jurisdiction. The generous tax breaks given to non-doms do not apply to other UK residents and take for granted the many benefits of life in the UK and of London as a financial capital. Why would nom-doms who have lived in the UK for more than a decade, who perhaps send their kids to schools in the UK, carry out business in the UK and own property here, need further incentives via tax breaks to invest here? There would be an outcry if we gave non-doms a reduced rate of income tax or capital gains tax that was not available to ordinary UK tax payers, so why are we carrying on with this charade right now? The USA makes sure that residents pay tax on their worldwide income and seems to have little problem attracting people to New York.
A good business investment is a good business investment whether it gets tax relief or not, and let us not kid ourselves that the sweetener of business interest relief is anything more than a sugar-coated inducement for non-doms who have already made their money. It is clear that stringent tests are not even done to assess whether someone applying for non-dom status meets the right criteria.
People who are temporarily resident in the UK pay tax on what they earn in the UK, as do permanent UK residents. Everyone else should pay tax on their worldwide income. It cannot be fair to be giving better treatment to some people who have lived in the UK for most if not all their lives but who, because of some convenient accident, can elect how much tax they can be liable for. Any changes to this loophole are of course welcome.
I am sceptical about how much investment into the real economy any changes to the business investment relief scheme will bring to the UK. If the Government do not decide to abolish the whole concept of non-doms, they should not allow non-doms to keep their assets outside the jurisdiction if the overseas trusts were created before they were deemed domiciled, and the Government should clamp down on any tax avoidance from mixed funds brought in to the UK.
Mel Stride
Clause 15 expands the scope of the business investment relief scheme because it supports economic growth and investment by encouraging foreign individuals to invest in UK businesses. Business investment relief was introduced in April 2012 and is aimed at individuals who are taxed on the remittance basis. As Members will be aware, a remittance basis taxpayer is subject to UK tax on their overseas income or gains only if they bring them to the UK. That can discourage them from bringing their overseas money into the country, even when doing so would benefit the UK economy by investing in UK business. The business investment relief scheme seeks to address this by allowing those who are taxed on the remittance basis to bring their income and gains to the UK without incurring a tax charge, provided those funds are invested in a qualifying UK business. In other words, the scheme enables overseas funds that would otherwise remain outside the UK to be invested in UK businesses.
The independent Office for Budget Responsibility has confirmed in the costings that, without this scheme, this money would simply be left offshore, and so the UK would not benefit from it. Any UK gains and income arising from the investment will be fully taxable in the UK. It is worth noting that elsewhere in the Finance Bill—contrary to the views expressed by the hon. Member for Enfield, Southgate (Bambos Charalambous)—the Government have introduced the most fundamental change to non-dom taxation in history, ending permanent non-dom status. That is more than the Labour party managed the last time it was in government. This clause supports these wider reforms by ensuring that the UK remains attractive to those people who want to live here and use their foreign income and gains to invest in Britain.
Clause 15 expands the types of businesses in which investment can be made. The new rules widen the relief so that it can be used to purchase existing shares, not just new shares. The changes also lengthen the time before a new start-up company has to become a trading business from two to five years. That will enable investment in large infrastructure projects, which can take a long time to complete. Finally, clause 15 updates the anti-avoidance rules to ensure that genuine investment is not discouraged.
Let me turn to the amendment and new clause tabled by the Scottish National party. As the hon. Member for Aberdeen North (Kirsty Blackman) outlined, amendment 13 and new clause 3 would delay the commencement of these provisions until the Government had laid before the House a review of the efficacy of the conditions for BIR. I can be clear that the Government are confident of the effectiveness of this scheme. Investment using BIR increased from £197 million in 2012-13 to £837 million in 2014-15. In only three years, that has meant total investments of more than £1.6 billion in our economy since the scheme was first introduced.
Kirsty Blackman
I would very much appreciate it if the Treasury would commit to publishing that information and details of the sectors in which the money has been invested. If it does that, we will all be much happier, across the House.
Mel Stride
I thank the hon. Lady for her intervention, and I will come on to deal with the information that the Treasury is already publishing, which is very comprehensive.
As I was saying, that includes investment in the hospitality and energy sectors, and in many different types of businesses, including small and medium-sized ones. It includes investment in manufacturing and pharmaceutical science businesses in the midlands and north of England, and a £3 million investment in aerospace businesses in the north-west of England. As I outlined earlier, the independent OBR has certified that these changes do not have any cost to the Exchequer. In other words, this is money coming to this country which would not otherwise have done so. I am sure that these are investments in our country that the whole House wants to see—investment in British businesses right across the country. I therefore urge Members to reject new clause 3 and amendment 13.
Let me also address new clause 1, tabled by the official Opposition. In a similar vein to new clause 3, it would require the Government to review the conditions under which BIR is available, including estimates of the value of the relief and an analysis of the characteristics of those using it. Such a review is wholly unnecessary, as Her Majesty’s Revenue and Customs publishes much of this information already. As my hon. Friend the Member for Wealden (Ms Ghani) pointed out, in August HMRC published official statistics on non-domiciled taxpayers in the UK, which includes a commentary document and tables. This publication contains statistics on the number of individuals who are non-domiciled, and on the total income tax, capital gains tax and national insurance contributions of the non-domiciled population. Moreover, it includes information on the current number of investments and the amount invested in the UK by non-domiciled individuals using business investment relief.
To provide the report, HMRC uses information provided by taxpayers through the self-assessment process. It is impossible to determine from an individual’s tax return whether or not they have characteristics that are protected under the Equality Act. HMRC does not have the capacity or the resource to acquire such information, so it would be unduly burdensome to place on HMRC a statutory obligation that it would be incapable of meeting. For those reasons, I urge Members to reject the new clause.
Kirsty Blackman
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 15 ordered to stand part of the Bill.
New Clause 1
Review of conditions under which business investment relief is available
‘(1) Chapter A1 of Part 14 of ITA 2007 (remittance basis) is amended as follows.
(2) After section 809VO (investments made from mixed funds), insert—
“809VP Review of conditions under which business investment relief is available
(1) Within six months of the coming into force of section 15 of the Finance (No. 2) Act 2017, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the conditions under which business investment relief is available.
(2) For the purposes of this section “the conditions” means—
(a) Condition A as defined in section 809VD,
(b) Condition B as defined in section 809VF.
(3) The review shall make an estimate of the value of the reliefs granted as a result of the conditions in respect of each tax year for which the relief has been available.
(4) The review shall make an estimate of the change in the value of the reliefs granted as a result of—
(a) changes to the conditions relating to eligible hybrid companies,
(b) changes to the periods specified in sections 809VD and 809VH,
(c) changes to the grace period in section 809VJ.
(5) The review shall make an assessment of the effectiveness of the conditions in relation to the stated policy aims of the Government in relation to business investment relief.
(6) The review shall prepare an analysis of the characteristics of beneficiaries of reliefs having particular regard to—
(a) income distribution,
(b) gender and other protected characteristics under the Equality Act 2010,
(c) domicile (including deemed domicile).
(7) A report of the review under this section shall be laid before the House of Commons within one calendar month of its completion.”’—(Anneliese Dodds.)
This new clause requires HMRC to carry out a review of the conditions under which business investment relief is available, including estimates of the value of the reliefs (before and after the changes proposed in this Bill) and an analysis of the characteristics of those using the relief, including their domicile status.
Brought up, and read the First time.
Question put, That the clause be read a Second time.
The Temporary Chair (Mr George Howarth)
With this it will be convenient to discuss new clause 2—Review of changes to chargeability of trading profits to corporation tax at Northern Ireland rate—
“(1) CTA 2010 is amended as follows.
(2) After section 357WH (Allocation of Northern Ireland profits etc of firm to company), insert—
‘357WI Review of changes to chargeability of trading profits to corporation tax at Northern Ireland rate
(1) As soon as practicable after the completion of the first financial year in respect of which the Northern Ireland rate is set by the Northern Ireland Assembly in accordance with the provisions of section 357IA, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects of the changes to chargeability of trading profits to corporation tax at the Northern Ireland rate made in Schedule 7 to the Finance (No. 2) Act 2017.
(2) A review under this section shall consider in particular the effect of those changes on the extent to which companies are based in—
(a) Northern Ireland, and
(b) Great Britain.
(3) A review under this section shall also consider the effect of those changes on the extent to which the profits or losses of companies and firms are Northern Ireland profits or losses.
(4) A review under this section shall also consider the effect on employment in—
(a) Northern Ireland, and
(b) Great Britain.
(5) A report of the review under this section shall be laid before the House of Commons within one calendar month of its completion.’”
This new clause requires HMRC to carry out a review after the first year of operation of the Northern Ireland rate of the effect of the changes in Schedule 7 on the location of companies in Northern Ireland and in Great Britain, the extent to which trading profits and losses are treated as subject to the Northern Ireland rate and on employment in Northern Ireland and in Great Britain.
Mel Stride
As with my contributions earlier this afternoon, I will set out why the Government have included this measure in the Bill, before turning to new clause 2.
Clause 25 and schedule 7 make amendments to the Northern Ireland corporation tax regime. The Government are committed to supporting growth across all parts of the UK. Creating a stronger Northern Ireland economy will benefit the entire United Kingdom.
Northern Ireland faces a unique set of circumstances and challenges. That was why, in 2015, this House legislated to devolve corporation tax rate-setting powers to the Northern Ireland Assembly, subject to commencement regulations. The introduction of the regime received nearly unanimous support from Northern Ireland’s political leaders and business community. The rate-setting powers given to the Northern Ireland Assembly are another tool to help to rebalance the Northern Ireland economy by revitalising private enterprise and attracting new investment.
This clause and schedule amend the regime to allow all small companies with trading activity in Northern Ireland the opportunity to benefit from future changes in the Northern Ireland corporation tax rate. They also make changes to ensure that the regime is robust against abuse and ready for commencement once a restored Northern Ireland Executive demonstrate that their finances are on a sustainable footing.
It may help the House if I set out how the devolved rate regime has been designed to focus on incentivising genuine investment in Northern Ireland. The regime was set out in the Corporation Tax (Northern Ireland) Act 2015.
Jonathan Edwards (Carmarthen East and Dinefwr) (PC)
The Minister is making a powerful case as to why the devolution of corporation tax is a good thing for the Northern Ireland economy, but should the same case not apply to Wales and Scotland, because it creates an imbalance if one devolved Government have a set of fiscal powers that the other devolved Governments do not have?
Mel Stride
I thank the hon. Gentleman for his intervention, but there is, of course, one key distinction between Wales and Northern Ireland, and that is that Northern Ireland has a land border with the Republic of Ireland, which has a corporation tax rate of just 12.5%. It is particularly important in that context that we make these provisions.
Jonathan Edwards
The Minister makes a fair point about the land border, but large parts of Wales, including my part of Wales—the west of Wales—have a sea border with the Republic of Ireland.
Mel Stride
I do not think it is within the scope of this particular clause to start getting too much into the devolutionary settlement for Wales.
The regime was set out in the 2015 Act, which, subject to commencement regulations, will devolve corporation tax rate-setting powers to the Northern Ireland Assembly. The Government have committed to working with an incoming Northern Ireland Executive on options for commencement, including on timing and adjustments to the Northern Ireland Executive block grant to reflect tax revenues forgone by the UK Government.
There are two key features to the regime’s design. First, the devolved rate will apply only to a company’s trading profits; investment activities, which are highly mobile, are not in scope. Secondly, the Act requires large companies with a substantial trading presence in Northern Ireland to calculate their Northern Ireland profits separately from the rest of their profits. That calculation must follow internationally accepted principles for attributing cross-border profits. Broadly, that means that companies with profits generated in different tax jurisdictions must calculate their branch profits as though each branch were an independent entity. These profit attribution rules are important to make sure the regime works as intended.
An SME with 75% or more of employment time and costs in Northern Ireland would have all its trading profit taxed at the Northern Ireland corporation tax rate. An SME below the 75% threshold would have all its trading profits, including those generated in Northern Ireland, taxed at the UK corporation tax rate.
Ian Paisley (North Antrim) (DUP)
Does the Minister accept that the introduction of this will allow for the rebalancing of the Northern Ireland economy in a very beneficial way? It will allow us to generate more investment and, potentially, more private sector jobs. Of course, this corporation tax will not apply to the financial service sector, so it will not wrongly attract businesses away to Northern Ireland.
Mel Stride
My hon. Friend makes the very powerful point that this is not about brass-plating and shifting profits; it is about generating growth in a very important part of the United Kingdom.
Since we legislated in 2015, we have heard that some small businesses want the option to benefit from the Northern Ireland corporation tax rate on the proportion of their profits generated by trading activity in Northern Ireland. The changes made by clause 25 will give all SMEs trading in Northern Ireland the potential to benefit from the devolved rate, should they choose to do so. That will be done without watering down the rules, and it will ensure that the regime is focused on incentivising genuine economic activity in Northern Ireland. Like large companies, those SMEs that opt to take advantage of this measure will be required to calculate their Northern Ireland profits according to well-established principles. These changes deliver a fair outcome for small companies.
Let me be clear that under these rules a company’s trading profits will be taxed at the Northern Ireland rate only if the company has a substantial physical presence in Northern Ireland and if that is where the economic activity that generates the profit takes place.
New clause 2 would require HMRC to conduct a review of the impact of the changes in schedule 7 on the corporation tax system, the location of companies and the levels of employment across Northern Ireland and Great Britain. A mandated formal review is not an appropriate response to a regime that has been carefully designed to be robust in relation to avoidance and abuse, and one that, as I have said, builds on tried and tested rules when doing so. As with all policies, the Government will monitor the regime closely once it is commenced to ensure that it operates as intended. I urge the Opposition not to press the new clause.
Ian Paisley
Does the Minister accept that those who espouse the peace process also want to see an economic dividend post that process? Therefore, why would anyone want to vote against something that allows that economic dividend, building upon the peace in Northern Ireland?
Mel Stride
My hon. Friend makes a powerful point. This is about strengthening Northern Ireland’s economy, society and infrastructure, to the end that we all seek, which is a stronger and more united Northern Ireland.
In conclusion, these provisions include changes that will ensure that the regime is robust against abuse, in order to maintain the regime’s focus on encouraging genuine additional economic activity in Northern Ireland.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I thank the Financial Secretary for introducing this group. This is an important debate, not only for the future of Northern Ireland, but for this country’s overall approach to taxation and devolution.
We know—we have discussed it frequently throughout this process—that our country faces a substantial tax gap. The official estimate of the UK’s tax gap is at least £36 billion, up from £33 billion in 2010, but that is at best a conservative estimate, given that the Government’s definition of the tax gap excludes convoluted corporate structures, which we know are used by multinationals to minimise their tax liabilities. The view that the tax gap is underestimated is shared by the Institute for Fiscal Studies and the Public Accounts Committee. I think that we all agree that that £36 billion, and possibly more, is money that should be used to fund our public services, and that everybody should pay their fair share.
Corporation tax is an important part of the UK’s tax revenue. In 2016-17, HMRC collected £56 billion in corporation tax receipts. Although it is important that we keep the rate competitive, particularly in the light of the UK’s exit from the European Union, it is worth noting that we face a law of diminishing returns in this regard. At 19%, the UK’s corporation tax rate is already one of the lowest in Europe. We should be confident that we do not need to plunge the rate to rock bottom in order to encourage businesses to invest and domicile here. The UK plays host to a wealth of resources that enable it to be globally competitive, including our legal system, our language, our time zone, our infrastructure, our regulatory bodies and, most of all, our people.
It is equally important that Northern Ireland is equipped with the tools to compete in that international landscape, as has been brought to the fore recently with the punitive tariffs aimed at Bombardier in the United States. As the Financial Secretary has explained, the corporation tax rate has already been devolved to the Northern Ireland Assembly, through the Corporation Tax (Northern Ireland) Act 2015. Now that that legislation has been decided, it is for Northern Ireland’s politicians to work together and use those powers to see where the line lies between a lower tax rate and the broader appeal of Northern Ireland as a business destination. At present, the decision has been that 12.5% best achieves those ends. It is not my intention to revisit those arguments today, and nor would it be appropriate to do so, given the reasons already outlined.
What is relevant, and the reason Labour has proposed new clause 2, is the relationship between that rate and the rest of the UK. The gap between 12.5% and 19% represents a significant potential for arbitrage between Northern Ireland and the rest of the UK. Some businesses might base their decisions on where to domicile purely with regard to taxation, and that is a risk that we accept—indeed, we already compete with the rest of Europe on that basis. Our concern is that the Government are introducing measures that could be exploited by companies that will seek to abuse the proximity between Northern Ireland and the UK simply to divert profits and benefit from a lower tax regime, which would benefit neither the UK nor Northern Ireland.
Mr Gregory Campbell (East Londonderry) (DUP)
The hon. Gentleman spoke a few moments ago about the importance of competitiveness throughout Europe. Does he agree that the argument that he is making runs counter to the attempts to make Northern Ireland’s private sector business more competitive, when we have a difficult relationship with the Irish Republic and its very low corporation tax, which he has alluded to?
Jonathan Reynolds
I take the hon. Gentleman’s point, but I would not agree with his characterisation of the situation. We are making the case that our amendment will really benefit Northern Ireland, because if the relationship was abused and firms sought to benefit from the lower rate without investing in Northern Irish jobs or business production, that would surely defeat the purpose of having a lower corporation tax rate—that is the sole point of trying to devolve the rate to Northern Ireland. Our concern is that loosening the rules could lead to brass-plating, where UK businesses are given a loophole that allows them to domicile their businesses in lower-tax jurisdictions while they continue, in reality, to operate in the UK.
Ian Paisley
The hon. Gentleman recognises that the one sector in which the proposals might be abused, the financial services sector, is specifically precluded from taking advantage of them. Could he provide the House with an example of a sector that he thinks would abuse the rules?
Jonathan Reynolds
I do not agree with the hon. Gentleman’s assertion that only the financial services sector will seek to do that. We are proposing a very reasonable review of the measure after one year, and he has nothing to fear from such an amendment.
Labour, more than any other party in this House, has consistently made the case for a level playing field between larger and smaller businesses, but a level playing field cannot be simply an equal race to the bottom in which smaller businesses are given the same tax avoidance opportunities as larger ones. That is not to say that the rule changes will necessarily lead to a flight of small and medium-sized enterprises rushing to domicile in Northern Ireland. We note that the majority of enterprises operating in the UK are honest and committed to paying their fair share. We should be vocal in praise of that contribution and its role in making the UK economy a success. However, opening what could become a loophole is significant, and it is critical that we protect against unforeseen consequences.
At this stage we have little indication of the potential impact of this measure, because behavioural effects are notoriously unpredictable to model. For that reason, we have tabled an amendment that calls on the Government to review the measure as soon as is practicable after the completion of the first financial year in which it has been fully in force. The report of that review would be presented to the House within one month. That would allow us to understand fully the impact of chargeability, see how companies are responding and react accordingly if the measure is being treated as a loophole. In turn, if evidence shows that the measure is forging stronger business links between Northern Ireland and the rest of the UK, and that the impact to the Exchequer is minimal, at least a proper assessment will have been made.
We are at a critical time when the UK economy simply cannot afford to lose revenue to tax avoidance. We have heard in the Chamber many times the arguments about why it makes little sense to drop corporation tax rates to below European averages. To do so betrays a lack of confidence in the many attractions of the UK as a domicile for ambitious companies that seek to grow their businesses. We should not be compounding revenue loss by opening a back door to even lower corporation tax rates without a framework in place to assess the impact properly.
Jonathan Edwards
I am sure that the hon. Gentleman agrees that one of the biggest economic challenges that we face is the huge and gross geographical wealth inequality within the British state. Is the Labour position that fiscal devolution has no part to play in the strategy for dealing with geographical wealth inequalities?
Jonathan Reynolds
The hon. Gentleman is not correct in that assessment. I certainly agree with him that regional disparity in the UK is one of the principal economic challenges that we face, but I do not agree that the solution is a race to the bottom in corporation tax rates between different parts of the UK. That would be neither effective nor the right way forward, and it would almost certainly fail to address the problems that he raises.
I put it to the House that new clause 2 is a sensible, pragmatic and effective proposal to deliver objectives that are widely shared by Members from all parts of the House: a prosperous Northern Ireland, an effective partnership across the nations of this country and a competitive UK with strong public finances supporting quality public services.
Sammy Wilson (East Antrim) (DUP)
First, I welcome the proposal in the Finance Bill, which adds to the previous decision about devolving corporation tax to Northern Ireland and giving us autonomy to make decisions about what the appropriate level may be.
I am a bit bemused by new clause 2. The argument is that devolving corporation tax to Northern Ireland and our having a different rate will somehow or other open the door to abuse. That objection could of course have been made, and more appropriately made, when the decision was made to devolve the tax in the first place. If it is open to abuse, it will create the kind of problems described by the shadow Minister, but if that were the case, I cannot understand why these issues were not raised at the time we voted on the principle of devolution. I suspect this is more to do with the fact that the Labour party is opposed to any reduction in corporation tax.
Let me address a couple of the points that have been made about extending this to small and medium-sized enterprises. The Minister made it quite clear that the criteria are, first, that they have to have a physical presence in Northern Ireland; and, secondly, that they have to register profits commensurate with the activities they engage in in Northern Ireland. That of course will have to be shown—by accounts, by employment, by the physical infrastructure that such a business would have in Northern Ireland—so there are already safeguards anyway. It can be measured whether an SME is simply moving paper money to register profits in Northern Ireland, or whether it is creating genuine jobs.
The biggest safeguard will be the decisions made by the Executive in Northern Ireland—if, indeed, an Executive is ever up and running again in Northern Ireland. We hope there will be, but that is one of the problems at the moment. It is not in the interests of the Northern Ireland Government to allow the situation that has been described by the Labour spokesman, for the simple reason that the payment for the devolution of corporation tax comes from the block grant. If we allow companies simply to migrate their business to Northern Ireland, register their accounts in Northern Ireland and declare their profits in Northern Ireland, but they do not actually create any physical activity in Northern Ireland, we will have to pay the amount of tax lost from the block grant. There will be no better policeman or policewoman of this than the Northern Ireland Executive themselves.
The review asked for—if there is any point in a review after a year—is therefore superfluous. First, there is the evidence that the company has to produce, and then there will be the scrutiny of HMRC. When we negotiated the devolution of corporation tax, compliance costs were built in, because of the additional scrutiny. It will also be in the interests of the Northern Ireland Executive to ensure that the system is not abused. For all those reasons, I believe that the new clause is superfluous. It is not needed, and we will therefore vote against it.
Emma Little Pengelly (Belfast South) (DUP)
I want to raise one additional point. My hon. Friend the Member for East Antrim (Sammy Wilson) has set out very well a number of our concerns about the proposed new clause. We have looked at this issue in the Northern Ireland Assembly, and I had the privilege of being the Chairperson of the Finance Committee when we considered the detail of it. We listened to concerns from small business and to those outlined by the Opposition spokesperson, but the key objective is to attract new business and jobs to the UK. We do not necessarily want movement from the rest of the UK to Northern Ireland. This is about foreign direct investment, trying to create new jobs and contributing positively to the economy of Northern Ireland and of the UK.
In Northern Ireland, we have looked at this issue for many years. It has been scrutinised by committees. We have had a range of consultants and others look at the detail of the proposal because we want it to work. As my hon. Friend the Member for East Antrim said, we do not want it to be simply an exercise in brass-plating or anything like that. We want jobs, employment and further investment in Northern Ireland.
One of the big issues in terms of the movement and type of jobs we want is certainty. Certainty is essential if we are to get commitment from companies—hopefully, big companies—to move into the UK for the first time and to invest in plant and staff recruitment. The proposal in new clause 2 to have a review after 12 months will create uncertainty. What international business would look at the UK and invest in plant, employees and recruitment when one of the big incentives to moving—the lower corporation tax rate—could be removed following a review after just 12 months? It is essential that we remain positive about the measure and have certainty about it. I reiterate: we want new jobs for the UK, and we want them in Northern Ireland.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
New Clause 2
Review of changes to chargeability of trading profits to corporation tax at Northern Ireland rate
‘(1) CTA 2010 is amended as follows.
(2) After section 357WH (Allocation of Northern Ireland profits etc of firm to company), insert—
“357WI Review of changes to chargeability of trading profits to corporation tax at Northern Ireland rate
(1) As soon as practicable after the completion of the first financial year in respect of which the Northern Ireland rate is set by the Northern Ireland Assembly in accordance with the provisions of section 357IA, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects of the changes to chargeability of trading profits to corporation tax at the Northern Ireland rate made in Schedule 7 to the Finance (No. 2) Act 2017.
(2) A review under this section shall consider in particular the effect of those changes on the extent to which companies are based in—
(a) Northern Ireland, and
(b) Great Britain.
(3) A review under this section shall also consider the effect of those changes on the extent to which the profits or losses of companies and firms are Northern Ireland profits or losses.
(4) A review under this section shall also consider the effect on employment in—
(a) Northern Ireland, and
(b) Great Britain.
(5) A report of the review under this section shall be laid before the House of Commons within one calendar month of its completion.”” —(Jonathan Reynolds.)
This new clause requires HMRC to carry out a review after the first year of operation of the Northern Ireland rate of the effect of the changes in Schedule 7 on the location of companies in Northern Ireland and in Great Britain, the extent to which trading profits and losses are treated as subject to the Northern Ireland rate and on employment in Northern Ireland and in Great Britain.
Brought up, and read the First time.
Question put, That the clause be read a Second time.
Finance Bill (First sitting)
Tuesday 17th October 2017
(7 years, 1 month ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 October 2017 - (17 Oct 2017)
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 10 / Noes: 3 - Question accordingly agreed to.
The Chair
Before we begin, perhaps I should make a few preliminary announcements, which may be helpful to the Committee. Members may, if they wish, remove their jackets during Committee sittings. I remind them that no refreshments other than the water provided should be consumed in the Room. Please would all Members ensure that mobile phones, pagers and so on are turned off or switched to silent mode during sittings. Document boxes are provided, for Members to keep their Bill papers in between sittings if they wish. It would be much appreciated if they could return the boxes to the cupboard at the end of the sitting.
As a general rule, my fellow Chair and I do not intend to call starred amendments that have not been tabled with adequate notice. The required notice period in a Public Bill Committee is three working days; therefore amendments should be tabled by the rise of the House on Monday for consideration on Thursday, and by the rise of the House on Thursday for consideration on Tuesday.
Not everyone is familiar with the procedure in Public Bill Committees, so it may be helpful if I briefly explain how we will proceed. The Committee will first be asked to consider the programme motion on the amendment paper, for which debate, if it is required, is limited to half an hour. We will then proceed to a motion to report any written evidence. Then we will begin line-by-line consideration of the Bill.
The selection list for today’s sitting, which is available in the Room, shows how the amendments selected for debate have been grouped together for debate. Amendments grouped together are generally on the same or a similar and related issue. The Member who has put their name to the leading amendment in the group is called first. Other Members are then free to catch my eye in order to speak to the amendments in that group. A Member may speak more than once, depending on the subjects under discussion. At the end of the debate on the group of amendments, I will call the Member who moved the lead amendment again. Before they sit down, they will need to indicate whether they want to withdraw the amendment or seek a decision. If any Member wants to press any other amendment in the group to a Division, they will need to let me know in advance.
The assumption is that the Government wish the Committee to reach a decision on all Government amendments. Please note that decisions on amendments take place not in the order they are debated, but in the order in which they appear on the amendment paper. Decisions on new clauses will therefore be taken at the conclusion of line-by-line consideration of the Bill.
Where a group includes the words “clause stand part”, that means that Members should make any remarks they want to about the content of the clause during the course of the debate. There will then be no separate debate on the question that the clause should stand part of the Bill. Where it is already indicated on the selection list, Mr Walker and I will use our discretion to decide whether to allow a separate stand part debate on individual clauses or individual schedules. Clause stand part debates begin with the Chair proposing the question that the clause shall stand part of the Bill. There is no need for the Minister or any other Member to move that the clause stand part of the Bill.
Ordered,
That—
(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 17 October) meet—
(a) at 2.00 pm on Tuesday 17 October;
(b) at 11.30 am and 2.00 pm on Thursday 19 October;
(c) at 9.25 am and 2.00 pm on Tuesday 24 October;
(d) at 11.30 am and 2.00 pm on Thursday 26 October;
(2) the proceedings shall be taken in the following order: Clauses 1 to 4; Clauses 6 to 14; Schedule 1; Clause 16; Schedule 2; Clause 17; Schedule 3; Clause 18; Schedule 4; Clauses 19 and 20; Schedule 5; Clause 21; Schedule 6; Clauses 22 to 24; Schedule 7; Clauses 26 to 29; Schedule 8; Clauses 30 and 31; Schedule 9; Clauses 32 and 33; Schedule 10; Clause 34; Schedule 11; Clause 35; Schedule 12; Clauses 36 to 55; Schedule 13; Clauses 56 to 61; Schedule 14; Clauses 62 and 63; Schedule 15; Clauses 64 and 65; Schedule 16; Clause 66; Schedule 17; Clause 67; Schedule 18; Clauses 68 to 72; new Clauses; new Schedules; remaining proceedings on the Bill;
(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 26 October.—(Mel Stride.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Mel Stride.)
The Chair
Copies of any written evidence that the Committee receives will be available to Committee members.
Clause 1
Taxable benefits: time limit for making good
Question proposed, That the clause stand part of the Bill.
The Financial Secretary to the Treasury (Mel Stride)
May I say at the outset what a pleasure it is to serve under your chairmanship, Mr Howarth? I look forward to serving under the chairmanship of Mr Walker in due course, and to having a constructive and positive engagement with all Committee members over the next couple of weeks.
Clause 1 makes changes to ensure that there is a clear and consistent date for making good on non-payrolled benefits in kind. Those changes will provide greater clarity and help employers and employees to understand their obligations.
As the Committee will be aware, a benefit in kind is a form of non-cash employee remuneration. The cash equivalent of a benefit in kind is subject to tax and employer national insurance contributions. Making good is where an employee makes a payment in return for a benefit in kind that they receive. A making good payment has the effect of reducing the taxable value of a benefit. For example, a television manufacturer might provide an employee with a television with a taxable value of £1,000; if the employee makes good by repaying the employer £1,000, the taxable value is reduced to nil.
There is currently a range of dates by which employees need to make good on benefits in kind, and for some no fixed date is prescribed in legislation. Employers, large accountancy firms and representative bodies have told us that that often causes confusion and have asked for greater clarity about the deadline for making good. Clause 1 will set the date for making good for non-payrolled benefits in kind as 6 July following the end of the tax year in which the benefit in kind is provided. That is the date by which employers have to notify Her Majesty’s Revenue and Customs of any taxable benefits in kind on their P11D form. For that reason, it is also the date by which many employees already make good in practice. This approach has been greatly welcomed by employers.
The change will take effect for benefits in kind that give rise to a tax liability for the 2017-18 tax year and all subsequent tax years. This small but sensible change will bring greater clarity for businesses.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clause 2
Taxable benefits: ultra-low emission vehicles
Anneliese Dodds (Oxford East) (Lab/Co-op)
I beg to move amendment 13, in clause 2, page 5, line 7, at end insert—
‘(5A) After section 170 (Orders etc relating to this Chapter), insert—
“170A Review of changes to appropriate percentages etc for cars
(1) Prior to 31 March 2018, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the forecast effects of the amendments made by subsections (1) to (4) of section 2 of the Finance (No. 2) Act 2017.
(2) The review shall consider in particular the effects on—
(a) the use of zero and ultra-low emission cars as company cars, and
(b) air quality in towns and cities
in each year from 2020-21 to 2030-31.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”’
This amendment would require HMRC to undertake a review of the changes to be made by Clause 2 in advance of their implementation.
Anneliese Dodds
First, I apologise to colleagues —I am full of the cold, and I had a nose bleed this morning given the excitement of the topics that we would be discussing, but I hope that I will be able to struggle through.
We tabled amendment 13 because we believe that it would be sensible for HMRC to undertake a review of the changes to be made by clause 2 in advance of their implementation.
Mel Stride
I welcome the hon. Lady to her position. I am sorry about her cold, and about the excitement that caused her nose bleed. I assure her that there will be no further nose bleeds, because there will probably not be much excitement as the Committee continues, but that is where we are.
Before I respond to what the hon. Lady said about amendment 13, let me remind the Committee about what the clause seeks to achieve. Clause 2 changes the taxation of company cars to support the uptake of the cleanest zero and ultra-low emission cars. As the Committee will be aware, the taxation of company cars is linked to carbon dioxide emissions to promote the purchase of environmentally friendly vehicles. The appropriate percentages for company car tax increase each year in order to ensure that there is always an incentive for company car drivers to choose the most environmentally friendly vehicles.
By 2020-21 the current ultra-low emission vehicle bands in the company car tax regime will no longer support the uptake of the cleanest cars using the latest technology. The changes being made by clause 2 will address that by updating the current two ultra-low emission vehicle bands. From April 2020, the graduated table of company car tax bands will include a differential for cars with emissions of 1 to 50 grams per kilometre based on the zero-emission range of the car. A separate zero-emission band will also be introduced. In addition, the clause will increase the appropriate percentage for conventionally fuelled cars by 1 percentage point in 2020-21, to sharpen the incentive for people to choose ultra-low emission vehicles instead of more heavily polluting ones.
The changes in the clause mean that in 2020-21 a basic rate taxpayer driving a popular battery-powered company car, such as a Nissan Leaf, will be £720 better off compared with 2019-20. That is a saving of £750 per year compared with a basic rate taxpayer choosing an average petrol-powered car such as a Vauxhall Corsa. Legislating in advance will provide certainty and stability for industry and give companies and employees the chance to make informed choices about the future tax implications of their company car.
Amendment 13 proposes that the Chancellor should publish a report reviewing the impact of these changes, focusing on the effects on the use of zero and ultra-low emission vehicles as company cars, as well as air quality in towns and cities in each year from 2020 to 2030-31. I appreciate that the hon Members are trying to ensure that policies are being assessed to ensure they are supporting the uptake of greener vehicles, but a report on our forecasts is not the way to achieve that.
Company car tax rates are set three years in advance, so that companies and employees are able to make informed choices about the future tax implications of their company car. Of course, we have had to take a view of how the market will develop, including for ultra-low emission vehicles, when we set the rates. However, the amendment is asking us to provide a review of the effect of the measure before it has been implemented. It is also not appropriate for the Government to provide commentary on their forecasts, as that could lead to uncertainty that we could make last-minute changes to our proposals. That would go against our policy to announce CCT rates three years in advance for taxpayer certainty.
Hon. Members should also bear in mind that the 2020-21 rates have come out of an extensive consultation with our stakeholders that we carried out in the summer of 2016 into how CCT should be structured. That consultation looked specifically at how to encourage company car drivers to choose the cleanest vehicles. That is what clause 2 seeks to achieve by updating the current two ultra-low emission vehicle bands. Increasing the incentive for people to purchase cleaner cars will help to ensure we meet our legally binding carbon emissions and air quality targets, helping to improve the air quality of our towns and cities and protect the environment for the next generation. Of course, we continue to review the uptake of ultra-low emission vehicles as part of our wider strategy on improving air quality. On that basis I believe that the amendment is unnecessary, and I ask the hon. Lady to withdraw it.
To conclude, the clause strikes the right balance between supporting the purchase and manufacture of ultra-low emission cars, and ensuring that all company car drivers and their employers pay a fair level of tax. I therefore commend the clause to the Committee.
Anneliese Dodds
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 2 ordered to stand part of the Bill.
Clause 3
Pensions advice
Peter Dowd (Bootle) (Lab)
I beg to move amendment 14, in clause 3, page 5, line 22, leave out “£500” and insert “£1,000”.
This amendment would increase the income tax exemption in relation to pensions advice from £500 to £1,000.
The Chair
With this it will be convenient to discuss the following:
Amendment 11, in clause 3, page 6, line 16, at end insert—
“308D Review of use of provisions of section 308C
(1) Within one year of the passing of the Finance (No. 2) Act 2017, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the use of the provisions of section 308C in tax years 2017-18 and 2018-19.
(2) The review shall consider in particular—
(a) the use of the relief by persons over 55, and
(b) the use of the relief by women born on or after 6 April 1950.
(3) The Commissioners shall consult the Financial Conduct Authority in carrying out the review under this section.
(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”
This amendment would require HMRC to undertake a review of the use of the new income tax exemption for pensions advice in the first two years of its operation.
Amendment 15, in clause 3, page 6, line 16, at end insert—
“308D Review of effectiveness of provisions of section 308C
(1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effectiveness of the operation of the provisions of section 308C in tax years 2017-18 and 2018-19.
(2) The review shall consider in particular—
(a) the estimated value of the exemption in each tax year,
(b) the effects of the Conditions in subsections (6) and (7) , and
(c) the effects of the provisions on the availability and accessibility of relevant pensions advice.
(3) The Commissioners shall consult the Financial Conduct Authority in carrying out the review under this section.
(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”
This amendment would require HMRC to undertake a review of the effectiveness of the new income tax exemption for pensions advice in the first two years of its operation.
Clause 3 stand part.
Peter Dowd
It is a pleasure to serve under your chairmanship, Mr Howarth. The extent, nature and quality of advice received by a person wanting a pension is of great importance and significance. That is particularly the case considering that, in 2017, 30% of the working age population is at state pension age or older. The Department for Work and Pensions recently summarised perfectly the importance of pensions advice on its website:
“For most people in the UK, their pension savings will be their largest financial asset, which they will save towards over the course of their working lives”.
That gets to the nub of the matter. Hopefully, most of us will be saving towards a pension for the majority of our lives and we are ultimately relying on that to secure a good-quality standard of living when we retire. Therefore, the advice received matters a great deal.
For many, the securing of pension advice is, given the nature of their employment, for example, not as problematic. People who work in certain sectors, such as the finance sector, on the whole will find that their companies automatically cover pension advice. For others, the cost of such advice is minimal in the grand scheme of things. However, it has to be said that, for those who do not have much disposable cash and whose retirement is dependent on making wise investments with their pensions and ensuring that they save the right amount, good-quality advice is the key to a more secure retirement. I am sure that that will be greeted with unanimous nodding from Government members, if nothing else.
As Committee members know, the financial advice market review was launched in August 2015
“to explore ways in which government, industry and regulators could take individual and collective steps to stimulate the development of a market that delivers affordable and accessible financial advice and guidance to everyone.”
That is a laudable endeavour if ever there was one. It set out a strong and compelling case that there is a retirement “advice gap” for those without significant wealth. Research by Unbiased, an organisation of Financial Conduct Authority-regulated advisers who are independent of product providers, found that those who sought retirement advice increased their retirement savings by an average of £98 a month. However, less than one third of people have accessed financial advice on their pension. The financial advice market review found that many people perceived financial advice to be unaffordable or “not for people” like them.
The advice gap is not getting any smaller. Although the introduction of the exemption for the first £500-worth of pensions advice to employees is welcome, particularly as it replaces the provisions that limited the advice that people could receive—the cap was set at £150—we think that that does not go far enough. Most people in the pension advice sector would reasonably point out that £500-worth of tax-free advice is a relatively small figure given the importance of the decisions that people face. There are genuine questions to be asked about the impact that such a figure will have on the current pensions advice gap and, importantly, on the quality of that advice.
Kelvin Hopkins (Luton North) (Lab)
My hon. Friend is absolutely right about the affordability of pensions advice, but the trustworthiness of pensions advice is also an issue. Even I—I am fairly numerate—do not trust the advice I am given, although fortunately the Independent Parliamentary Standards Authority gives better advice than most. Many ordinary people not only think that it is not for the likes of them and are rather nervous, but fear that they are not given correct and disinterested advice.
Peter Dowd
That is a very valid point that people should listen to. As I said before, that goes to the nub of the situation.
In the light of that, I have a number of very reasonable amendments that the Committee members certainly will agree are pertinent, which need to be asked for and which need answers. Perhaps the Minister, who I know is the epitome of helpfulness, could explain to the Committee how the figure of £500 was reached, who was consulted on the figure, and the basis of the figure, in terms of the pensions advice market—or is the figure arbitrary? Dare I say, is there a smokescreen?
I am sure that the Government do not want to be seen to be acting without providing adequate funds to address the root problem. The cost of financial advice will inevitably inform the value of the advice. That is why we have put forward the amendment, which would raise the threshold for tax-free pension advice from £500 to £1,000. Pensions advice is, after all, the greatest protection against the threat of fraudsters keen to prey on some of those in vulnerable positions. Because we are talking about large sums of money that people rarely engage with until the end of their lives, pension savings are often an active target for scams.
We must recognise that as technology makes it easier for us to access our pension pots, it also increases the risk of fraud. This is also true of the reforms brought in by the Government under the previous Chancellor, giving pensioners greater freedom to withdraw a portion of their pensions earlier. That has been a benefit to some pensioners, although it has brought with it substantial risks and the problems that we continue to see today. The Money Advice Service website outlines the common signs of pension fraud. They include unsolicited approaches by way of a phone call, text messaging or emails. Other practices include a firm not allowing a person to call it back, and people being pressurised and forced into making a quick decision, or being encouraged to transfer pensions quickly and to send documents by courier. Contact details provided are mobile phone numbers only, or a post office box address.
Other tactics include claiming to be a person who can help to unlock a pension before the age of 55, which is sometimes known as pension liberation or referred to as a personal loan. This is possible only in very rare cases, such as very poor health. People say they know of tax loopholes, or they promise extra savings. They offer a suggested high rate of return on investments, but claim that the risk is low.
The Money Advice Service recommends that people looking for pensions advice check against the FCA register of approved pension advisers. The Opposition welcome the loosening of the advice that an individual can claim under the tax-free allowance, as I indicated earlier. Over the past few years, it has become apparent that people not only are concerned about the level of savings in their pensions, but have taken a greater interest in where their pension savings are being invested. Of course this is a good thing, and ultimately pension funds should be accountable to the person whose savings they invest.
All these issues that I have raised so far summarise the Opposition’s concerns about this clause and why we have put forward an amendment that would require a review of the effectiveness of the tax-free relief in the years 2017, 2018 and 2019. It is important that the Government accept the review, rather than rushing ahead with further reforms that may be considered tinkering around the edges. We are suggesting an increase from £500 to £1,000, and a review of the allowance system in due course.
Kirsty Blackman (Aberdeen North) (SNP)
It is a pleasure to take part in another Finance Bill Committee, and I am looking forward to another one coming later this year. It feels like we have been discussing this one for quite some time, so I am glad to finally be at the Committee stage in a Committee Room. Thank you for your chairmanship, Mr Howarth.
I wanted to highlight our amendment on this. There have been a huge number of changes in the pensions landscape in relatively recent years. In my working lifetime, we have seen a move away from a final salary pension scheme to career average for the majority of people, even in the public sector. We have seen changes to things such as the lifetime individual savings account and the ability to withdraw pensions. Those are pretty significant changes in the landscape; pensions for people my age look very different from how they looked not that many years ago.
We have also seen changes to the Women Against State Pension Inequality issue, and the equalisation problem. A number of people have come through the door of my surgery and talked to me about how they have been caught by the WASPI issue. If they had had different pensions advice, they would not have retired in the way they did. More than one person who took early retirement now finds that they are caught by the WASPI issue when they should have retired under ill health, which would have given them a completely different outlook on their pensions. If they had had more appropriate advice when they were deciding when to retire, they would have been much better off.
I welcome the Minister’s proposal to make the first £500 of pension advice tax-free; that is an important change and one that we all generally agree with. I agree with the shadow Minister, however, who asked whether £500 is the most appropriate amount. Should it be £1,000? Should it be less? The amendment we have put forward specifically asks about the issues for women born on or after 6 April 1950, because they are the ones who have been caught by this WASPI issue. I am keen to see an increased uptake of pensions advice by those women, because for some of them changing the way in which they retire would make a difference.
Those women have been failed by the system. They have been failed by the Government, who have moved the goalposts and changed the date on which they expected to retire. Some of them retired not long ago and were completely unaware of the change. Those are people who would have read every bit of paper that came through their door. A medical secretary came to my surgery the other day. A medical secretary is someone very diligent about reading bits of information that come through the door, particularly about financial matters that are important for her future, and I believe that she would have chosen a different route to retirement if she had had appropriate advice, and if she had known what would happen on state pension equalisation and what would happen to her.
David Linden (Glasgow East) (SNP)
Does my hon. Friend agree that this Government have a pretty dire record on protecting pensioners, not least on the WASPI issue, but even on the winter fuel payment?
Kirsty Blackman
That is absolutely correct; I have seen people come through my surgery door to complain about that as well. I did not quite realise the difference in temperature between London and where I live until I became an MP. In London, I could quite easily not have the heating on at all through the entire year, whereas in Aberdeen my heating is on in September, or even earlier. Heating costs significantly more, so the winter fuel payment is hugely important for a number of my constituents and makes a significant difference to their lives. Those people are in fuel poverty; they have been failed by the system, and it is important to note that.
I will not stretch this out too much, but I must be clear that a number of people have been failed by changes to the goalposts. Those changes might be in how their pension is structured and what kind of pension they will get in the end because of movements away from final salary pensions, or because their state pension age has been moved, or because of things like the Government’s wonderful lifetime ISA, which means that if someone becomes sick, their lifetime ISA is considered a savings pot for benefits and held against them when they try to claim benefits. Therefore, a lifetime ISA cannot be seen as something that can be used instead of a pension, because it does not provide the level of safeguards that a real, proper pension pot does.
Ruth George (High Peak) (Lab)
The hon. Lady makes some valid points, as did my hon. Friend the Member for Bootle. My question is: given that Which? uncovered back in 2015, the fact that the average cost of independent retirement advice on a £100,000 pension pot was £1,863, does she feel that £500 is an appropriate limit for tax relief?
Kirsty Blackman
I thank the hon. Lady for her intervention, which highlights the issue. It would be useful to hear from the Minister about why £500 has been chosen, given that a £100,000 pension pot is not the biggest of pension pots and some people will have more in their pension pot than that. We need to hear from the Minister the reasons behind choosing that figure. It would also be useful to hear about how this might affect those women caught up in and disadvantaged by the Government’s changes to the state pension age, particularly those who have not been told about these changes.
Mel Stride
I welcome the hon. Member for Bootle and the hon. Member for Aberdeen North to the Committee and the part that they will play in the debates that lie ahead.
Before I respond to some of the detailed points raised, including the amendments, I will set out the purpose of clause 3. As we have heard, the clause introduces a new income tax exemption to the cover the first £500-worth of pensions advice provided to an employee in a tax year. That will increase the affordability and accessibility of financial advice for those saving for retirement through a workplace pension.
The success of the Government’s auto-enrolment policy means that more people than ever are saving into a workplace pension scheme, as the hon. Lady recognised. There has been quite a change to the general territory of pensions. On top of this, the Government’s historic pension flexibility reforms have given people better access to their retirement savings and control over their money, but with more money and more options, individuals may have a greater need for professional financial advice.
The recent financial advice market review conducted by HM Treasury and the Financial Conduct Authority concluded that there is a particular advice gap in relation to pensions. The Government are keen to ensure that financial advice is accessible and affordable to consumers, especially those nearing retirement. We want to encourage employers to provide advice to their employees to help them to make informed choices about what to do with their pension savings.
As I said, the changes made by the clause will introduce a new tax exemption to cover the first £500-worth of advice in a tax year. It will apply to advice provided to an employee on pensions savings, and on the general financial and tax issues relating to pensions. The exemption applies whether the employer pays or reimburses the employee for the cost of that advice.
Amendment 14 would double the tax exemption to cover the first £1,000-worth of pensions advice provided to an employee in a tax year. We believe that £500 is an appropriate amount. As the hon. Member for Bootle pointed out, that more than triples the current exemption. It also balances the cost to the Exchequer with the objective of encouraging more employers to provide access for their employees to affordable advice. Increasing the tax exemption to cover the first £1,000 also risks inflating the market and making advice too expensive for employers and employees. I can report that we are already seeing the emergence of new forms of tailored advice at a more accessible price of about £500.
The hon. Gentleman spoke about consultation. We have not formally consulted on the changes. As he pointed out, the matter was covered by the financial advice market review consultation, which received 268 responses. Respondents supported the introduction of tax measures to help consumers to afford financial advice. A wide range of stakeholders responded, including employers, individuals and financial services firms. The FAMR also conducted regional roundtables and sought the views of an advisory panel of industry and consumer experts. Consultation on the measure has been deep and meaningful.
On the question whether £500 is the correct amount, as I have explained, this is a tripling of the amount hitherto available. In addition, each employer can utilise the £500 exemption, so an employee who works for two companies may be provided advice by each and benefit from two allocations of the exemption. Although advice can be more expensive, the Government expect more affordable advice propositions to be launched as a direct result of the FAMR. For example, in May 2016 the Financial Conduct Authority launched its advice unit, which will provide regulatory support to firms developing cheaper, automated advice propositions.
The hon. Gentleman also raised the important issue of protections against pension fraud. The important point to bear in mind is that this measure covers all formats of pensions advice, as long as the advice is regulated financial advice delivered by an FCA-authorised adviser. I urge the hon. Gentleman to withdraw the amendment.
Kirsty Blackman
The Minister said the effectiveness of the provisions will be kept under review. Will he commit to ensuring that the review is published at some point?
Mel Stride
As I said, the FAMR body will be conducting a review, which is expected to be published in 2019, and the Government will keep those matters under review on an ongoing basis, as we do all measures of taxation, whether impositions or reliefs.
Peter Dowd
It is crucial that we send the message that the Government are serious about helping people with their pension advice. Although the figure has gone up from £150—a fairly small amount in itself—to £500, we believe that still does not send the proper message about seeking sound advice. Given that, and notwithstanding the Minister’s assurances, we will press the amendment increasing the figure to £1,000 to a vote.
Question put, That the amendment be made.
Peter Dowd
Given the assurances from the Minister, no, Mr Howarth.
Clause 3 ordered to stand part of the Bill.
Clause 4
Legal expenses etc
Peter Dowd
I beg to move amendment 16, in clause 4, page 9, line 23, at end insert—
‘(7A) After section 716B (Employment intermediaries, etc), insert—
“716C Review of effectiveness of changes to reliefs for legal expenses
(1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effectiveness of the changes made to this Act by section 3 of the Finance (No. 2) Act 2017.
(2) The review shall consider in particular the estimated value of the additional relief provided as a result of the changes in each tax year.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.””
This amendment would require HMRC to undertake a review of the effectiveness of the changes relating to relief in connection with legal expenses in Clause 4.
Peter Dowd
We all agree that the current model of legal expenses or indemnity insurance for employees is wholly inadequate to the modern workplace. It is worth getting a plug in here in relation to the household insurance that people have for when they wish to defend their position in court, whether criminal or civil. I have experience of some of these policies not being fit for purpose. That goes to the heart of some of these issues, although it is not directly related. I am sure that other Members have had people come to them with insurance policies that they bought thinking they would cover them for this, that or the other, only to find that they are not fit for purpose. It is worth this Committee sending the message out that some of those policies are not up to scratch.
Getting back to the point, under the current system, only an employee who has had an allegation made against them can claim for legal expenses, which will be deducted from their earnings. Potentially, if a person is called as a witness at a public hearing, he or she will immediately be put out of pocket for any legal expenses. Similarly, if an employee is to give evidence at a public hearing, perhaps in one of our Committee Rooms in this building, under the current system they will be out of pocket if they need legal counsel. That is a deterrent to both employee and employer. The measure would tidy up and expand the current, rather vague, provision to cover employees giving evidence at public hearings, which we welcome; however, I have a number of questions.
How many employers will the new measure cover? Will it cover all employers? How extensive is it? Are any particular sectors affected by the measure? What is the estimated cost of such a measure to the Exchequer? Does the measure include cover for employment tribunals? That has been a bone of contention in the past few months, in the light of the Government’s introduction of quite significant fees for people making employment tribunal claims.
Kelvin Hopkins
There is evidence that thousands of people have been deterred from bringing a case to employment tribunals simply because of the fees.
Peter Dowd
My hon. Friend makes an important point. That is why it is important to tease out the issues. People get confused and deeply worried about these matters, so we need clarity.
Our concern is that the measure will, in essence, be used as a tax break for employers, to the detriment of employees. I am not saying that that is the intention, but it is important to get clarity. Given the lack of detail, we believe that a review of the impact of the changes on the coverage of legal expenses is in order. It would focus specifically on the effectiveness of the measure, the value of the relief and, of course, how many employers and employees it brings within its purview. I reaffirm the point: it is important that this area is clarified and that people know the direction of travel, which is why we moved the amendment, to keep tabs on the proposal.
Mel Stride
Before I address Labour’s amendment 16, I will set out the purpose of clause 4.
The clause makes changes to ensure fair and consistent tax treatment for employees who receive legal support from their employer. Currently, employers may provide legal support or a legal indemnity insurance to their employees tax and NICs-free but, as the hon. Member for Bootle rightly points out, that only applies when employees have had allegations made against them in connection with their employment. Construction workers, nurses or surveyors, for example, may have legal indemnity insurance to provide legal advice in case they are accused of negligence. No equivalent tax treatment for relief is available in relation to proceedings in which no allegation has been made against the employee, such as when an employee is asked to give evidence before a public inquiry.
The changes made by the clause will extend the existing provisions to correct that unfairness. The relief will be made available for expenses incurred in employment-related proceedings where no allegation has been made against the employee. In addition, the clause extends a relief for individuals on termination of their employment or for individuals now deceased, so that a deduction is allowable if the relevant costs are met by the employer on behalf of the individual.
The hon. Gentleman asked some specific questions, in particular about the cost to the Exchequer of the measures, which will in fact be negligible. We expect fewer than 1,500 employees in total to require the benefits of the measure.
As we have heard, amendment 16 would require HMRC commissioners to complete a review before 30 June 2019 of the effectiveness of the changes. Such a review would be disproportionate. As I have explained, this is an important but small change to correct an unfairness. As there is no tax to pay, employers do not need to report information about the legal support or legal indemnity insurance provided to their employees. Indeed, it would be burdensome for employers to have to provide such information simply for the purposes of the review sought by the hon. Gentleman. I urge the Committee to resist the amendment.
The Government acknowledge that legal inquiries can be a challenging and unfamiliar time for employees. The clause will make the system fairer by extending the existing relief for all employees who may require legal advice, helping to ensure that they get the support they need. I therefore commend the clause to the Committee.
Peter Dowd
Again, I appreciate the Minister’s explanations and assurances to some extent, but this is one of those areas that is of importance to people. It is very technical, but teasing the issues out is important. A review might be of specific areas, but reviews often bring up other issues and signpost for us where regulations or the law may need to be changed or tightened. For that reason, it is important for us to send the message that this is something that we will review. Notwithstanding the assurances given, I will press the amendment to a vote.
Question put, That the amendment be made.
Mel Stride
Clause 6 makes changes to simplify the PAYE settlement agreements process, by allowing employers to propose PAYE settlement agreements without the need to agree that with an officer of Revenue and Customs beforehand. PAYE settlement agreements, or PSAs, were introduced in the 1990s as an administrative easement for employers and HMRC. They allow employers to settle, in a single payment, the income tax liability on behalf of their employees for certain benefits-in-kind and expenses.
In their 2014 review of employee benefits and expenses, the Office of Tax Simplification highlighted a number of issues with the PSA process. In response, the Government launched a consultation in the summer of 2016 on proposals to simplify the process for arranging, and clarifying the use of, PAYE settlement agreements. In line with the Office of Tax Simplification’s recommendations, the changes being made by clause 6 will simplify the PSA process. Employers will no longer be required to submit a request in advance of their year-end reporting obligations. Instead, they will be able to submit their PSA request at the year end and make ad hoc requests throughout the year. It also removes the need for PAYE settlement agreements to be agreed with an officer of HMRC. In addition, HMRC will develop a digital tool to replace the submission of paper returns. HMRC’s guidance will be strengthened and updated, in order to reduce errors and provide certainty for employers.
The Government are committed to reducing the administrative burden for employers. In line with recommendations made by the OTS, clause 6 will help to simplify the PSA process and provide certainty and stability for employers. I therefore move that this clause stands part of the Bill.
Peter Dowd
Although the Opposition have not tabled an amendment on this clause, Members will be aware that we have wider concerns about the overall intention of the measure and, for example, its relationship to the Government’s wider digital tax strategy. We have been clear that, although we support the gradual digitisation of taxation and the capacity it has to remove the administrative burden from HMRC, the self-employed, small and medium-sized businesses and larger companies that have to submit tax returns, we are concerned about the Government’s rush to introduce this timetable, which in our view is ill thought-out—as we have said many times.
In principle, we agree with the aims of the measure, which appears to allow employers the ability to settle income tax liabilities for certain benefits and expenses in a more efficient and timely manner. I do not think any of us would want to argue with that. However, we are concerned about the removal, without assurances, of the agreement of the officers of HMRC in this process. I am sure that that is mere coincidence, given that the measure is being introduced at a time when the Government have reduced HMRC staffing levels by 17% since 2010. I would like to take it on good faith from the Minister that the removal of the need for agreement with an officer of HMRC has little to do with the falling numbers of staff.
The clause explicitly states that this measure aligns with the principles of HMRC’s wider digital transformation strategy and therefore it seems impossible to discuss the clause without also referring to clauses 60 to 62, which introduce the digital reporting of VAT and income tax. Given that link, I would like to take the opportunity to ask the Minister about the overall digital transformation strategy at HMRC.
First, how far along is HMRC with this new digital solution that the Government plan to develop? How many pilots have been run of the new software needed at HMRC? How many of those pilots were successful? What is the cost to HMRC of the new software? What is the cost to an employer of using that software? How will HMRC be able to intervene manually to mitigate compliance risk?
The Government have made much of the huge administrative burden that employers face, and of how this measure, along with others, will ensure that employers can submit their PAYE settlement agreement requests at the end of the year and make ad hoc requests during the year, but that is surely completely inconsistent with the Government’s plans to mandate quarterly digital reporting for income tax and VAT. It will remove some administrative burdens for employers with regard to income tax on the one hand, but add further burdens on the other. I would be grateful if the Minister helped us out with that.
Mel Stride
As we have set out, clause 6 makes changes to simplify the PSA process. I am grateful that the hon. Member for Bootle appears to welcome those changes. The Government believe that it is extremely important to lower the burdens on our businesses, which create the wealth and pay the taxes that pay for the public services that, as a civilised society, we all want.
The hon. Gentleman raised making tax digital and the digital changes to the way that tax will be reported. He will know that I laid a written ministerial statement a little while ago that set out a changed timescale for the roll-out of that element. Consequently, no businesses will be involved in making tax digital until 2019 at the earliest, and even then only those at or above the VAT threshold will be involved, and only in respect of VAT reporting. No further roll-out will occur in any other areas until 2020 at the earliest. The Government are in listening mode, and we have listened extremely carefully and reacted extremely positively to feedback from businesses.
The hon. Gentleman raised several pertinent and legitimate questions about the piloting of the making tax digital process. They were very specific, and I do not think for a moment that he expects me to have all the answers in my head, talented though I am.
Mel Stride
And modest—quite. I will ensure that we write to the hon. Member for Bootle to answer the specific questions that he asked in that context.
Peter Dowd
I take the Minister’s assurances. I am sure that he has all the answers in his head, but he does not want to share them at this point. I will be able to read the letter that he sends over a nice cup of tea.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7
Money purchase annual allowance
Peter Dowd
I beg to move amendment 17, in clause 7, page 15, line 11, at end insert—
‘(4A) After section 227G (when pension rights are first flexibly accessed), insert—
“227H Review of effects of changes to money purchase annual allowance
(1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects of the changes made to this Act by section 7 of the Finance (No. 2) Act 2017.
(2) The review shall consider in particular—
(a) the change to the tax charge applied in each tax year, and
(b) the behavioural effects of the changes.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”’
This amendment would require HMRC to undertake a review of the effects of the change to the money purchase annual allowance in Clause 7.
Peter Dowd
The money purchase allowance has its roots in the latter days of the previous Chancellor’s tenure at the Treasury. The pension flexibility measures that were introduced in 2015 gave pensioners those flexibilities if they wished to pay anything further into a defined-contribution pension, but restricted the contributions on which they could receive tax relief. The Government set the money purchase allowance at £10,000, limiting the tax relief that pensioners could receive. The clause will cut that drastically, to £4,000.
The Minister says that the clause is, in effect, an attempt to stop individuals who have already accessed pension savings recycling that cash back into pensions, thereby benefiting from tax relief a second time. I completely acknowledge the concern about that, but a number of pensioners will no doubt be caught by the change. In fact, the submissions that we all received by email and were circulated today allude to that, and I will come to that in a bit more detail.
How much notice have pensioners been given of this planned change? What marketing and targeted awareness campaigns have the Government conducted to ensure pensioners are aware of the change? How much has the Treasury or other Departments spent to ensure that pensioners are aware of the change? I come back to the point I made earlier that this is about the security of people’s retirement. People have planned and are planning for retirement and, what with Brexit and lots of other things going on in the world, we want to keep the uncertainty in life to an absolute minimum. I am sure that everybody agrees with that.
How much does the Financial Secretary believe that the measure will raise? The Opposition feel that there is a clear need for the level of the money purchase annual allowance to be reviewed, and many of the stakeholders who have written to us agree. It is important that the Government take the necessary steps to ensure that pensioners who are caught out by the change are not at an unfair disadvantage.
One submission to Members in the bundle that has been circulated indicates:
“The reduction of the Money Purchase Annual Allowance to £4,000:
a. will create an anomalous position
b. may encourage manipulation of pension arrangements to use the small pots rules to circumvent the MPAA rules
c. will create a differential position between members of occupational arrangements and personal schemes”.
The submission gives a perfectly reasonable example of that, which I will not go into now.
Another organisation, the Low Incomes Tax Reform Group, also has concerns. It was set up by the Chartered Institute of Taxation to give “a voice to the unrepresented”. I will quote from its submission, because it is pertinent:
“The money purchase annual allowance of £10,000 is very unlikely to catch out too many people who might do this. But reducing it to £4,000 from April 2017–equating to savings of £333 a month–is much more likely to cause problems for these people; especially if thinking about it in terms of someone choosing to save money they might have previously been paying on a mortgage. This is even easier to see as being a problem if we consider that the net of basic rate tax contribution–the amount the individual pays–would be £3,200, ie £266 per month. Such a monthly sum could well be half the person’s previous mortgage repayments and therefore an easy sum to find for topping up their pensions”.
The review laid out in our amendment seeks to review the effectiveness of the measure, how many people it affects and the impact of cutting the money purchase allowance on the overall level of pension contributions.
To conclude, I cannot reiterate this point too much. I do not think it is necessarily a question of our wanting to replace the £10,000 with £4,000, £6,000 or £8,000 or any other figure, for that matter. If the Government have made that decision—and it is reasonable to adjust the figure up or down, whatever it might be—given that this is about people’s pensions and their future in retirement, it is important that we are clear what the impact is going to be. That is why we ask for the review. We all need to satisfy ourselves that when we are dealing with this area, for which people have planned, they are not going to be detrimentally affected at a time in their lives when they may be vulnerable.
Mel Stride
Amendment 17 would require the Government to undertake a review of the effect of the change to the money purchase annual allowance under clause 7. Before I set out why that review would be unnecessary, I want first to remind Committee members of the background to clause 7, and what it seeks to achieve. The historic pension freedoms introduced in April 2015 have given people with savings in money purchase arrangements greater flexibility to get access to their pension savings. Once a person has accessed their pension savings flexibly, further tax-relieved contributions are restricted to the money purchase annual allowance.
Peter Dowd
In the spirit of co-operation and the assurances the Minister gave, I am prepared to withdraw the amendment in relation to a review. None the less, serious concerns have been identified by organisations. The Minister alluded to the fact that there did not appear to be much concern, but that is not what I am hearing, hence the need for a review. However, in the light of the Minister’s assurances, I am happy to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 7 ordered to stand part of the Bill.
Clause 8
Dividend nil rate for tax year 2018-19 etc
Anneliese Dodds
I beg to move amendment 18, in clause 8, page 15, line 17, at end insert—
‘(1A) After section 13A (income charged at the dividend nil rate), insert—
“13B Review of effects of changes to dividend nil rate
(1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects of the changes made to this Act by section 8 of the Finance (No. 2) Act 2017.
(2) The review shall consider in particular the effects on the self-employed.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”’
This amendment would require HMRC to undertake a review of the effects of the change to the dividend nil rate in Clause 8.
Anneliese Dodds
As colleagues know, the clause changes, from 2018-19 onwards, the amount to which the dividend nil rate applies down to £2,000 under section 13A of the Income Tax Act 2007. The Opposition are particularly keen to hear the Government’s position on what the impact of the change is likely to be for the self-employed, who could be significantly affected. I would be grateful if the Minister clarified that today.
That change is occurring in a context where existing changes to tax arrangements for self-employed people have not always been adequately dealt with. For example, HMRC’s electronic portal is frequently raised with us as an issue by tax practitioners. I do not mean to sound like a stuck record in relation to my hon. Friend the Member for Bootle, but that is occurring in the context of considerable structural change in HMRC, and we know that many people are already struggling to get through to it to receive advice on making tax returns. This measure will clearly have interaction with other allowances, so greater clarification would be welcome.
That is why we are calling for a review. There needs to be more consideration of these issues and the tax system’s readiness to deal with the change. The amendment would therefore require HMRC to undertake a review of the effects of the change to the dividend nil rate in the clause.
Kirsty Blackman
I hear the hon. Lady’s words, but I would probably go even further. We do not agree that the change should be made to the dividend nil rate for a number of reasons. To begin with, those people who are self-employed may have been planning their self-employment for some time and may have been relying on the fact that the dividend nil rate is currently £5,000 in their financial planning. I do not think that there is enough notice for those people who have been making plans to become self-employed. It is not good enough from the Government. There is not enough notice, and the change they are making is pretty rubbish. People on pretty low incomes are going to be hit by some of the change. It is really important that, for example, people who are becoming self-employed for the first time have the nil rate allowance that they thought they were going to have. Those people have not been given enough time to make considerations.
The point raised by the hon. Lady in relation to getting through to HMRC is relevant, particularly given the closures of tax offices and the difficulty that my constituents are having when trying to contact HMRC. The guidance and forms on its website tend to be black and white, but the answer might be somewhere grey in the middle, so people have to phone to get the advice they need to fill in the form online appropriately. As I said, one of our concerns about the general movement towards making tax digital is how people can get advice on filling in online forms, never mind anything else. It is difficult for people to get through to HMRC, and that is a relevant consideration. We are inclined to vote against clause stand part when that comes. However, we would support the amendment, were it to be pressed to a vote.
Mel Stride
Before I respond to the amendment as well as the other points raised in the debate, let me first remind the Committee of what the clause seeks to achieve. As we have heard, it reduces the tax-free dividend allowance from £5,000 to £2,000 from April 2018. The change will ensure that support for investors is more effectively targeted and helps to deliver a fairer and more sustainable tax system. It will also help to reduce the tax differential between individuals working through their own company and those working as employees and self-employed. Crucially, it raises revenue to invest in our public services, raising approximately £2.6 billion out to 2021-22.
Since the tax-free dividend allowance was first announced, the landscape for small business owners, savers and investors has changed. The hon. Member for Oxford East specifically asked about support for businesses in the context of these changes. I can assure her that, as the party of business, we are wholeheartedly behind businesses. First, we have supported businesses by reducing the main corporation tax rate to 19%, which is now the lowest rate in the G20. Secondly, for savers, we have increased the amount of money that an individual can save or invest tax-free through an ISA, by the largest amount ever, to £20,000, nearly doubling the limit since 2010. Thirdly, we have continued to increase the personal allowance to £11,500 this April. We have committed to increasing it further, to £12,500, helping individuals keep more of the money that they earn.
The hon. Member for Aberdeen North raised a specific point about response rates from HMRC to telephone contact. That is one of the measures that we are constantly looking at—how good are customer services—and I reassure her that it is one measure where HMRC performance has been relatively strong recently.
The clause should be considered in the context of that wider support for business and the need to deliver a tax system that works for everyone. We also need to take account of the ongoing trends in the different ways in which people are working. The design of the current tax system means that individuals who work through a company can pay significantly less tax than individuals who are self-employed or who work as employees. That can be true even when those individuals are doing very similar work.
At the autumn statement last year, the Office for Budget Responsibility estimated that the faster growth of new incorporations, compared with the growth of employment, would reduce tax receipts by an additional £3.5 billion in 2021-22. By that year, HMRC estimated that the cost to the public finances of the existing company population will be more than £6 billion.
The Government are committed to helping all businesses to succeed, large and small, and in all parts of the United Kingdom, but to deliver and maintain low taxes for everyone, we need a tax base that is sustainable. The cost to the public finances of the growth in incorporation is clearly not sustainable. It is, therefore, right to make the small but sensible change to reduce some of the distortions to which I have referred.
As we have heard from the hon. Member for Oxford East, amendment 18 would commit HMRC to undertake a formal review of the effect of this change to the dividend nil rate by the end of June 2019. It has been specifically proposed that such a review should consider in particular the effect of the change on the self-employed. Such a formal review is not necessary.
As I have mentioned, the change needs to be considered in the context of the wider support that the Government have provided to business owners all across the United Kingdom, from reducing the rate of corporation tax to giving the self-employed the same access to the state pension as employees, worth almost £1,900 more per year, to introducing successive increases to the personal allowance, which is available in addition to the dividend allowance.
Indeed, the Government have given careful consideration to the impact of reducing the dividend allowance. A £2,000 allowance ensures that support is more effectively targeted following this change. Around 65% of all recipients of dividend income will continue to pay no tax on such income. That includes around 80% of all general investors. Typically, a general investor will still be able to invest around £50,000 without paying any tax on the resulting dividend income. Those investors who are affected will have, on average, investments worth around £100,000, which will put them in the top 10% of wealthiest households in the country. I therefore invite the hon. Lady to withdraw the amendment.
The Government are delivering a tax system that works for everyone, including businesses, savers and investors. As the OBR has highlighted, there is a rising and unsustainable cost to the public finances of the growth in incorporation. The clause would help to address that by reducing the tax differential between those who work for a company structure and pay themselves in dividends and those who work as employees or self-employed, while ensuring that support for investors is more effectively targeted. I, therefore, urge the hon. Lady to withdraw amendment 18, while I commend clause 8 to the Committee.
Anneliese Dodds
I am grateful to the Minister for his comments. However, we still feel that this is a substantial change. Despite his helpful comments, it does not appear that there has been sufficient consideration, specifically of the impact of this new measure on the income of the very entrepreneurs we should support, especially when they are beginning the life cycle of their new firm. We are concerned that, in effect, many of those live off the income from dividends at the beginning of their business and we do not feel that we have had the assurances that we require that there will not be a negative impact on their income. Therefore, we would like to push this amendment to a vote.
Anneliese Dodds
I beg to move amendment 19, in clause 9, page 17, line 45, at end insert—
“512B Review of operation of sections 507A and 512A
(1) Prior to 30 June 2020, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of sections 507A and 512A.
(2) The review shall consider in particular—
(a) the number of applications made under each section,
(b) the number of occasions a gain was recalculated on a just and reasonable basis under each section.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”
This amendment would require HMRC to undertake a review of the operation of the new provisions for requests for new calculations in relating to wholly disproportionate gains by policyholders.
Anneliese Dodds
Clause 9 removes tax liability where wholly disproportionate gains inadvertently are made from surrendering life insurance. We can understand the motivation behind the measure. We know that the clause aims to introduce an application by which policyholders who part surrendered or part assigned their life insurance policies, including capital redemption policies and contracts for life annuities, and generated a wholly disproportionate taxable gain, can apply to HMRC to have their gain recalculated on a just and reasonable basis. None the less, we are concerned about the lack of key safeguards and the exercise of what is essentially a discretionary remedy by HMRC. The measure is not backed by the fundamental safeguard of a statutory right of appeal to a first-tier tribunal of the officer’s decision on what constitutes a just and reasonable basis for the calculation. It would be helpful if the Minister explained the reasoning for not making express legislative provision for a right of appeal, which we feel is a fundamental safeguard in the exercise of a discretionary remedy. Therefore, our amendment asks for greater consideration of that and other issues through a review, and I hope the Government will accept that request.
Mel Stride
Clause 9 makes changes to ensure that policyholders who take value from their ongoing life insurance policies in such a way that a wholly disproportionate gain is generated, as the hon. Member for Oxford East pointed out, can apply to HMRC to have the gain recalculated on a just and reasonable basis. Recent litigation has exposed circumstances in which cash withdrawals from life insurance policies, known as part surrenders, can give rise to a wholly disproportionate taxable gain. That could also occur following an early sale of part of a policy, also known as a part assignment. In particular, large early withdrawals of cash from a policy that shows little or no underlying economic growth can generate taxable gains that are wholly disproportionate in size and effect. Usually, if cash had been taken by a different method, little or no gain would have arisen.
At Budget 2016, the Government announced their intention to change the tax rules on part surrenders and part assignments of life insurance policies. The changes made by clause 9 will introduce an application process through which policyholders who trigger wholly disproportionate gains can apply to HMRC to have their gain recalculated on a just and reasonable basis.
The hon. Lady raised the issue of appeals. Although taxpayers do not have a right of appeal, they have strong safeguards through the complaints procedure, which provides a simple and straightforward way for policyholders to express dissatisfaction with a decision and have it scrutinised independently. Recalculation applications will be dealt with by a small team in HMRC, ensuring consistency and quality of approach. If taxpayers are unhappy with the decision made, they can complain, and any complaint will be dealt with fairly and impartially by someone independent of the original decision maker. If taxpayers are still not satisfied, the complaint can be referred to the adjudicator or the Parliamentary and Health Service Ombudsman.
The changes will provide a fair outcome for policyholders who inadvertently generate disproportionate gains. An important point is that the measure is expected to affect fewer than 10 policyholders per year and to have a negligible cost to the Exchequer. The impact on life insurance companies, which broadly support the measure, is also expected to be negligible.
The Opposition amendment would require HMRC to complete a review of the operation of these changes by June 2020. The proposed changes in the clause provide a fair outcome for the very small number of policyholders—around 10—who inadvertently generate these gains. As mentioned earlier, we expect fewer than 10 policyholders to be affected. A formal mandated review, followed by a report to the House of Commons, would be an excessive requirement for changes so narrow in scope and for such a small number of individuals affected. I therefore ask the Committee to resist the amendment.
To conclude, clause 9 will provide a fairer outcome for a small number of policyholders who generate wholly disproportionate gains. I invite the hon. Lady not to press her amendment, and I commend the clause to the Committee.
Anneliese Dodds
We are willing to withdraw the amendment, but we want to ensure above all that the information and advice about the provisions are definitely made available to the albeit small number of policyholders. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 9 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Graham Stuart.)
Finance Bill (Second sitting)
Tuesday 17th October 2017
(7 years, 1 month ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 October 2017 - (17 Oct 2017)
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Chair
Mr Howarth made some preliminary announcements this morning regarding Committee proceedings, including permission for Members to remove their jackets if they wish to do so in this October heatwave. Before we come to clause 10, I understand that the Minister wishes to raise a point of order.
The Financial Secretary to the Treasury (Mel Stride)
On a point of order, Mr Walker. I believe that in this morning’s sitting, in response to a question from the hon. Member for Bootle, I may have inadvertently suggested that the Bill’s changes to the money purchase annual allowance regime will result in a £70 million per annum cost to the Exchequer. I should have said that £70 million of revenue will be raised for the Exchequer in each year.
The Chair
I thank the Minister for that clarification, as I am sure does the entire Committee.
Clause 10
Personal portfolio bonds
Question proposed, That the clause stand part of the Bill.
Mel Stride
It is a great pleasure to serve under your chairmanship, Mr Walker. Clause 10 provides the power to amend by way of statutory instrument the property categories that the holder of a life annuity, life insurance policy or capital redemption policy can select without making that policy or contract a personal portfolio bond.
The personal portfolio bond rules introduced in 1999 countered avoidance arrangements where an individual could select personal investments, such as property portfolios, in life insurance policies to defer the tax charge on any resulting income or gains. The legislation treats a policy as a personal portfolio bond if it allows the holder to select the property held in that policy. A policy will not be a personal portfolio bond if it permits only the selection of property specifically listed in the legislation. The categories of property listed in the legislation have features that ensure that the policyholder cannot customise them to allow personal property to be placed within the policy.
The list of permitted property has not materially changed since the rules were introduced in 1999. Since then, various new types of investment vehicle have been developed that similarly cannot be manipulated to include personal property. Up to now, those have not been added to the list. That unnecessarily narrows the range of investment choices for policyholders.
The clause provides the power to make secondary legislation to amend the categories of property listed. The power will ensure that, in future, the rules can be updated more quickly to accommodate new types of investment vehicles. Following Royal Assent, the Government will lay regulations using the power to add three investment vehicles as permitted property: real estate investment trusts, overseas investment trust companies and authorised contractual schemes. Draft statutory instruments have been provided to the Committee. The power will allow the Government to respond quickly as new methods of investment develop, to enable legislation to keep pace with changes in the financial services industry and ensure that tax rules do not needlessly impede innovation and competition in the sector.
Anneliese Dodds (Oxford East) (Lab/Co-op)
I am grateful to the Minister for providing clarification. Is there any evidence of the extent of awareness among fund advisers regarding the existing restrictions, and how will they be made aware of the new rules? That is particularly important if new rules are to be adopted through secondary legislation. We have heard about the new categories of property that might be incorporated, but there is likely to be less spotlight on them in future if we do not discuss them in the context of a Finance Bill. At present, it is possible for fund advisers to accidentally acquire non-permitted assets for a client’s policy, which rules it out as a PPB and means that the rules on yearly deemed gain do not apply.
Mel Stride
I reassure the hon. Lady that there has been extensive consultation on the measure. The consultation on reviewing the list of properties ran from 9 August to 3 October 2016 and explored adding three types of investment vehicle. The majority of respondents welcomed the proposed addition of the investment vehicles discussed. Many suggested further additions, which will require further review before any recommendation is made.
Question put and agreed to.
Clause 10 accordingly ordered to stand part of the Bill.
Clause 11
EIS and SEIS: the no pre-arranged exits requirement
Question proposed, That the clause stand part of the Bill.
Mel Stride
Clauses 11, 12 and 13 make changes to the tax-advantaged venture capital schemes: the enterprise investment scheme, the seed enterprise investment scheme and venture capital trusts. The changes provide small but useful easing of the rules, which I shall explain in more detail. Following the calling of the general election and subsequent negotiations between the Government and the Opposition, these clauses were removed from the Finance Act 2017. As all the clauses are wholly relieving, the Government have introduced retrospective legislation to ensure that taxpayers can still benefit from the changes being made from the original commencement date.
The tax-advantaged venture capital schemes provide a range of generous tax reliefs to encourage individuals to invest directly or indirectly in certain smaller and higher-risk early stage companies. These small companies would otherwise struggle to access the funding they need to grow and develop, because they have little or no track record to attract funding from the market.
Clause 11 makes changes to an anti-abuse rule, the no pre-arranged exits requirement, in the enterprise investment and seed enterprise investment schemes. The rule prevents tax relief from being provided if arrangements under which the shares were issued might lead to a disposal of those or other shares in the company and so potentially put the future continuation of the company at risk.
Many companies include such rights in their standard documents. However, rights allowing for share conversions in the future carry no risk to the integrity of the scheme, as excluding the rights can be administratively burdensome for some companies. The changes will allow companies to qualify for relief if they issue shares that include rights to a future conversion into shares of another class in that company. The changes are wholly relieving and will apply retrospectively, with effect for shares issued on or after 5 December 2016.
Clause 12 makes technical changes to clarify the law and ensures venture capital trusts can provide follow-on funding to certain groups of companies. The changes ensure that the VCT rules work in the same way as those for EIS. The rules for VCTs and EIS were changed in late 2015 to target the schemes more closely on early stage companies. However, the rules do allow older companies to receive tax-advantaged investments in some situations. These include follow-on funding provisions. Broadly speaking, follow-on funding may be provided to an older company as long as the company received its initial tax-advantaged funding at a time when it met the basic age limit. The changes made by clause 12 ensure that, where certain conditions are met, VCTs will be able to provide follow-on funding for companies that have been taken over by a new holding company after the initial funding was received.
Clause 13 makes changes to extend a power for the Treasury to make regulations on the exchange of certain investments held by a VCT. A VCT may hold non-qualifying investments, but only in very limited circumstances. Regulations under the current power ensure that VCTs are not at immediate risk of losing their approved status when they are obliged to exchange a qualifying investment for a non-qualifying investment. However, the power to make regulations applies only where the original investment is a qualifying investment.
The new regulations will provide broadly similar protection to VCTs where the original investment is a non-qualifying investment and the VCT is similarly required to exchange the investment as part of a commercial reorganisation or buy-out. Without the new regulations, VCTs would continue to rely on Her Majesty’s Revenue and Customs exercising its discretion to avoid immediate loss of approval when a non-qualifying investment is exchanged. Draft regulations will be published for public consultation later in the year. The regulations will provide certainty to a VCT regarding the treatment of the new shares or securities obtained when it exchanges non-qualifying investments.
Clauses 11, 12 and 13 make technical easements to reduce administrative burdens and smooth certain rules within the tax-advantaged venture capital schemes. I therefore hope that they will stand part of the Bill.
Anneliese Dodds
I have two questions about clauses 11 and 12. First, EIS and SEIS are two of the four tax-advantaged venture capital schemes, alongside venture capital plus and social investment tax relief, which we will discuss under a later clause. In addition to the features mentioned by the Minister, the schemes share in common the fact that advance assurance applications and submissions of statutory compliance statements are often sought by those seeking to reassure potential investors about the tax treatment of their investments. Clearly, the new requirement will widen eligibility for EIS and SEIS, potentially leading to a greater number of requests to HMRC for these kinds of ex-ante assessments. I would be grateful if the Minister could assure us that HMRC will be able to satisfy those requests in a timely manner.
I understand from the Minister’s response to my parliamentary question on this matter that there is no time limit on an advance assurance application, and while the target for more complex cases is 40 days, he admitted that more complex cases may take longer. Although I agree with him that the changes will simplify the administrative side for business to an extent, they could complicate qualifying criteria from HMRC’s point of view. How will the Minister ensure that that does not lead to greater pressures on an already struggling HMRC?
On clause 12, my second question is perhaps more fundamental. As I understand it, EU state-aid rules generally suggest that the operation of such tax reliefs should focus on genuinely promoting new growth rather than on the acquiring of existing businesses, given that we are talking about the state exempting certain categories of firms from tax that others must pay. Will the Minister provide us with a taste of how he has assured himself that this relief genuinely will focus on the promotion of such new growth?
Mel Stride
I thank the hon. Lady for her questions. On clause 11, she has been in touch with the Treasury about the important matter of advance assurances from HMRC, which always does its utmost to provide advice in as timely a manner as possible. The change proposed by the clause, however, is to remove a requirement on HMRC to opine on the approach that some companies intend to take, which will introduce greater certainty.
Clause 12, which relates to VCTs and the introduction of a parent company, is also likely to ease the investment decision because it will take away the uncertainty that would otherwise accrue by having a parent company inserted into the corporate structure under consideration. These technical amendments therefore make important changes to existing legislation.
Question put and agreed to.
Clause 11 accordingly ordered to stand part of the Bill.
Clauses 12 and 13 ordered to stand part of the Bill.
Clause 14
Social investment tax relief
Question proposed, That the clause stand part of the Bill.
The Chair
With this, it will be convenient to discuss the following:
Amendment 20, in schedule 1, page 103, line 37, at end insert—
“10A After section 257TE (minor definitions etc), insert—
“257TF Review of operation of this Part
(1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of social investment tax relief.
(2) The review shall consider in particular—
(a) the effects of changes made to this Part by Schedule 1 to the Finance (No. 2) Act 2017, and
(b) the effectiveness of the anti-abuse provision.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.””
This amendment would require HMRC to undertake a review of the operation of social investment tax relief, including the changes to it made by Schedule 1.
That schedule 1 be the First Schedule to the Bill.
Mel Stride
Clause 14 and schedule 1 make changes to increase the amount of investment that newer social enterprises can raise through social investment tax relief. These changes will make social investment more attractive to a wider range of enterprises and investors. Excluding lower risk activities will ensure that the scheme is well targeted and delivers value for money.
Would it be in order, Mr Walker, to speak now to amendment 20 and schedule 1?
Anneliese Dodds
As the Minister has indicated, amendment 20 is to the schedule, which is grouped with clause 14. We have a number of concerns about the proposed changes to social investment tax relief, which is why our amendment asks for a review of their effectiveness and impact.
As colleagues will be aware, social investment tax relief is aimed at supporting social enterprises, comprising those businesses that plough their profits—or at least a proportion of them—back into a social and/or environmental mission. With this relief, where investments by individuals are eligible, they can reduce an individual’s income for income tax purposes by almost a third. It is clearly a significant relief and one that, while having many positive impacts, has been suggested as leading to abuses, with the social or environmental impacts from investment in some anecdotal cases being cosmetic rather than actual.
There are also underlying issues about whether there is a level playing field between social enterprises and the public sector when it comes to the delivery of some public services, which could be intensified by the development of additional scope or type of tax reliefs when it comes to social enterprises. Indeed, for those reasons, some people have entirely rejected even the principle of social investment tax relief in the first place. I understand Dame Hilary Blume, director of the Charities Advisory Trust, was concerned about the creation of the relief in the first place, saying it would attract those interested in profits rather than social good to the sector.
In my experience as a constituency MP—and others may share this experience—social enterprises that operate in my constituency, such as the charity Aspire Oxford, undertake work that the Government either have never done or which they have abandoned due to a lack of resources, such as the enormous reductions in support provided through probation services. It is important that organisations such as these, which genuinely deliver additionality, are supported. Nonetheless, in that context, we have a variety of concerns about the currently proposed changes and it is for that reason that we ask for a review. I would be grateful—even if our amendment does not pass—if the Minister could provide answers to a number of these concerns, presently or by letter in the future.
The first concern we have is about the process surrounding these measures. As colleagues will know, rather confusingly, not all social enterprises qualify for social enterprise relief. Predominantly, the relief is focused on community interest companies, charities and community benefit societies. For that reason, before receiving investment, many social enterprises ask HMRC for advance assurance—this topic pops up again—that they will qualify for SITR. I am concerned to have learned from the sector that assessors seem to have been taking decisions already about whether social enterprises will qualify for SITR on the basis of the rules we have in front of us today, which have not yet been passed by Parliament, rather than on the basis of the current rules.
I know the rules would have retrospective impacts: in practice they would be for investments dating from 1 April. It seems strange, however, for assessors to be taking decisions already on the basis of the new rules and this is potentially a disadvantage for social enterprises that are negatively affected by the new rules.
I have also heard concerns about the new treatment of leasing within the new provisions. As I understand it, the Government conceive of leasing as an inherently low-risk activity and therefore not worthy of subsidy, but it is not clear to me that all the implications of this position have been thought through. An example is that of a specialist facility, such as a rundown heritage swimming pool. In fact, many of us may have those in our constituencies—as we know, many have closed. It is very difficult for local authorities to redevelop those facilities in current financial circumstances. We could imagine an example where a social enterprise might want to take on that pool, purchase it, attract investors into that project, but not run the swimming pool themselves as they do not have the expertise to do so. They might then want to have a leasing arrangement with a specialist leisure provider to deliver the services from that swimming pool. The problem with the new changes is that, in this context, even though the risk of that new approach would be reduced because the specialist provider would have more experience of running swimming pools than the social enterprise, the latter would be left in an invidious position, because it would lose the tax break if it engaged in that kind of leasing arrangement.
Stella Creasy (Walthamstow) (Lab/Co-op)
My hon. Friend is making a powerful case about the importance of trying to make these kind of rules work for the reality of how social investment often happens in our local communities. Does she agree with me that there is also a concern that by excluding asset-leasing, things like community pubs and community land trusts might also be excluded by the Government, probably unintentionally? Many of us know of small community groups that may want to take over pubs in our communities that would be excluded by this measure and unintentionally actioned against. Surely we should be acting on that.
Anneliese Dodds
I am grateful to my hon. Friend for making that point, and I agree that this could apply to a range of different facilities. In many circumstances, this kind of arrangement is the only way to keep those facilities going. We could see them entirely disappear—we all know about the sad disappearance of community pubs in our areas—so I am grateful to her for making that point.
In addition to those potential issues, we are also concerned about the differential treatment of social enterprises by age, with the £1.5 million cap being lifted for social enterprises under seven years old. Will the Minister explain why there is precisely this seven-year limit? It may in practice be that local authorities are relying on well-established, well-run and highly experienced social enterprises to help to provide essential services and facilities in conditions of extreme budget cuts, but it is those older enterprises that are potentially disadvantaged by this scheme. I hope that we are going to learn the exact decision-making process on this seven-year cut-off point. If it is specifically to advantage younger social enterprises, why is that the point? Is it the case that youth is being viewed as a proxy for the ability to take on risky activities? If so, where is the evidence basis for that?
I point again to the example of Aspire in my constituency that operates a range of programmes, including one that supports offenders going into work—people who would not normally necessarily be taken on by different employers. Surely that is a highly risky activity, but it is one at which they—as an established social enterprise—excel. Age does not necessarily appear to be a good proxy for the ability to take on riskier activities. If this seven-year cut-off is not there to encourage younger social enterprises, then why has it been instituted? We need more information on this.
Finally, we feel that additional evidence on the effectiveness of the anti-avoidance clauses within the new provisions is required. Social enterprises in the voluntary sector have a long history in areas such as hospice care, specialist domestic violence and mental health services where they have often genuinely driven innovation. Other social enterprises, such as those I mentioned earlier, have merely donated some of their profits to charity, rather than having a genuinely social or environmental mission. May we have more clarification on how abuse will be identified and dealt with?
Kirsty Blackman (Aberdeen North) (SNP)
I do not want to speak for long, but I wanted to say that the hon. Member for Oxford East made a comprehensive, passionate and well-informed case on the amendment. If the Labour party seeks to press the amendment to a vote, we will support it. If the Minister responds to any of the comments by letter, I would be keen to see some of his answers, so I would appreciate being copied into that response.
Mel Stride
Compared with typical companies, social enterprises face greater difficulties in accessing the funding they need to grow and develop. Social investment tax relief provides a number of generous tax reliefs to encourage individuals to invest in social enterprises that deliver social or community benefits. The current limit to the amount of investment that a social enterprise can receive through SITR is around £300,000 over three years. We announced in 2014 that we would look to expand the scheme, and we are now doing so.
The changes made by schedule 1 will increase the investment limit to £1.5 million over the lifetime of all social enterprises using SITR. In order to target the relief more effectively at the social enterprises that most struggle to attract investment, those under seven years old will no longer be bound by the three-year rolling investment limit of £300,000. I think this addresses the issues raised by the hon. Member for Oxford East about why the period is seven years. There is a greater vulnerability when social enterprises start up and they are fresh and young. They have yet to have a track record on which they can build, in order to grow. For those we are removing the roaming £300,000 over three years requirement. Social enterprises older than seven years can still use SITR for investment up to the three-year rolling investment limit of £300,000, subject to the lifetime limit of £1.5 million.
Schedule 1 makes a number of other changes to ensure that the scheme is well targeted at activities that will genuinely achieve socially beneficial aims, and provides value for money. That includes targeting SITR at social enterprises with fewer than 250 employees. Some activities have always been excluded from the relief so that it is not used as a tax-advantage route for low-risk investment. The excluded activities list will be updated to exclude a number of low-risk activities, including leasing assets and raising finance to lend on to others.
I agreed wholeheartedly with the hon. Member for Oxford East’s assertion about the importance of these social enterprises. She mentioned Aspire, for example, in her own constituency and many of us can think of similar organisations in our constituencies. On the more detailed process points that she was interested in, particularly around HMRC and advanced assurances, I am happy to write to her.
On the specific issue of leasing, allowing those activities to benefit from SITR would risk diverting finance away from higher risk social enterprises. We must not lose sight of the fact that the whole purpose of this scheme is to encourage those kinds of organisations and all the good works that they do, which might not otherwise come forward for the reason of being high risk. Of course, those organisations struggle the most to raise finance. Leasing assets typically provides a reliable income stream, which makes it a lower risk activity. Allowing social enterprises to raise money to lend on to other enterprises would be complex to administer and would leave the scheme open to misuse.
Stella Creasy
As a Co-op, as well as Labour, MP, I am rather passionate about the idea of social investment. The Minister seems to be a little short-sighted about the idea of assets—after all, there are many people looking at running community pubs, for instance, which is a great example of a community asset that we might want to support. I would not see that as an example of a low-risk venture. Surely, if he accepts our amendment, we can look at some of those issues and make sure that he is not missing out on some of the things he would like to see investment in because of a concept of risk that is rather narrow, rather than recognising some of the boundaries of co-operative and social investment.
Mel Stride
I thank the hon. Lady for her intervention. I guess there is a trade-off between getting very detailed and more precise in where we target these kinds of reliefs and, on the other hand, sometimes having complexity and confusion. It can be difficult to winkle out the precise anomalies that she may be alluding to. However, I can reassure her that, under the EIS scheme, many pubs, including community pubs, can qualify. They may be excluded under certain circumstances within the SITR scheme, but under EIS she will find that there are at least possibilities.
On the general issue of anti-avoidance, we are seeking to avoid situations where these schemes—whether they are EIS, SITR or VCTs—are simply being used as places to preserve capital at very little risk and to give a tax return as a consequence of the scheme. It is important that we have tight, sensible and effective avoidance measures in place.
Finally, further provisions to align the rules more closely with the enterprise investment scheme, including anti- abuse provisions, will also be introduced. Amendment 20 would require a review of the effects of the scheme, including the effectiveness of the anti-abuse provision and other changes being made by schedule 1. The Government have already committed to a full review of SITR within two years of its expansion. An early review would make it impossible to adequately gauge the effectiveness of the provisions that we are introducing now. Further, these anti-abuse provisions were introduced in direct response to HMRC becoming aware of the creation of aggressive tax-planning structures designed to exploit this relief. We estimate that around 800 social enterprises will benefit from the relief over the next five years. By 2021-22, SITR is forecast to cost £65 million per year, £30 million more than if the scheme was not enlarged.
We have had an interesting debate on the scheme. As we have already committed to a full review, I ask the hon. Member for Oxford East to withdraw amendment 20. Schedule 1 will increase the amount of investment that social enterprises can raise through SITR making it attractive to a wider range of enterprises and investors. Other changes will ensure that the scheme is well targeted and delivers value for money.
Anneliese Dodds
I am grateful to the Minister for his clarification, which has been enormously helpful. However, he referred to winkling out particular anomalies and we feel that that is exactly what we need a little more of. On the issue of the seven years of activity as a social enterprise before qualifying for the three-year £1.5 million cap, I am concerned, despite the Minister’s helpful comments, that we are not focusing on the exact loci of risk. We seem to be assuming that risk is inherent in the age of the social enterprise concerned and not on the activity that it is engaged in. It is perfectly possible—I mentioned an example earlier—for an older social enterprise to try to attract funding in order to undertake a very risky activity. Dealing with some of those risky activities is what we need social enterprise to be engaged in, particularly as we have many areas where local authority funding is no longer available and there are also market failures. We really need to have community facilities and different services preserved. I therefore wish to press the amendment.
Mel Stride
I think we are in total agreement with the hon. Lady on the issue of focusing these funds and incentives on riskier social enterprises, in other words, the ones that would not naturally happen without this kind of intervention. However, while those that are less than seven years old will be subject to the £1.5 million cap, which is a considerable increase in what we have had before and will not be restricted by the £300,000 maximum investment in any three-year period, those social enterprises that have been trading for longer than seven years, can still have access to £1.5 million in total, albeit in any three-year period they are restricted to £300,000 maximum to be raised. It is not as if there is a terrible cliff edge between the two. We will still be providing a lot of support for older social enterprise.
Anneliese Dodds
I thank the Minister, but I am still concerned about why exactly seven years has been chosen as the cut-off. Listening to his helpful remarks, I imagine that we could see some gaming around this, because there is a significant tax advantage from having a younger social enterprise. Would we see social enterprises being created out of previous ones just to qualify for the different tax treatment when actually they would be focused on the same activity? It seems peculiar to me and I do not understand why the seven-year figure has been chosen. My dad was an accountant; he always said to me, “You’ve got to keep your bank statements for seven years”, so I can understand seven years from that perspective. Why is there no gradation? Why seven and not another figure—three, five, 15 or 20 years? Perhaps some clarification can be provided.
Mel Stride
I suppose we are saying that whatever number of years we chose, the hon. Lady’s argument would always be relevant, in the sense that it is an arbitrary figure. It happens to be seven years in this case. In terms of anti-avoidance and gaming at the margins, to which she referred, there are some strong anti-avoidance measures in the Bill that, for example, seek to address directly the specific issues she raised of perhaps one social enterprise taking over another that has a different age profile and in some way gaming the system as a consequence. Those elements are addressed in the anti-avoidance measures.
Question put and agreed to.
Clause 14 accordingly ordered to stand part of the Bill.
Schedule 1
Social investment tax relief
Amendment proposed: 20, in schedule 1, page 103, line 37, at end insert—
“10A After section 257TE (minor definitions etc), insert—
“257TF Review of operation of this Part
(1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of social investment tax relief.
(2) The review shall consider in particular—
(a) the effects of changes made to this Part by Schedule 1 to the Finance (No. 2) Act 2017, and
(b) the effectiveness of the anti-abuse provision.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.””—(Anneliese Dodds.)
This amendment would require HMRC to undertake a review of the operation of social investment tax relief, including the changes to it made by Schedule 1.
Question put, That the amendment be made.
The Chair
With this it will be convenient to discuss that schedule 2 be the Second schedule to the Bill.
Mel Stride
Clause 16 makes changes to ensure that landlords can use the cash basis to calculate their profits for tax, and simplifies the treatment of capital expenditure within the cash basis.
At Budget 2016, the Government announced that we would explore options to simplify the tax rules for businesses, self-employed people and landlords. Trading businesses have been able to use the cash basis method of calculating their profits for tax since 2013. The method calculates profits on a cash in, cash out basis and minimises the need for complicated accounting adjustments. It has been well received; more than 1 million trading businesses have chosen to use the cash basis since its introduction. Extending and improving the cash basis is a significant step to simplify the tax rules.
Following consultation, the Government announced that from April 2017 they would increase the cash basis threshold for traders to £150,000, extend the cash basis to some landlords, and simplify the treatment of capital expenditure in the cash basis. The increase to the cash basis threshold for traders was implemented by secondary legislation, so does not appear in the Bill.
The changes made by the clause will allow more than 2.3 million property businesses to choose to use the simpler cash basis method of calculating their profits for tax, which will provide administrative savings to approximately 1.8 million of them. The changes to the treatment of capital expenditure in the cash basis will allow capital expenditure to be deducted from income, unless it relates to specific types of assets listed in the legislation. That will mean that, including any additional property businesses, nearly 3 million businesses using the cash basis will have a clearer idea of what they can deduct for tax, and when.
The clause legislates for measures announced at spring Budget 2017 and takes effect from April 2017. It therefore has retrospective effect. The measures will simplify tax on many businesses and landlords, who will benefit from the use of the cash basis and the reform of the capital expenditure rules in the cash basis.
Question put and agreed to.
Clause 16 accordingly ordered to stand part of the Bill.
Schedule 2 agreed to.
Clause 17
Trading and property allowances
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Amendment 21, in schedule 3, page 155, line 15, at end insert—
“Chapter 3
Review of chapters 1 and 2
783BR Review of operation of this Part
(1) Prior to 30 June 2020, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of the provisions of this Part.
(2) The review shall consider in particular—
(a) the use and effects of full relief,
(b) the use and effects of partial relief,
(c) the use of relief in relation to trading income, and
(d) the use of relief in relation to property income.
(3) The review shall compare the effects on the Exchequer in each of the first two years of its operation with the effects forecast by the Office for Budget Responsibility at the time of—
(a) the 2016 Budget, and
(b) the 2016 Autumn Statement.
(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”
This amendment would require HMRC to undertake a review of the operation of the new trading and property allowances in the first two relevant tax years.
That schedule 3 be the Third schedule to the Bill.
Peter Dowd (Bootle) (Lab)
It is a pleasure to serve under your chairmanship, Mr Walker.
I appreciate that the strictures of Finance Bill procedure commonly give rise to the overwhelming excitement of review amendments, so I ask the Committee to withhold its lack of surprise that amendment 21 would introduce yet another review. The Government’s sensible stated aim in introducing the allowance is to recognise that many taxpayers no longer fit within a neat and simple model of PAYE-only income or self-assessment-only income. We all recognise that that is the reality, but we should not get too carried away by the idea that online hobby trading is an entirely new activity triggered by the advent of the online sharing economy; I suspect it is more like old wine in new skins. Spending a weekend repairing a few clocks as a hobby and then selling them on eBay for extra income on the side is not an entirely new phenomenon. People 20 years ago did the same through car boot sales, antique fairs or classified ads; this is just a modern version.
Modernising the tax system to recognise the multiple sources of income that taxpayers may now receive is sensible, but we should not always imagine that the problems that we are trying to solve are entirely new, nor should we make too hasty a stab in the dark for solutions. The Association of Taxation Technicians says that, as drafted, the provisions discriminate against individuals who, in addition to having the type of microbusiness to which the trading allowance is intended to apply, also have a sole trader business which cannot benefit from the trading allowance. In that situation, the provisions prevent the microbusiness from qualifying for the trading allowance. The ATT’s concern is that the allowance is potentially discriminatory.
The Government state that the aim of the allowance is to provide
“simplicity and certainty regarding Income Tax obligations on small amounts of income from providing goods, services, property or other assets…and to help the UK become leaders in the digital and sharing economy”,
but it could easily end up creating new complications for taxpayers, or lead inadvertently to perverse incentives. The Chartered Institute of Taxation’s Low Incomes Tax Reform Group welcomes the aim of the measures, but has said that it is
“very concerned that unrepresented low-earners will struggle to understand some of the more complex rules, especially if they have overlap profits, more than one trade or source of income or have not elected, as often will be the case, to use the cash basis of accounting.”
Its concerns stem especially from the fact that this relief’s intended group of users is less likely to engage professional accountants or other advisers. As a result of the complications involved in having to choose a particular accounting basis or work out the types of income that apply, the allowance may fail to benefit that group of users. It may instead become yet another strand in the complex web of allowances that professional advisers throw into the mix when helping their clients to avoid tax.
Anneliese Dodds
I appreciate my hon. Friend’s comments about the role of personal advisers; the same point came up this morning. Moreover, has not HMRC’s online system for calculating the taxes payable on relatively small amounts of income already been found wanting? As a result of the interaction between the four different allowances—personal savings, tax-free dividend income, the savings starting rate and the personal allowance—individuals have become liable for more tax than they should have to pay, because the online system is not calibrated appropriately. In theory, the new provision is meant to obviate the need to declare income for those purposes, but does my hon. Friend not agree that it must be designed carefully to avoid the flaws that affect people with small incomes who qualify for the allowances?
Peter Dowd
My hon. Friend hits the nail on the head; that is an excellent forensic point that the Minister will have heard, and will, I hope, take up, especially in relation to our amendment.
The potential problems might be still bigger in the case of property income where the new relief interacts with existing schemes such as rent-a-room relief. Taxpayers will need to work out which relief applies before determining whether and how they need to make a self-assessment return. Although I am confident that the Minister is genuine in his desire to help more people get on the right side and make the right declarations for their taxes, I worry that the added complexity could easily put off more people from making the correct declaration. I suspect that none of us wants that, including him, because it is not particularly sensible. In many cases, it will not be due to anyone’s desire for dishonesty; it will be because taxpayers used to operating only within pay-as-you-earn will be confronted with a confusion of options in considering how they must declare to HMRC.
The Low Incomes Tax Reform Group has rightly highlighted the complications that might arise for lower-income households. The new reliefs might free taxpayers from the need to declare very small amounts to HMRC, but will not have the same effect of releasing their obligations to account to the Department for Work and Pensions if they are universal credit claimants. Those are the households that would benefit most from simplification, rather than finding themselves subject to the most bewildering requirements to account to the state. I do not wish to waylay the Committee with the ongoing issue of universal credit implementation, as we will undoubtedly have a debate about that tomorrow, but the Low Incomes Tax Reform Group highlights a fair point: so-called simplifications involving tax and social security can sometimes have the opposite effect on those expected to use them. I think that we have all witnessed that to a greater or lesser degree.
Our amendment proposes an HMRC review, to report by 2020, of the use of the reliefs and the resulting effects on the Exchequer. I know that the inclination is to resist all Opposition amendments, but I can see little cause to resist this one. Inevitably, just like other measures discussed earlier, the reliefs will be revisited, unpicked, reworked and recalibrated in future Budgets. Sensible and calm review by HMRC must be in the interests of everybody involved.
Kelvin Hopkins (Luton North) (Lab)
It is a pleasure to serve under your chairmanship, Mr Walker. I support my hon. Friend the Member for Bootle. It is said that Britain has more accountants per head of population than any other country, probably because the complexity of our tax system means that we all need to use one. However, in this situation, as he said, the amounts involved might be small, and the cost of an accountant might be quite high. That could deter people from using accountants, getting them into more difficulty.
Is there not a case for a proper review by HMRC, which knows the score because it deals with such things on a daily basis? HMRC could advise the Government on introducing appropriate changes that would simplify the tax system as well as helping those who would benefit from tax reliefs in a more practical and pragmatic way.
Mel Stride
Clause 17 and schedule 3 introduce two new tax allowances so that, from April 2017, individuals with gross trading or property income below £1,000 no longer have to declare or pay tax on that income. Digital platforms are allowing more and more people to supplement their income by sharing property, resources, time and skills. It is perhaps a rather more rapidly growing segment than the hon. Member for Bootle recognised. The UK is a world leader in the sharing economy; a report by PwC shows that the UK sharing economy has grown at the fastest pace in Europe, with transactions worth about £7.4 billion in 2015. This is expected to grow to £140 billion in 2025.
As the economy changes, the tax system should keep pace. For this reason the Government want to support the sharing economy and ensure that the tax system is not burdensome for those making small amounts of income, whether through selling goods, providing services or renting out their property. This could include those advertising their plumbing services through an online platform or those renting out a driveway space, for example. The changes made by clause 17 will introduce two new income tax allowances so that the individuals with gross trading or property income below £1,000 will no longer have to declare or pay tax on that income. Many individuals engaging in these activities on a small scale are not aware of their tax obligations. The new allowances make these obligations clear and straightforward, providing much needed clarity for people making small levels of extra income.
The trading allowance will also include miscellaneous income from providing assets or services, creating certainty for individuals, who will not have to understand tax case law to determine whether their activities should be taxed as a trade. The Government estimate that at least 700,000 individuals could benefit from the allowances. Over three quarters of these are basic rate taxpayers who could save up to £400 in income tax each year.
The Opposition raised a number of points. One was the lack of availability of this allowance to those who are already making self-assessments to HMRC, because they are already sole traders. Part of the reason for that is to ensure that we do not have any diversion of activity from those individuals’ general work arrangements into this scheme driven solely by an attempt to lower taxation. The point has been made about the importance of simplicity in the scheme. Certain aspects of the scheme clearly make it simple: people with that kind of income are not required to make a submission to HMRC, and there is a “miscellaneous” category of income that can address the complications around whether this is trading income—“miscellaneous” is quite a wide-ranging term.
The hon. Member for Bootle raised a fair point on rent-a-room tax relief arrangements; that is why HMRC’s efforts in detailing its guidance on the gov.uk website are so important. All the allowances will be very carefully explained. The guidance is being prepared alongside representative bodies and will include clear, step-by-step explanations and a number of examples, so it will be very easy for people to follow exactly how the arrangements work. Support will also be available via the HMRC helpline.
Amendment 21 would require HMRC to complete a review of the cost and effectiveness of the allowances by 2020 and the effects on the Exchequer in each of the first two years. Such a review is unnecessary. As I have set out, the two new allowances ensure that the tax system is not burdensome for those making small amounts of income. Their effect will be to support the enormous contribution that the sharing economy is making to the UK economy, while simplifying the tax system to support the job creators of the future. As there is no need for taxpayers to declare this income to HMRC, any review would impose a disproportionate burden on taxpayers and be inconsistent with the core rationale for the reliefs. In addition, the Bill also includes specific clauses designed to prevent abuse, and HMRC will carefully monitor the reliefs to ensure that they work as intended. I therefore urge the Committee to resist this amendment.
The two new tax allowances will help micro-entrepreneurs by removing complexity and uncertainty for those wanting to earn small amounts of extra income. There will be no forms to fill in and no tax to pay. It is a tax break for the digital age, furthering the Government’s commitment to simplify the tax system and help the UK become a global leader in the digital and sharing economy. I therefore commend the clause to the Committee.
Peter Dowd
We will not press the amendment to a vote but the Minister acknowledges, de facto, that the economy and the world of work is changing fast. There are so many developments out there—apps, online, the whole kit and caboodle—which is all the more reason for the Government to keep on top of this issue. That is why we want the review, because the world changes so quickly.
Ruth George (High Peak) (Lab)
Obviously, universal credit is being rolled out. That will be a particular detriment to people on very low incomes who are self-employed, because they will be deemed to earn the minimum wage on 35 hours a week throughout the year: around £13,600. If their actual income is below that at the moment, they can receive tax credits and are eligible to apply if they have children and a family. Under universal credit, they will not be able to receive such payments, though they may be liable for tax. That is another reason why a review after the roll-out of universal credit would be particularly useful, to see the impact on the self-employed and people with micro- businesses.
Peter Dowd
My hon. Friend makes a valid point. This is not quite as simple as the Minister would like us to believe, although I am not suggesting that he is trying to cajole us into it. The bottom line is that we will not push this to a vote today but we hope that the Minister takes into account the views we have expressed. If he does not wish to take account of our views, I exhort him to consider those of at least the two organisations that sent us documentation on the matter.
Question put and agreed to.
Clause 17 accordingly ordered to stand part of the Bill.
Schedule 3 agreed to.
Clause 18
Carried-forward Losses
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Amendment 22, in schedule 4, page 230, line 37, at end insert—
“188FAA Review of operation of this Part
(1) Prior to 30 June 2020, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of the provisions of this Part.
(2) The review shall consider in particular—
(a) the use and effects of reliefs under this Part,
(b) the effects on the Exchequer in each year of operation,
(c) a comparison of the amounts referred to in paragraph (b) and any official forecasts of those amounts prior to the introduction of this Part.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”
This amendment would require HMRC to undertake a review of the operation of the provisions for group relief for carried-forward losses.
Amendment 23, in schedule 4 page 247, line 2, at end insert—
55A (1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review in accordance with the provisions of this paragraph.
(2) The review shall consider the changes made in—
(a) paragraphs 24 to 26 of this Schedule in relation to insurance companies,
(b) paragraphs 27 to 46 of this Schedule in relation to certain creative industries,
(c) paragraphs 47 to 55 of this Schedule in relation to oil activities.
(3) The review shall consider in particular and in relation to each of the sectors mentioned in sub-paragraph (2)—
(a) the use and effects of the changes made,
(b) the effects on the Exchequer in each year of operation,
(c) a comparison of the amounts referred to in paragraph (b) and any official forecasts of those amounts prior to the introduction of this Part, and
(d) any effects on the economic activities of companies and others in each of the sectors mentioned in sub-paragraph (2).
(4) The Chancellor of the Exchequer shall lay a report of the review under this paragraph before the House of Commons as soon as practicable after its completion.”
This amendment would require HMRC to undertake a review of the operation of the provisions for carrying forward trade losses for insurance companies, creative industries and oil activities.
That schedule 4 be the Fourth schedule to the Bill.
Clause 19 stand part.
Peter Dowd
These two clauses and the schedule represent the most complicated measures in the Bill, as I suspect everybody acknowledges. The corporate tax system and its rules on carrying forward losses present a maze of regulations and rules to be navigated by the heads of companies before they can claim relief. There is, therefore, some merit behind the Government’s measures to relax the rules around losses.
Under these measures, companies can set losses arising on 1 April this year against the total taxable profits, rather than particular types of income of a company and its group members. The amount of losses they can carry forward will be restricted to 50% and will apply to any losses incurred at any time. Of course, on top of that, each company or group will be entitled to a £5 million annual allowance of unrestricted profit, ensuring that 99% of companies are unaffected by the restriction.
I would like to ask the Minister how the £5 million figure for the annual allowance was reached. In addition, what consideration has the Treasury given to lowering or raising the threshold for unrestricted profit? The reforms being discussed today were first announced at the 2016 Budget. The Government then consulted on the measure in the business tax road map, as it was called, which I understand has led to this package of clauses and schedule.
The changes to the current rules have been encouraged because, under the old system, companies could offset all their eligible taxable profits through losses carried forward. That led to a situation where in some instances a large company pays no tax in a year when it makes a substantial profit. The majority of G7 countries already have restrictions of this kind in place.
I believe it is important to look at international comparisons and examine how other countries deal with this complex issue. From my research, it is clear that the big distinctions on how countries focus on carried-forward losses are: the length of time losses can be carried back; the length of time losses can be carried forward; and when losses can be shared with other companies.
Kelvin Hopkins
There is a lot of evidence that the banks are still engaging in risky gambling on the international exchanges, and compensating for that by squeezing ordinary taxpayers, ordinary bank customers and small businesses in particular to back up their gambling losses. Would my hon. Friend say that we are still facing danger in the future because of the banks’ behaviour?
Peter Dowd
We always have to be vigilant—that is the key. Vigilance is crucial. Virtually no one had experienced anything like the banking crisis in living memory. Given that, we have to be on our guard that we do not all breathe such a sigh of relief that it was so long ago that we lose our vigilance.
It seems to me that strong regulations, which will not only protect the taxpayer and their savings, but develop practices at the heart of the industry, are the only bulwark against another financial crisis being created and enacted through reckless banking practice. I hope that the Minister will give some thought to that, particularly given that when we finish the summer-autumn Finance Bill we will immediately start the winter Finance Bill. Given the Government’s delayed and, I have to say, sometimes chaotic timetable, it will no doubt end up being called the spring Bill instead. Dare I say it, we have a Minister who is the man for all seasons in that regard. [Interruption.] Don’t give up the day job, as they say—or perhaps hon. Members would like me to.
Many of the stakeholders to whom the Opposition spoke raised concerns about the complexity of the proposals and the speed with which the Government have attempted to take them through.
Anneliese Dodds
I am grateful to my hon. Friend for running through many of the problems that stakeholders have mentioned to us. One addition to the many ambiguities he mentioned is that, to my mind, a clear rationale does not seem to have been provided for the decision to loosen the rules so that past losses can be offset against any type of profit, rather than the current position of only being able to offset them against the same type of profit—for example, only offsetting trading losses against trading profits. That is yet another change for which we perhaps require further information and debate.
Peter Dowd
My hon. Friend makes another good point. The Chartered Institute of Taxation has criticised the Government—“criticise” is the word I use, although I am not sure it would say that; it would most probably say it has brought this to the Government’s attention—for not balancing
“its desires to raise some modest revenue with its duty to produce legislation that can be followed with predictability and certainty.”
Other financial organisations have argued that the measure is likely to create winners and losers. Small groups unlikely to have £5 million of losses, for which this is a high proportion of the total, will benefit from the change. For large groups that wish to access the group relief changes, it is less clear. Deloitte has argued that the slowdown in offset of brought-forward losses for large groups may in fact mean an acceleration in the tax cost for larger companies. Will the Minister offer more clarity on how the group relief will work in practice—particularly the nomination process, whereby a specific company has to be nominated to manage the whole group relief?
The measure seems fraught with potential dangers. For starters, the Bill makes no mention of what happens when a company chooses to join or leave a group that benefits from the group relief. Will the Minister explain whether such a mechanism will be built into the legislation, or whether we will need a further clause in a future Finance Bill that tinkers with carried-forward losses once more? Given the uncertainty felt by many in the business community, the Opposition believe it is only right that the Government submit a review of the operation of the group relief in the carried-forward losses, assessing the cost and impact of the new restrictions and how they will impact on large companies.
Mel Stride
Clauses 18 and 19 and schedule 4 make changes to the rules for corporation tax losses, as we have discussed. They modernise the losses rules by increasing their flexibility, while at the same time ensuring that companies pay tax in years when they earn significant profits. When a company makes a loss, it can carry it forward and use it to offset the tax liability of certain income in future years. Carrying forward losses is an important feature of the tax system and ensures that the tax paid by companies is proportionate with their profits over the long term.
However, these loss relief rules are not reflective of the way businesses operate and are out of step with international practice, which I shall come on to in a moment. First, carried-forward losses can typically only be set against profits from the activities to which they relate, as the hon. Member for Bootle pointed out, rather than the profits of other activities in a company, or the profits of other companies within a group. Secondly, the absence of any restriction on the amount of taxable profit that can be relieved by carried-forward losses means businesses making substantial UK profits may not pay any corporation tax due to losses incurred on historic activities.
The clauses will have effect from 1 April 2017, in line with the commencement date previously announced by the Government. The changes made by clause 18 will mean that rules will be relaxed for losses arising from 1 April 2017 that are carried forward, such that those losses can be set against the profits of different activities within a company and the taxable profits of its group members. As we have said, the amount of annual profit that can be relieved by carried-forward losses will be restricted to 50% from 1 April 2017, subject to an allowance of £5 million per group.
The hon. Member for Bootle asked specifically about that £5 million figure, and about whether the Treasury has looked at international comparisons and factored that into its thinking on this matter. I assure him that it has. This rate is more generous than the rates in a number of other countries. In Germany, for example, the rate is €1 million. As he pointed out, the main rationale for focusing the restriction above £5 million is to bear down on the top 1% of profitable businesses in the country without going further down the spectrum. We believe that we have achieved the right trade-off between the level of the figure and the number of companies that will potentially be affected by the restriction.
Peter Dowd
I tried to set to out as comprehensively as I could, without getting too complicated, complex or specific, why we were concerned to keep tabs on this. Trying to keep tabs on the Government’s proposals has been today’s theme, and that is why we have asked for reviews. In the current climate, when there are so many pressures on public services and a range of challenges for the country, we are all concerned to ensure that organisations that benefit from our fantastic country and from the protection of the rule of law pay their dues. That is not to point the finger at anyone specifically to say they are not paying their dues, but to ensure that we to some extent guard the guards. That is what we are trying to do today: to guard the guards; that is our job and our responsibility. Given the Minister’s explanation, we will not press the amendment, but no doubt we will come back to these issues in due course.
Question put and agreed to.
Clause 18 accordingly ordered to stand part of the Bill.
Schedule 4 agreed to.
Clause 19 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Graham Stuart.)
Finance Bill (Third sitting)
Thursday 19th October 2017
(7 years, 1 month ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 19 October 2017 - (19 Oct 2017)
The Committee divided: - Ayes: 7 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 7 / Noes: 10 - Question accordingly negatived.
The Chair
With this it will be convenient to discuss the following:
Amendment 5, in schedule 5, page 364, line 10, at end insert—
“443A Review of effects in relation to PFI companies
(1) Within three months of the coming into force of this Chapter, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects of the provisions of this Chapter in relation to PFI companies.
(2) The review shall consider in particular the effects if the provisions of—
(a) the Chapter, and
(b) the exemption in section 439
were not to apply to PFI companies.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”
This amendment requires a review to be undertaken of the impact of the provisions of Chapter 8 of new Part 10 of TIOPA 2010 in relation to PFI companies and if the provisions did not apply to PFI companies.
Amendment 28, in schedule 5, page 367, line 46, at end insert—
“448A Sectoral reporting on operation of this Chapter
(1) Within fifteen months of the coming into force of this Chapter, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review about the operation of its provisions in relation to different sectors.
(2) The sectors covered by this review shall be—
(a) water and sewerage,
(b) gas and electricity,
(c) telecommunications,
(d) railway facilities,
(e) roads and other transport facilities,
(f) health facilities,
(g) educational facilities,
(h) facilities or housing accommodation provided for use by any of the armed forces,
(i) facilities or housing accommodation provided for use by any police force,
(j) court or prison facilities,
(k) waste processing facilities,
(l) buildings (or parts of buildings) occupied by any relevant public body other than for purposes principally concerned with matters specified in paragraphs (a) to (k).
(3) A review under this section shall separately identify, in respect of each sector, information on operation in respect of qualifying infrastructure companies undertaking activities that were previously undertaken by a nationalised industry.
(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”
This amendment would require HMRC to report on the operation of the special provisions in Schedule 5 relating to public infrastructure in relation to sectors and, within sectors, in relation to privatised companies as a group.
Amendment 6, in schedule 5, page 368, line 13, at end insert—
“‘a PFI company’ means a company which has entered into a contract with a public sector body under the Private Finance Initiative or the PF2 initiative.”
This amendment defines a PFI company.
That schedule 5 be the Fifth schedule to the Bill.
New clause 1—Review of relief from corporation tax relief for PFI companies—
“(1) Within three months of the passing of this Act, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review about how corporation tax relief is given for losses, deficits, expenses and other amounts of PFI companies.
(2) For the purposes of this section, ‘a PFI company’ means a company which has entered into a contract with a public sector body under the Private Finance Initiative or the PF2 initiative.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”
This new clause requires a review to be undertaken of the corporation tax reliefs available to PFI companies.
Stella Creasy (Walthamstow) (Lab/Co-op)
It is a pleasure to serve under your chairmanship this morning, Mr Howarth. I am looking forward to this debate because it is something all of us across the House feel concerned about. I recognise that we are debating the Finance Bill. I reassure you that the amendments and the majority of what I will talk about today are about taxation and, in particular, the requirements of the legislation. I just want briefly to set out how that fits into the context of the concerns that are shared across the House about private finance and the cost to the public sector of borrowing to be able to build the infrastructure that we all know we need.
To be clear, Governments of all colours have used private finance and continue to do so. The private finance initiative and private finance 2 schemes are little different from each other. It is recognised that questions about the companies involved and the role of taxation in the decision to use PFI or PF2 to fund public infrastructure are questions for all of us, because we see in our constituencies the problems that are caused.
I note that the constituency of the hon. Member for Brentwood and Ongar now has repayments of £169 million as a result of private finance. The constituency of my hon. Friend the Member for Bootle, the shadow Minister, has £423 million-worth of repayments required under private finance contracts. I would describe private finance as the hire purchase of the public sector—indeed the legal loan sharks of the public sector— because the companies offer credit to the public sector, but at a high cost. In particular, the cost of the credit—the taxation that will come from the companies involved—is part of the decision to go with them. That is specifically part of the Green Book calculations. I am looking forward to the Minister telling us what has happened to those Green Book calculations, which were supposedly withdrawn in 2013 but I understand are still being used by Departments for private finance deals, to understand how tax plays a part in the decision to use private finance companies. The idea is that this form of credit may be more expensive but that the companies will repay us in taxation in the UK. That forms part of the decision to use them. The widespread evidence now is that those companies are not paying UK taxes, and that they are benefiting from changes in our tax regime over the past 20 or 30 years. That should trouble all of us because we are not getting the value for money that the deals were supposed to be.
One of my concerns that I hope the Minister will address is that PF2 also pays little regard to the question of where the companies are situated and how much tax they pay. I have therefore tabled two amendments—in fact, three; one is about defining private finance companies—to understand what kind of deal we are getting from those companies and how we as taxpayers and those who represent taxpayers can get a better deal for the British public.
For the avoidance of doubt, the debate is not about not using private finance. One day, I hope that we will have another debate—I am sure the Minister will look forward to it as much as he is looking forward to this one—about the alternatives to private finance. There is a role for private finance, but the question is, if we are getting a bad deal and if the companies are not honouring the obligations that we as taxpayers assigned to them, what can we do about it?
Clearly, the PFI companies are making huge profit. Research from the Centre for Health and the Public Interest shows that over the next five years almost £1 billion in taxpayer funds will go to PFI companies in the form of pre-tax profits. That is 22% of the extra £4.5 billion given to the Department of Health alone.
In my constituency I see at first hand the impact of this. Whipps Cross University Hospital is technically in the constituency next door, but serves my local community—it is part of Barts, which has the biggest PFI contract in the country: £1 billion-worth of build, £7 billion to be repaid. The hospital is paying back £150 million a year in PFI charges, more than 50% of which is interest alone on the loan. The hospital downgraded the nurses’ post to try to save money, and so found that many nurses left. It therefore faced a higher agency bill.
It is clear that PFI and the cost of those loans drives problems. It is also clear that those companies make what I would term excessive profits. That is where new clause 1 begins to try to offer us some answers. If the companies make excessive profits, that is not part of the contract that we signed with them. The National Audit Office has been incredibly critical of how taxation played a role in decisions about private finance companies, but that has not been realised.
Also, not that many companies are involved, yet the tax returns are huge. Just eight companies own or appear to have equity stakes in 92% of all the PFI contracts in the NHS. Innisfree manages Barts, which is my local hospital, and it has just 25 staff but stands to make £18 billion over the coming years. It might be thought, therefore, that companies of that size and stature would pay a substantial amount of tax—I see that the hon. Member for Brentwood and Ongar can predict where I am going with this; sadly, it does not appear to be the case.
Indeed, many of the companies seem to report little or no tax in the UK. One of the simple reasons for that is that many of them are not registered in the UK. That is crucial because the provisions in the Bill to give those companies a relief on paying tax on the interest that they get from shareholder debt are predicated on the idea that they are UK companies. That is the starting point for amendments 5 and 6. The Bill will bring in a cap on the amount of relief that companies can claim against interest. However, there is a public sector exemption, for public sector infrastructure companies, and it will substantially benefit the companies in question.
Having been a Member of this House for seven years, I have always assumed that when such a provision is introduced we will be able to debate its merits. I note that the restrictions in relation to the measure mean that we cannot stop it, or ask whether we are being wise and whether, given that we know the companies do not necessarily pay the tax it was assumed they would in the UK, we are getting their tax situation right. We cannot stop the measure, but we can certainly ask just how much the companies are going to benefit from it.
Amendments 5 and 6 are intended to enable taxpayers to understand how much the companies will benefit from the exemption, and how much extra money they will be able to write off against their tax bill, thus paying little tax in the future. It matters very much to the companies, because most are heavily indebted to their shareholders. They use a model involving 80% to 90% senior debt; the rest is equity loans in terms of the products that they offer. PF2 will change that very little. The amount of debt that they carry, and therefore the amount of interest that they can trade off, which the measure will allow them to do, will be relevant to their ability to give returns to their shareholders.
It is clear that those companies give their shareholders substantial returns, and will be able to fund that through such tax relief. Indeed, the shareholders’ returns are 28% on their sales—more than double the 12% to 15% that was predicted in the business cases. Between 2000 and 2016 the total value of sales of shares in PFI companies was £17 billion. It is notable that in 2016 100% of equity transactions involving those companies were to offshore infrastructure funds in Jersey, Guernsey and Luxembourg. That is based on a sample of 334 projects.
Those companies are going to get a substantial tax relief from the exemption. Yet they do not pay tax in the UK—or, certainly, there is a lot of evidence that they do not. It is an exemption that will enable them to continue to justify paying little or no tax; they will be able to write off the interest on their loans and projects against it. Yet taxpayers are not benefiting from the tax that they said they would pay.
New clause 1 goes to the heart of that question. Those companies signed up for public sector contracts, with particular rates of tax at the time they were finalised. Yet, as we know, corporation tax has varied substantially over the past decade. The debate is not about what the right level of corporation tax is; it is about a simple principle. If a company has signed up to pay a certain rate of tax, and the tax rate changes, it clearly benefits from that. We signed up to the deals for taxpayers, however, on the basis that they would pay a certain rate of tax. That tax rate will now change. New clause 1, again, asks just how much the companies are benefiting from the changes.
I know that the Minister will tell me that there are various anti-discriminatory clauses in the PFI and indeed the PF2 contracts. I agree with him. Therefore, how we might start to reclaim some of that excessive profit is a tricky question, but there is a strong case that, if a company has signed up in good faith to a particular rate of tax, surely that is the rate of tax that it should pay. That is written into the contract, it is part of the business case in the Green Book that is made on these sorts of deals. We as taxpayers have an expectation. Indeed, I would expect the Minister to have a series of sums reflecting the amount of money that would be paid back that he would write off against the large sums that I talked about. However, given that the corporation tax situation has moved from some of these companies nominally paying 28% to their paying 19% or less, that is clearly a substantial discount on what they were expected to pay. New clause 1 asks us to do what, frankly, at the moment we do not do as a country—understand what the difference is between what we expected to get in from tax from these companies and what we will get in.
It is always troubling to me that the Treasury does not seem to have a central database either of how much we were paying to take on these loans—particularly the rates of return, which we know are substantially higher than the rate of borrowing on the public sector—or of the taxation these companies are paying back versus what they were expected to pay back. New clause 1 would get to the heart of that matter and it sits alongside amendments 5 and 6 in trying to understand where these companies are making excessive profits from the public sector.
I am sure that the Minister will tell me that this is a dreadful attack on the private sector and that we should not be saying that these companies are ripping the British public off and that they are legal loan sharks. However, I ask him: if he will not accept the amendments, will he commit to gathering the data about how much these companies have paid in tax, how much difference these have made to the value-for-money case for these businesses, and therefore how our communities will be able to pay back the sums involved?
I am sure that the hon. Member for Brentwood and Ongar would love to have £169 million to invest in his local community; there are many worthy causes that I am sure he would support. I am sure that the hon. Member for Hitchin and Harpenden would be interested in the £170 million that I believe Stevenage, near his constituency, will have to pay out to PFI companies. That money could be invested in the public infrastructure that we so desperately need.
I am sure that all of us would agree that we expect these companies to pay their tax, as they signed up to in these contracts, yet it is clear that they do not. So if the Minister is not prepared to accept these incredibly reasonable amendments in this environment, I hope that he will set out precisely what he is going to do to get our tax money back. All of us and all of our constituents need and deserve nothing less.
Peter Dowd (Bootle) (Lab)
It is again a pleasure to serve under your stewardship, Mr Howarth.
I thank my hon. Friend for tabling the amendment, which seeks a review of the effect that the measures we are discussing will have on PFI companies. The Government blithely assert, including in their notes on the Bill, that companies involved in public benefit infrastructure spending are an inherently low risk for tax avoidance. That is an odd claim, especially in the light of what my hon. Friend has said. We know that some PFI companies have engaged in profit shifting to non-UK jurisdictions. It does not make sense to say that just because the profits of a company are extracted from public investment it cannot seek to be paid in a way that is fiscally undesirable.
No one should bemoan the huge public infrastructure investment that the last Labour Government enabled. It was fixing many of the problems left from years of neglect in the public sector. All Governments have taken part in PFI. When PFI was in effect the only game in town, so to speak, many public authorities took up the chance to make the investment they needed; my hon. Friend identified some in my constituency that benefited from such investment. However, we know that some contracts have produced excessive costs for the public sector, where direct borrowing could have produced much lower ongoing costs and provided for more direct influence over the quality of some ancillary services. Therefore, it is right that a review be used to work out whether we should be privileging PFI companies with exemptions from these measures at the same time as knowing that they often benefit from guaranteed profits at the public expense.
Kirsty Blackman (Aberdeen North) (SNP)
I appreciate where the hon. Member for Walthamstow is coming from with the amendments. We support Labour on new clause 1, which calls for a review of how much we are spending and where the money is going. Good points have been well made about how companies are making more of a profit as a result of the changes in corporation tax rates.
On the other amendments, we are concerned about the possible impact that any changes to PFI would have on Scotland. We are still paying off a number of PFI projects in Scotland. I know that people say that all Governments have implemented such projects, but the Scottish Government have moved away from the PFI funding model because the SNP does not support it. We have the Scottish Futures Trust and not-for-profit delivery mechanisms, which mean that profits do not go to private companies.
Stella Creasy
To be clear, the evidence of the problems with the PFI model extends to the not-for-profit model. I encourage the hon. Lady to read the work of Mark Hellowell of the University of Edinburgh. No political party can claim the moral high ground when it comes to private finance in this country.
Kirsty Blackman
I appreciate the hon. Lady’s comments. The not-for-profit model that was set up when I was a local councillor, which built schools in Aberdeen, was significantly better than some of the previous rental models. Perhaps that was just because Aberdeen was particularly diligent with the not-for-profit model that it chose specifically for its schools funding project.
As I have said, I am concerned about the effect the amendments might have on the projects in Scotland that were put in place under the previous Scottish Executive. The SNP Scottish Government have been very clear that the old PFI models are not the way to go and that they are incredibly burdensome for the public purse. Although there is a shiny new building, quite often they saddle the public purse with repayments for a very long time, which can amount to much more than the original cost of the building. There is also less flexibility, because the rules of the private sector organisation have to be abided by.
I agree with the concerns raised about PFI models and that we should not use them. The SNP Scottish Government have recognised that and are using initiatives such as the Scottish Futures Trust, which has delivered a significant amount of funding, savings and benefits to the people of Scotland. As I have said, we support new clause 1 because we do not agree with PFI models and think that it is completely reasonable to reconsider them, but we do not support the Labour party’s other amendments.
Kelvin Hopkins (Luton North) (Lab)
It is a pleasure to serve under your chairmanship, Mr Howarth. Rather than speak specifically to the amendment, I want to make a comment. My hon. Friend the Member for Walthamstow has raised some very important issues about PFI, but from the beginning it has been an outrageous rip-off of the public purse and the citizens of this country. It should be abandoned. Indeed, in his speech at our party conference, the shadow Chancellor suggested that we should take PFI contracts into public ownership, saving billions for the public purse over time. That is what I want. I have spoken against, voted against and written a chapter of a book against PFI, because it is utterly ridiculous and total nonsense. It is driven by ideology to try to drive as much of the public sector as possible into the private sector. That is what PFI is really about: it puts vast sums of public money into rich private pockets. I will pursue that view vigorously over the next few years.
The Financial Secretary to the Treasury (Mel Stride)
It is once again a great pleasure to serve under your chairmanship, Mr Howarth. Before I respond specifically to the amendments tabled by Opposition Members, I will set out the aims of the Bill and some details of how it will work.
Clause 20 and schedule 5 introduce new rules to limit the amount of interest expense and similar financing costs that a corporate group can deduct against its taxable profits. Interest is a deductible expense in the calculation of profit subject to corporation tax. Therefore, there is a risk of groups borrowing excessively in the United Kingdom, with the resulting deductions for interest expense eroding the UK tax base.
The new rules are part of the Government’s wider changes to align the location of taxable profits with the location of economic activity. The rules follow the internationally agreed recommendations from the OECD’s base erosion and profit shifting, or BEPS, project to tackle tax avoidance by multinational companies. The rules aim to prevent businesses from reducing their taxable profits by using a disproportionate amount of interest expense in the UK.
The schedule introduces a new part into the Taxation (International and Other Provisions) Act 2010 and will raise about £1 billion a year from multinational enterprises and other large companies. The rules take effect from 1 April 2017, as announced in the business tax road map published in 2016 and reconfirmed at the spring Budget this year. Maintaining that commencement date ensures that groups that have already made changes in light of the new rules are not unfairly disadvantaged and that there is no delay in protecting the UK tax base. Given the sophisticated nature of corporate finance, the rules are detailed and technical. However, the core effect of the rules, which aim to match deductions with taxable profits, is relatively simple.
All groups will be able to deduct £2 million in net interest expense a year, so only larger businesses—those with financing costs above that level—can suffer a restriction. Above that threshold, the core rules will restrict interest deductions to a proportion of the group’s UK earnings or the net external expense of the group, whichever is lower. I will discuss the rules in further detail.
First, the fixed ratio rule will limit interest deductions to 30% of the company’s taxable EBITDA—earnings before interest, tax, depreciation and amortisation. Secondly, the modified debt cap will limit interest deductions to the net external interest expense of the worldwide group; this rule is consistent with the recommendation in the OECD BEPS report. There are provisions to ensure that the rules will not adversely affect groups that are highly leveraged with third-party debt for genuine commercial reasons. Thirdly, the group ratio rule will allow groups to increase their deductions if their UK borrowing does not exceed a fair proportion of the external borrowing of the worldwide group. In addition, there are public infrastructure rules that provide an alternative but equally effective approach for companies that are highly leveraged because they own and manage public infrastructure assets.
The Bill provides rules to help address fluctuations in levels of net interest expense and EBITDA. Amounts of restricted interest are carried forward indefinitely and may be deducted in a later period if there is a sufficient allowance. Unused interest allowance can also be carried forward, for up to five years.
The Bill introduces additional provisions to ensure that the rules work for certain types of business, such as banks and insurers, joint ventures, securitisation vehicles and real estate investment trusts. There are also rules to deal with particular issues including related parties; leases; payments to charities; the oil and gas tax regime; incentives such as the patent box and research and development tax credits; and double taxation relief. Given the technical nature of the Bill, we need to deal with a wide range of corporate arrangements. We will, as always, continue to keep their detailed implementation under review.
I welcome the opportunity to debate amendments 5 and 6 and new clause 1, tabled by the hon. Member for Walthamstow. Amendments 5 and 6 propose a review within three months of Royal Assent on the effect of the provisions contained in the new chapter 8 proposed by the schedule on companies with PFI contracts. Legislating for a review of the rules within three months is unnecessary. The Government have already undertaken extensive work and consultation on the issue over the past 18 months. We will continue to monitor the impact of the legislation, and Government officials continue to meet key stakeholders impacted by the rules in the chapter.
Proposed new chapter 8 includes the public infrastructure rules designed to ensure that companies holding public infrastructure assets are not disproportionately affected by the corporate interest restriction. In particular, proposed new section 439 of chapter 8 contains a grandfathering provision for loans entered into by certain companies on or before 12 May 2016. Such companies are highly leveraged as part of their standard business model, given their fixed assets and fixed income flows. The grandfathering ensures that investors who entered into contracts to provide Government services in good faith are not unfairly impacted. That could be the case where the additional tax expense was not factored into original funding models and there is no scope to pass on any of the cost. Given that PFI projects are long-term in nature and provide many of our vital public services, the rules grandfather the treatment of interest payable to related parties to the extent that the loan was agreed prior to the publication, on 12 May 2016, of detailed proposals for the interest restriction rules.
Stella Creasy
The Minister says that he has met the stakeholders affected and is setting out how those companies might be impacted. Will he clarify which companies his officials have met to discuss these rules?
Mel Stride
With respect to the hon. Lady, I do not think I said that I had met all the stakeholders, but as part of their ongoing work in this area officials naturally meet a large range of officials. If she is keen to know exactly who they are and what types of companies, I would be happy to ask my officials to write to her with that information.
The hon. Lady also proposes a new clause, which would require a review within three months of Royal Assent of how tax relief is given for losses, deficits, expenses and other amounts in relation to PFI companies. PFI companies do not obtain any special treatment under the tax rules in the way that losses, deficits, expenses and other amounts are treated. Legislating for a review of these rules in three months is unnecessary. As we debated on Tuesday, the Government have already undertaken extensive work on the treatment of losses and deficits over the past 18 months and through extensive consultation. The Government will continue to monitor the legislation’s impact, and officials continue to meet key stakeholders impacted by the rules in this chapter.
I turn now to some of the more general and specific points that the hon. Lady has raised. In doing so, I should acknowledge the important contribution she has made over a long period in Parliament on the important issues surrounding PFI. She is right to point out that PFI contracts are the creatures of many different Governments. It would be widely accepted that many of the issues that have arisen, and to which she and other Members have alluded, certainly occurred under the watch of the previous Labour Government. She rightly points out that not all of those contracts are perfect. That is evidenced by the fact that this Government have secured a rebate of about £2.5 billion by working with the private sector and raising funds through that approach.
We have had a general discussion about PFI, and proposed chapter 8 gives rise to the question whether PFI infrastructure projects should be treated differently from other projects that would otherwise be subject to the interest restriction. I have two important points to make. First, these are infrastructure projects, so they are, by their very nature, highly leveraged. They are projects where large amounts of interest are often part of the natural, right and proper, way in which they are constructed.
The second point, which in a sense follows from that, is that of proportionality. To what degree does one apply this kind of approach to a business of that particular nature, given that the downstream revenues from PFI arrangements cannot be easily adjusted to accommodate the provisions that would otherwise apply in the Bill?
The hon. Lady raised two specific points. One was related to the Green Book calculations. In 2012 we set up the operational efficiency programme to deliver savings from existing programmes. That brought in £2.5 billion. We also introduced the new PF2 model, to offer better value for money and greater transparency in the operation of these arrangements.
Kelvin Hopkins
Rather than having another elaborate PFI system, would it not be simpler, in the health service and in the education sector, to build by traditional public borrowing, which is extremely cheap and would save billions for the taxpayer?
Mel Stride
With great respect to the hon. Gentleman, I think that is probably a little out of scope of the issues being dealt with in the Bill. I make the point that his party is committed to bringing a lot of these back in, as it has described. That is a fine idea in principle, but it will cost a huge amount of money and there has been no suggestion from his party as to how it would be raised, what taxes will have to be raised as a consequence, or what additional borrowing will have to occur in order to do that.
Peter Dowd
I do not think that the Minister has recognised the paradigm shift in the public’s view of PFI. In fact, Mr Howarth, as you know, in the area where we live there is a big debate at the moment about a significant infrastructure project, which is creating all sorts of tensions because of the implications of the way it is constructed. I am not criticising anybody, because all political parties—certainly the two main parties—have dipped their fingers, possibly even up to their shoulders, into PFI, so it is not a question of pointing a finger at anyone.
My hon. Friend the Member for Walthamstow eloquently and forensically identified some of the issues, and I thank her for that. However, things are moving on and we have to keep up with the tone outside in the country. People are becoming increasingly suspicious of PFI contracts. I know that we are not discussing the whole question of PFI. I completely accept that, but there is a question about the generality of the measure, to contextualise it. What we have here in the Bill is one of the most complex measures ever legislated for in Britain. Schedule 5 alone stretches to 157 pages of dense text, which is far longer than the entire length of the majority of Bills that we debate in Parliament, and I daresay is longer than the entire tax code of some jurisdictions. We have to take that into account; that is the context we are working in.
The length, of course, relates to the complexity of what the measure tries to achieve, but sometimes the complexity and length do not improve the operation of law. The excessive length of the existing tax code is well known. In reality we have in PFI, as identified in amendment 28, a range of services in the public sector: water, sewerage, gas and electricity, telecoms, railway facilities, roads, health facilities—referred to earlier—educational facilities, court and prison facilities, and waste processing facilities. We have moved beyond dealing with this as just a technical issue—it is a wider issue—but for today’s purposes we must identify how much those projects cost the taxpayer and how much of our tax take they denude us of.
The UK’s engagement in the OECD’s base erosion and profit shifting project, which the Minister referred to, will be welcome if it really does lead to the end of practices that have denuded Exchequers here and abroad of much needed receipts, but many people are not convinced about that. They genuinely are not convinced that PFI projects, which have been in operation for the best part of a quarter of a century, have given us the best value for money. There are deep concerns about the Exchequer being denuded of tax, especially when many of these projects, if not all of them, have the copper-bottomed guarantee of the British state. They are hardly the riskiest ventures in the world. In fact, they are probably some of the safest. We have to take that into account. There has been a shift in people’s attitude to PFI. We must recognise that things have moved on.
We certainly do not oppose the overall aim of reducing companies’ ability to shift profits through artificial interest charge arrangements—no one is suggesting that—but as I and others have said, there is a concern that those deeply complex measures and the many loopholes have already found their way into the minds of tax advisers and into the accounting practices of many corporations. I said to the Minister only the other day that we are here to guard the guards, and I know that he recognises that we are perfectly entitled to ask many questions.
The debate about PFI—the concept, the philosophy, the notion—will take place elsewhere. The shadow Chancellor mentioned it in his party conference speech. We will take the issue out to the public, but given the context we want to delve down, and one of the only ways that the Opposition have to delve down is to ask HMRC to report on the implications. Amendment 28 would do that.
The Chair
I am going to call the hon. Member for Walthamstow, who tabled two of the amendments. The hon. Member for Bootle cleverly managed to balance the context and the amendments, but we need speeches that, although they might refer to the context, actually speak to the amendments at hand.
Stella Creasy
Be under no illusions, Mr Howarth; I intend very much to speak to the amendments at hand.
The Minister argued, slightly bizarrely, that we already have information about whether the changes would affect PFI companies, because the Government have been able to assess that, yet they are rejecting our call to put that information in the public domain. The Minister said clearly that his officials have met PFI companies, and I asked him to clarify which companies. I hope that when he meets stakeholders he will meet my local hospital, which is dealing with the difficult consequences of PFI deals for its financial position. I would argue that officials who are essentially having to sack nurses to pay back PFI loans are equally stakeholders, so I would be interested to know whether he has met any of them.
Kelvin Hopkins
Does my hon. Friend have a figure for the total cost of PFI repayments every year to the national health service? That would illustrate the enormous burden of PFI schemes on our health service.
Stella Creasy
Well, this is why how much tax these companies pay matters. I hate to tell the Minister how to do his job, but I have looked at the PFI and public sector comparator documents used to assess the value for money of the deals, and they explicitly talk about the levels of tax that the companies pay and, indeed, look at how those would be traded off against the cost of borrowing to the public sector.
My hon. Friend the Member for Luton North asks about the £300 billion for which we are now indebted in repayments on the loans, as against the £55 billion of outlay. One reason why we took on the £300 billion was that we expected to get back in tax from the companies money to trade off against it. That was an explicit part of the value-for-money calculations done by the Departments. That is why the Green Book matters. That is why I am slightly troubled when the Minister says that tax treatment is part of the deal, but does not then want to give us those data. He says that his Department has looked at the matter and therefore the amendment is unnecessary. Will he therefore commit simply to publishing the information used to assess whether the exemption was in the public interest? It can be in the public interest only if it does not affect the amount of tax that we get back from the companies to go towards the £300 billion that we will have to pay out as a consequence of signing the contracts.
I encourage the Minister to read the work from the National Audit Office on this issue, and specifically about the tax adjustments made in the contracts and whether that really did get value for money for us, and indeed its assessment of PF2. Far be it from me to suggest that pride comes before a fall, but I think that he will find it as troubling as I do that we have not cracked how best to borrow, given that, as my hon. Friend the shadow Minister says, we are always a good bet. Frankly, we never let hospitals or schools go bust, so we always repay our debts. I also encourage my colleagues from north of the border in Scotland to do that, given that the problems also apply to the Scottish Futures Trust. This is about the use of private finance companies. Their tax take is absolutely part of the calculation.
I note, too, that the Minister did not address at all new clause 1 and the levels of tax that the companies signed up to pay. Again, that is very troubling. Either the Minister is telling us that he knows and does not want to tell us, or he does not know and does not care. Either way, we as taxpayers should know and should care, because that money should go towards the £300 billion.
The new clause matters because we know that tax relief on interest paid to shareholders and other affiliates where the debt is held at arm’s length, which is what many of these companies do, has been widely abused, with shareholders injecting debt for the sole purpose of reducing their pre-tax profits and hence the company’s corporation tax. When the Minister gives the tax relief to these particular companies, which he admits are highly leveraged, he is giving them a bonanza. All the amendments do is ask the Government to admit just how much that is, because all of us will have to recognise that that money, which the companies will be able to pay off against their loans, is money that we will have to find to bridge the gap in relation to the £300 billion that we have now committed to paying them. It is entirely in order and within the scope of this legislation, Mr Howarth, that we should ask for that information.
For the avoidance of doubt, let me be very clear that I have absolutely no intention of giving these companies a penny more of taxpayers’ money. I do not wish to get into litigious battles with them about their tearing up their contracts and giving their lawyers an opportunity to claim even more money. Frankly, they have had more than enough from the British taxpayer. I am determined that we can table legislation and show these companies that we are serious about recognising where they have generated excessive profits, where we can learn from the windfall tax of the previous Labour Government, to be able to bring them to the table to renegotiate the costs and get the money back for the British taxpayer so that we can properly invest in infrastructure.
There is another debate to be had about the range of credit available to this country, but with this legislation and the tax breaks that this Government are giving to these companies, it is the taxpayer who will lose out, and we deserve to know by just how much.
Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to serve under your chairmanship, Mr Howarth. I have just two comments. The first is in response to what the Minister said about the extent to which the new measures implement OECD recommendations. The second is a comment about our amendment 28.
As I am sure the Minister is aware, the OECD BEPS recommendations, and specifically recommendation 4, which applies to this area, offer a range of possibilities when it comes to deciding what the write-off can be. The cap is allowed to be between 10% and 30%. Her Majesty’s Government have decided to go with 30%, but it is feasible for states to go down to 10%. When the EU looked at implementing this measure through the anti-tax avoidance directive, which of course applies to us for as long we are still a member of the EU, again a range between 10% and 30% was given. I have not yet heard why the Government have chosen 30% rather than 10%.
On amendment 28, our request for a review is specifically about the rationale for having special provisions for public infrastructure-providing companies. That is in the light of some quite worrying developments occurring around large swathes of British public infrastructure now being owned by firms and in effect provided through debt finance.
Stella Creasy
My hon. Friend is making a powerful point about the nature of these companies based overseas. Does she share my frustration that the Minister seems to think that does not matter because these clauses will only affect companies in the UK while not recognising that those companies have only nominal addresses in the United Kingdom, with their parent companies being based overseas? They are able to trade off the tax exemptions that the Bill will bring in. All of these PFI infrastructure companies may well claim to be UK-based for tax purposes to trade off these incomes, but actually they will be in Guernsey and Jersey, the Cayman Islands and the like. It is a con.
Anneliese Dodds
I am grateful to my hon. Friend for making those points. Indeed, that issue came up in Committee of the Whole House. There needs to be much more muscular engagement in questions around profit shifting between jurisdictions and especially between those that have low or no-tax regimes, where there appears to be a lot of evidence of harmful tax practices.
Mel Stride
I thank hon. Members for their contributions to this important and interesting debate. To come back on a few of the points made by the hon. Member for Walthamstow, at the heart of this there is a distinction. She kept raising the issue of how PFI organisations should have taken into account that tax treatments could change. To some degree that is a fair argument, but there is a distinction for a company that is involved in highly leveraged infrastructure projects, which after all is delivering to public services. While she might be right that many PFI contracts have been very lucrative, not all of them have been; some are far more marginal. She has to conjure with the possibility that, if we go down the road she suggests, some may fail. That is an important point for her to consider.
On the hon. Lady’s second point, it may be the case that part of the rationale for entering into PFI agreements was an assumption about what future taxes may be paid under the pre-chapter 8 system. However, such a decision would have been taken at that time, on that basis, and that is nothing other than what she would expect them to do. An important point is that after the announcement of these arrangements all PFI arrangements will not be subject to chapter 8; they will be under the arrangements we discussed previously.
The hon. Lady talks about smoke and mirrors in relation to overseas businesses effectively brass-plating over here, with all the profits being diverted elsewhere. There is plenty of anti-avoidance legislation out there, including the diverted profits tax, to address those matters.
The hon. Member for Oxford East raised the BEPS project and recommendation 4. She is right that there is a corridor—a range of percentages that could be applied for the corporate interest restriction—and that is between 10% and 30%. The Government have a balance to strike because of the importance of the UK remaining competitive. Germany, Italy and Spain have all elected to go for 30%. It should not be overlooked that these measures are bringing in £1 billion extra every year in which they operate, which is a considerable increase in the tax take. The Bill will bring in about £16 billion across the scorecard period, about £5 billion of which will be from this one measure. On that basis, I ask the Committee to reject the amendments and to support the clause and the schedule.
Question put and agreed to.
Clause 20 accordingly ordered to stand part of the Bill.
Schedule 5
Corporate interest restriction
Amendment proposed: 5, in schedule 5, page 364, line 10, at end insert—
“443A Review of effects in relation to PFI companies
(1) Within three months of the coming into force of this Chapter, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects of the provisions of this Chapter in relation to PFI companies.
(2) The review shall consider in particular the effects if the provisions of—
(a) the Chapter, and
(b) the exemption in section 439 were not to apply to PFI companies.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”—(Stella Creasy.)
This amendment requires a review to be undertaken of the impact of the provisions of Chapter 8 of new Part 10 of TIOPA 2010 in relation to PFI companies and if the provisions did not apply to PFI companies.
Question put, That the amendment be made.
The Chair
With this it will be convenient to discuss the following:
Amendment 29, in schedule 6, page 479, line 15, at end insert—
“Chapter 7
Review and policy statement
1218ZFB Review of operation of this Part and policy statement
(1) No later than 30 September 2020, the Chancellor of the Exchequer shall lay before the House of Commons a report of a review and a policy statement in accordance with the provisions of this section.
(2) The review shall consider—
(a) the number of touring exhibitions benefiting from the relief,
(b) the number of other exhibitions benefiting from the relief,
(c) an assessment of the operation of the provisions.
(3) The policy statement shall set our proposals for the continuation, discontinuation or modification of the relief from 2022 onwards.”
This amendment would make statutory provision for the 2020 review of the operation of the new museums and galleries tax relief, including consideration of its effects and its future beyond 2022.
That schedule 6 be the Sixth schedule to the Bill.
Mel Stride
The Government recognise the cultural value of museums and galleries across the United Kingdom, and understand the role they play in local communities. Clause 21 and schedule 6 provide support to those institutions across the country by introducing a corporation tax relief for the production of new exhibitions. The relief will encourage large and small museums and galleries to develop creative new exhibitions and to display their collections to a wider audience. To provide further incentive for institutions to tour their best exhibitions across the UK and abroad, there will be a higher rate of relief for touring exhibitions.
There are more than 1,700 officially accredited museums and galleries in the United Kingdom, as well as many other galleries without permanent collections. The relief introduced by clause 21 recognises the importance of new, creative exhibitions to those cultural institutions.
The Government originally intended the relief to be available solely on temporary and touring exhibitions. However, a consultation over autumn 2016 made it clear that that would not be accessible to a number of smaller museums and galleries. To ensure a wide range of institutions across the country are able to access the relief, autumn statement 2016 announced that it would be extended to permanent exhibitions. Given that they can at times be much more expensive than temporary exhibitions, the relief will be capped at the equivalent of £500,000 of qualifying expenditure per exhibition, to allow the change without significantly increasing costs to the Exchequer.
Following the responses to a consultation document released shortly after the autumn statement, the Government have also amended the legislation to include exhibitions with an element of live performance where that is not the main focus. Through constructive and positive engagement with the industry, we have been able to design a relief that will work across the sector.
Clause 21 introduces a new corporation tax relief and payable tax credit for the qualifying cost to museums and galleries of producing a new exhibition. It will allow qualifying museums and galleries to claim a payable tax credit worth up to 25% of the cost of developing a touring exhibition and 20% of the cost of a non-touring exhibition. The clause will take effect from 1 April this year, allowing museums and galleries to benefit from the date that was announced and expected.
The relief is aimed at museums and galleries with charitable or educational objectives. Across the country, such institutions play a major role in society by maintaining important objects and educating people about different cultures or local history. For that reason, the relief will only be available to charitable or local authority-owned museums. Exhibitions that are not open to the general public or that are run purely to advertise or sell goods or services will not be eligible.
Peter Dowd
No doubt all hon. Members support these measures, which will see more people, particularly children and young people, having the opportunity to access touring museum and gallery exhibitions and expand their educational horizons.
The United Kingdom leads the way with its diverse range of museums and galleries. It is estimated that there are 2,500 museums and galleries in the UK, which collectively receive more than 100 million visits a year. That is quite substantial. As you will know, Mr Howarth, some of the finest museums and galleries in the country are in our own city region: the Walker Art Gallery, the Atkinson, the Lady Lever, the Merseyside Maritime Museum, the World Museum, the International Slavery Museum, the Beatles Museum—the list goes on.
The huge impact the sector has on the economy cannot be discounted. According to the Department for Digital, Culture, Media and Sport, the culture sector accounts for 10% of GDP. Broadly speaking, £1 in every £1,000 in the UK economy is directly related to the museum and gallery sector, and there is a spend of more than £650 million a year.
The funding of museum and gallery exhibitions varies between national museums and the smaller independent museums. On average, national museums generate almost half of their own income, while the rest comes from the Government. Small independent museums are often fully funded by private donations, ticket sales and sponsorship. Most museums and gallery exhibitions are limited to large city centres, with a sizeable proportion in the capital. Domestically touring exhibitions allow the opportunity for people who would not otherwise have access to museums and galleries to see, visit and be in contact with them. We are fully behind the measures in schedule 6, which seek to support smaller companies that produce touring museum and gallery exhibitions and struggle to break even.
The Chair
I think the hon. Gentleman is referring to the Minister. I assure him that I have nothing further to say about it.
Peter Dowd
Which is a shame, I have to say.
The Minister referred to consultation. Consultation about what we want to do in the future, what people would like to see from the relief and how it might operate is in advance of the implementation. We consult, and we think this or that is a good idea, but it is also important to find out whether the relief has had the effect that the consultation wanted to achieve. One of the only ways to establish whether the consultation and the implementation have been effective is a review, and that is what we seek. If we are to have these reliefs, we must review whether they are doing the job they are supposed to do. The amendment is fairly simple in that regard.
Kelvin Hopkins
I support what my hon. Friend said, and I hope Members will support the amendment and that it will be successful. I have a brief comment to make.
In my ideal world, we would fund museums and the rich cultural heritage we have not through tax reliefs but by direct funding. We would collect all the tax and then pay it to museums and galleries directly through local authority and national funding and by specific grants where necessary. There would, of course, be charitable and private donations as well, but the great bulk of it would be in the public sector. I hope we can look towards a world where we have direct public funding, rather than a complex jungle of tax reliefs, and collect all the tax and forget about the tax reliefs.
The Chair
The hon. Gentleman has a tendency in this Committee to lead us down paths beyond the scope of the amendments he addresses. That being a matter of broadening our cultural horizons, I have been very lenient with him, but I hope he will in future stick to the matter at hand.
Mel Stride
I thank Opposition Members for their contributions. The hon. Member for Bootle calls once again for a review. We seem to be having a review-fest. Of course, there are always some arguments for having a review, but the critical thing is whether it is proportionate and sensible, given the measures we are taking on consultation. We will, of course, keep all these issues and the concerns he raised about the possible misuse of the provisions for the purposes of tax avoidance closely under review.
Peter Dowd
I understand where the Minister is coming from in his reference to a review-fest. I referred earlier to the size of the Bill, which is one of the longest Finance Bills in the history of Parliament. Given that the Government have started the festival off with the size of the Bill, we are perfectly entitled to a festival on reviews of that huge Bill. I am sure the Minister agrees with that.
The Chair
I do not think we want to get bogged down in the length of the Bill itself, but should rather confine ourselves to the amendments.
Mel Stride
Quite right, Mr Howarth. I think we should just agree that I will see you at Glastonbury next year. Sorry—I will see the hon. Gentleman there; I might see you there as well, Mr Howarth.
On the specific point the hon. Gentleman raised about ensuring that relief is not abused, anti-avoidance rules are clearly critical to the long-term success and stability of the museums and galleries exhibition tax relief. The Government will include rules similar to those applied under the film tax relief to prevent artificial inflation claims. In addition, there will be a general anti-avoidance rule, based on the general anti-abuse rule, denying relief where there are any tax avoidance arrangements relating to the production. During the consultation, respondents generally said that the strategy appeared robust and did not identify any additional opportunities for abuse. Of course, as I have said previously, HMRC will continue to monitor these important matters. On that basis, I hope that the hon. Gentleman will not press his amendment.
Question put and agreed to.
Clause 21 accordingly ordered to stand part of the Bill.
Schedule 6 agreed to.
Clause 22
Grassroots sport
Anneliese Dodds
I beg to move amendment 30, in clause 22, page 27, line 25, at end insert—
“217E Review of operation of this Part
(1) Within fifteen months of the coming into force of this Part, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review about the operation its provisions (including in relation to different eligible sports).
(2) The review shall, so far as practical, identify the extent to which the provisions have benefitted particular eligible sports.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”
This amendment would make statutory provision for a review of the new relief for grassroots sport, including identification of benefits to particular sports where possible.
Anneliese Dodds
I should at the start declare an interest in this topic: my partner is an amateur football referee in the Uhlsport Hellenic League and others.
First, we need to be clear that the measures have been introduced, according to the Government’s consultation of last year, at least partly due to a lack of other funding sources for sport. That is obviously rather worrying, particularly following widespread concern that the legacy of the Olympic games has not been capitalised on to build the habitual involvement of the wider population in sport.
We also need to consider this measure in the context of other taxation measures that affect sports facilities, not least the changes to business rates and the fact that there was such a long postponement of the uprating. That has had a significant impact on many clubs, whose headquarters or area of operation is also that of a small business; I am particularly thinking about riding schools, for example, which may have seen a substantial increase in their business rate. There is also an unfortunate interaction between small business rate relief and the relief provided through the community amateur sports clubs relief. I mention that because it is important that we do not look at this issue entirely in isolation, because corporate support for sport can be enormously fickle; it will relate to the nature of the business environment. Many smaller sports clubs—exactly those the measure seeks to support—need reliable funding over the long term, and they particularly need to know that their premises will be supported over the long term.
For those reasons and others, we believe that there needs to be a thorough review of the benefits of this proposed relief for grassroots sports. We think it particularly important that that review examines which sports would be supported through the mechanism. That is especially important when it is clear that there are funding gaps in certain areas of sport in Britain, compared with other countries. For example, the provision of athletics facilities outside the capital is very patchy, particularly for amateur athletics. That is why we request a review of the measure.
Mel Stride
Before I speak to the amendment, I will set out for Committee members the general background and aims of the clause. Clause 22 introduces a new tax relief to support investment in grassroots sports by companies and our sports national governing bodies. It will help governing bodies channel their profits into grassroots sports and will give companies a simple means of making valuable contributions to support grassroots sport activity.
The changes made by the clause will allow qualifying expenditure on grassroots sports as a deduction from the company’s total profits in calculating their corporation tax profits. Sport governing bodies and their subsidiaries will be able to make deductions for all their contributions to grassroots sports. Companies will be able to make deductions for all contributions to grassroots sports through sport governing bodies, and deductions of up to £2,500 in total annually for direct contributions to grassroots sports. The relief has been designed to be simple to make it attractive to potential contributors and to allow as many organisations that support grassroots sports to benefit as possible.
Contributions must facilitate participation in eligible amateur sport, and the activities must be open to a sufficiently broad section of the public. The hon. Member for Oxford East asked who would be included and excluded. I am happy to write to her on that matter so that she has all the information she needs. No payments to participators will be allowed, other than to cover the reasonable cost of participation. Such requirements will ensure that payments are made for the intended purposes and will prevent payments from being made for personal benefit.
Following the calling of the general election, clause 22 was removed from the original Bill. The clause will take effect from 1 April 2017 so that taxpayers can still benefit from the changes being made from the original commencement date.
I do not want to dwell too long on amendment 30 because I am conscious that we are eager to make progress on what is a very lengthy Bill. On the issue that the hon. Lady raised about the interplay between business rate relief and sports club reliefs, if she writes to me with her questions I will be happy to provide the information to her. However, I can reassure hon. Members that the Government ran a full consultation on the policy and the legislation prior to its inclusion in the Bill. During that process, there was extensive engagement with key stakeholders to ensure that the legislation is well designed and targeted at meeting its policy objectives. I was pleased to see a recent article in World Sports Advocate welcoming this new relief as
“a welcome incentive to support community sport for everyone”.
An important aspect of the legislation is that it has been deliberately designed to be as simple as possible to operate. There is no new reporting requirement and we want the new relief, particularly the relief for small deductions by companies, to benefit a wide range of sports in the UK without added administration burdens and costs. The Department for Digital, Culture, Media and Sport will of course continue to liaise closely with the sports governing bodies on a range of issues through their existing processes. A review, particularly to the timescale proposed, is neither practical nor necessary, and I hope that Opposition Members will not press their amendment to a vote.
Anneliese Dodds
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 22 ordered to stand part of the Bill.
Clause 23
Profits from the exploitation of patents: cost-sharing arrangements
Anneliese Dodds
I beg to move amendment 31, in clause 23, page 32, line 45, at end insert—
“357GCZG Review of changes to provisions for cost-sharing arrangements
(1) Within fifteen months of the passing of the Finance (No. 2) Act 2017, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review about the effects of the changes to cost-sharing arrangements.
(2) In this section, “the changes to cost-sharing arrangements” means the changes to this Part of this Act made by section 23 of the Finance (No. 2) Act 2017.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”
This amendment would make statutory provision for a review of the effects of the changes relating to cost-sharing arrangements on profits from the exploitation of patents or similar intellectual property.
Anneliese Dodds
As hon. Members will be aware, the patent box system in the UK was introduced following the Labour Government’s 2009 Budget, which committed to,
“consider the evidence for changes to the way the tax system encourages innovative activity and the relative attractiveness to global firms as they make decisions on where to locate their research and development and other innovation activities.”
As a result of that commitment, the patent box was created, intended to cover income from patents dating from April 2013. In 2010, before it came into practice, it was altered by the coalition Government.
The patent box rules reduced the corporation tax that accrues to profits from the development and exploitation of patents and some other forms of intellectual property. Our regime was identified during the OECD BEPS process, which we have already referred to this morning, as harmful and open to abuse. It was also identified as potentially harmful by the EU’s code of conduct group in 2013. It is therefore positive to see attempts to tighten the regime, following other measures that were discussed last year.
We have already seen a shift to the nexus basis for identifying the fraction of profits that will be allowed in a claim through the patent box as derived from R and D activities. That brings us in line with international best practice. It is good to see other countries adopting that approach as well. In this context, the British tax regime undoubtedly will have some impact on business investment decisions, but comparative evidence suggests that other factors, not least infrastructure and the availability of highly skilled researchers, technologists and other workers, are most significant to our overall competitiveness.
Mel Stride
The Opposition amendment would require the Government to review the effects of the changes to cost-sharing arrangements made in clause 23. Before I set out why that review would be inappropriate, I will remind Committee members of the background of the clause and what it is designed to achieve.
The clause introduces provisions for companies undertaking R and D collaboratively under a cost-sharing arrangement that will ensure that those companies are neither advantaged nor disadvantaged compared with those undertaking R and D outside such an arrangement. Following the calling of the general election and subsequent wash-up negotiations between the Government and the Opposition, clause 23 was removed from the Bill that became the Finance Act 2017. The Government propose that the provisions in the clause will apply from 1 April 2017 as originally intended and announced.
The UK patent box was introduced by the coalition Government in 2012. It provides a reduced rate of tax to companies exploiting intellectual property, such as patents, to incentivise them to grow their businesses and to create jobs in the UK. The Finance Act 2016 included changes to the patent box rules in line with the new international framework agreed by the OECD for intellectual property regimes, as part of the BEPS action plan. The main change was the introduction of the R and D fraction, which connects the amount of profit from an item of intellectual property that can benefit from the patent box to the proportion of the R and D activity undertaken by the claimant company.
The 2016 Act did not directly address R and D undertaken as part of cost-sharing arrangements, as it required further consultation to ensure that, as the hon. Member for Oxford East pointed out, very complex collaborative arrangements are appropriately addressed. Following completion of the consultation, the clause now adds specific provisions to deal with cost-sharing arrangements.
Under a cost-sharing arrangement, typically companies agree to undertake a proportion of R and D activity as part of a collaborative project, therefore receiving a commensurate proportion of income if the project is successful. That means that the calculation of the R and D fraction must take into account how the company has discharged its proportion of the R and D costs throughout the life of the arrangement.
The arrangements create specific challenges in the application of the OECD framework. Over the life of the arrangement, the claimant’s R and D activity may fluctuate year on year and trigger additional top-up contributions—balancing payments—payable to and from the claimant company to other companies in the cost-sharing agreement. Although at the end of the project the claimant may have met its agreed proportion of R and D costs, the interim position can differ greatly. Without providing a specific mechanism to deal with the treatment of the payments, the claimant’s R and D fraction would be unduly depressed, putting it at a comparative disadvantage to claimants undertaking R and D outside a cost-sharing arrangement. The changes made by clause 23 are therefore exclusively focused on addressing that issue. Specifically, balancing payments made by the claimant will generally be treated as if subcontracted to the other member of the cost-sharing arrangement, so the impact on the fraction will depend on whether the two parties are connected.
It might be helpful at this stage to remind the Committee that under the revised patent box rules, payments to connected subcontractors reduce the R&D fraction, as does spending on acquired intellectual property, in line with the OECD guidelines. Balancing payments received by the claimant—that is, receipts—will be offset against outgoing payments, again depending on the relationship between the parties.
The hon. Lady raised the question whether that could be used for the purposes of tax avoidance. My comment is that the OECD base erosion and profit shifting project agreed an acceptable framework for intellectual property regimes that would address concerns about profit shifting, and the UK patent box regime was revised in the Finance Act 2016 to align with that framework. The changes ensure that the amount of profit and benefit from the patent box is restricted to the proportion of research and development undertaken by the company when compared with the total research and development. As a result of the changes, the payments and receipts should net out to ensure that, at the end of the project, the claimant’s R&D fraction reflects only the costs it has incurred to meet its agreed share of R&D activity.
Amendment 31 would impose a requirement on the Government to undertake a review of the effects of these changes to the patent box regime. However, the Government have carefully considered the regime and consulted extensively with stakeholders to ensure that the changes comply with the relevant international frameworks and provide no opportunities for abuse. The Government regularly publish statistics on the patent box and will continue to monitor the impacts of both the patent box and these legislative changes. On those grounds, I urge the hon. Members to reject the amendment.
Anneliese Dodds
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 23 ordered to stand part of the Bill.
Clause 24 ordered to stand part of the Bill.
Schedule 7 agreed to.
Clause 26 ordered to stand part of the Bill.
Clause 27
Substantial shareholding exemption
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Government amendments 1 and 2.
Clause 28 stand part.
Mel Stride
Clauses 27 and 28 deal with the exemption from corporation tax on gains and losses arising on certain disposals of shares, known as the substantial shareholding exemption, or SSE. Clause 27 simplifies the substantial shareholding exemption by removing some conditions that impose unnecessary administrative burdens. Amendments 1 and 2 to clause 28 together ensure that the definition of a substantial shareholding in companies owned by institutional investors applies for the whole of the SSE rules, as intended. Clause 28 introduces a new and simpler SSE for companies owned by some tax-exempt institutional investors; it will help to promote the UK as a place where global investors can establish and manage their investments in trading businesses, infrastructure projects and real estate.
The exemption was originally introduced in 2002, with the aim of eliminating the potential double taxation of trading profits when a corporate shareholder disposes of a large shareholding in a trading company or sub-group. That allows a group of companies to restructure its trading operations without facing a further tax charge. The value of the shares being sold generally reflects profits that have already been taxed, so a tax on disposal of the shareholding would amount to another layer of taxation. The Government announced a consultation on the existing rules at Budget 2016, with the aim of simplifying the rules and making the UK more competitive globally.
The changes made by clause 27 will simplify the regime in a number of ways, affording greater certainty to the business community at negligible cost. Those changes include removing the onerous condition that the company making the share disposal must show that it, and any group of which it is a part, does not have substantial non-trading activity. Previously, the company making the disposal would have had to establish the level of trading activity across a group, which could be worldwide. The change ensures that all companies holding large shareholdings in trading companies can benefit from the exemption, with a reduced administrative burden. They also extend the ownership period in which a substantial shareholding must be held in order to qualify. That ensures that companies can continue to benefit from the exemption in instances where shareholdings are disposed of in tranches over many years, or where an initially large stake in a growing company is diluted to below 10% by new share issues.
The changes made by clause 28 provide a simpler exemption for companies owned by a specific class of investor, defined as qualifying institutional investors. Those include pension funds, widely marketed UK investment funds, life assurance funds and other large international investors that would be exempted from UK tax on their chargeable gains if they held shares directly. The clause allows them to organise their investments through UK holding companies by removing tax barriers. At present, most choose to locate their holding companies in a variety of other European jurisdictions that have effective share exemption regimes. Clause 28 provides an exemption without regard to the nature of the business activities of either the company making the disposal or the company in which it has a substantial shareholding.
Government amendments 1 and 2 are essential to ensure that institutional investments in shares costing at least £20 million always qualify for SSE. That is an extension of the general SSE threshold that requires holdings to be at least 10% of the shares. Unless an amendment is made, the £20 million rule would apply to investments in real estate or other non-trade activities but not to other activities that are equally important to the UK, such as investments in major infrastructure projects or other trading companies.
The changes introduced by the clauses will make the UK tax regime more competitive globally and will incentivise these institutional investors to hold and manage their investments from the UK, with negligible cost to the Exchequer. Following the calling of the general election, these clauses were removed from the Finance Act 2017. The changes are almost wholly relieving and so the Bill provides for them to take effect retrospectively, so that taxpayers can still benefit from the changes being made from the original commencement date. The clauses simplify the corporation tax regime and make the UK a more attractive location for investment. I urge the Committee to accept amendments 1 and 2 and commend clauses 27 and 28.
Anneliese Dodds
I have a couple of brief questions. Clause 27 provides the Treasury with new powers to regulate the list of approved investors that qualify for the substantial shareholding exemption. It would therefore be helpful to know what checks will be placed on the Treasury’s use of those new powers. In its assessment of the measure, the Treasury said that the financial impact would be negligible, which sounds slightly peculiar. Any further information about that would be gratefully received.
I understand the rationale for the measure in clause 28, which will shift the qualifying conditions for exemption from the activities of the disposing company or the company being disposed of to instead focus on, as described by the Minister, the shareholding for which the disposal is made and to the other shareholders of the company disposed of. I would be interested to learn whether the Minister believes that the new measures will extend beyond trading companies to encompass, for example, commercial real estate. What assessment has he made of the likely impact that might have?
More broadly, I am keen to learn how the Government are trying to balance the need to ensure that tax treatments do not artificially impact on commercial decision making with the need to prevent any potential for abuse.
Mel Stride
The hon. Lady asks a large number of technical questions, which are gratefully received, but I hope she will forgive me if I drop her a note on the more specific points. The measures have been scored by the Office for Budget Responsibility as having a negligible cost. They are independently assessed and scored by that authority. I hope on that basis we can move forward.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Clause 28
Substantial shareholding exemption: institutional investors
Amendments made: 1, in clause 28, page 38, line 5, leave out from “applies” to “in” in line 6.
Amendment 2, in clause 28, page 38, line 10, leave out “paragraph 7” and insert “this Schedule”.—(Mel Stride.)
Clause 28, as amended, ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Graham Stuart.)
Finance Bill (Fourth sitting)
Thursday 19th October 2017
(7 years, 1 month ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 19 October 2017 - (19 Oct 2017)
The Chair
With this it will be convenient to discuss the following:
That schedule 8 be the Eighth schedule to the Bill.
Clause 30 stand part.
Clause 31 stand part.
That schedule 9 be the Ninth schedule to the Bill.
Clause 32 stand part.
New clause 3—Deemed domicile: review of protection of overseas trusts—
“(1) Within fifteen months of the passing of this Act, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review about the operation of the provisions for the protection of overseas trusts in relation to deemed domicile.
(2) The review shall in particular consider—
(a) the effects of those provisions on the Exchequer,
(b) the behavioural effects of those provisions, and
(c) the effects on the matters specified in paragraphs (a) and (b) if those provisions were repealed.
(3) For the purposes of this section, “the provisions for the protection of overseas trusts” means the provisions inserted by paragraphs 18 to 38 and 40 of Schedule 8 to this Act.
(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”
This new clause requires a review to be undertaken of the effects of the provisions for protecting overseas trusts from the new provisions in relation to deemed domicile.
Peter Dowd (Bootle) (Lab)
As ever, it is a pleasure to work under your stewardship, Mr Walker, and your perfect pronunciation of the word “schedule”.
I would like to deal with the Government’s overall intention behind this group of clauses and schedules reforming non-domiciled status. Under the measures being introduced through the Bill, an individual who has been resident in the UK for 15 out of the last 20 years will be considered UK-domiciled for the purposes of income tax, capital gains tax and inheritance tax. From appearances, one might think that overall the Government are finally doing away with non-dom status, but that is far from fact.
The changes in the measures are superficial—one could even say artificial—and designed to give the impression that the Government are seriously clamping down on tax avoidance. Why else would an exemption be built into the measures for offshore trusts? Another question is: why else would the Government have given a grace period for those non-doms affected to get an offshore trust if they do not have one already? Another question begging for an answer is: why else would the Government have actively signposted the changes for non-doms, which has set hares running? It seems to me that those are things that the architect of the measures would do if they were of a mind to completely undermine the measures’ effectiveness. They close one loophole and—hey presto!—create another. Put a new coat of paint on it and no one will notice—job done.
I of course accept that some people will be caught by the changes, but I imagine that it will be the few—and “few” is the operative word—who cannot afford the financial advice fees and legal fees to set up an offshore trust. Once again, we are talking about low-hanging fruit. In my opinion and that of some of my colleagues, this is indicative of the Government’s tax policy. They are doing this rather than tackling tax avoidance undertaken by wealthy individuals who are—I will mix my rodent analogies here—squirrelling their money away in offshore trusts, or large multinational corporations that play cat and mouse with Her Majesty’s Revenue and Customs, with, in this situation, HMRC being the mouse and the one that rarely roars to boot. It is happening daily: certain people are not paying their fair share, and the Government are instead attempting to squeeze further taxes out of everyone else. That is no doubt motivated in part by the dwindling resources of HMRC, whose staff levels have been cut by 17% since 2010. The shame that HMRC does not have the resources to clamp down on the use of offshore trusts is part of the motivation behind these measures, but I am not convinced that the Government have the inclination to do so, either.
The delayed timetabling of the measures will also have an impact on their effectiveness. They were first proposed in the summer Budget 2015, they were consulted on in late 2016, and they were meant to be debated and come into effect in March 2017. Of course, we had an unnecessary snap election, whose mother was hubris and whose father turned out to be pyrrhic. As Plutarch noted—it is always worthwhile getting in a quote from Plutarch:
“If we are victorious in one more battle with the Romans, we shall be utterly ruined.”
I ask Government Members opposite to bear that in mind when the next election comes.
Peter Dowd
I actually was going to bring that, but the Chair has difficulty enough pronouncing English to check me on my Latin.
Added to that, we had a zombie Parliament throughout the summer, with the Minister announcing that the measures would not be brought back until September. In total, that means that the best-advised non-doms will have had two years’ advance notice, while even those with little to no advice would have had seven months to prepare, even without the Government’s grace period. That is why the Opposition are proposing that, at the very least, the Government conduct—the Minister will not be surprised to hear this—a review to assess the impact of leaving in the exemption for offshore trusts on the effectiveness of the measures.
Our opposition to these measures is well noted. I raised concerns over them on Second Reading of the Finance Act 2017. We raised them further in private discussions with the Government, to no avail, as well as during the Ways and Means resolutions debate and on Second Reading of the Bill, so our view is fairly well laid out. What we want is genuinely not unrealistic or far removed from the observations of most members of the public, which is, in short, the removal of the exemption for offshore trusts from these clauses and schedules. It is simply lubricious—I was thinking of another word—to introduce measures abolishing non-dom status while at the same time creating further loopholes. I would have used “disingenuous”, but no doubt you would have ruled me out of order, Mr Walker.
I ask the Minister once more, as I have at every stage of the Bill, to remove the exemption for offshore trusts. If the Government are truly committed to abolishing non-dom status and not just paying lip service to it, the Minister should have no problem doing so.
Ruth George (High Peak) (Lab)
Does my hon. Friend agree that creating this loophole, which enables non-domiciled individuals who are coming back into UK domicile to simply send funds to offshore trusts, creates work for accountants and tax specialists without actually assisting the Treasury or the Government?
Peter Dowd
That is a very good point. It is also actually creating an awful lot of work for us, given the amount of times we have asked for this to be dealt with. It is getting pretty repetitive. I do not know how many times we have to ask for this to be dealt with once and for all; no doubt we will come back to it time and again until something is sorted out.
This is not only about non-doms using offshore trusts to hide their money and essentially subvert the measures in the clause; it is about the source of the money and its value, particularly when we are discussing how to clamp down on tax avoidance. The Government should consider a register of offshore trusts, ensuring that non-doms have to register the sources of their property and income. Again, that request is not unreasonable to the public or to our constituents who elect and send us to this place, all of whom have to register the sources of their income with HMRC. In fact, a number of the measures in the Bill will require even more financial information to be passed on to HMRC through the bulk collection of financial data by third parties. It seems to many people that there is one law for one group and another for the rest of us. That cannot be right.
Kelvin Hopkins (Luton North) (Lab)
The issue of non-dom taxation has been going on for years. The reality is that Conservative Governments and perhaps even Labour Governments have not gone far enough to eliminate the problem by saying that these people are going to pay tax properly and not wriggle all the time. Does my hon. Friend agree that we have to get rid of a world where rich people live in Monaco in the south of France and fly in a couple of times a week in their private planes, working in the City and making billions, just to avoid tax, and that we should be making sure they pay their taxes and be looking after ordinary people?
Peter Dowd
What we need is a fair taxation system—that is the key. I do not think it is beyond the wit of this Government or any Government, for that matter, to deal with that. That is not to say that we have not moved some. That would not be appropriate. We have moved on.
The Financial Secretary to the Treasury (Mel Stride)
In terms of having moved some, as the hon. Gentleman puts it, does he accept that with the current proposals we have gone much further in the direction he seeks than was the case under any previous Labour Government?
Peter Dowd
It is a moving feast. Dealing with tax avoidance is—to use the old hackneyed phrase—a process, not an event. That process, at different times over the decades, moves along at different paces and with varying levels of enthusiasm. We have to set the tone and send the message from this place that we will tackle tax avoidance wherever we see it occurring. We should all do that as robustly as we can. It is not a beauty contest between which party has done the most. The reality is that we all have to stick together in tackling tax avoidance. That is the reason for our proposal, which would move this process further on, regardless of what may or may not have happened in the past.
The contention between the Opposition and the Government on this part of the Bill highlights a fundamental problem with parliamentary procedure around financial legislation. Some argue—I do not necessarily agree—that it is ludicrous that the Government can introduce a measure that claims to abolish non-dom status with an exemption for offshore trusts, and that the Opposition are unable to push through an amendment that would remove it. That goes back to the point I made earlier when the Minister referred to a review-fest. That is one of the only tools the Opposition have in this situation, given the nature of proceedings.
I do not criticise that at all. We are where we are. It would be better if we were not here, in some regards, but we are. We are trying, with the tools available to us, to move the debate on. I understand the limited scope that the Opposition have to amend financial legislation, particularly on bringing more people into tax or raising revenue. That may have to be looked at, especially in the light of the Minister’s concern that we are partying too much on this issue.
Ruth George
Given that the only reason for a trust going offshore seems to be to engage a lower rate of taxation, will my hon. Friend join me in asking the Minister what the reasons are for the exemption for offshore trusts and for opposing listing those offshore trusts to ensure we have greater transparency in our tax system?
Peter Dowd
That is a fair point. I will hang on every word the Minister says when he explains that today; he will have my full attention and concentration.
The convention of the limit on parliamentary scrutiny, particularly at a time when the Government do not have a parliamentary majority, risks enfeebling the Opposition by denying us the ability to properly scrutinise the Government and their financial legislation—essentially, the ability to do our job. Here we are, with a limited armoury, and that is why we are asking for a review. It is important that this is as transparent and open as possible. This is the line I bring to the Committee and have put to the House a number of times: it is not a question of us, the Opposition, guarding the guards; it is a question of the public guarding the guards. That is why we have tabled this measure.
Mel Stride
Again, it is a pleasure to serve under your chairmanship, Mr Walker.
Members of the Committee are now turning their attention to clauses 29 to 32, which with schedules 8 and 9 bring an end to permanent non-dom status in the United Kingdom. This historic change was announced by the Government at the 2015 summer Budget. The provisions were then introduced in the Finance Bill in the last Parliament, but were removed at the Opposition’s request following the calling of the general election. At the time, the Government announced they would return to legislate these proposals at the earliest opportunity, and I am pleased to be able to deliver on that promise and introduce the changes from April 2017, as originally intended. I should perhaps pick up the comments by the hon. Member for Bootle, who suggested that the delays, such as they are, may in some way have favoured non-doms by delaying the introduction of these measures. These measures will be introduced, as we have always indicated, in April this year. In that sense, they are retrospective in a way in which I am sure he will approve.
As the Committee will be aware, individuals who are non-domiciled in the UK for tax purposes enjoy two significant advantages. The first is that where such individuals are resident in the UK, they have access to the remittance basis of taxation. That allows them to defer tax on any of their income and gains arising overseas until they are brought into the United Kingdom. The second big advantage is an inheritance tax rule, whereby those who are domiciled overseas need pay tax on only their assets that are situated in the UK, rather than on their assets worldwide. Those advantages have been a feature of the UK tax system for many years. As successive Governments have recognised, the advantages have played a big role in ensuring that the UK is an attractive place to live and work for people from around the world, and it should not be forgotten that non-doms have actually brought in around £9 billion each year in much-needed revenue for the Exchequer.
None the less, the Government recognise that there are some unfairnesses in the current rules for non-doms that need to be addressed. For example, the Government believe that it is unfair that someone can live in the UK for lengthy periods of time—in some cases, virtually their entire life—and continue to enjoy tax advantages that are not available to the vast majority of people who live and work in the UK. These provisions seek to address that unfairness, and I am sure that will enjoy cross-party support.
The changes being made by clause 29 will bring an end to the permanent non-dom status for the purposes of both income tax and capital gains tax. That means that from April 2017 anyone who has been resident in the UK for 15 or more of the previous 20 years can no longer be treated as a non-dom for tax purposes. They will instead be taxed in the same way as everybody else and pay tax on their worldwide income and gains. Likewise, anyone who was born here with a UK domicile of origin will also become deemed domiciled whenever they are resident in the UK. The clause fundamentally changes the way that non-doms pay tax in the UK, raising a further £1.6 billion over the next five years to fund our vital public services.
Clause 30 sets out how the deeming rules apply for the purposes of inheritance tax, ensuring that all those who become deemed domiciled under the new provisions are liable for UK inheritance tax in the same way as UK residents. Clause 31 ensures that individuals who become deemed domiciled under the new provisions pay the right amount of tax on any benefits they receive from overseas trusts that they set up while they were domiciled outside the UK. Finally, clause 32 ensures that a double charge is prevented by excluding gains that represent carried interest from the trust charging provisions.
The hon. Member for Bootle wants the removal of what he terms “the exemptions” from off-shore trusts for those who have become deemed domiciled under these new proposals. I assure him, and he should reflect on the fact, that any moneys coming out of those trusts for whatever purpose will be taxed once an individual becomes deemed domiciled.
There is also an important matter of proportionality here. As I have already indicated, the Exchequer raises around £9 billion per year from those who are non-domiciled in the United Kingdom. That is a huge amount of money, which goes some way to paying for our doctors and nurses, our armed forces and so on. These measures will raise a further £1.6 billion over the scorecard period, as I have indicated.
Ruth George
How can the Treasury be so sure of the projected future income of £1.6 billion when there is a loophole for transferring money to offshore trusts that could be used to avoid the taxation? How can those future projections possibly be calculated?
Mel Stride
I am clearly not in a position to share with the hon. Lady the entire ins and outs of all the intricacies of calculating such figures, but I can assure her that the numbers are looked at in great detail and are scored by the independent Office for Budget Responsibility. They are robust figures, albeit that no figures are entirely, absolutely guaranteed in cast iron ahead of time—but they are robust.
During the debate, the hon. Lady raised an important issue about transparency of trust arrangements. The UK is right at the forefront of greater transparency. We spearheaded an initiative to systematically share information on beneficial ownership arrangements with more than 50 countries. That will help law enforcement to unravel complex, cross-border changes in companies and trusts. Following our work with international partners, by September 2018 more than 100 jurisdictions will be sharing information with the UK under the common reporting standard, which will provide HMRC with taxpayer information from tax authorities around the world, enabling it to better target tax evaders.
That brings me to my next point. The hon. Member for Bootle would have us believe two things: that we are only on the side of the wealthy and that we are not actually that interested in clamping down on tax avoidance. On the first point, I remind the Committee that the top 1% of earners in this country pay 27% of all taxes. That is virtually at an historic high, and is certainly higher than was the case under the previous Labour Government.
Anneliese Dodds (Oxford East) (Lab/Co-op)
Does that not reflect the wealth of the very richest in our society? Surely it would be more appropriate to assess the ratio of tax against their whole income and wealth. In that case, most studies would suggest that the very worst-off people pay much more of their income in tax than the very best-off. That figure does not suggest that we have a more progressive tax system—it does not give us any indication of the progressivity of the tax system.
Mel Stride
I hate to disagree with the hon. Lady, but I have to. If she checks something called the Gini coefficient, which is about income inequality—
Anneliese Dodds
With all due respect, the Gini coefficient does not reflect the impact of tax on people’s incomes. I repeat my point: if we are looking at the progressivity of the tax system, considering the overall tax that is contributed by the 1% is not helpful. The two are independent.
Mel Stride
With respect, the first point is that income inequality is at its lowest level for 30 years. That is a simple fact. Secondly, in terms of how progressive the tax system is, we are the Government that, since 2010, have raised the personal allowance to £11,500, which has taken about 3 million people out of tax altogether, and we have a manifesto commitment to raise that still further, by 2020, to £12,500. Much that we are doing is extremely progressive.
It is also a fact that the wealthiest 3,000 in this country pay as much tax as the poorest 9 million, just to put some of those figures into perspective.
Anneliese Dodds
That is clearly a reflection of very severe income inequality. If we focus on income, rather than on tax, which the Minister is trying to pull us towards, and look at the overall impact to the fiscal system, taking into account that fact that working tax credits are being folded into universal credit, we will see that the very poorest people in Britain are much worse off now than in previous years.
The Chair
Order. We will indulge the Minister with one more response. We might then have to make a little progress.
Mel Stride
A very quick one—perhaps we should leave it there, but no. The national living wage is another example of doing things for those who are less well-off. There are many things to consider.
David Linden (Glasgow East) (SNP)
Does the Minister accept that the national living wage that he is trumpeting is in fact a con trick, because it does not apply to under-25s?
Mel Stride
I do not think that is true, because we have a national minimum wage that certainly applies to under-25s. However, as Mr Walker has suggested, we are probably going slightly beyond the scope—fun though it is—of the actual matter in hand.
Mel Stride
If the hon. Lady will let me make a little progress, perhaps we will have time later.
Another point the hon. Member for Bootle raised was the suggestion that we are somehow slack or not concerned about tax avoidance. This Government have clamped down on avoidance to the extent that we have brought in £160 billion in revenue by clamping down on tax avoidance, evasion and non-compliance. We have done that despite his constant assertions that HMRC is under-resourced and incapable of acting. We are bringing in record levels of compliance income at the moment.
Peter Dowd
I think the Minister misrepresents what I was saying. I was trying to say that we need to push harder. The reality is that HMRC does as good a job as it possibly can given its resource. I suspect that if its resource were returned to the previous level, HMRC would do an even better job.
Mel Stride
Given the resource that HMRC has, which the hon. Gentleman suggests is inadequate, the tax gap—the amount of tax that we have failed to collect by not bearing down on avoidance—is at its lowest level for many, many years, including every year under the last Government. It is 6.5% compared with, I think, 8.3% in 2005-06. In terms of bearing down on avoidance, we are doing our bit.
The Chair
Order. Everybody sit down for a bit. We have not heard the word non-domiciled for a long time. I would quite like to hear it.
Anneliese Dodds
I am grateful, Mr Walker. I was grimacing because I felt like I had to come back on the Minister’s assertion, but we are talking generally about tax avoidance and evasion and we have had those general debates in earlier discussions. It is just that when specific claims are made, it is hard for the Opposition not to react and respond to them. To repeat points that we went around the houses on in earlier debates, the tax gap figures—as I know the Minister is aware, because he is very well-versed in these matters—do not cover problems related to profit-shifting, which many experts have suggested constitute a huge portion of taxes that are forgone. The element of error in the tax gap has increased.
The Chair
Order. I may not have a grasp of English, but I do have a grasp of this Committee, and it is trying my patience. Let us get back to the subject. I am very cross.
Mel Stride
Mr Walker, you are right, as you always are. Let me now turn to new clause 3, tabled by the Opposition, which is the subject of debate at the moment. The new clause would commit the Government to publish a review of the effects of the provisions for protecting overseas trusts from the deemed domicile changes set out in schedule 8.
The provisions outlined in schedule 8 relate to trusts that were created before an individual became deemed domiciled under the new rules. As I am sure members of the Committee will appreciate, many non-doms will have set up family structures in their home country long before they ever considered moving to the UK. That is an important point. The Government believe that it would be unreasonable to expect individuals in such circumstances to pay UK tax on all the money in such a structure as it arose. The provisions therefore protect such trusts from unintended consequences and ensure that the UK remains an attractive place for those individuals to live and work.
Let me be clear: even with those protections in place, those non-doms who do become deemed UK-domiciled will only be protected on income and gains that remain inside the trust. Any moneys withdrawn, or benefits provided, will lead to a tax charge.
The Government recognise that non-doms make an important contribution to the UK’s economy. In terms of tax alone, as I have already stated, they contribute more than £9 billion to the Exchequer per year. It is therefore vital that these changes are not introduced in a way that would drive non-doms out of the UK altogether.
Kirsty Blackman (Aberdeen North) (SNP)
I promise that I will stick to the topic of the debate. For the avoidance of doubt, we will support the Opposition’s new clause 3. I heard what the Minister said about previous family structures, but that does not give us enough reassurance that the system that is being set up for overseas trusts is the correct one.
Mel Stride
I thank the hon. Lady for making her intentions so clear.
These changes are fair, and they have been carefully considered and consulted on since they were announced more than two years ago. With regard to a review of the legislation, as stated in the tax information and impact note published in December 2016, HMRC will monitor the effects of the provisions through information collected in tax returns. I therefore urge the Opposition not to press new clause 3.
The changes introduced by clauses 29 to 32 and schedules 8 and 9 will bring an end to permanent non-domicile tax status. When people live in the UK permanently, it is right that they should pay the same tax as everyone else. This is the biggest and most fundamental change to non-dom taxation in history, and strikes the right balance between raising £1.6 billion of much-needed revenue and ensuring that the UK tax system remains internationally competitive.
Peter Dowd
In the light of what has been said today, we may want to tease out the matter of non-doms further at a later date, but let us be clear: there is nothing wrong with being a non-dom. It is not an illness or a disease. It is not something that we want to eradicate absolutely. We do not want to tell non-doms to go home or to go back to where they lived. This is not about that; it is about fairness in comparison with people who are not non-doms. That is what it comes down to.
We recognise that non-doms contribute to our economy. I do not think that anyone is denying that at all. Non-doms have existed in this country since Napoleonic times, in effect. That is the essence of their origin. After 200 years, we might think, notwithstanding the fact that we are coming out of Europe, that we should have done something about them sooner. The bottom line is that there is nothing wrong with being a non-dom. There are issues vis-à-vis the status of parents of non-doms, too, which we will no doubt come back to in due course.
We have made our point for today’s purposes. As I alluded to, new clause 3 seeks to have a review in relation to non-doms. I do not think that there is anything wrong with asking for a review of how this proposal will work. That is our job, and we will persist with it. We are determined to raise this issue time and again.
The Chair
The Committee will be aware that new clause 3 will be moved later. I do not want anybody to feel disappointed or cheated.
Question put and agreed to.
Clause 29 accordingly ordered to stand part of the Bill.
Schedule 8 agreed to.
Clauses 30 and 31 ordered to stand part of the Bill.
Schedule 9 agreed to.
Clause 32 ordered to stand part of the Bill.
Clause 33
Inheritance tax on overseas property representing UK residential property
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to consider that schedule 10 be the Tenth schedule to the Bill.
Mel Stride
Clause 33 and schedule 10 introduce the final element of this historic package of non-dom reforms. As with the clauses that we have just discussed, it was our intention to include these provisions in the previous Finance Bill, and we are pleased to be able to introduce the changes from April 2017 as we originally intended. The changes will ensure that non-domiciled individuals who hold UK residential property through an overseas structure are liable for inheritance tax on that property, in the same way as UK residents.
The basic inheritance tax position is that a non-UK-domiciled individual is liable for UK inheritance tax only on the property in their estate that is situated in the UK. That has been the case since inheritance tax was first introduced.
However, it has long been fairly common practice for some individuals to take deliberate steps to avoid tax on homes they hold in the United Kingdom. Instead of owning UK residential properties directly in their own names, they set up an overseas company or partnership that has legal ownership of the property. They will often use overseas trusts as part of those structures. The effect of doing so is that the non-domiciled individual is no longer a UK homeowner; instead they own shares in an overseas company or an interest in an overseas partnership. In other words, by changing the structure of the way they hold UK assets—UK property is transformed into overseas property—they are no longer subject to UK inheritance tax.
The Government do not believe it is fair that non-doms with residential property in the UK can avoid paying UK inheritance tax in that way. That is why we are making changes to ensure that, from now on, they will pay the same tax as everybody else. The changes made by clause 33 and schedule 10 will ensure that individuals domiciled overseas pay inheritance tax on UK residential properties they hold through overseas structures. They will do so by looking through the overseas structures to the underlying UK property, bringing any share or interest into the scope of inheritance tax, even if those shares are overseas. In other words, the clause will ensure that an inheritance tax charge will arise wherever the value of such structures is derived from a residential property in the UK.
The clause closes a long-standing loophole that has allowed non-domiciled individuals to structure their assets to avoid inheritance tax on their UK homes. This change will ensure that non-dom individuals with residential property in the United Kingdom are treated the same way as everyone else, raising an estimated £250 million over the next four years.
Stella Creasy (Walthamstow) (Lab/Co-op)
Having heard the Minister make a compelling case about the importance of ensuring that non-doms do not avoid paying tax, I look forward to the debate that we will have on new clause 2, which raises exactly the same issues about the treatment of commercial property as a way for non-doms to avoid residential property taxes. I look forward to the Minister supporting the new clause accordingly.
Mel Stride
Like the hon. Lady, I cannot wait to get to the matter at hand.
Question put and agreed to.
Clause 33 accordingly ordered to stand part of the Bill.
Schedule 10 agreed to.
Clause 34
Employment income provided through third parties
Question proposed, that the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
That schedule 11 be the Eleventh schedule to the Bill.
Clause 35 stand part.
That schedule 12 be the Twelfth schedule to the Bill.
Mel Stride
Clause 34 introduces schedule 11, which makes changes to ensure that businesses and individuals who have used disguised remuneration tax avoidance schemes pay their fair share of income tax and national insurance contributions. Clause 35 and schedule 12 follow on from clause 34 in tackling similar avoidance schemes used by the self-employed, introducing new rules to make those schemes ineffective and ensuring that individuals pay the tax they owe.
Disguised remuneration schemes claim to avoid tax and national insurance contributions by paying individuals through third parties in ways that promoters claim are not taxable, such as loans. These schemes are highly artificial, and it is the Government’s firm view that they have never worked. The coalition Government began tackling the schemes in 2011, introducing legislation to successfully stop the schemes that existed at that time. Since then, HMRC has collected more than £1.8 billion in settlements from scheme users.
However, not every scheme user settled, and since 2011 the tax avoidance industry has created and sold more than 70 new and different schemes aimed at sidestepping the 2011 legislation. These schemes are generally more contrived and aggressive than those that existed before and are growing in popularity, including with the self-employed. These schemes deprive the Exchequer of hundreds of millions of pounds each year and have been used by up to 65,000 companies and individuals. The Government’s firm view is that they do not work. We therefore need to take further action to tackle this avoidance and ensure that scheme users pay their fair share.
The Government introduced legislation in the Finance Act 2017 to put it beyond doubt that new employment income schemes are caught within the existing rules. Schedule 11 will tackle the existing use of schemes by introducing a new charge on loans outstanding from these arrangements on 5 April 2019. Affected scheme users can avoid the loan charge by repaying the loan and replacing it with a commercial loan, or by settling the tax due with HMRC. The Government will bring forward further measures in the coming year’s Finance Bill to ensure that the rules are appropriately targeted.
Clause 35 will put it beyond doubt that these schemes do not work for the self-employed. Where there is an arrangement of this type, the receipt will be taxed as a trading receipt, no matter what form it is received in by the self-employed individual. The clause applies from 6 April 2017 to protect Exchequer revenue and ensure that scheme users pay their fair share. Schedule 12 introduces a new charge on loans outstanding from self-employed schemes on 5 April 2019 in a similar way to schedule 11.
It is right that everyone should pay their fair share of tax and make a contribution to public services. These changes will ensure that users of disguised remuneration schemes pay the tax they owe and will help to bring in more than £3 billion by 2020-21.
Anneliese Dodds
I will first address clause 34 and schedule 11 before moving on to clause 35, given that both were created at the same time. As I understand it, clause 34 and schedule 11 re-characterise loans as remuneration for tax purposes, but in some cases they would be doing so many years after the original transaction. The Opposition want to see change in this area, because abuses have been clearly documented.
However, this measure comes after a long period of relative inaction, at least in the areas where this legislation is focused. That has meant that many people believed the arrangements they entered into were legal and did not constitute tax avoidance. The April 2019 change in these circumstances could, some have opined to us, cause significant problems, for example to individuals whose situation has changed such that they no longer have the funds to meet the tax charge. How will the Minister ensure that this measure will not cause hardship or injustice to individuals who planned on the basis of previous arrangements, and how will that be balanced against the clear and pressing need to prevent the abuse, which the measure is targeted at?
Clause 35 and schedule 12 aim to tackle avoidance by the self-employed and those trading through a partnership, where their taxable income has been replaced by loans and other non-taxable amounts in order to avoid tax. The pertinent question is how to ensure that the measure is not overly wide-ranging. In particular, how will it be ensured that a transaction entered into in the ordinary course of business, and on commercial arm’s length terms, is not caught within the definition of remuneration? The scope of the measure appears to be relatively wide, particularly when compared with others—for example, the Income Tax (Earnings and Pensions) Act 2003, which discards remuneration—where certain transactions are excluded, but they are not here. It would be helpful to have more specification on that.
Finally, there is a broader question: how will the Minister ensure that these measures are genuinely achieving their objective of ensuring that the full earnings of self-employment remain part of the individual’s taxable income, subject to income tax and national insurance contributions, and that attempts to circumvent that position and still reward the individual are genuinely ignored?
Mel Stride
I thank the hon. Lady for her typically thoughtful contribution and important questions. She raised the issue of the retrospection or otherwise of these measures. We will certainly be looking at individuals who may have entered into these kinds of arrangements as far back as 1999. Critically, they have until 2019 to clean those arrangements up, if they wish to. If the schemes are legitimate and above board, they have no reason to be concerned because those schemes will stand the tests that we have set.
Mel Stride
Clause 38 introduces a new tax relief to support the development and installation of recharging equipment for electric vehicles. The first-year allowance of 100% allows businesses to deduct charge point investments from their pre-tax profits in the year of purchase. To ensure that businesses could take advantage of the changes as soon as possible, the legislation had effect from the date of its announcement, which was 23 November 2016.
The Government are committed to encouraging the uptake of cleaner, more efficient vehicles that can help improve air quality in our towns and cities. We are doing that in a number of ways through the tax system. First, from 2020-21 company car tax rates for ultra-low emission vehicles will be lowered to 2% to incentivise uptake of the cleanest cars. Under the new vehicle excise duty system for cars registered after 1 April 2017, people with the cleanest zero-emission cars will pay nothing in first-year rates.
The availability of electric charge points is key to encouraging further take-up of cleaner vehicles by giving ULEV drivers greater confidence about where and how far they can drive. There are already more than 11,000 charge points at more than 4,000 locations in the UK, but more are needed. It currently takes at least 30 minutes to charge an ultra-low emission vehicle, which gives a range of between 50 and 100 miles, compared with 30 seconds to fill a petrol-powered car for a similar mileage range. We need to make charge points a more common feature on our roads in order to make electric cars a more convenient and reliable mode of transport.
Clause 38 supports the development and installation of electric charge point equipment by introducing a new tax relief for eligible expenditure on charge point infrastructure. Businesses that invest in electric charge points can deduct the expenditure from their pre-tax profits, thereby benefiting from a lower tax bill. The tax relief complements existing reliefs that encourage the use of cleaner vehicles, including the 100% first-year allowance for cars with low carbon dioxide emissions and the 100% first-year allowance for equipment used by cars powered by natural gas, biogas and hydrogen. It will help to increase the number of electric charge points on our roads, improving the infrastructure for electric car drivers and encouraging further take-up of low-emission vehicles for a cleaner environment.
Anneliese Dodds
We support measures to increase the uptake in electric vehicles, and we recognise that creating more electric vehicle charge points is a part of that. However, I would be grateful if the Minister addressed two questions.
First, as I understand it—he will correct me if I have the wrong end of the stick—the clause focuses on firms that invest at least £200,000 a year in plants and machines. Small business will not be able to take advantage of the same tax breaks, and I am concerned that that could create an imbalance. In town centres with a zero-carbon target—the first was in my home city of Oxford—businesses are required to use only electric vehicles or other zero-carbon modes of transport, so it is important that they are on a level playing field. Is there an imbalance? I may have misunderstood the legislation, but I would appreciate the Minister’s thoughts.
Secondly, how does the policy relate to other measures within the fiscal system that aim to promote low-carbon technologies? The founder and CEO of the renewable energy investor Rockfire Capital states:
“Increasing availability of charging for electric cars is all very good but the biggest challenge is making sure the energy used is as green as the cars. These measures are a drop in the ocean compared with what is actually required.”
Removing the renewable energy exemption from the climate change levy has reduced the tax incentives for business to invest in large-scale renewable energy schemes. Green cars are only green if green energy is going into them.
Ruth George
Like my hon. Friend, I am pleased to see decent allowance made for expenditure on electric vehicle charge points. It is much needed, particularly in my rural constituency, where it will be difficult to install the infrastructure in a way that business can comply with. I echo her point about small businesses. I understand that the Automated and Electric Vehicles Bill may introduce a requirement for service stations to install electric vehicle charge points. Many service stations are independently owned; it seems particularly hard on them that they will not receive tax incentives for installing charge points, but larger companies will.
Will the Minister explain why the cut-off date is 31 March 2019 for corporation tax and 5 April 2019 for income tax? The technology is already being produced but will change constantly over the next few years. It is important to ensure that companies can consider the full range of technology coming on the market and adapt their charging points to the most successful and future-proofed. For that reason, it seems odd to include an arbitrary time limit. Can the Minister explain that?
Mel Stride
I have a direct answer for the hon. Members for High Peak and for Oxford East: the relief will be available to businesses of all sizes. I take on board the point made by the hon. Member for High Peak about her own constituents in that context.
The hon. Member for Oxford East raised the general issue of whether the electricity going through the charging points would be green enough. It is probably not the purpose of the Committee to determine that, but I certainly share her aspiration that we should encourage as much green energy as possible, which is why we are investing so much in the shift from traditional power generation to greener alternatives. She also quoted the suggestion that the number of charging points was a drop in the ocean, which is why we hope that such tax reliefs will help set up charging points as quickly as possible.
The hon. Member for High Peak also asked about the March and April dates for tax year ends for the different categories.
Mel Stride
I thought the question was about March and April. The reason for March and April was that individuals and companies have different tax year ends in that respect.
Ruth George
May I clarify? I was simply asking why there was a 2019 cut-off, not why there were two dates of 31 March and 5 April, which I think is fairly widely understood.
Mel Stride
I believe that is the review date—the point at which we would naturally want to look again at the issue and see how the roll-out has occurred.
Question put and agreed to.
Clause 38 accordingly ordered to stand part of the Bill.
Clause 39 ordered to stand part of the Bill.
Clause 40
Co-ownership authorised contractual schemes: capital allowances
Anneliese Dodds
I beg to move amendment 32, in clause 40, page 58, line 31, at end insert—
“262AG Review of operation of co-ownership authorised contractual schemes
(1) Within fifteen months of the passing of the Finance (No. 2) Act 2017, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of the new provisions for co-ownership authorised contractual schemes.
(2) The review shall, in particular, consider the operation of these provisions in relation to master funds.
(3) In this section, “the new provisions for co-ownership authorised contractual schemes” means—
(a) sections 262AA to 262AF of this Act, and
(b) regulations made under sections 41 and 42 of the Finance (No. 2) Act 2017.
(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”
This amendment would make statutory provision for a review of the operation of the new provisions for co-ownership authorised contractual schemes.
Anneliese Dodds
As colleagues will have noted, the Opposition are requesting a review of the operation of the new provisions for co-ownership authorised contractual schemes. Authorised contractual schemes, previously referred to as tax transparent funds, can be established as either limited partnerships or co-ownership schemes, although this discussion will focus on the latter.
The schemes were introduced in 2013 to aid the establishment of UCITS—undertakings for collective investment in transferable securities—master funds in the UK. A number of the new rules appear relatively sensible from my perspective—for example, in clause 41, the provision of additional information by schemes to their investors—but I have some concerns, particularly about clauses 40 and 42. That is why we have suggested that a review would be helpful.
Clause 40 focuses on reducing the administrative burdens of such schemes. I am concerned that additional consideration should be given to the potential for tax avoidance now that the Government are loosening rules. Luxembourg and Dublin already provide tax transparent vehicles. Surely, in our focus on ensuring that Britain is an attractive destination for investment, we must ensure that our offer is based on our investment expertise and the investment opportunities available here, rather than any artificial factors. Furthermore, I do not feel from what I have examined that I have sufficient understanding of the rationale for enacting some of the provisions through secondary legislation. It would be helpful to understand how the Minister will ensure that the measures are discussed with an appropriate degree of accountability.
Mel Stride
Before I respond to the amendment tabled by Labour Members, I would like to set out for members of the Committee the overall aims as they relate to this particular piece of legislation.
Clauses 40, 41 and 42 make changes to ensure that the tax system works effectively for investors in co-ownership authorised contractual schemes, which I will refer to as COACS for short. COACS are UK collective investment schemes authorised by the Financial Conduct Authority. They were introduced in 2013 to make the asset management industry more competitive internationally, to reduce industry costs and to increase returns to investors. These schemes are transparent for tax on income. That means that the income generated by the scheme is taxed on the investors, not on the scheme. Investors are taxed as if they had invested directly rather than through the scheme.
COACS have been welcomed by investors, which are predominantly institutions such as pension funds and life insurance companies. Following consultation last year, the Government are now making three changes to simplify the tax rules for investors in COACS and to align them with rules for other types of investment funds so far as is practical.
Amendment 32 would require HMRC to complete a review of the operation of COACS by early 2019. I reassure the hon. Member for Oxford East that the Government have consulted extensively on the measure. There was a formal consultation in summer 2016, in which the industry participated fully and constructively. The consultation process also included a well-attended open forum of interested parties in September 2016 to investigate and evaluate options. In addition, the Government have held regular discussions with industry representatives. It was in those discussions that the issue that clause 40 seeks to address was first highlighted. The Government will continue to engage with the sector on COACS and the practical implementation of the rules governing the schemes.
The hon. Lady referred to master funds, which are a fund structure where a fund has a number of separate feeder funds as its investors. They were not the subject of any response to the consultation, but HMRC stands ready to engage further with industry, should it have any questions related to COACS and master funds. The hon. Lady suggested that there may be a possible means of tax avoidance here. Income accruing to a master fund that is a co-ownership authorised contractual scheme is treated as the income of the investors, so UK investors cannot avoid tax on it. Clause 42 and its related secondary legislation will help to protect revenue. The measure as a whole is robust against potential tax avoidance, but HMRC will of course continue to be vigilant.
Kirsty Blackman
The Minister has been positive about the transference of accountability with COACS. I want to raise a query. Will he confirm that the changes being made will not erode the transparency and accountability of the scheme as it is? Will that be kept under review ?
Mel Stride
Absolutely. All these matters will be kept under review. It is not the Government’s belief that the changes will erode the scheme; we believe that the changes will facilitate and ease the operation of these particular schemes to the advantage of pension funds and others that typically make use of them.
In the light of the extensive consultation held and the Government’s continuing commitment to work with industry on the implementation of rules governing COACS, I hope that the hon. Member for Oxford East will withdraw the amendment.
I turn now to the background to the clauses. COACS are not subject to tax, but the operators of the schemes hold information needed by investors to complete their own tax returns and to claim any capital allowances to which they are entitled. The calculation of capital allowances falls in practice on the investors and can be extremely complex. In addition, operators hold information that would help HMRC to check that investors’ tax returns are accurate, but at the moment there is no statutory requirement for COACS to provide tax information to either investors or HMRC. That is one example of the easements, from the investors’ and HMRC’s point of view, that the hon. Member for Oxford East may be interested in. Further, where a COACS holds investments in offshore funds, the rules that normally apply to ensure that offshore income is taxed appropriately on UK investors do not work as they should.
Clause 40 introduces new rules that allow the operator of a COACS to elect to calculate any capital allowances due, benefiting investors by avoiding the need to exchange large amounts of information with the operator of the COACS. The election can be made for periods that start on or after 1 April 2017. Clause 41 enables the Treasury to make regulations that will do three things to help to ensure that the right tax is paid on investments in COACS. First, the regulations will require the operator of a COACS to provide sufficient information to investors for them to complete their own tax returns. Secondly, they will require the operator to provide information to HMRC about the income arising to investors each year, and provide HMRC with a power to request copies of any other information provided to investors. Thirdly, they will impose penalties if scheme operators do not comply.
Clause 42 enables the Treasury to make regulations that will require a COACS that has invested in an offshore fund to ensure that all of the offshore fund’s income is treated as its investors’ income, regardless of whether it is actually distributed to them. This removes the risk of income rolling up offshore without being taxed as it arises. It also brings the treatment of investors in COACS into line with the treatment of UK investors in offshore funds generally.
These targeted measures will help to ensure that the tax system works efficiently for investors in COACS, and that they pay the right tax on their investments. I hope that the hon. Lady will withdraw the amendment, and that clauses 40, 41 and 42 will stand part of the Bill unamended.
Anneliese Dodds
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clauses 40 to 42 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Graham Stuart.)
Finance Bill (Fifth sitting)
Tuesday 24th October 2017
(7 years ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 October 2017 - (24 Oct 2017)
The Committee divided: - Ayes: 2 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 7 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure once again to serve under your chairmanship, Mr Howarth. Clause 43 will ensure that rates of air passenger duty for the tax year 2018-19 increase in line with the retail prices index. The changes will ensure that the aviation sector continues to play a part in contributing towards general taxation.
APD forms an important part of Government revenue. The Government have raised APD by RPI each year since 2012, and the clause continues that trend. With no tax on aviation fuel or VAT on international and domestic flights, APD ensures that the aviation sector plays its part in contributing towards general taxation, raising £3.1 billion per annum. The aviation sector continues to perform strongly. The UK has the third largest aviation network in the world, and passenger numbers at UK airports have grown by more than 15% in the past five years.
Clause 43 sets the APD rates for the tax year 2018-19 in line with RPI. The changes will increase the long-haul reduced rate for economy class tickets by just £3 and the standard rate for all classes above economy by just £6. The rounding of APD rates to the nearest pound means that short-haul rates will remain frozen for the sixth year in a row. That will benefit 80% of all airline passengers. To give industry sufficient notice, we will announce APD rates for 2019-20 at the autumn Budget 2017, legislating in the corresponding Finance Bill.
APD is a fair and efficient tax, where the amount paid corresponds to the distance and class of travel of the passenger. The changes made by clause 43 will ensure that the aviation sector continues to play its part in contributing towards general taxation, raising £3.1 billion a year.
Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to serve under your chairmanship, Mr Howarth. I have a couple of questions. Air passenger duty is a matter of considerable public debate, and debate within the industry, so it is appropriate that we probe this.
First, can the Minister provide us with a little more understanding of what he views as the purpose of this tax? In his introductory remarks, he appeared to reduce it specifically to revenue raising. Others have seen the duty as a potential green tax as well, although clearly it is not hypothecated for that purpose. It would be helpful to know whether he believes the duty has any kind of deterrent effect.
Secondly, in the light of the Scottish Government’s policy approach, does the Minister anticipate a race to the bottom in relation to APD in future, particularly given the representations made by Newcastle airport and others about potential unfair competition from across the border?
Finally, mention has been made in some of the discussions on this duty of the potential impact on those with protected characteristics who might need to travel more frequently on long-haul flights, for example. It would be helpful to hear the Minister’s views on whether these changes might have a disproportionate impact on certain ethnic minorities. That has come up in some of the debates around APD.
Mel Stride
I thank the hon. Lady for her questions, which I will answer in order.
The purpose of APD is clearly, as the hon. Lady identified and as I explained in my opening remarks, to raise revenue—£3.1 billion in this instance. Like all taxes, it will also change behaviour to some degree, and to the extent that it makes flying a little bit more expensive, it could be expected to have the effect of diminishing demand for air travel. The lower rates for economy, which takes up more space on aircraft than first class, assist in ensuring that flights are as full as they can be.
The hon. Lady mentioned the Scottish Parliament and the devolution of APD, which will become air departure tax in Scotland. That tax has not yet been switched on, although devolution arrangements are in place, and we will of course monitor the issues that she has understandably raised in respect of competition with airports, particularly in the north of England. On long-haul flights and the impact on various groups, including ethnic minorities, I would be happy to write to the hon. Lady with any information that we have.
Kelvin Hopkins (Luton North) (Lab)
I am glad that the Minister has raised the question of ethnic minorities. My constituency has a large Caribbean community, who are concerned about air passenger duty’s effect on flights to the Caribbean to see family and so on. Has the Minister received any specific representations on that? The other question, of course, is about the airlines themselves. In Luton, we have London Luton airport. What representations have the airlines made to the Minister?
Mel Stride
If I may, I shall write to the hon. Gentleman on the specific questions that he has raised about the consultation on these measures.
Question put and agreed to.
Clause 43 accordingly ordered to stand part of the Bill.
Clause 44
Petroleum revenue tax: elections for oil fields to become non-taxable
Question proposed, That the clause stand part of the Bill.
Kirsty Blackman (Aberdeen North) (SNP)
It is welcome that the Government are looking to reduce the administrative burden in relation to elections for oilfields to become non-taxable. That is positive news. The Chancellor of the Exchequer has mentioned in two Budgets that there will be changes in the taxation system to make it easier for late-life assets to be transferred. I have heard noises from the Chancellor in recent times that he may not introduce that in the autumn statement this year, and I will just make this pitch to the Minister. This issue is incredibly important. The oil and gas industry is not asking at this moment for significant changes, but for the change in relation to the transfer of late-life assets. I would very much appreciate it if, in the context of reducing the administrative burden and making things easier for companies dealing with the very mature field in the North sea, the Minister would hear my case on that and make the case to the Chancellor.
Anneliese Dodds
I must admit to being slightly confused about the purported impact of this change. Some of the inputs from stakeholder bodies seem to imply that there will be some kind of Revenue impact as a result of the changes in relation to procedures for elections for oilfields to become non-taxable. For example, Oil & Gas UK has welcomed the change, saying that the move will reduce the headline rate of tax paid on UK oil and gas production. In contrast, Friends of the Earth has expressed disappointment at the tax cut. As I understand it, petroleum revenue tax was permanently zero-rated in 2016, and the Government’s assessment of the measure’s impact on the Exchequer is that it will be negligible. Therefore, can the Minister enlighten us on why some people appear to view the measure as potentially having an Exchequer impact, but the Government do not appear to have that view?
Mel Stride
Perhaps I should set the scene that I would have set had I realised that others were going to contribute to this debate, because I think that that will pick up some of the questions that have been raised. However, before I do that, I shall turn immediately to the question raised by the hon. Member for Aberdeen North about the transfer of long-life assets. I will take her remarks as a Budget representation, but I am sure that she understands that at this moment, in the run-up to the Budget, I will not comment further on specific taxes or arrangements relating thereto.
Clause 44 makes changes to simplify the process for opting oil and gas fields out of the petroleum revenue tax regime, reducing the administrative burdens on affected companies. To ensure that participators could take advantage of the changes as soon as possible, the legislation had effect from the date of its announcement, on 23 November 2016. I shall provide Committee members with some background to the measure.
At Budget 2016, as part of a £1 billion package of measures to support the oil and gas industry, the Government announced that PRT would be permanently zero-rated. That was to simplify the tax regime, to level the playing field between older fields and new developments and to increase the attractiveness of UK investment opportunities. It was decided that the tax should not be abolished completely, because some companies still require access to their tax history for carrying back trading losses and decommissioning costs. As a result, participators still have to submit returns, which many find complex, time consuming and expensive. Following consultation with industry, the Government are therefore simplifying the rules for opting fields out of the PRT regime. The changes made by clause 44 will allow the responsible person for a taxable oilfield to remove the field from the PRT regime simply by making an election to do so and then notifying HMRC. When coupled with the Government’s removal of other reporting requirements, these changes will save companies an estimated £620,000 in total ongoing costs per annum.
The clause builds on the Government’s support for the UK oil and gas industry, including the £2.3 billion package of fiscal reforms announced in the 2015-16 Budget. I therefore hope that the clause will stand part of the Bill.
Question put and agreed to.
Clause 44 accordingly ordered to stand part of the Bill.
Clauses 45 to 47 ordered to stand part of the Bill.
Clause 48
Carrying on a third country goods fulfilment business
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clauses 49 to 55 stand part.
That schedule 13 be the Thirteenth schedule to the Bill.
Clauses 56 to 59 stand part.
New clause 5—Annual report on powers in relation to third country goods fulfilment businesses—
‘(1) The Commissioners must prepare a report on the operation of the provisions of Part 3 of this Act in relation to each tax year after their commencement within six months after the completion of that tax year.
(2) The Chancellor of the Exchequer shall lay a report under subsection (1) before the House of Commons.
(3) Each report under subsection (1) shall cover in particular—
(a) prosecutions for an offence under section 53,
(b) penalties imposed under Schedule 13,
(c) the effects on the operation of Part 3 of the United Kingdom’s withdrawal from the European Union or (as the case may be) preparations for that withdrawal,
(d) implications of the matters specified in sub-paragraph (c) for the activities and resource requirements of HMRC in connection with the provisions of this Part,
(e) implications of the matters specified in sub-paragraph (c) for the exercise of the powers to make regulations under Part 3, and
(f) HMRC’s assessment of the extent to which the operation of, or changes to the operation of, comparable provisions in other countries affect businesses in the United Kingdom.’
This new clause requires HMRC to produce an annual report on the operation of Part 3 relating to third party goods fulfilment businesses and specifies some of the information to be included in that annual report.
Peter Dowd (Bootle) (Lab)
It is, as ever, a pleasure to serve under your stewardship, Mr Howarth.
I want to talk about fulfilment businesses in part 3, clauses 48 to 59, and the annual report on powers in relation to third-party goods fulfilment businesses, or new clause 5. I will speak a little about the fulfilment business measures before addressing the specifics of our new clause.
We welcome the action and powers for HMRC to deal with the problems created by the difficulty in properly taxing and charging VAT on the profusion of small businesses trading online through platforms such as Amazon. They are not just problems for the Exchequer. Many small businesses find themselves outcompeted and outpriced by overseas traders, which not only have lower operating costs but artificially lower their prices by failing to pay VAT on the goods they sell to UK consumers through fulfilment houses based here. It is essential that we act to protect both the taxpayer in general and the thousands of small British businesses that are, as we have discussed, the lifeblood of our economy.
It is not just lower prices and running costs that present problems for our small businesses. I have dealt with casework from small businesses that found themselves severely disadvantaged when filling out their VAT returns when they were unable to obtain VAT receipts from either their overseas supplier or the fulfilment business in question. In one case, the reason for the problem was simple: there were no VAT receipts because the seller had not charged VAT, unbeknownst to that particular British business. The online fulfilment house involved simply washed its hands of the matter and blamed a third-party seller that it supposedly has no control or influence over. It is right that we bring our laws up to date and ask the huge online fulfilment businesses to take their responsibilities to our society seriously, assist the Exchequer in levying the proper taxes and stop hiding behind the excuse of separate businesses.
Many of the overseas sellers we are talking about could not and would not exist were it not for online retailing sites and the fulfilment services they provide. The business models are entirely based on the mode of operation laid down by the multinational online marketplace, which makes their businesses possible. Action has been too slow to deal with these problems, which have festered for far too long, but better late than never. We do not seek to hinder action on this at all and we welcome the broad sweep of these measures and other related efforts to address the problems that have grown up from online marketplaces and fulfilment houses.
New clause 5 seeks another review—this time on an annual basis—examining the working of these new powers and responsibilities so that Parliament can keep a check and a close eye on the problems around fulfilment businesses. It is an expanding market and business sector, and we have to try to keep up with it. We hope that the new clause will prevent any future problems from festering too long and ensure that Her Majesty’s Treasury keeps a close eye on changing business practices in this field, which might threaten the Exchequer or, importantly, undermine small businesses.
Kelvin Hopkins
It is a pleasure to serve under your chairmanship again this morning, Mr Howarth. When I first entered this House over 20 years ago, I visited my local VAT office and they said that if they had more VAT officers they could collect many more times their own salaries. That has been the case ever since. I am not so familiar with third country goods fulfilment businesses, but it nevertheless strikes me as something that requires a proper resource within the VAT component of HMRC. I wonder whether we are still understaffing VAT offices and whether we could collect much more by employing more staff. At that time, the ratio between the staff salary and the tax they collected was about 5:1. Every additional member of the VAT staff produced five times more than their own salary. If that is still the case today—it may be an even bigger ratio—it would be helpful to think about employing more staff.
Mel Stride
Clauses 48 to 59 and schedule 13 implement the fulfilment house due diligence scheme. The scheme will require that from 1 April 2018, fulfilment businesses in the UK that fulfil goods for traders based outside the EU must register with HMRC, keep certain records, and carry out robust due diligence checks on their overseas clients.
The fulfilment house due diligence scheme is part of a package of measures announced at Budget 2016 that will disrupt and deter VAT abuse by overseas traders who sell goods to UK consumers via online markets. To address the point raised by the hon. Member for Luton North, the measure is not one that requires lots of extra inspectors; it requires a different attitude and regime for the fulfilment houses that are facilitating this VAT fraud. We expect it to be effective in those terms, rather than needing large numbers of additional staff.
Together, these measures are expected to deliver £875 million for the Exchequer by 2021. Many overseas traders selling via online marketplaces import their goods en masse to fulfilment houses in the UK, in readiness to fulfil anticipated future orders from UK customers. Once imported, the fulfilment house businesses will store, pack and sometimes deliver these goods on their behalf. Currently, certain overseas traders do not comply with the obligation to charge VAT on their goods held at UK fulfilment houses, as the hon. Member for Luton North pointed out. This not only deprives the UK Government of a significant amount of revenue but allows these overseas traders to obtain an unfair competitive advantage over the honest majority of VAT-compliant businesses operating in our country.
Clauses 48 to 59 and schedule 13 implement the fulfilment house due diligence scheme. Clause 48 sets out that all UK fulfilment houses that fulfil goods owned by traders established outside the European Union will be within the scope of the new scheme. These are referred to throughout the legislation as “third country goods fulfilment businesses”.
Clause 49 sets out that, following commencement of the scheme, all third country goods fulfilment businesses in the UK will require approval from HMRC as a “fit and proper” person in order to continue operating legally.
Clause 50 outlines that HMRC will maintain a register of all such approved persons. It will publish such details from the register as it deems necessary to allow counterparties, such as those in the express deliveries industry, to check whether they are dealing with a compliant fulfilment business.
Kirsty Blackman
I beg to move amendment 37, in clause 60, page 71, line 16, leave out ‘paragraph 2’ and insert ‘paragraphs 1A and 2.
1A (1) The provisions of this Schedule shall not apply to a person specified in paragraph 1(1) except in accordance with the provisions of this paragraph.
(2) No person shall be subject to the provisions of this Schedule unless they fall within a class of persons specified in regulations made under sub-paragraph (3).
(3) The Commissioners may by regulations specify a class of persons to whom this Schedule applies provided that the relevant conditions in sub-paragraphs (4) to (9) are met.
(4) The condition in this sub-paragraph is that the first regulations may not be made until after the Commissioners have undertaken an assessment of the impact of the implementation of the provisions of this Schedule on—
(a) small businesses that have limited technological connectedness,
(b) businesses in rural areas, and
(c) businesses that are likely to have been affected by the closure of HMRC offices.
(5) The condition in this sub-paragraph is that the first regulations may not apply to more than 25 per cent of persons to whom paragraph 1(1) applies.
(6) The condition in this sub-paragraph is that the Commissioners have prepared an assessment of the likely effects of making regulations in the form of a draft which has been laid before the House of Commons by the Treasury.
(7) The condition in this sub-paragraph is that the House of Commons has resolved that regulations should be made in the form of a draft laid in accordance with sub-paragraph (6).
(8) The condition in this sub-paragraph is that the second regulations may not be made—
(a) until at least twelve months have elapsed since the making of the first regulations,
(b) unless, taken together with the first regulations, they apply to no more than 90 per cent of persons to whom paragraph 1(1) applies.
(9) The condition in this sub-paragraph is that the third set of regulations may not be made until at least twelve months have passed since the making of the second regulations.’
This amendment would provide for a staged implementation of the provisions for making tax digital in relation to income tax, with review of impact on specific groups and provision for each new stage to be subject to approval by resolution of the House of Commons.
The Chair
With this it will be convenient to discuss the following:
Amendment 7, in clause 60, page 75, line 7, at end insert—
‘(1A) Regulations under sub-paragraph (1) must in particular require a person or partnership to record service charges separately from other income.’
This amendment imposes a duty on HMRC to require separate records to be kept of service charges.
Amendment 8, in clause 60, page 75, line 7, at end insert—
‘(1B) Regulations under sub-paragraph (1) must in particular require a person or partnership to maintain separate records in respect of each employee and in respect of any prescribed time period of service charges received and to make those records available in a prescribed manner.
(1C) In sub-paragraph (1B), “prescribed” means prescribed by regulations.’
This amendment imposes a duty on HMRC to require separate records of service charges to be kept in respect of each employee and in respect of prescribed period to be made available in a prescribed manner.
Amendment 39, in clause 60, page 75, line 7, at end insert—
‘(1B) Regulations under sub-paragraph (1) must in particular require a person or partnership to maintain separate records in respect of each employee and in respect of any prescribed time period of service charges received and to make those records available to those employees.
(1C) in sub-paragraph (1B), “prescribed” means prescribed by regulations.’
This amendment imposes a duty on HMRC to require separate records of service charges kept in respect of each employee and in respect of prescribed period to be made available to those employees.
Amendment 33, in clause 60, page 78, line 19, after ‘day’, insert
‘no earlier than 1 January 2022’.
This amendment provides that the provisions for digital reporting in Clause 60 may not be brought into force before 2022.
Amendment 40, in clause 60, page 78, line 20, at end insert—
‘(4A) No regulations may be made under subsection (4) until after 90 days after the Chancellor of the Exchequer has laid a report before the House of Commons which sets out—
(a) the steps which HMRC has undertaken to establish that suitable software is available;
(b) the results of the testing by HMRC and others of that software; and
(c) the reasons why mandatory use of the software is in the interest of HMRC and taxpayers.’
This amendment would require the Chancellor of the Exchequer to report on software suitability and testing before giving effect to the provisions of Clause 60.
Clause 60 stand part.
Amendment 34, in clause 61, page 78, line 34, after ‘day’, insert
‘no earlier than 1 January 2022’.
This amendment provides that the provisions for digital reporting in Schedule 14 and Clause 61 may not be brought into force before 2022.
Clause 61 stand part.
That schedule 14 be the Fourteenth schedule to the Bill.
Amendment 35, in clause 62, page 79, line 12, at end insert—
‘(5A) No regulations may be made under sub-paragraph (5) on a day prior to 1 January 2022.’
This amendment provides that the provisions for digital reporting in Clause 62 may not be brought into force before 2022.
Amendment 38, in clause 62, page 79, line 12, at end insert—
‘(5A) But no regulations may be made by the Commissioners unless the conditions in sub-paragraphs (5B) to (5D) are met.
(5B) The condition in this sub-paragraph is that the first regulations may not be made until after the Commissioners have undertaken an assessment of the impact of the implementation of the provisions of those regulations on—
(a) small businesses that have limited technological connectedness,
(b) businesses in rural areas, and
(c) businesses that are likely to have been affected by the closure of HMRC offices.
(5C) The condition in this sub-paragraph is that the Commissioners have prepared an assessment of the likely effects of making regulations in the form of a draft which has been laid before the House of Commons by the Treasury.
(5D) The condition in this sub-paragraph is that the House of Commons has resolved that regulations should be made in the form of a draft laid in accordance with sub-paragraph (5C).’
This amendment would provide for implementation of the provisions for making tax digital in relation to VAT to take place only following a review of impact on specific groups and provision for regulations to be subject to approval by resolution of the House of Commons.
Amendment 36, in clause 62, page 79, line 19, at end insert—
‘(6A) Regulations under sub-paragraph (5) may not impose mandatory requirements for businesses to generate quarterly updates.’
This amendment provides that any system for quarterly updates to be generated must not be mandatory.
Amendment 10, in clause 62, page 80, line 13, at end insert—
‘(12) Before making regulations under sub-paragraph (5) and in any case within three months of the passing of the Finance (No. 2) Act 2017, the Commissioners shall lay before the House of Commons an assessment on the effects on compliance with the requirements of those regulations by small businesses of the United Kingdom’s withdrawal from the European Union.’
This amendment requires HMRC to publish an assessment of the effects on electronic VAT records requirements for small business of the UK’s withdrawal from the EU.
Clause 62 stand part.
Kirsty Blackman
The Scottish National party has previously raised concerns about the moves to digital reporting. It is not that we do not support the principle of moving towards digital reporting. We have been clear that we think this could be a positive move. The concerns that we have raised previously have been about the timing of the moves and the way in which smaller companies were expected to move to digital reporting first. The Minister, to his credit, has changed the proposed plans and come up with a much more sensible direction and timeline for moving to digital reporting than the Government previously suggested.
Our amendment highlights specific concerns about the move to digital reporting, which, despite the Government’s changes and moves, we still feel have not been adequately answered. The amendment deals with the impact on specific groups that we feel might be negatively affected by the move to digital reporting.
The first group is small businesses that have limited technology for connectedness. There are small businesses that do not make that much use of the internet. There are some coming through that are wholly internet-based, and for which it is very important; but some are still starting that are not technologically advanced and do not use the internet much. We are concerned about the impact on them of having to report digitally online, in view of their access to technology. The businesses in question are not only in rural areas; they may just be run by someone who does not make huge use of the internet.
The second group is businesses in rural areas. In those areas in particular, even though commitments have been given by the Scottish and UK Governments about improving access to digital connectivity, at the moment not everyone has a fast enough internet connection to enable them to access the relevant services. If it is mandatory for businesses to use online digital reporting, that will be a problem for those without access to adequate technology—particularly in rural areas. Areas in England are affected, as well as those in more remote parts of Scotland. I understand that there have been Government commitments to get people on to digital systems, but we are not quite there yet.
Ruth George (High Peak) (Lab)
Does the hon. Lady agree that, in areas such as the remoter parts of Scotland, as in areas of my constituency, broadband access can be intermittent? The Government have excluded from the provision those who are completely digitally excluded. However, there are areas with patchy broadband—people have it on some days but not others—and there could be a problem for people who do not fall in the group that the Government have excluded.
Kirsty Blackman
I agree. In Kingswells in my constituency, which is a large suburb of Scotland’s third city, there are significant issues about access to fast broadband. There is access to slow broadband, and it is sometimes intermittent, for reasons to do with historical infrastructure. Broadband companies were put on the grid to begin with and they now find it more difficult to upgrade the historical technology. I appreciate the point that the hon. Lady has made; it is important to note that for some people intermittent access can be as difficult as no access.
The third category of businesses we have chosen is those likely to be affected by the closure of HMRC offices. I have needed to do tax returns online only since I became an MP. The problem with some of the questions is that yes or no are the options but my answer has been “maybe” or “kind of”. Despite the fact that the online form was fairly clear, I needed to phone someone to get some advice on whether to tick yes or no. If businesses lack advice and information from HMRC about the correct option to choose in some cases, it will be more difficult for them to fill out the forms.
It is important that businesses should be given the advice, information and support they need to fill in the forms correctly online. I am sure that no businesses will be trying to make errors; they will be looking for advice. My concern, particularly regarding HMRC offices, is the lack of access to advice that people might have.
Mel Stride
The important point is that, for many years, people have not simply been walking into or getting an appointment at their local HMRC office. The fact that we are drawing offices together into 13 beefed-up regional centres is particularly important in the context of telephone advice, which the hon. Lady is alluding to and which will still very much be available for exactly the circumstances she describes.
Kirsty Blackman
I appreciate the Minister’s point. In an earlier sitting, he mentioned the positive timelines when people phone HMRC for advice; apparently the phone is answered very quickly. I get that he says the statistics show that, but people are walking into my surgeries and into my constituency office saying that they have tried for hours to phone HMRC and have really struggled to get through. Despite him saying that the statistics show one thing, the lived experience of my constituents is very different. That is why I have these concerns, and even if one person or a handful of people cannot get through on the phone and fill in their form on time because they are not able to answer the question, it is a concern. I implore the Minister to continue working on call times and to ensure that, when people phone, they get through as quickly as possible and that the calls are answered, and that the advice provided is correct so that people can make the correct choice, particularly with online forms.
Labour Members have tabled a number of amendments to the clause. We were clear in the SNP manifesto that we supported a phased move to digital reporting, so what the Minister has proposed is now much more in line with what we were thinking. I ask that Labour Members, in speaking to the amendments, explain why they chose 2022, and I will make a call after that on whether we think supporting them is relevant. One Labour amendment suggests that we should not move towards digital reporting, which would be a concern for us because our manifesto commitment was positive about digital reporting. I look forward to hearing the comments from the Opposition and the Minister.
Stella Creasy (Walthamstow) (Lab/Co-op)
As ever, I am eager to serve under your chairmanship, Mr Howarth. I come to the Committee with a series of amendments on what digital reporting might offer us to resolve some of the challenges faced by employers and employees in our country. There are two issues in particular, which I will come to in turn, because as ever with the Finance Bill, they are technical.
First, I will deal with the treatment of the lowest-paid staff in our country—Office for National Statistics data show that, of all low-paid people, waiters and hospitality staff get paid the least—and what we can do to help them with their incomes. Secondly, I will look at how digitisation could help us to address compliance, which is one of the biggest issues for small businesses. To prefigure the Minister’s comments, I know he will say that that is for another Bill, but given how important it is for the systems to work together, I think this is an issue for this Bill. I hope he will bear with me.
I turn first to amendments 7 and 8—amendments 8 and 39 are identical—which concern the treatment of waiters and hospitality staff. Many Members may be familiar with campaigns on the treatment of tips, service charges and gratuities and with evidence showing that some employers were using those to top up people’s wages and to avoid paying the national minimum wage. Members might therefore be relieved that legislation was brought in to prevent that, but it has become clear that many employers still use tips, service charges and gratuities to avoid paying their staff properly. The amendments go to the heart of how we can address that.
In particular, Members might not be aware that people are supposed to pay tax and national insurance on their tips. If an employee is paid their tips through a tronc, where their employer collects the money usually using an online system, which is what we are debating today, the employer is supposed not only to pool the tips and share them out—after all, I think we would all recognise that as well as the person who serves a meal, the people who work in the kitchen deserve recognition of their work—but to check that the employee has paid national insurance and tax.
Bim Afolami (Hitchin and Harpenden) (Con)
On the question whether a scheme is being run by the employer or by employees or staff, is the hon. Lady alleging that employers are acting contrary to existing guidance and legislation? I am not entirely sure.
Stella Creasy
Yes, that is the concern. There is a lot of evidence that the exemption, which lets staff run their own tips scheme—it is like staff in a small café sharing the money in the jar, but across a large restaurant chain—is being used by major employers to avoid paying national insurance and, indeed, pension obligations further down the line, especially given auto-enrolment.
Another issue to which the amendments relate is the variations in charges that employers apply to employees for administering such schemes. Some restaurant chains will pass on 100% of the tips paid to a member of staff, while others will charge up to 20% in administration fees for doing it through an electronic system. Clearly, that is not fair and I warrant that customers have never had a restaurant explain to them how much they will charge the employee to pass on the tip that customers want to give them. The amendments are designed to help us understand what is going on.
I hope that the Minister will have strong words with his colleagues in the Department for Business, Energy and Industrial Strategy, because if, as we fear, a tax take is being avoided and the lowest-paid people in our country are being exploited as a result, surely we all agree that we need to do something about that. That is why I tabled the amendments. Indeed, 18 months ago, many of us took part in a Government consultation on precisely those issues—that is, how to ensure a fair system for administering tips, service charges and gratuities. I have to tell the Minister that, 18 months on, the Government have not even published the results of that consultation, let alone looked at what could be done to make sure that neither the Exchequer nor the employer is being short-changed.
The Bill offers the Minister an opportunity to make progress on an issue that his ministerial colleagues have kicked into the long grass. If we are digitising records, we can ask employers to clarify precisely what is being collected in tips, service charges and gratuities, and what is income. The amendments address exactly that point: they simply propose that an employer should record the different forms of income—with electronic systems that should be a relatively easy thing to do—and an employee would then be able to access that information.
That is important because if someone is self-employed and working in restaurants—my colleagues from north of the border have mentioned people administering their own tax records—they ought to know what their liabilities are. At present, however, someone who is part of a tronc system does not necessarily know what they are being paid in tips, gratuities and service charges. These simple amendments ask the employer to set out precisely the different streams of income, which their computer systems will easily collate for them, so that our tax system acts more efficiently.
If the Minister is not prepared to accept the amendments and acknowledge the need to make progress—we are, after all, talking about the poorest-paid employees in our country—will he commit to asking his ministerial colleagues in BEIS why it is that, 18 months on, when so many people have provided information about how we could solve the problems, nothing has happened? Indeed, I have regularly asked when the consultation results might at least be published, but the answer has always been, “Sometime in the future.” I am sure that the Minister would agree that the people who serve him a cup of coffee in a restaurant deserve better service from us in making sure that they are not exploited.
Amendment 10 relates to an issue that has come up very little in this Committee—we should correct that—namely the Japanese knotweed that is Brexit, which has taken up so much of our time. I appreciate that the Minister will say that the amendment is not needed because he has published a White Paper on how customs and VAT should fit together. However, having read that White Paper, I must draw attention to an omission from it.
I am sure that Government Members will judge me because I have become slightly obsessed with things such as the 13th directive on VAT, and I am sure they would all like to do a pub quiz on it too. Normal VAT rules allow that businesses registered in the UK can recover UK VAT. People understand that: for most businesses, VAT compliance is one of their biggest pieces of work. The issue with the 13th directive, which the amendment addresses, is the question of what happens when businesses trade in Europe. After all, Europe is still the primary market for the vast majority of businesses: 63% of members of the Federation of Small Businesses have said that Europe is their priority market. That means that if a salesman goes to Sweden and stays in a hotel, the hotel might charge VAT and there is no way that that business would be able to deduct Swedish VAT on its UK VAT return. At the moment, however, under the single market procedures, there is a process by which foreign VAT can be recovered directly from the country in which it was incurred.
For those Members who are VAT geeks, that provision is in articles 170 and 171 of Council directive 2006/112/EC, the prime VAT directive. I will, of course, pass that detail on to Hansard. The detailed rules are in Council directive 2008/9/EC. That is implemented in our own domestic legislation, in section 39 of the Value Added Tax Act 1994 and regulation 20 of the Value Added Tax Regulations 1995. In practice, that means that each European state is obligated to make a VAT refund. Obviously, there are rules on that, but it works pretty straightforwardly through an online electronic system, which is why it is relevant to the charge under discussion. I can see the Whip wondering where I am going with this, but there is a direct connection.
A similar scheme applies across the EU to businesses that are not established in the EU. That is the 13th VAT directive, which is implemented by section 39(2)(b) of the 1994 Act and is a more complicated system. The amendment is simple. When we leave the EU, we will no longer be able to rely on the simplicity of the intra-country VAT collection scheme that has helped businesses in Britain to trade and provide services, particularly in Europe. We will, therefore, need to move to the 13th directive, or we may move to something else. The customs White Paper, for instance, mentions an “innovative” scheme, but I am pretty sure that other countries, for which the intra-country scheme works well, would not be particularly willing to undertake such innovation. I think they would be happy for us to move to the 13th directive.
I am concerned that there is a lot of evidence that the 13th directive and its administration is not very effective for countries outside the EU. In particular, the 13th directive states that member states must refund VAT to foreign traders. It also states:
“Member states may make the refunds…conditional upon the granting by third states of comparable advantages regarding turnover and taxes.”
One could argue that the Bill’s introduction of an online electronic system provides a comparable advantage, but my amendment asks the simple question being asked by many businesses, including local businesses in my constituency, which are starting to panic about how they will manage their VAT returns in future. How will the proposed electronic scheme fit in with regard to both the current regulations relating to intra-EU VAT refunds and the 13th directive?
Having looked at the Minister’s document, I am concerned that, although it talks a lot about what the UK will do, it does not talk a lot about the 13th directive and what it will mean for British businesses. Page 19 refers to contingency in case there is no deal—of course, we all know that that is a sensitive question for the Cabinet—but what British businesses need to know now is, if they are going to continue to trade in Europe, how they can do that in a cost-effective and red-tape-free way?
One of the more bizarre elements of Brexit is that we seem to be arguing about red tape as though the other side wants more of it, and those of us who wanted to stay in the European Union are bad for wanting less of it. This issue is a great example of that challenge, where being part of the European Union had simplified a process for British businesses. A quarter of FSB members have said that the introduction of any tariff or complication with trading with Europe would put them off trading altogether. We need this Bill to match what is going to happen in future, so that businesses using an online system will not have to change it very quickly as a result of the rules of the 13th directive implemented by other countries making it harder for them to use.
If the Minister will not accept my very simple amendment asking him to set out just how this Bill will impact on the 13th directive, will he commit to discussing with British businesses what the directive might mean for them in terms of VAT compliance and recouping their costs, and what the consequences for them will be in terms of administering the scheme? All small businesses in our constituencies that are looking at that future trading relationship will want to know how much additional paperwork they are going to get, and they deserve an answer.
Peter Dowd
I will to speak to clauses 60 and 61, schedule 14 and clause 62 together, as they represent a package of measures that would introduce powers and regulations surrounding digital reporting and record keeping for both VAT and income tax.
The Opposition’s concerns about the Government’s plans for making tax digital are well-versed. We raised them on Second Reading of the March Finance Bill, before they were dropped, and raised them again in the debate on the Ways and Means resolution for this Bill, as well as on its Second Reading. We fully support digitalised tax reporting, which we can all agree has the potential to drastically reduce the amount of time individuals and business owners will have to spend filling out long and complicated tax returns. We could also free up some of HMRC’s time, so that it is better spent clamping down on tax avoidance.
Mel Stride
These clauses introduce the requirements for making tax digital for businesses. That is a major step in our journey towards a system in which technology makes it easier for businesses to get their tax right. The majority of businesses, as we have heard, want to get their taxes right but, none the less, make honest and avoidable mistakes in fulfilling their tax obligations. Not only does that cause them concern and frustration when HMRC intervenes to put it right, but taxpayer error and failure to take reasonable care cost the Exchequer £8 billion a year.
VAT has been online since 2010 and more than 98% of registered businesses already send VAT returns to HMRC in this way; many do it themselves, some use agents to do it for them. Making tax digital will be voluntary for income tax and national insurance contributions for those who fall below the VAT threshold, even if they are registered for VAT. Hon. Members will note that provisions in the Bill relating to income tax—that is, clauses 60 and 61—cannot enter into force until an appointed day order is made by the Treasury. The Government have committed that that will not happen before 2020.
The hon. Member for Bootle very generously welcomed, as did other Members, the timetable changes that I announced in July. The hon. Gentleman suggested that we have not gone far enough. I would point him to the remarks of Mike Cherry, the FSB chairman, who welcomed the delay that I announced in July. He said that it makes
“the roll-out of the changes far more manageable for all of the nation’s small firms”.
Many similar comments were made by businesses and organisations representing businesses at that time.
Let me set out in detail a few aspects of the legislation for making tax digital and we can pick up some of the points made by hon. Members. Clause 60 provides the framework for a future extension of making tax digital to income tax and class 4 national insurance. It sets out to whom the rules would apply—broadly, any unincorporated trading business or landlord with turnover of more than £10,000 a year. Clause 60 provides that the regulations made using these powers cannot mandate the provision of information more frequently than once a quarter, so we can be very clear on the frequency issue in the legislation. That output will be generated automatically by software and sent at the press of a button to HMRC. There will be no requirement for businesses to pay income tax or national insurance alongside their final year update.
Clause 61 introduces schedule 14, which makes consequential amendments to the existing income tax administration rules. Clause 62 amends the powers in the VAT Act 1994, enabling HMRC to amend the existing VAT regulations to provide for digital record keeping and information reporting.
The hon. Member for Bootle has suggested a number of amendments to clauses 60 to 62. He also asked several questions relating to those clauses in Committee last week, which I hope to address today. Amendments 33 to 35 would have the effect of delaying making tax digital implementation until 2022 at the earliest. Having consulted widely and received feedback both from external stakeholders and Members, the clear message was that, although digitising tax was a positive step, some had concerns about the scope and pace of change.
As many Members have reflected today, on 13 July we announced significant changes to the scope and timetable for making tax digital, giving 3.5 million businesses more time in which to prepare. Businesses will not now be mandated to join making tax digital until April 2019, and then only to meet the VAT obligations. Businesses with a turnover below the VAT threshold will be exempt from making tax digital altogether. That change was widely welcomed—as I pointed out, it seems a realistic path to implementation. Trade representative bodies and other stakeholders who previously expressed concerns are now engaging with HMRC to ensure a successful roll-out of the programme. HMRC has already started piloting the changes for income tax, allowing for at least three years of testing on a voluntary basis before mandation.
Changing the timetable further would create uncertainty for businesses and undermine our ability to pilot the changes properly. Digital software is increasingly part of the way that businesses operate; further delay to making tax digital would result in increased divergence between the way that businesses run themselves and the way they do their tax. Making tax digital is about ensuring that businesses get their tax right and helping HMRC to address the £8.7 billion tax gap. We need to balance ensuring that businesses and agents have time to prepare with ensuring that everyone can experience the benefits of doing tax digitally at the earliest opportunity. I am confident that the current timetable strikes the right balance.
The hon. Member for Bootle also tabled an amendment to stipulate that there should be no requirement under MTD for mandatory quarterly updates for VAT. Under our current plans for MTD for VAT, no business will be required to provide updates to HMRC more frequently than they do now. Most already submit VAT returns quarterly and they will provide the same information with the same frequency. The difference is that the updates will be sent to HMRC from digital records.
The hon. Gentleman’s final amendment would require my right hon. Friend the Chancellor to lay a report relating to the software used for MTD before the House. HMRC has begun piloting MTD services and intends to test the system extensively. That pilot will be used to test the range of software products available to businesses. HMRC is working with the software developer industry and others to ensure that products are available to businesses and agents at a range of different price points. As it emerges from the pilots, HMRC will publish information about available software products on gov.uk to enable businesses to choose appropriate products.
The hon. Member for Walthamstow has tabled three amendments to clause 60—I would expect no less than three; it is very modest of her, on this occasion, though I think one amendment was submitted twice—which seek to ensure that businesses record service charges separately for each employee. As the hon. Lady knows and has pointed out, the Department for Business, Energy and Industrial Strategy has consulted on service charges on these matters. The issue is of course very important: I know that she has pursued it for a long time and given an eloquent and lengthy discourse on many of its byways and alleyways. As perhaps was demonstrated by the intervention of my hon. friend the Member for Hitchin and Harpenden, these particular matters are complex. It is the Government’s contention that this is not the right forum in which to start trying to address, tempting though it is, through making tax digital, some of what I accept may be iniquities in the operation of companies’ tips and service charge systems. We have to wait for the results of the BEIS consultation.
Stella Creasy
I am a little surprised, given that we have presented evidence today that tax may be being avoided by using HMRC’s E24 guidelines, that the Minister says that we have to wait. We have been waiting 18 months for the consultation even to be published. If he will not accept the amendments today, can he just tell us how long he is prepared to wait and how many people he is prepared to see exploited by the regulations before the Government act?
Mel Stride
I thank the hon. Lady for what is a slightly loaded question, if I may say so. I am certainly not prepared to wait for abuses of any kind, but I am prepared to wait, and it is right to wait, for a deep and considered consultation, as opposed to a short debate in the context of the Finance Bill. That is the critical point to bear in mind on this matter.
The clauses before us provide for making tax digital for business. That concerns the way in which businesses record and report their tax liabilities. The hon. Lady made some powerful points about the treatment of service charges, but I believe that they would be better pursued through the Department for Business, Energy and Industrial Strategy. It has responsibility for this area and is best placed to ensure that tips, gratuities and service charges are treated in line with the principles of clarity and transparency set out in its recent consultation. Dealing with the matter through legislation on digital taxation would risk missing crucial elements for employees or businesses that have been captured in the submissions to the consultation.
Ruth George
Bearing in mind that national minimum wage legislation can be implemented by BEIS only on an individual basis, when an individual complains, and such cases can be settled only on an individual basis, does the Minister not agree that a wider remit than that of BEIS will be required to tackle substantive abuses that go across whole workforces, as described by my hon. Friend the Member for Walthamstow?
Mel Stride
The hon. Lady raises an extremely important matter, which is those employers who do not adhere to the requirements of the national minimum wage. HMRC and the Treasury take that extremely seriously, and we have mechanisms in place, as she may know, for reporting instances of that where they occur. I can assure her that the Treasury is the Ministry directly responsible for strategic oversight of HMRC and that HMRC takes any abuse of the national minimum wage requirements and regulations in this country extremely seriously, and pursues and brings to book those who commit abuses.
Stella Creasy
Will the Minister therefore commit today to investigating the use of the E24 guidelines and the tronc schemes, to which we have referred? He may not accept our wider point about protecting people and the tips that they have rightly earned, but HMRC’s E24 guidelines fall directly within his remit, and it is precisely that scheme that we are worried employers are abusing, so will he commit today, given that he has just explained to my hon. Friend the Member for High Peak that he cares very much about this matter, to an investigation and to publishing the results, so that we can all be confident that no one is being exploited in that way?
Mel Stride
HMRC can already investigate when it suspects the kind of abuse to which the hon. Lady alludes. To be specific, if HMRC opens an inquiry into whether PAYE or NICs are being operated correctly, it will be able to ask the employer or the troncmaster how they have recorded service charges and tips and how those have been allocated, and trace them back even to which customers paid for them. The tools are there, the willingness is there and the evidence is there that HMRC is doing precisely what the hon. Lady would expect it to do in pursuing this matter.
Stella Creasy
Just so that we are all clear, because I can see that Government Members are also concerned that there may be abuse of the E24 guidelines—this is not about individual companies—will the Minister commit today to his officials doing an investigation on whether the E24 guidelines are being abused in the way that has been described and to reporting back to all of us in the House?
Mel Stride
As I just said to the hon. Lady, we can say in relation to any aspect of HMRC’s operation or any of the rules that it is there to clamp down on that we want regular reporting and all the rest of it. The point is that as a Ministry, the Treasury is there to have strategic oversight of HMRC and to ensure that it is behaving in an appropriate way and chasing down tax avoidance, evasion and non-compliance in whatever form they may appear, including the forms that she has raised. We will continue to do just that.
Ruth George
Bearing in mind that individuals have to raise a complaint in order to secure an investigation by HMRC compliance, and that the workers we are talking about are some of the most vulnerable and most susceptible to exploitation, immediate dismissal or changes to their terms and conditions because they are often not in the workplace for a substantial length of time, does the Minister agree that it would be helpful if HMRC were able proactively to investigate these schemes, rather than having to wait for individual vulnerable employees to put themselves at risk by raising a complaint?
Mel Stride
The hon. Lady overlooks the fact that it is often possible for those who wish to complain to do so anonymously through their trade union or other representatives. That is what happens in many cases. HMRC does not have to rely on a specific complaint to conduct an investigation. It may have suspicions of its own for a variety of reasons. I do not think that we are in a position where people are unable to come forward, as she suggests.
The hon. Member for Aberdeen North has tabled two amendments that seek to review the impact of MTD on specific groups. I recognise her concerns, but the Government have been clear from the outset that businesses that are unable to go digital will not be required to do so.
If you will indulge me, Mr Howarth, it is worth looking at some of the detail of the Bill at this point. The hon. Lady has raised a very important point about potential digital exclusion. Clause 60 covers exemptions, as I am sure she is aware. New sub-paragraph (4) of paragraph 14 of schedule A1 states:
“The digital exclusion condition is met”—
for those who would not be required to put in their returns digitally—
“in relation to a person or partner if…for any reason (including age, disability or location)”—
the hon. Lady rightly raised rural localities—
“it is not reasonably practicable”—
that is not the same as completely impossible—
“for the person or partner to use electronic communications or to keep electronic records”.
I think that is a well-crafted clause to catch the kind of circumstances about which the hon. Lady and I are concerned.
Kirsty Blackman
The concern raised by the hon. Member for High Peak was about intermittency. The issue is not about people who do not have access to the internet at all, but those who have only intermittent access. The clause may not be lenient enough for them to make a case for not having digital access. Does the Minister have a view on that?
Mel Stride
I thank the hon. Lady for her further point. I guess it comes down to interpretation. It seems to me that if it is not reasonably practical for a person or company to use electronic communications, the reliability of the service—another way of describing the point she raised—would be an important part of the judgment that would be made.
The clause continues with “Further exemptions”. Proposed new paragraph 15(1) states:
“The Commissioners may by regulations make provision for further exemptions.”
New paragraph 15(1) states:
“The exemptions for which provision may be made include exemptions based on income or other financial criteria.”
There is therefore a recognition in the Bill that not only do we need to get it right for the current circumstances, but we need the flexibility to be ready for any circumstances that might present themselves and which we have not considered at this stage. Those would need to be addressed further down the line.
For those who can go digital but require additional assistance, HMRC will continue to provide a diverse range of digital support, including webinars, helplines and YouTube videos, to help them meet the requirements of making tax digital.
The hon. Member for Aberdeen North also seeks to provide for a phased implementation period, with the commencement of each new stage requiring approval by the House. We have already revised the implementation to start with businesses that report quarterly, and stakeholders are operating on the basis of the new timeline. We are phasing in the implementation by piloting the changes and by starting with mandation only for VAT and those above the VAT threshold. The secondary legislation required to lay out the detailed operation of MTD will be laid before the House in due course, offering Members a further opportunity to scrutinise our plans and consider our proposals.
The hon. Member for Walthamstow has tabled an amendment to require HMRC to publish an assessment of the effect of our exit from the European Union on MTD for VAT for small businesses. HMRC wants to give businesses plenty of time to adapt to MTD and is allowing for a full year of piloting the changes before mandation applies and before the UK leaves the European Union. If businesses wish to begin keeping their records digitally before we leave the EU, they will be able to do so.
The hon. Lady raised specific issues in respect of VAT and the 13th directive. The Government do not consider there to be an MTD issue here. MTD is about how records are kept and reported, rather than the nature of the VAT regime itself. The regulations will be consistent with the requirements of the 13th VAT directive, but if she has specific concerns, HMRC will be happy to look into them.
Stella Creasy
I am happy to clarify. At the moment, the intra-country VAT scheme is administered online, which makes it relatively simple for people in the UK to reclaim VAT they have incurred in other countries. As we know, the 13th directive requires every single other country to come up with its own VAT scheme, so there is a question about the compliance of different schemes with our scheme. If we have a digitised system, it needs to be able to interact with 27 other countries’ VAT schemes, rather than one EU-wide scheme. Has the Minister’s Department done any work on how the other 27 schemes will interact with our online scheme, so that businesses can be assured of the frictionless transfer that his Government so often promise on these issues?
Mel Stride
The hon. Lady raises a very specific point within what is a large set of negotiations on all the issues of customs, excise and VAT. She will be aware that a customs and excise Bill will be presented to Parliament fairly shortly.
Stella Creasy
I have looked at the Minister’s White Paper, and it does not mention the 13th directive at all. If he could clarify that a second White Paper will address this issue with the 13th directive, I am sure that many small businesses would be relieved.
Mel Stride
As I am sure the hon. Lady knows, the White Paper sets out that the Bill will be a framework Bill. The purpose of the Bill will be to ensure we can enact through legislation—largely secondary legislation—whatever arrangements we arrive at as a consequence of the negotiations we are in the middle of. It is not my position here today to prejudge exactly where we will end up on VAT, but I can reassure the hon. Lady that all the preparations and legislation will be in place to accommodate in as frictionless a manner as possible—as she rightly says—the exercise of VAT between ourselves and our former European partners, as well as customs at the borders and all the other important issues that will arise once we leave the European Union.
Stella Creasy
The Minister is being incredibly generous. I hope he will forgive me; sometimes I must feel like a bear of very little brain on these issues. The 13th directive is the manner by which EU countries deal with non-EU countries’ VAT claims. It is an immovable part of the post-Brexit landscape, as I am sure the Minister agrees. Can he clarify that it is the 13th directive that his Department is engaging with? He said that the White Paper was a framework document. Will the customs union legislation deal with the 13th directive, or does he think there will somehow be a completely different scheme? I know that the White Paper talks about innovation, but it seems a bit pie in the sky to suggest that the 13th directive will not be part of this. Why is he not talking about it?
Mel Stride
I refer the hon. Lady to my last reply: the customs Bill is not there to map out every single eventuality as to how VAT will be handled, what rules and regulations we may or may not operate with under World Trade Organisation rules or what agreement we will have with the EU on all the issues, including those she has raised, or otherwise. It will be a framework Bill that will ensure that we are in a position promptly and effectively to bring in whatever measures we need to move forward in the orderly manner she referred to. On that note, I think we have given her amendments a thorough examination.
The Government’s ambition is for the UK to be the best place in the world to start and grow a business, and for HMRC to be one of the most digitally advanced tax administrations in the world. Making tax digital will be a major step forward in the way that businesses conduct their record keeping and interact with HMRC. I commend the clauses to the Committee.
Question put, That the amendment be made.
The Chair
With this it will be convenient to consider the following:
Amendment 41, in schedule 16, page 609, line 4, leave out “may” and insert “must”.
This amendment would remove HMRC’s discretion over whether to publish information on people have incurred a penalty and the conditions of paragraph 46 have been met.
Amendment 42, in schedule 16, page 611, line 27, at end insert—
“Duty to publish information on operation of penalty regime
51A (1) The Commissioners must publish information about the operation of the penalty scheme in relation to each tax year within six months of the completion of that tax year.
(2) Such information shall cover in particular—
(a) the nature of the abusive tax arrangements giving rise to penalties,
(b) the extent to which such arrangements relate to offshore income, assets and activities,
(c) the extent to which people who would otherwise have been liable for a penalty under these provisions were not liable due to being convicted of a criminal offence in accordance with paragraph 52.”
This amendment would broaden the requirement for HMRC to publish information on penalties to cover the nature of the abusive tax arrangements, the extent to which they involve offshoring and the instances where successful criminal prosecution is used instead.
That schedule 16 be the Sixteenth schedule to the Bill.
Mel Stride
Clause 65 and schedule 16 introduce a new penalty for any person who enables the use of tax avoidance arrangements that are later defeated by HMRC. Currently, tax avoiders face significant financial costs when HMRC defeats them, but those who enable them bear little risk; they gain financially while their clients foot the bill. The purpose of the penalty is to deter people from enabling tax avoidance arrangements, reducing the number of schemes on the market.
Enablers of tax avoidance arrangements will now face penalties of 100% of the fees that they earned from the failed avoidance. The measures ensure that there are powers to tackle the full supply chain of avoidance arrangements. The penalty is designed to have a behavioural impact on the minority who continue to supply abusive avoidance arrangements, while ensuring that the vast majority of professionals who advise on genuine commercial arrangements are not affected. The measures are targeted carefully to capture abusive arrangements that no reasonable person could consider to be a reasonable course of action, and only those enablers who knowingly enable such arrangements that are later defeated.
The measure was developed after extensive consultation last year with representative bodies and large accountancy and law firms. Following the publication of draft legislation in December 2016, HMRC held a significant number of meetings with stakeholders to help refine the technical detail of the legislation. That engagement has been constructive, and stakeholders have welcomed HMRC’s collaborative approach, acknowledging that many of their concerns have been addressed.
For too long, those who enable tax avoiders have been able to gain financially from schemes, knowing that they face little sanction when their scheme is defeated. It is time that that is put right.
Anneliese Dodds
As the Minister has helpfully set out, the measures will introduce new penalties for tax avoidance enablers. Specifically, penalties charged will be equal to the amount of consideration received or receivable by the enabler for their role in enabling the tax avoidance arrangements that were defeated.
Our amendments 41 and 42 would require the publication of information about how the new scheme will operate. Specifically, we think it is necessary for lawmakers, the public and others to be aware of who is being penalised through these new tax measures; the nature of the abusive tax arrangements that have been uncovered and dealt with; the extent to which they apply to offshore income, assets and activities; and the extent to which successful criminal prosecution is used rather than this penalty.
We think that that information is necessary because we are concerned that, although it is a welcome step, this measure is potentially insufficient. We are concerned that the Minister’s aspirations for this measure to have a behavioural impact might not be realised, and that concern relates specifically to the extent of the penalty.
As I have said, the penalties charged will be equal to the amount of consideration received or receivable by the enabler for their role in enabling the tax avoidance. Therefore, in effect, they will be required to pay back merely the payment they received for the inappropriate arrangement in the first place. That payment might not even cover HMRC’s costs of investigation and recovery.
As I understand it, penalties have been reduced after consultation, which is regrettable. Given that this is the Finance Bill, we cannot suggest that those penalties should be restored to a level that would cover HMRC’s costs—that would be inadmissible. None the less, we can ask for the information that we will require to assess whether this regime is watertight and driving the behavioural change suggested by the Minister.
Ruth George
Does my hon. Friend think that the clause provides HMRC with any impetus to investigate such schemes at an early stage? At that point, very little tax may be recoverable, resulting in a smaller penalty. That would create a perverse incentive to delay investigations until greater charges can be levied in order to cover HMRC’s costs. I would hope that the Minister would want to incentivise the early investigation of such schemes.
Anneliese Dodds
My hon. Friend makes a good point about the potential perverse incentives created by focusing uniquely on HMRC receiving payment from the client for the creation of such schemes and the enrolling of individuals and firms on to them, rather than on the activity of creating those schemes in the first place and, above all, on HMRC’s costs as a result of investigating them.
All of us, as Members of Parliament, are well aware of the kinds of schemes under discussion. It was interesting to hear the Minister mention the principle of eliminating those schemes that no reasonable person would think should be followed by taxpayers. We have voluminous evidence that that is not currently the case. We need only look at some of the flow charts produced and revealed during the Lux and Panama leaks to be aware that there clearly is an industry in creating such tax avoidance schemes.
We need very tough measures against those schemes. Given that they could be costing the Exchequer dearly, we feel it is appropriate to have a greater amount of information about the measures and, in particular, to compel HMRC and the Government to publish that information in full so that we can assess their efficacy.
Mel Stride
I make clear the Government’s total commitment to clamping down on tax avoidance. We have brought in £160 billion since 2010 by clamping down on avoidance, evasion and non-compliance. We have already introduced legislation that clamps down on those who generate abusive schemes, and the Bill seeks to catch up with those who have benefited or who expect to benefit from such schemes. That leaves us to deal with the enablers in the centre of the equation.
The hon. Member for Oxford East raised the issue of naming. The Bill will allow the flexibility to name those who have been enabling these schemes. We believe that a proportionality test should be applied to take account of how significant and widespread the abuse has been, but if a very serious level of abuse has occurred, there is provision for the individuals, partnership or company concerned to be named in the way she described.
The hon. Member for High Peak is entirely correct that HMRC should be encouraged to address these cases early, rather than letting them run on. The clause seeks not only to ensure that we can catch up with these things quickly, but to prevent them from happening in the first place. It is about behavioural change, which is so important. We have seen a lot of evidence that many of these schemes are beginning to close down because we are sending the right signals and getting tough and serious about it.
Anneliese Dodds
I am concerned about incentives. HMRC is not being given specific additional resources, and some of the investigations may be quite detailed. As my hon. Friend the Member for High Peak asks, where is the incentive to crack down on the schemes early? The funds receivable may be very small because the schemes are unlikely to be used by a large number of taxpayers. I am concerned that we may be making it difficult for HMRC to take action, because the Bill does not include a requirement to cover its costs.
Mel Stride
The incentive for HMRC and for the Government is to squeeze the tax gap and minimise the number of people avoiding tax. If we do not get on with clamping down on those individuals and companies in a timely fashion, we will make things worse right across the piece and generate less tax as a consequence. We have a clear incentive to ensure that these measures bite at the earliest opportunity. It is about changing behaviour. The very best approach to tax avoidance is to ensure that it does not happen in the first place.
Question put and agreed to.
Clause 65 accordingly ordered to stand part of the Bill.
Schedule 16
Penalties for enablers of defeated tax avoidance
Amendment proposed: 41, in schedule 16, page 609, line 4, leave out “may” and insert “must”.—(Anneliese Dodds.)
This amendment would remove HMRC’s discretion over whether to publish information on people have incurred a penalty and the conditions of paragraph 46 have been met.
Question put, That the amendment be made.
Finance Bill (Sixth sitting)
Tuesday 24th October 2017
(7 years ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 October 2017 - (24 Oct 2017)
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived. ]]]]HS_COL-159]]]]
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Chair
We come to the dénouement of the Finance Bill in Committee. I hope the Government Whip liked my use of English—very evocative. I call Peter Dowd to move amendment 43.
Peter Dowd (Bootle) (Lab)
I beg to move amendment 43, in clause 69, page 91, line 16, at end insert—
“(1A) In Schedule 23 to FA 2011, after paragraph 65, insert—
‘66 (1) No later than 30 September 2020, the Commissioner shall undertake a review of the exercise of the powers under this Schedule in relation to relevant data holders specified in paragraph 13D.
(2) The review shall consider in particular the number of appeals in relation to Data-holder Notices.
(3) The Chancellor of the Exchequer shall lay a report of a review under this paragraph before the House of Commons within one month of its completion.’”
This amendment would require HMRC to review the exercise of its data-gathering powers in relation to money service businesses.
Peter Dowd
It is a pleasure to serve under your stewardship, Mr Walker, notwithstanding the fact that you have just stolen my joke. I asked my daughter, who studied French, what the French for “dénouement” and “ambience” was, but she did not find that very amusing.
Clause 69 extends bulk data-gathering powers, which were given to HMRC in the Finance Act 2011, to money service businesses such as Western Union. The clause continues the Government’s plans to rapidly expand HMRC’s powers to collect bulk data from third parties. In the Finance Acts of 2011, 2013 and 2016, the powers were extended to merchant acquirers, and in 2016 they were extended to, to collect bulk data from providers of electronic stored-value payment services, also known as digital wallet transactions.
The powers are part of the Government’s strategy to tackle the hidden economy and reduce the tax gap. All Members agree that people operating within the hidden economy evade tax and gain an unfair competitive advantage over law-abiding, tax-paying individuals and businesses. Under anti-money laundering legislation, money service businesses are already required to conduct due diligence checks on customers, in certain circumstances at least. HMRC supervises the majority of money service businesses for compliance with that legislation, so it can request limited information from them as part of its supervision for anti-money laundering purposes. It can also use any information obtained for tax compliance purposes but cannot currently request that information with the original intention of checking the tax position of their customers. This clause would change that by requiring money service businesses to become data holders, to collect data from their users, and to pass that data on to HMRC when requested.
It is important to be clear about how a money service business would hand over a customer’s data to HMRC. First, HMRC would issue a notice to the data holder requiring it to provide HMRC with information. The data holder can respond and, if it rejects the notice, can appeal to the tribunal. The tribunal then makes its ruling. Under these provisions, any money service business that does not comply will be issued with a financial penalty. Similarly, HMRC has the power under this measure to apply directly to a tribunal for approval at a hearing without notice being given to the data holder—effectively going over its head.
At no point in the process is the individual or the business who used the money service business and whose information is being passed to HMRC notified, as I understand it. It seems that the clause is not open to individual appeal at any point in the judicial process. In fact, it rests solely on the shoulders of the money service business to appeal when necessary.
The Opposition fully support measures to clamp down on the hidden economy—on individuals and on businesses using unsavoury and slippery practices to avoid paying their fair share of tax—but we are talking about third parties collecting massive amounts of data to hand over to HMRC. Money service businesses are effectively being asked to pick up the slack for HMRC, which, in our view, is increasingly underfunded and under-resourced. I have said it before, and I will say it again: Government statistics show that since 2010, there has been a 17% reduction in HMRC staffing levels. The Minister needs to address the resources available to HMRC to crack down on the hidden economy. It appears that once again the Government are ambitious in the powers they wish to give themselves—through the back door, some would say—but not so enthusiastic about funding and resourcing their commitments.
The Minister will be aware that although most money service businesses keep records of due diligence checks on customers, they do not have the time—or, I suspect, the inclination—for the pretty onerous task of sifting through the data to provide HMRC with individual records. I therefore find it unlikely that they would refuse or appeal a notice, which is the supposed judicial check on this broad, sweeping power. What does the Minister think is a reasonable notice period for a money service business to process and respond to HMRC? Does he accept that there may be hidden costs for money service businesses that have to comply with these measures?
In the Government’s consultation, there was much debate about the substance of the information that would be transferred between money service businesses and HMRC. According to the Information Commissioner’s Office,
“it is clear that some of the information that may be provided to HMRC for the purposes of extending data gathering powers to money service businesses will constitute personal data in instances where the customer is an individual, a sole trader or a partnership… It will therefore be an important data protection obligation for the MSBs under the scope of the proposed legislation to provide their customers with privacy notices… The minimisation of the collection of personal data of individual consumers is an important privacy protection principle in financial transactions.”
I suspect the Minister will need to consider those concerns as part of a wider discussion about the scope of HMRC’s powers.
The privacy group Liberty has raised concerns that the practice of bulk data surveillance is suspicionless surveillance and constitutes a disproportionate interference with article 8 of the European convention on human rights, as enshrined in the Human Rights Act 1998: the right to respect for private and family life. Liberty’s concern is that bulk data surveillance inverts the traditional relationship between suspicion and surveillance that exists in UK law, because suspicion comes first to justify subsequent surveillance.
In the light of these concerns, our amendment calls for a review of the exercise of schedule 23 powers, with a particular emphasis on how they relate to data protection. The Government have the right to ensure that HMRC has the necessary powers to tackle the hidden economy, but they are also obliged to ensure proper judicial oversight and the protection of people’s rights.
I am reaching my dénouement. The Minister’s case for new bulk data-gathering powers rests on the need for third parties to help HMRC to catch customers who participate in the hidden economy, which costs the Treasury £6.2 billion a year, as I recall. However, he has rejected our attempts to introduce a register for offshore trusts, our calls to crack down on tax avoidance by removing the exemption for offshore trusts in the Government’s deemed domicile proposals, and any meaningful attempt to bring transparency and accountability to non-doms who abuse the UK tax system. I will not call it a double standard; that is not a fair assessment.
However, the Government are demanding all this information from money service businesses customers to ensure that they are not participating in the hidden economy—yet at the same time rejecting any sort of information being held on offshore trusts, which are used to shelter hundreds of billions from the UK Exchequer. As I said last week, there needs to be careful consideration of the balance between individual liberty and the powers of the state. Over the past few years, we have seen multiple Finance Bills whereby Government give HMRC sweeping data-gathering powers, from merchant banking to digital wallets. I believe there is a rational concern that though these powers can tackle criminality, they can also impede an individual’s right to privacy. Any Government need to ensure that the balance is struck fairly and proportionately—and we are not convinced that this does so. Otherwise, there is a real fear that, increasingly, only those who can afford to secure their financial privacy, or to shelter and shield their wealth and financial transactions from the state, will have any privacy. The Government should give more thought to that.
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure to serve again under your chairmanship, Mr Walker.
Clause 69 will extend HMRC’s data-gathering powers to money service businesses, allowing it to better identify and take action against businesses and individuals operating in the hidden economy. Money service businesses, or MSBs, are entities that provide money transmission, cheque cashing, or currency exchange services. They provide valuable financial services that are relied upon by many tax-compliant customers. However, these services are vulnerable to exploitation by those who want to disguise their income. Under the clause, data provided by MSBs to HMRC will allow HMRC to better identify non-compliant customers who are exploiting MSB services to hide their income and operate in the hidden economy.
The hidden economy is made up of those businesses that fail to register for tax, and individuals who fail to declare a source of income that should be taxed. By hiding their activity from HMRC, those operating in the hidden economy deprive the Government of vital funds to run public services. That places an unfair burden on the vast majority of people and businesses who pay their fair share of tax. Hidden economic activity also disadvantages compliant businesses. HMRC’s operational experience shows that non-compliant businesses and individuals can exploit the services offered by MSBs to disguise or dispose of undeclared income. They can do this, for example, by cashing a cheque for undeclared work. HMRC’s data-gathering powers allow it to collect data from certain third parties. Following public consultation and a Government response in 2016, the clause extends those powers to MSBs. It does that by introducing MSBs as a new category of data holder from whom HMRC may require data. MSBs are defined under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
“Credit institutions”, or, practically, banks and building societies, are excluded. The term MSB is generally taken to mean a business that provides money transmission, cheque cashing or currency exchange services without transacting through a bank account or providing general banking services. The clause is intended to cover those businesses. Supporting regulations will be made at Royal Assent, using an existing power to make regulations contained in schedule 23 of the Finance Act 2011. Those will provide detail of the types of data that can be requested. A draft of the regulations was published for consultation last year and regulations will subsequently be laid before the House, subject to the negative resolution procedure. The clause does not impose any additional record-keeping requirements on MSBs. HMRC cannot request data that an MSB does not hold. That is an important point and relates to the concern raised by the hon. Member for Bootle.
HMRC will work collaboratively with MSBs to minimise the administrative burden of complying with the new law. MSBs can appeal against a data notice issued by HMRC on the grounds that it is unduly onerous, or if they consider that the notice asks for data that is outside the scope of relevant regulations. HMRC can request data necessary to detect and quantify hidden economy tax risks. That includes information needed to identify an MSB’s customers and records that the MSB is required to keep under money laundering regulations. It also includes data about aggregate customer transactions. HMRC will not request data on individual transactions.
The hon. Member for Bootle raised an important point—what data can HMRC request under these provisions? The answer is aggregated data, which will not include data on the value of individual transactions made by customers.
Kelvin Hopkins (Luton North) (Lab)
I want to respond briefly to what the Minister said. It is a pleasure to serve under your chairmanship yet again, Mr Walker, possibly for the last time during this Committee.
I have always had a concern about the money service industry, particularly since many of my constituents send money to family members overseas. There are large immigrant minorities from every part of the world in my constituency. Some of the transactions have been insecure—we have seen companies where money has been lost, and I have long thought that there ought to be a much higher degree of regulation of that industry.
There is obviously an issue around charges. I suspect that charges vary widely and are often very high. It seems to me that what we really want is at least a state company doing this business, either instead of or alongside these organisations, which would be properly regulated, have fair charges, and be open and transparent, apart from personal secure information about transactions, which my hon. Friend the Member for Bootle talked about. Bringing the state actively into that area would be a great advance. Perhaps I speak from a left position that might not find favour with the Government, but we ought to look forward to a much more regulated industry with a strong state sector in the future.
Mel Stride
To reply briefly to the hon. Gentleman’s point: the issue of MSB ownership and state involvement is probably slightly beyond the scope of this Bill, but his points are noted. If he continues to work very hard, who knows what might happen? Much to our horror and dread, the state may end up owning just about everything in this country, if he and his merry men and women have their way.
Peter Dowd
I have accepted previous assurances provided by the Minister and we have withdrawn amendments appropriately, in good faith and good spirit. The issue under discussion goes beyond the technicalities and reaches into the very nature of a state that does not interfere in people’s affairs where it has no business to do so. That is not to say that the state has no business interfering; it does so with tax collection, which helps maintain the balance of society. It would not be appropriate for me to withdraw the amendment, because I think that many members of the Committee would like to err on the side of caution and accept it, even though they will not do so. We will therefore leave it hanging and I have no doubt that we will return to the issue of privacy at a future date.
Question put, That the amendment be made.
Stella Creasy (Walthamstow) (Lab/Co-op)
I beg to move, That the clause be read a Second time.
It is a pleasure to serve under your chairmanship, Mr Walker. I am conscious that several members of the Committee may wish to take part in the emergency debate on universal credit—a subject close to many of our hearts—so I do not intend to speak for a long time. However, we ought to get value for money out of these Committee sittings and, indeed, this Bill, so I hope that my new clause gives the Government some ideas about how we can solve the pressing problem of the public finances and the lack of funding.
Government Members often argue that Labour only wants to spend money, but my proposals very much seek to save money for the country. Indeed, they present a way to protect UK taxpayers and British businesses, generate potentially billions for the Exchequer, and address the pressures on the housing market. I am sure that none of us would want to lay claim to the magic money tree, but I believe that my new clause would provide for a concrete cash cow in which the Government could invest, and I hope to convince Ministers and Government Back Benchers to support it.
The new clause relates to a proposal by the previous Chancellor of the Exchequer—I am not sure how many jobs he has now, but he is currently the editor of the Evening Standard—about the way in which capital gains tax was applied to property sales.
Kelvin Hopkins
I am interested in the former Chancellor and how many jobs he has. It is particularly interesting to learn how much he is being paid for those jobs.
Stella Creasy
I am afraid that I do not have that figure to hand, but I do have figures relating to the amount of money that the new clause could raise for the public Exchequer. I hope that my hon. Friend will be as pleased with and as interested in those numbers as I am.
Historically, only UK residents or those with a permanent UK base have been subject to capital gains tax. In April 2013 that was changed to include the disposals of UK dwellings owned by non-resident companies, partnerships and collective investment schemes, which were subject to an annual tax on enveloped dwellings. In April 2015 that was extended to all non-UK residents disposing of UK residential property, and the critical point is that that was about residential property. The argument that non-doms should be paying capital gains tax on the disposal of property was put forward by the previous, and indeed current, Government. The question is: why did they make it apply only to residential properties? As I hope to prove, that has created a loophole through which some people have chosen to put their properties.
We are talking about a rate of tax that is between 18% and 28%, or 20% for corporates. The standard OECD double tax treaty expressly preserves the right of countries to tax non-residents on capital gains from the disposal of local real estate. Many of us will have seen at first hand in our communities the impact of this country’s over-inflated housing market and the connection between the residential and the commercial property market. The Adam Smith Institute reckons that there are 1 million non-doms in the UK, although only 110,000 are declared. Those people are part of our communities, but they are benefitting from an advantageous tax position because of this loophole.
The Bill tries to address issues relating to inheritance tax and holding property through UK companies, so the Government are interested in where people might be using companies to avoid paying tax. Indeed, that is one of the debates that we have been having. The new clause addresses another issue, which is the ability to designate a property as a commercial property to avoid paying the residential charge that this Government introduced in 2015. We know that that is hitting UK companies competing with non-UK companies. In tabling this new clause, I am making a plea to the Minister to be on the side of British businesses that are being unfairly treated in our tax system. We know that people set up property holding companies to avoid those charges. By changing the loophole, we would be able to apply the charge fairly across the board. Indeed, it has to be asked why anybody would hold UK real estate through a foreign company except for tax purposes.
The Minister might say that this about a competitive tax advantage for the UK. Let me reassure him that almost nowhere else in the world exempts foreigners from tax on selling real estate. By closing the loophole, we would simply bring ourselves into line with Canada, Australia and indeed the rest of Europe. The Minister may claim that there are anti-avoidance rules that would take precedence, but if a non-resident company operates in the UK through a UK permanent establishment, the disposal will be subject to UK capital gains tax. That is not the requirement we are talking about; we are talking about organisations that hold property in the UK through offshore companies and designate that property as commercial property. It is the difference between the residential and the commercial that we need to deal with in terms of this loophole.
Ruth George (High Peak) (Lab)
Does my hon. Friend think that the definition of commercial properties would include properties that were previously residential, such as those in my constituency in the Peak district? They were residential homes, but they were sold to owners who live outside the area and are now used primarily as second homes, although they are rented for a very small number of weeks during the year. That has turned them into commercial properties, severely depleting the number of homes available to local people, particularly in rural areas of outstanding natural beauty.
Stella Creasy
My hon. Friend has shown how simple it is to evade the tax by avoiding the loophole—the previous Chancellor tried to close it by ensuring that non-doms paid capital gains tax on the sale of residential property—simply by repurposing a building as commercial property. Even given the rules on closed companies in existing legislation, people can get around the charge. I am suggesting that the figure could be as much as £8 billion. I certainly think that at least £1 billion of public revenue could come from closing the loophole and simplifying the way we treat non-doms with capital gains tax. The Minister may have a different number, but the point of the new clause is to get the number.
The Bill is about how we manage public finances. Giving this tax loophole to non-doms means that our British businesses are unfairly treated and our property market faces artificial pressure. We are missing out on vital funds that could go into our public services. The new clause is not a magic money tree; it is a concrete cash cow. If the Minister will not agree to publishing the data, will he commit to looking at how we can close the loophole?
Mel Stride
New clause 2—I think it is now known as the concrete cash cow clause—provides us with an opportunity to discuss the rules surrounding UK commercial property and those who are foreign-domiciled. As the hon. Member for Walthamstow explained, her new clause would require HMRC to review the taxation of capital gains on commercial property disposal by UK taxpayers with a foreign domicile.
There is no question but that all UK residents, whether UK-based or non-domiciled, are chargeable for tax on profits from selling UK land. That includes non-domiciles who are taxed on a remittance basis, where foreign income and gains are taxed only when they are brought into the UK. Our tax base is predominantly those who are resident in the United Kingdom. As the hon. Lady has drawn to our attention, recent changes removed non-residents into the UK tax base for the sale of UK residential property. The new clause raises the fact that that treatment does not extend to non-residents for the sale of commercial property in this country. While I understand why she suggests that extending the laws would raise revenue, I should point out that this is a very complex area, which needs to be carefully considered.
The 2015 rules were designed to catch individuals and ways in which a person may hold title over a dwelling such as via trusts and closely held companies. They do not apply to companies with lots of shareholders. The structures that are used to own commercial property are different from residential property, often more complex and involving corporates, joint ventures and specialist property vehicles. We would need rules that address such structures and get to the heart of the ultimate owner.
Will the hon. Lady consider this illustration? I might live in Canada and own 50% of a home in Walthamstow. I might easily conceive, if I did not know for sure, that selling my part of the house in the UK would mean paying some UK tax. However, imagine instead that I own a handful of shares in a fund of some kind, which in turn owns half an office block in Walthamstow. Being such a minor shareholder, I may not even know how my money is invested. To send the tax man chasing round overseas for the little shareholder in a commercial building would hardly be cost-effective. We would need to design balanced rules that look at how the market works and what would yield the Exchequer the best return.
Extending the current rules to include any UK property is not a simple matter of striking through “residential property” and inserting “all UK property” into the current provisions, as this would not take into account the intrinsic differences in the way that commercial properties are owned and dealt with.
Ruth George
Does the Minister agree that now that we are seeing residential property increasingly acquired by such complex structures, and that by eradicating the omission for commercial properties, it would simplify the legislation? HMRC would not have to establish whether a property was commercial or residential because there are so many grey areas, as my hon. Friend the Member for Walthamstow pointed out.
Mel Stride
The point I was trying to make was not so much whether one classified a property as residential or commercial. My point was that where it is commercial, the ownership arrangements can be so complicated that this kind of approach is far from simple.
Stella Creasy
I think the Minister is making a strong case for the new clause and providing the data. He may want to update his colleagues on the fact that the closed company model is five or fewer participants. Were there to be six participants, that would extend the limitations he is talking about. I also want to ask him, now that we have the residential rules in place, whether he will commit to publishing how many properties that were previously cast as residential are now categorised as commercial use since that legislation came in. We might begin to get an understanding of whether people are using this loophole to evade the capital gains tax to which we are entitled.
Mel Stride
I am certainly happy to look into the issue of what data are available that might reasonably be released for those properties that might have changed from residential to commercial. My point is that the existing rules for residential property involve, for example, consultation with external experts over a period of two years. They are arguably, for reasons that we have been discussing, more simple and straightforward than the arrangements that would need to be in place for a commercial property situation. To ensure that legislation works effectively, HMRC would be able to collect taxes from overseas taxpayers.
The UK commercial property market is even more complex and inextricably linked to many other markets and investments both in the UK and overseas. Bringing non-resident companies into these rules would bring with them a whole tax code for corporates, which would need to be considered and applied consistently in the context of someone who may have no other UK tax footprint.
Of course, there are existing exemptions and reliefs for the UK investor that would need to be considered to see whether and how they might apply to an overseas equivalent and whether such exemptions could be used to undermine the idea as a whole. Any change to further broaden our base would require consultation with the public, tax experts and affected sectors, particularly those involved with funds and pensions, to ensure they were clear, enforceable, robust to avoidance, and achieved their intention. I assure the hon. Member for Walthamstow that we keep all taxes under careful and continuous review to ensure that the tax system works effectively for the taxpayers of this country.
Stella Creasy
Again, the Minister makes a compelling case for the new clause, which would enable exactly such an information-gathering exercise. As he points out, this may be a complex area. I note, however, that the Bill deals with overseas companies and their inheritance tax positions. I fail to understand why Ministers accept that we need to address the use of commercial entities to avoid inheritance tax but do not accept that we need to address their use to avoid capital gains tax. Will he say a little about that?
Mel Stride
As I have said, I assure the hon. Lady that we keep all taxes under careful review to ensure that the tax system works effectively for the taxpayers of this country. I favour that, rather than requiring HMRC by statute to conduct reviews, as the best way to develop tax policy. I heard what she had to say about those taxes, and I will certainly consider the questions that she raised, but I urge the Committee to reject the new clause.
Stella Creasy
I am afraid that I am not satisfied that the Minister has made a strong enough argument against his own argument that this is a complicated area in which we need information. The new clause would not commit the Government to closing the loophole; it would simply start the process of asking how much the loophole costs us and recognising that, where we create a category for one type of property and people can apply it to another, that may generate a loophole that is exploited to the detriment of the UK taxpayer. With that in mind, and in full support of the British businesses that are being penalised as a result of the Government’s failure to address that loophole, I wish to test the will of the Committee on this matter.
Question put, That the clause be read a Second time.
Mel Stride
Mr Walker, having rocketed through this Bill, efficiently and I think in near-record time, it is only right that I say “thank you” to all those who have made our rapid progress possible. I start with yourself, Mr Walker. I thank you for your patience, good humour and of course for teaching us the right pronunciation of “schedule”. I also thank your co-Chair, Mr Howarth, for his sagacity, which is unrivalled on the Panel of Chairs, with perhaps the exception of yourself, Mr Walker.
I thank all members of the Committee. I thank Opposition Members for their pursuit of their duty of scrutiny of the Bill, although ultimately they were, rather pleasingly, unsuccessful in all the Divisions that we have had. However, we will not hold that against them; they did their job very thoroughly and very effectively indeed. I want to particularly and personally thank the hon. Members for Bootle, for Oxford East and for Aberdeen North for the very good-natured and decent way in which they have dealt with me personally and all the Government Members of the Committee; and, yes, I want to thank the hon. Member for Walthamstow as well, from the bottom of my heart. I genuinely respect her eloquence and determination, and I have enjoyed the mental contortions that she has put me through during the Committee.
I thank the Government Members of the Committee. Their contributions were slightly limited, but when they came they were of a quality that was unrivalled and unparalleled in the history of Committees. I thank the Whips on both sides: my hon. Friend the Member for Beverley and Holderness and the hon. Member for Manchester, Withington. As a former Whip, I know that often they are in the background but what they do really matters and they have ensured that this Committee has run in a very efficient and effective manner.
I thank those who gave evidence to the Committee, the Clerks, Hansard and the Doorkeepers. Most especially, I thank my own officials at the Treasury and HMRC, who in the short time that I have been a Minister have impressed me immensely with their knowledge, guidance and overall their patience and kindness towards me, in many, many hours of trying to explain what has been an extremely technical Bill.
Finally, on a personal note, if I might be indulged, I thank my two young daughters, Ophelia and Evelyn, who, in the last couple of weeks, while their father grappled in his dreams with this highly technical Bill, managed to stay out of their mother and father’s bed and to give them some sleep.
I look forward to Report. Of course, as someone has already mentioned, we have the delights of a further Finance Bill after the Budget, which I know we can hardly wait for.
Peter Dowd
May I completely concur with the sentiments of the Minister? I thank all my colleagues and Government Members for their patience and forbearance. I will just leave on this note because I am quite stunned: I have visions of the Minister grappling in bed. [Laughter.] Best to leave it on that note.
Kirsty Blackman
I thank you, Mr Walker, and Mr Howarth for your chairmanship of this Committee. It has been excellent, as ever. I also thank all hon. Members—in particular, my hon. Friend the Member for Glasgow East, who has sat through his first Finance Bill. It will possibly be the first of many. I think he hopes not, but we shall see. I would like to give special thanks to Miriam Brett, our researcher, who provided me and my hon. Friend with a huge amount of useful information, which we used during the Committee.
Question put and agreed to.
Bill, as amended, accordingly to be reported.
Finance Bill
Wednesday 1st November 2017
(7 years ago)
Lords ChamberRead Full debate Finance (No.2) Act 2017 Read Hansard Text Amendment Paper: List of Commons amendments - (1 Nov 2017)
Finance Bill
Wednesday 15th November 2017
(7 years ago)
Lords ChamberRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: List of Commons amendments - (1 Nov 2017)
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, the Lords Finance Bill debate gives us the opportunity to bring to bear the wide range of expertise that this House possesses on the issue of tax reforms. I particularly thank the Lords Economic Affairs Finance Bill Sub-Committee for its report, Making Tax Digital, and I am delighted that several members of that committee—including the noble Lord, Lord Turnbull, and my noble friends Lord Wakeham and Lord Leigh—will participate in the debate. I look forward to their contributions and to those of others.
The scrutiny of the Bill that comes both from the Finance Bill Sub-Committee and in this debate is invaluable to making our tax system stronger, and I thank noble Lords for their contributions. This year, the Finance Bill has taken an unusual route to get here. The clauses it contains were introduced first in March and withdrawn from the Finance Bill passed before the general election. This Bill makes sure that all in this country pay their fair share of tax, that our public services have the funds they need and that our tax system is as modern as the economy over which it presides. Fundamentally, it is a Bill to make Britain a fairer and more prosperous nation.
I turn first to the issue of tax avoidance and evasion, which is a major theme of the Bill. This Government have done more than any other in their crackdown on tax avoidance and evasion. The tax gap is at a record low of 6% and we are bringing in £11.8 billion more each year as a result of the new measures introduced. Since 2010, HMRC has secured over £160 billion in additional tax revenue as a result of tackling avoidance, evasion and non-compliance, helping the UK to achieve one of the lowest tax gaps in the world. This includes more than £53 billion from big businesses and more than £2.5 billion from the very wealthiest. The second 2017 Finance Bill introduces over 10 policies to help build on this work.
For too long, employers and their employees have participated in disguised remuneration schemes, hiding salary in interest-free and tax-free loans. This Bill strives to bring an end to that practice by placing charges on such loans. This change alone will bring in an extra £3 billion by 2021, all of which can be spent on our key public services. Alongside that, the Bill works to strip the rewards from those who enable tax avoidance, imposing 100% fines on fees earned from enabling defeated avoidance schemes. This is not about penalising the tax profession. It is about making sure that deliberately enabling tax avoidance is not a profitable enterprise.
Finally, we are granting new powers to HMRC to deal with VAT avoidance by overseas companies using UK-based fulfilment houses. These overseas companies have for too long avoided their VAT obligations, undercutting British business. Now, HMRC will be in a better position to tackle this unfair practice.
Not only are the Government committed to clamping down on avoidance and evasion, but they are also working towards making the whole tax system fairer and more sustainable. In law, since colonial times, permanent non-dom status has become a source of inequity in the British tax system. These people live in Britain for the vast majority of their lives. They draw on public services and the opportunities our country offers but pay a lower rate of tax. There is no denying the contribution that non-doms make to this country. They are in many ways a great import, bringing in talent, skill and cultural diversity. But if you live in Britain for a long time, you should pay your taxes like everyone else. By getting rid of permanent non-dom status and ending the qualification for those who have lived in Britain for more than 15 of the last 20 years, the Bill ends an inequity. Permanent residents of this country should pay tax just like everyone else—and now they will.
As well as reforming the treatment of non-doms, we are also making fair and reasonable adjustments to the way in which businesses can claim interest expenses and calculate their losses. Thanks to these changes, big businesses will no longer be able to claim excessive tax deductions on interest payments or offset their new profits with old losses, getting out of paying fair amounts of tax. Each of these measures brings in vital revenue to help fund the public realm: schools, hospitals and universities. They are fair, proportionate and progressive.
Britain faces a historic challenge and opportunity. The economy is changing and developing rapidly. For the Government to keep pace with the increasingly digital world, the way we interact with people must be modernised, too. This goes for our tax system as much as in any other area. That is why, over the next five years, we will be making tax digital. Every year, avoidable errors cost HMRC £9.4 billion—money that could be spent on key public services. By digitising our tax service, we will make it easier for businesses to get their tax right. The new system will help make tax an integral part of their business, rather than a burdensome process to be completed separately.
However, we understand that this is a big change. Indeed, various challenges faced by businesses in this transition were highlighted by the Lords Finance Bill Sub-Committee in its report, which I referred to at the beginning of my remarks. I will now respond to some of the points raised in that helpful report by setting out the Government’s position.
The sub-committee asked that making tax digital should be implemented from 2020. We saw the benefits of allowing businesses more time to adjust and have pushed back any mandatory implementation until 2019. Even then, it will be only on VAT and only for larger businesses. We believe that this strikes the right balance between allowing us time to properly pilot the changes and ensuring that businesses and the public purse see the benefits of the new system as soon as possible. The sub-committee recommended that businesses trading below the VAT threshold could not be expected to be ready to implement only a year after larger businesses and that it was unfair to subject them to an untested system. We heard that and we saw that it was right. Businesses below the VAT threshold will be able to adopt making tax digital on a voluntary basis and at their own pace.
The sub-committee raised a number of points about the scope and timetable for the programme and we have responded. It also had concerns about having time to test making tax digital. The pilots have already begun and we are encouraged by the aspects of the system that we have been able to test so far. We will ensure that making tax digital is shown to work before we introduce it for taxes other than VAT. This is a change that is as good for business as it is for government, and we will make sure that it goes ahead and is a success.
It has been pointed out that this is a long Bill, and there is no denying that. It is long because we have made vital changes to complex law, especially around interest expenses and loss calculation. It is not a good idea to avoid length if it means neglecting certainty and precision on tax obligations. We have avoided doing just that—for which it seems strange to have to apologise, but I recognise that it is a weighty document.
This is a forward-looking Bill that makes our tax system fairer and more progressive and readies it for the future. Its measures will bring in extra revenue for our public services while making sure that our tax system remains competitive and that Britain remains a place where businesses can thrive. It will reform non-doms to make sure that people pay their fair share; crack down on tax avoidance to force businesses to comply with the spirit, not just the letter, of the law; and bring tax into the modern age by making it digital. It has been consulted on, critiqued and strengthened by the wide-ranging scrutiny of Parliament, including this House, and the business world. It is thorough and it is necessary. I therefore commend the Bill to the House and beg to move.
Lord Turnbull (CB)
My Lords, I am pleased to introduce the report of the Sub-Committee of the Economic Affairs Committee on the draft Finance Bill 2017. It was prepared under the excellent chairmanship of the noble Lord, Lord Hollick, before his term ended. I thank our two advisers, Elspeth Orcharton and Tony Orhnial. It is a funny old world in which we are debating this—only days before the next budget cycle starts—but then 2017 has been a funny old year anyway.
As tax policy and rates are outside its remit, the committee looks into issues of administration and simplification. One issue leapt out of the Bill. Making tax digital, as the Minister indicated, covers only nine pages out of 660 but we were extremely concerned by what we saw. In the original plans there were proposals to require all companies, large and small, plus unincorporated businesses and private landlords—about 5 million entities—to keep records digitally using not only spreadsheets but software compatible with HMRC systems; to submit a tax account quarterly; and to prepare an annual statement. This was to apply to all taxpayers with incomes of over £10,000 a year unless they secured an exemption as digitally excluded, which is not easily done. It was put to us that 80% of farms have broadband speeds below the Government’s minimum standards. Note that this is income over £10,000—not net income or profit—and that this level is below the personal allowance and the minimum wage.
We also found that the consultation process was inadequate and taxpayer awareness of the changes was low. HMRC was making the elementary error of moving to the next phase before the results of any pilots were available and analysed. Even on HMRC’s own figures, it will take businesses 10 years to recoup the start-up costs from the savings made; software development was lagging behind schedule; and inadequate provision was being made for businesses with irregular or seasonal incomes, such as farmers, performers and those working in the gig economy. We were told that 53% of independent retailers still had no electronic point of sale. So it has a lot of ground to cover.
When a major change is introduced, it is better practice to start with larger businesses, which are better equipped, moving down to smaller ones as experience is gained, as was done with pensions auto-enrolment. However, this time, HMRC was starting at the bottom. Why was it behaving in this way? The answer is that it believes that by making small businesses keep quarterly, rather than annual, accounts, it would collect more tax—around £1 billion per annum—by reducing errors and carelessness. Few people believe that this was plausible. It was pointed out that errors could go both ways and better advised taxpayers could end up paying less. The timetable was being driven not by what made sense for the project but by what had been agreed by the OBR and put into the Budget arithmetic.
The FBSC recommended: a slower timetable to allow more consultation and a better pilot study to be completed; no mandatory digital reporting below the VAT threshold, then £83,000; more attention to non-standard businesses; an updated impact assessment for taxpayers; and an updated business case for HMRC. I am pleased to report that HMRC, having for months shown little sign of movement, has brought forward some welcome changes, which were announced in June of this year and which the Minister has just repeated. These include: a slower timetable; no mandation below the VAT threshold, though businesses can opt in; and, above this threshold, initially only VAT submissions are to be digital, with other taxes not brought in until after 2020.
We do not know if this was the result of genuine conversion or just the expediency of jettisoning anything controversial in the post-election panic—but let us give the Government the benefit of the doubt.
So is it job done and a victory for parliamentary scrutiny in this House and the other place? Not quite. The most egregious flaws have been addressed but there are still concerns in the taxpayer community. Taxpayer awareness remains low and the pilots are still seen as too limited. It is far from clear that the principle set out by the noble Lord, Lord Carter of Coles, in his 2006 report on online taxation is being observed—that is, that capacity should be tested at least a year before implementation. There is no sign yet of the revised impact assessments and no clear road map for the proposal to widen the scope of making tax digital beyond VAT.
What are the general messages from this controversy? First, I should make it clear that the committee fully endorses the view that the adoption of digital technology for delivering public services will grow and grow, but the pace and sequencing require careful planning and efforts must be put in to helping all taxpayers to prepare. Businesses come in all shapes and sizes and have different capabilities. Secondly, departments must look at the totality of interventions on the sector. At one point it looked as though the self-employed could be hit by paying more tax, incurring higher costs, higher business rates and higher national insurance contributions while they saw corporation tax being cut and the IT giants getting off lightly. Fortunately that train wreck seems to have been avoided. Thirdly, it is dangerous to introduce major changes to meet an arbitrary timetable for increasing revenues.
There is another wider lesson for HMRC and DWP. They need to recognise just how complicated and chaotic are the lives of many in the poorer and less well-educated parts of society and just how financially precarious they are, as revealed by the recent report by the Financial Conduct Authority. Making tax digital is not the only scheme that has run into criticism for failing to recognise this. The noble Baroness, Lady Primarolo, will well remember the difficulties facing the introduction of tax credits. The same is happening right now with universal credit.
The history is that, for many decades, the Inland Revenue tried to reduce the frequency of its contact with individual taxpayers, through PAYE, MIRAS, interest and dividends deducted at source. The arrival of tax credits has put that into reverse. However, an organisation staffed by highly professional people—mostly graduates—in secure jobs, being paid regularly and with financial resources to fall back on, may find it difficult to empathise with families whose circumstances can change by the day and who are living on the breadline. My final recommendations are that those tax and benefit officials dealing directly with the public should spend time at a CAB office, a debt charity or an MP’s surgery. Then they should tune into “The Archers”—not for the love lives of teenagers or pensioners, which feature so prominently these days, but to follow the fortunes, or otherwise, of the Grundy family, who are scratching a living on all kinds of dodgy enterprises and are barely making ends meet. Officials should ask themselves before they press the button on something like MTD: do the Grundys understand what is being asked of them and can they cope?
In conclusion, there were many pressures on government to modify the original MTD proposals. What we have now is significantly better than it was a year ago and for that this House can claim some credit. I hope, however, that the Minister will convey the remaining concerns back to HMRC and the Treasury.
Lord Wakeham (Con)
My Lords, before I say what I am going to say about the Finance Bill, I have been waiting for an opportunity to say how much I appreciate my noble friend’s contributions from the Front Bench. He seems to be speaking on all kinds of different subjects at all kinds of different times and every time he does so he is well informed, has done his homework, is courteous and is a great tribute to the House in the way he acts as a Minister. I hope he does not mind me saying that because, as my next sentence, I am going to say that I have been party to the Select Committee report that the noble Lord, Lord Turnbull, has spoken about and it is the most critical report I have ever been associated with in over 40 years in Parliament—so I thought that would be a good way to start.
We all think that making tax digital is the right way to proceed, and it is strange to be as critical as we were of a proposal which, in essence, we think ought to happen. It is a peculiar situation in which to find ourselves. No doubt there are objections to what has been done. This morning I received in the post something like 15 pages of criticism of the proposals from the Chartered Institute of Taxation. I have to say to the Minister that the Government are not yet finished in terms of getting these proposals right, although in principle they are.
I want to comment on how it could have happened like this because it is intriguing. As soon as I saw that this was the way we were working, I made sure that the Prime Minister in No. 10 knew what was coming, because that is where it would have ended up. The proposition that a Government could bring in taxation changes that would be damaging to the small business community in our country while more sophisticated operators with their advisers could get away with it is a proposition that you realise was simply never going to run in the way it was originally envisaged. There was a great deal of logic in what HMRC was trying to do, but in my view the way it set about doing it was completely wrong. I want to discuss briefly what went wrong and perhaps how that can be avoided in the future.
We have to ask the Government to look at the effectiveness of HMRC’s consultation process. I have had no part in it for a long time now, but when I was a Treasury Minister, my boss Geoffrey Howe asked me to see if we could improve the consultation process. I have to say that my work was not entirely successful. The Inland Revenue, as it was known in those days, wanted to know exactly what issues were going to be raised, particularly so that at meetings its officials could speak with one voice and carefully make sure that they did not have to concede anything. I am afraid that the special advisers were not in a much different position because they themselves had negotiated with all the other professions what they were going to say, so as far as I could see those meetings were, at best, things of minds that were not really prepared to negotiate at all; they just wanted to reiterate their points. I do not say that some good was not produced from time to time, but the consultation was not nearly as effective as it should have been. If that is the sort of consultation which is going on at the moment, it is not surprising that we get some of the results wrong. Going back all those years ago to when I was a Treasury Minister, I asked Geoffrey Howe’s permission to have another go. We found two or three eminent professional people who would come in and talk about these things informally, off the record and in a quiet and effective way. That was infinitely more effective than the formal process of the two sides marching in and doing battle, so it was much more useful.
To its credit, HMRC can see the problems and has tried to deal with some of them, but I am not convinced that its process of consultation, which should have avoided many of these problems, was anything like as good as it could have been. I say that because it was obvious what was going to happen. My recommendation to the Government is that they should take another look at the consultation process to see whether it could be more effective in the future for other things they want to change.
Lord Campbell-Savours (Lab)
My Lords, the noble Lord, Lord Wakeham, has taken me back to those long nights we used to spend on the Finance Bill in the House of Commons. We would go in at around three o’clock in the afternoon and come out at seven o’clock or eight o’clock the following morning. I worked for something like eight years on those Finance Bills in the 1980s and I always remember Peter Rees, who came here subsequently, standing in his braces early in the morning asking for his breakfast in between amendments. They used to bring it in for him on a plate. However, he is no longer with us.
When I decided to speak on this Bill, I went to the Printed Paper Office and was given a copy of the Bill. I have never seen a Finance Bill as large as this in my life. When I was in the Commons the Finance Bill was about half an inch wide, now it is more than an inch wide. I do not know what is going on, so obviously something is happening which I do not quite understand.
I want to concentrate on three issues. The first is inheritance, the second is stamp duty and the third is the treatment by HMRC of private landlords. Inheritance tax is referred to in Clause 30 but is limited to dealing with rules on residence. No reference at all is made to stamp duty, although it is a hot subject in the country because of people’s concerns about the way the current system, with its surcharge, is operating. Private landlords are dealt with in Part 4 of Schedule 4, but it seems to deal only with losses on property as against profits and their taxation.
I shall start with inheritance. I should make it absolutely clear that I am totally opposed to the system as it currently operates. I am opposed to the seven-year tapered relief arrangement. Indeed, some years ago I was asked by family members to help arrange a will that would take advantage of the seven-year arrangement, but as a matter of principle I refused to do it. In my own case, I would not dream of doing it in my will. I very much favour the 10% reduction for those who make charitable donations, which in effect reduces the rate from 40% to 36%. We have taken advantage of that within my own family. I am also, as are we all, pleased with the arrangements for inter-spouse transfer free of tax. However, I believe that we could raise far more money under the inheritance tax arrangements.
I have spent some time looking at what happens in Germany, which has a very successful economy. I suspect that we could learn a lot from Germany in many areas of taxation and industrial strategy. The Germans pursue a system which for years I have been arguing for, whereby the tax is paid by the beneficiaries, not by the deceased’s estate. If we were to go down the German route, we would then pay in the UK context tax on inheritance at a person’s marginal tax rate, but we would have a differential threshold for family, friends or charities. We could have a different threshold for each group of recipients. But the recipients of a will would pay the tax at their marginal rate over and above the threshold. This has one great advantage: it really does lead to a wider distribution of wealth. Those who want to minimise their tax liability will spread their estates more widely so that more people benefit. If they are on a low marginal rate or not paying any tax, they may well gain from the arrangement I am advocating.
However, I think that overall it would actually lead to a far greater tax take. I have tabled Questions about this matter, but the Treasury has never done any work on it. I think it is somehow fearful of upsetting the public, but I do not think that it would. A lot of people in this country are worried about the effect of inheritance tax on the property market. It is grossly inflating the price of housing. I know that over the years my own party has been fearful about looking at this, but it is the way forward and we should look at what is happening in Germany and to what extent it works.
I turn now to the issue of stamp duty and the surcharge. I understand that it was introduced to slow down growth in the buy-to-let market, but its operation has consequences for the wider property market. The surcharge is slowing down the market, particularly here in London. We all know that when the market in property slows down in the United Kingdom, it always starts in London and then it radiates out. How we affect the property market in London can undermine confidence nationally, so I think that we should reconsider that surcharge. People are caught in a trap when buying and selling. If you buy a house, having not sold your existing house, you end up with the house you are purchasing being treated as your second home for stamp duty purposes.
In a Daily Telegraph article, Sam Meadows put it this way:
“An additional 3pc surcharge on second properties was introduced last year as a measure aimed to slow the growth of buy-to-let. But it quickly drew criticism, including from those home-movers who buy their next property before selling their current one. Under a ‘replacement main residence’ rule, people who do this who must pay the higher stamp duty rate upfront. They are then eligible for a refund if they sell their former home within three years. Government figures, released today, reveal HMRC has had to give refunds on 10,700 transactions at an average cost of £11,869. Lucy Brennan, a partner at accountancy firm Saffery Champness, said having to make a payment of that size could prevent families from moving on to their ideal property”.
There is every evidence that the system is damaging the property market, and the Government should look at it in the Budget, even as early as next week.
This reminds me of the import deposit scheme that, as some Members may remember, was introduced in the 1969 Labour Budget, nearly 50 years ago. Under that scheme, importers had to pay an additional sum of money to the Revenue—what was then Customs and Excise. The idea behind that was to restrain, to some extent, the increasing level of imports into the United Kingdom. The effect was that the Government were effectively gathering in money, which was then offset when it later had to be repaid. Firms were set up to buy the liability to pay the import deposit levy, so importers ended up paying interest on the money they were borrowing to pay the scheme. Of course, they got the money back in the end, over a six-month period, I think. So, stamp duty is operating in very much the same way—being collected, then being given back.
There are two ways to deal with that. If the Treasury does not want to spend a lot of money, it could extend the time to sell property from three to five years. That is one way to deal with it; on the other hand, the more expensive—but preferable—option would be to cease upfront payments of the surcharge.
Finally, I want to move to the question of landlords and their payment of tax to HMRC. I want to pray in aid a report produced by the London Borough of Newham, which I got hold of this week. I do not know if the Minister has seen the report, but I advise Treasury officials to dig it out. It states:
“the primary purpose of Newham’s licensing scheme is foremost to protect tenants. We have shown that private rented sector licensing has ancillary benefits in ensuring landlords meet their tax responsibilities both to local and central government … Through the data collated by our private rented sector licensing regime, we have been able to assist HMRC in assessing tax compliance by landlords. It is our understanding that a significant number of Newham’s landlords are of interest to HMRC, where there are discrepancies between declared income and our records. Based on research Newham conducted, which was independently evaluated by the Institute for Public Policy Research (IPPR), we estimated that the amount of undeclared tax by landlords in London alone back in 2014 could be as much as £183.1 million. The rapid growth of the private rented sector and escalation in rent levels since means that the amount of undisclosed tax is now potentially even greater. The Treasury currently estimates that the national tax gap from rental income is £590 million”.
So, Newham is stating a figure of nearly £200 million in London alone, and the Treasury is stating £590 million nationally. I think that £590 million is a gross under- estimation of revenue lost because HMRC does not have the resources to follow up in the way that Newham Council can in the case of private landlords.
The report then states:
“Newham emailed all licensed landlords in partnership with HMRC shortly after introducing the scheme, advising landlords how they could get their tax affairs up to date. As a result, it is our understanding that a number of landlords on our register voluntarily disclosed previously undeclared rental income. Newham has also provided HMRC with the details of all registered landlords in the borough. It is our understanding that this uncovered a significant number of landlords who may not be declaring their income”.
Why do the Government not promote this idea of a registration scheme for landlords nationally, for every borough, whereby they could link up with HMRC and increase the tax take from private landlords? I was put on to this by a chap called Mr Gunston, who wrote to me last week. I had asked the noble Lord, Lord Bourne, a question on this matter. Mr Gunston said:
“Clearly Lord Bourne had not read the report by the London Borough of Newham that of the 26,254 landlords on its Houses in Multiple Occupation register, some 13,000 had not registered with HMRC for tax self-assessment. You will be aware that it is a requirement for all landlords receiving annual rent of £2,500 or above to register for tax self-assessment with HM Revenue and Customs. Given that this is just one London Borough, if replicated across London and the remainder of England, it would suggest that there is a significant problem of landlord tax evasion and the loss of significant tax revenues. In an era of limited government finances and a large government debt, clearly Lord Bourne needs to take the issue of tax evasion and tax avoidance more seriously”.
I was not expecting the noble Lord, Lord Bourne, to give me an immediate answer at the time, but I think he may wish to refer to my modest contribution to the debate.
All I am saying is that there is a lot more money to collect out there. When we hear of reductions in resources available to HMRC, that fact is worrying. The Government should act on the basis of information I have provided, which I would have thought HMRC is aware of but unable to deal with at the present time.
Lord Leigh of Hurley (Con)
My Lords, this year I served on the Finance Bill Sub-Committee of the Select Committee on Economic Affairs. I congratulate the noble Lords, Lord Turnbull and Lord Hollick, and my colleagues on the committee on, and thank the special advisers who helped us so ably for, the report’s publication. I draw your Lordships’ attention to my interest in the register, not least as a member of the Institute of Chartered Accountants in England and Wales and, by something of a fluke, as a member of the Chartered Institute of Taxation. It is something of a fluke because, somehow or other, I passed the exams in 1985, to the great surprise of my teachers and colleagues at the time. Taxation post-1985 has been a bit of a mystery to me, but I have some expertise of it pre-1985.
None the less, it is particularly gratifying to debate the report at Second Reading of the Finance Bill. I served on the sub-committee when we investigated taxation on LLPs, and was very disheartened to find that none of the many recommendations we made were adopted by the previous Chancellor. I am extremely encouraged that the current Chancellor has taken a completely different approach, and is clearly listening to submissions and reports, such as the one made by your Lordships’ committee. However, it was disappointing that the Statement of 13 July thanked many members of the public, and others, for contributions, but did not recognise our report. I think we can take it that they were listening.
As considerable time and effort goes into these reports and, equally important, members of the public give their valuable time making written and oral representations, I was pleased to learn that so much of the report is being implemented in the Finance Bill and subsequent announcements. We heard from a number of witnesses worried about the impact on their businesses and from professional advisers who pointed out that their clients were simply not prepared to tackle digitalisation. As the noble Lord, Lord Turnbull, said, it was eye-opening to learn how many taxpayers and members of the public were either digitally excluded or referred to as “assisted digital”, who would need some sort of help to interact digitally with the Government. This ranged from about 30% of micro-businesses to 45% of the adult population.
Our report welcomed the Chancellor’s announcement of a delay, but made the point that it did not go far enough to allow proper testing in pilot areas, as had been planned. Overall, it must be right to encourage all businesses to go digital, but it is not clear to me that this will close the tax gap as contended, although I of course recognise that the tax gap under this Government is the lowest ever. However, the behavioural assumptions made imply that errors, when corrected, will always be in the Exchequer’s favour. I am not sure this is the case. The Chartered Institute of Taxation surveyed its members; 41% thought that the changes would have little impact on the level of their clients’ errors, and nearly 40% considered that they would increase errors, which could of course lead to a loss of Treasury revenue.
The Association of Accounting Technicians, another institute very much at the front end of helping business, was concerned that time-consuming and costly quarterly reporting requirements would result in businesses turning to the black economy. I was persuaded that the impact of quarterly reporting could substantially increase the error rate. HM Treasury and HMRC seem confident that their estimates will hold up, but I am not convinced that the pilot studies have been as extensive or as deep as they could be.
I can see that where businesses use spreadsheets rather than software, particularly where they have partial exemptions, converting the output figures into the VAT return will be a challenge. There is still time to be flexible as the regulations are not scheduled to be laid before Parliament before spring 2018, so one can only hope that HMRC is listening and talking to those affected.
I can tell noble Lords that quarterly accounting is causing great concern in the business community. To make corporate tax quarterly returns effective will need considerable work, not least in assessing accruals, identifying provisions and computating capital allowances. Is this really a constructive use of entrepreneurs’ time?
Once again, I add my voice to those who plead for tax simplification. I do not have it but there are 640-odd pages.
Lord Leigh of Hurley
I thank the noble Lord. That does not seem very far along the road of tax simplification. Businesses will have all sorts of challenges when MTD hits them. I hope the Government will listen to the Office of Tax Simplification, which, in its submissions to us, was clear that its opinions had not really had an impact.
It has to be said that, despite my earlier comments, HM Treasury really has by and large listened to those with genuine concerns. One can only hope that it continues in this direction of travel.
I turn my attention to a couple of other areas in the Finance Bill, not the report. I will not touch on inheritance tax, but it was extremely interesting to hear some radical views on it. I would welcome further debate in this House on taxation. It is a little disappointing that so few of your Lordships are able to speak tonight, but although we are not allowed to comment on rates, allowances and so forth, I would have thought we were allowed to comment on structures and new and radical ideas. I hope the usual channels might permit debate on this subject at a later date.
The area I will talk about relates to Clauses 48 to 59, which deal with fulfilment of third-country goods coming in to the UK via online marketplaces. This follows measures in last year’s Budget and gives HMRC much greater powers, as my noble friend Lord Bates said. I first raised this issue in an Oral Question in December 2015 and have, together with my noble friend Lord Lucas, continued to address it in a number of speeches in your Lordships’ House. Accordingly, I welcome these important clauses, but I am concerned that much greater work needs to be done. Only last month I asked in a Written Question whether HMRC obtains data on the amount of goods that non-UK sellers of the likes of Amazon and eBay import into the UK and, if so, whether HMRC reconciles that data with declared sales. The answer from my noble friend the Minister—I join my noble friend Lord Wakeham in congratulating him on his performance here and in other roles—was a little disappointing as it, shall we say, avoided, if not evaded, the question.
I have also asked whether the Government will treat Amazon as a supply chain for VAT purposes and was very encouraged by that answer. I remind my noble friend that there is nothing more irritating to UK retailers than seeing overseas, third-party, non-EU companies sell their goods into the UK without VAT, effectively undercutting UK retailers.
I do not think the importance of these clauses has been recognised. I urge my noble friend to read the written submissions by Richard Allen of vatfraud.org to the Public Accounts Committee hearing on 13 September this year. It states that the VAT registration numbers of traders on Amazon are either not being displayed, or, where they are, could be completely bogus. As a result, customs authorities are unable to police abuse. Consequently, it could be that certain internet retailers will not and should not be regarded as fit and proper fulfilment operators as defined by these clauses. There are many examples of certain internet retailers being aware of abuse and just not acting.
To the extent that Clauses 48 to 59 give HMRC great power, they are very welcome. I do not agree with the Chartered Institute of Taxation; the fact that they could be guilty of committing a criminal offence is a good thing. My concern is that there is evidence of HMRC not using its existing powers and this has now become a national issue. The level of VAT loss here is estimated by HM Treasury to be in the region of £1 billion to £1.5 billion—huge numbers. So, yes, HMRC needs to be properly resourced to pursue this, but the third parties must also share the costs as the ones who are benefiting. They now bear joint and several liability, and action is the only way to tackle this huge loss of VAT and damage to regular UK traders. It is vital that HMRC acts on these clauses and related ones, and a number of us in this House and in the other place will monitor this issue with further Written Questions and debates.
I want finally to address the clauses covering the EIS, or enterprise investment scheme, and VCTs, or venture capital trusts. The clauses in the Finance Bill largely implement previously announced changes to the scheme, but their very existence implies that the Treasury is committed to the VCT scheme and EIS. It was pleasing to see that there were no substantial changes, negatively, in the Finance Bill and I make a plea for no more dramatic changes to the VCT and EIS legislation over the next few weeks, or even days. We of course await the patient capital review, but it is clear that VCT funding is of a longer term, typically seven years, and plugs the finance gap of equity funding in the £2 million to £10 million range. Some excellent research has been done by the venture capital trust association which shows an increase in the number jobs created by VCT investees. I am aware that the Treasury does not like to see a loss of revenue, which occurs when investment is made in such businesses, but to maintain the UK’s position as one of the leading countries for start-up businesses, it would be a great shame if either of these incentives for new business and growing businesses was in any way hampered.
There are many other areas in the Bill which merit further discussion, such as tax avoidance and interest deduction by companies, but I think I have said enough for the moment and eagerly look forward to the proposals in the Budget in a couple of weeks’ time, which I hope will enable your Lordships’ Economic Affairs Finance Bill Sub-Committee to meet again and take on new and fresh challenges.
Baroness Kramer (LD)
My Lords, it has been a short debate—I am beginning to think that debates are in inverse size to a Bill, as is perhaps true in this case—but a fascinating one, and I am glad to be the first of the wind-up speakers. When the Minister opened this discussion of the Bill, he concentrated first on praising the Government for their action on tax avoidance. If he feels that action has been adequate, he will have heard within the context of this debate some additional ideas from the noble Lords, Lord Campbell-Savours and Lord Leigh of Hurley, and others, and I recommend that perhaps he follow some of the coverage of the Paradise papers. The tax avoidance community is constantly ingenious and always finds yet another loophole. It is about time that the Government looked again at the possibility of a general anti-avoidance rule rather than living as we do at the moment with a general anti-abuse rule, which limits our capacity to shut down many such operations in the early stages of their development. We are constantly playing a catch-up game with the specialists, and it seems that most people in this House would like to see that process change dramatically. I am not saying that there has not been improvement—there has been some closing of loopholes—but there is an incredibly long way to go before we get a grip on this, mostly because too much money is involved, which is a constant incentive to others always to look for yet another way to get around the latest measure that HMRC has managed to put forward.
On non-doms, I think that there is some frustration around the Bill in that all of us feel that each person should pay their fair share of taxes. The noble Lord, Lord Bates, was quite eloquent in saying that, and there has been a tightening up of non-dom regulation, but through a potential loophole with offshore taxes it almost feels as though there has been tightening with one hand and loosening with the other. This is an issue which for the purposes of public trust alone should really be taken off the table. It is important that the Government get a real grip of issues such as non-dom status. Taxpayers really feel the pressure of being honest in paying their taxes and feel that others can always find some mechanism. Although they may be using non-dom status and not tax avoidance in the conventional sense, it feels exactly the same if you are a member of the public and there are opportunities to continue to exploit that kind of positioning and designation.
The noble Lord, Lord Turnbull, took on the core issue in this Bill. I join others in praising the work of the Economic Affairs sub-committee, because I have sat on it in the past and know how closely it follows the legislation and the detailed evidence it takes. The noble Lord, Lord Wakeham, praised the Minister—I think that we all join in that praise—but his sting in the tail was that this was a pretty critical report, and it certainly is. However, it is a very important one. Both the noble Lord, Lord Turnbull, and the noble Lord, Lord Leigh, acknowledged that the Government had shifted in part in response to the issues that had been raised in the report and the protests that the business community has raised much more widely about the whole process of making tax digital, but frankly we are looking at small companies. There is no meaningful rationale for making this process mandatory on smaller entities. It should be a voluntary process. These companies live reasonably hand to mouth and take a great deal of risk. I was looking at a report from the Federation of Small Businesses that identifies the fact that small businesses already carry costs of more than £3,500 a year to meet tax and regulation requirements; adding more to that process every year, putting the additional stresses on companies of quarterly and digital reporting, really undermines a group of companies that we absolutely require as the backbone of our economy. Their growth is critical and taking any measure that hinders that growth is, frankly, retrograde.
I had not realised until I looked at this that a significant minority still complete their returns manually. Asking them to make this step into digital reporting is surely a challenge: many lack the IT skills and the digital technology, but it is also an issue of time. Anyone who has worked in a small business—I have had one of my own—knows that the day is not an eight or nine-hour working day but a 12 or 15 or 16-hour working day. Frankly, we should look at ways to lift pressure off these companies, not add pressure to them. I really do not understand why HMRC does not recognise the realities of life as a small company and turn this into a voluntary scheme rather than a mandatory scheme. Additional time—an additional year—is welcome, but it really does not meet the need in this instance.
One of the most striking comments in the report, at least from an administrative perspective, is that the benefit to HMRC “remains opaque”. If we do not have administrative benefits, then putting an additional administrative burden on small businesses seems even more extraordinary, frankly, in this area. I make one last comment: I hope that HMRC will take on board the challenge that small businesses are finding in meeting what it obviously thinks should be one of the easier tasks, which is going digital for tax purposes and reporting quarterly. We are looking, with Brexit, at a reality where border clearance for exports to the EU as part of a supply chain will require an extraordinary level of paperwork. If the only relief for that burden—the only way of reducing that cost and that friction—is to go digital, which is the suggestion we hear from the Government, it is going to be a near impossible challenge for small businesses, with huge consequences for them and the way they work.
I very much hope that HMRC will take on board and learn from this experience that this is not an easy process, has significant costs for small businesses and undermines their capacity to grow and thrive. A lesson needs to be learned. I join others in saying that one of the most interesting parts of the debate has been some of the suggestions that have come forward for different ways of looking at tax. We do not have those debates very often in this House and there are surely some exciting opportunities to rethink the way we levy taxation. We keep building on what is essentially a Victorian system and a Victorian set of assumptions yet we are going into the 21st century, into a digital world with a fourth Industrial Revolution coming. It seems to me that that requires really fundamental rethinking; it is both an opportunity and a challenge and I am sure that, within this House, there is an expertise that could very much contribute to it.
Lord Davies of Oldham (Lab)
My Lords, this has been an excellent debate. It has centred on a financial Bill which scarcely gripped the nation—save those aspects of it which were junked in the early stages, straight after the Budget, with all the controversy which surrounded that. It had a pretty poor parentage in those terms and of course this reception has helped to indicate that the Bill is not a terribly important one in the nation’s affairs. The other aspect of it, with regard to timing, is that we are considering the Bill, as the other place has been considering the Bill in the last couple of weeks, within a week or so of the next Budget and the next financial Bill—so it is not surprising that the Bill has not provoked a great deal of controversy, nor a great deal of approval.
Because of this I feel free to concentrate first on the Economic Affairs Finance Bill Sub-Committee report and congratulate the noble Lord, Lord Turnbull, on his introduction, which made the issue so clear, and the noble Lord, Lord Wakeham, who contributed as a member of that committee. It seems to me that the report puts forward a very clear position, which the Government ought to take cognisance of.
In two concurrent sentences, the report makes its case clear. It says:
“The digitalisation of tax administration in a way that assists taxpayers is … to be welcomed”.
The Official Opposition endorse that wholeheartedly, but it is a question of how we make that work. The next sentence in the report states:
“Where the Government is wrong”,
is in their timetable. We certainly endorse that point as well. Of course, the Government have moved a little on the timetable—but not, we think, far enough.
We put forward an amendment in the other place proposing that there should be more time for people to adjust to the demands of responding to the Inland Revenue than the Government are providing at present. The reason is quite clear. It is thought that 61% of those who are self-employed—2 million people—will struggle with the process of compliance. They may struggle with that process for other reasons as well, because people do not enthuse about paying tax. But what is reflected here is that these people will have the greatest difficulty in meeting the standard requirements of the Inland Revenue for the submission of their returns. We therefore cannot possibly demand that they respond without adequate preparation.
I very much enjoyed the contribution of my noble friend Lord Campbell-Savours, along with the fact that the noble Lord, Lord Leigh, gave him some support. I imagine that they would differ a great deal on detail, but my noble friend identified that there is at least a significant case for the Inland Revenue, and for the Government, to concentrate rather more on wealth than income. We all know how wealth has accumulated in recent years, and how limited the range of that wealth is in the numbers of people who have benefited from it. So it is right that we look at the issues introduced by my noble friend Lord Campbell-Savours, particularly on inheritance tax. I would certainly welcome it if this House engaged in a series of debates on issues as fundamental as this.
If this was the sole area of our criticism of the Bill, it would be serious enough—but we have criticisms of many other features as well. The Minister in his opening speech, which we all enjoyed as we always do when he contributes, made some surprising statements about the strength of the economy. Some responsible opinion, such as that of the Institute for Public Policy Research, has actually said that the economy is broken and “needs fundamental reform”. It is only Ministers who can glibly say that all is well in the world; it seems to me that there is a great deal that needs to be reformed.
The Government persist in lower taxation for the rich and for big companies, while hitting the income of those less well-off very hard—even to the point where those who depend on universal credit are meant to sustain themselves, devoid of any resources from welfare, until the issues are sorted out. If that continues to happen as we run into the Christmas period, and if people find themselves unable to meet their bills and therefore get ejected from their homes, this Government will not know what has hit them.
This is nothing to do with taxation but on one occasion, I found that one of my great boyhood heroes when I was a young cricketer, the wonderful spin bowler from the West Indies, Sonny Ramadhin, happened to be a publican in the town that I represented. The brewery decided that it wanted to take possession of the pub and throw him out on Christmas Eve. How very thoughtful. How very considerate. This was a man who had won the plaudits of nations—I say “nations” because the British approved of him as much as the West Indians in the tests. He was thrown out on Christmas Eve. You should have seen how that stirred the people of Oldham. Corrective action was taken quite quickly. If this Government are heading for that kind of conduct over the next month or so because of the way in which they are implementing universal credit, I warn them that they are in for a very difficult time indeed.
The Government present what I think is a somewhat rosy picture of the strength of the Inland Revenue. From the very first day that they came to office, we were anxious about cuts in HMRC. Within a year it was quite clear that the cuts there were the same as those in other departments. It did not matter how much we told the Government that they were in fact cutting jobs and people who were bringing in revenue, they persisted. They persisted all through the days of austerity. The Minister is trying to pretend to me now that in fact the Inland Revenue is quite able to reach its requirements. One of the things that is going on in the Inland Revenue at present is a very significant cut in the number of offices and the creation of the regions. I have no doubt that that fits some grand plan somewhere that will be efficient in the long run, but in the short term and where we now want the Inland Revenue to be effective, it is bound to have deleterious effects.
Do the Government understand the diversity of UK society at present? How can they talk well about an economy when people under 30 have very little hope of matching the living standards of their parents? Housing is far too expensive for them to be part of the property-owning democracy—except for the favoured few—and rents rocket up in the private sector for all the reasons we know only too well. Over this period of austerity, wages and salaries have been frozen, particularly in the public sector, and jobs have often been replaced by zero-hours contracts and jobs which bear no resemblance to the public sector jobs that they have replaced.
People should envisage what it means to work for an employer who has such power in relation to the so-called contract that you actually have not got with him. He can tell you to sling your hook, basically, at a moment’s notice. If we have that kind of society, the Government cannot boast about full employment too much if quite a percentage of jobs fit into this pattern. Without wage growth, what is happening? At present, inflation is dashing past the rise in wages and people are being impoverished by that fact. Housing inflation, in particular, means that there is no hope for so many who would otherwise aspire to own their home.
That is about people who live in our country and try to cope within this flourishing economy—but the national statistics bear out the limitations of this Government as far as the economy is concerned. We have the lowest productivity in the G7. Germans are able to produce three times as much as we can in the same unit of time. The trade imbalance is still increasing and Britain is finding it very difficult to make its way. There are great disparities between incomes and wealth in London and the south-east, and the rest of England and the rest of the United Kingdom—Wales, Scotland and Northern Ireland. These are all indications of an economy about which the Minister, far from being complacent, ought to be concerned. He should demonstrate how the Government are analysing their response to these great issues.
Under it all of course is the great uncertainty of Brexit. We all recognise that Brexit is a massive challenge for the Government, but the Minister must recognise that the time delay that is going on before any definition of progress with regard to the negotiations means that of course business confidence is very severely affected.
This is a finance Bill whose only merit is that it will in fact be supplanted by another one in the very near future.
Lord Bates
My Lords, I thank all noble Lords for their contributions in this short but very helpful debate, which was significantly strengthened, as many noble Lords said, by the excellent report on making tax digital prepared by the sub-committee, which I again pay tribute to. There were, rightly, some concerns about consultation and the steps which have been taken. My noble friend Lord Wakeham, although very generous towards me personally, then lulled me into a false sense of security by reminding me of the limitations of consultation. As he was saying that, I was thinking back to a text that used to be above the kitchen steps in my parents’ home, from Proverbs 16, verse 18:
“Pride cometh before a fall”.
I certainly do not want to go down that route, but we in your Lordships’ House can be proud of the contribution that it has made in terms of improving the way in which these measures have been introduced.
In no particular order, I will try to address some of the issues in the time that I have available. The noble Baroness, Lady Kramer, asked how we expect the process of making tax digital to bring in more tax. In 2014-15, more than £3.5 billion was lost due to mistakes in VAT tax returns alone, and the Office for Budget Responsibility will certify costings for the revenue programme and how yields from taxation are forecast to increase in the course of the Budget.
The noble Baroness also said that not enough action was being taken to dissuade tax avoiders. Clause 65 and Schedule 16 introduce a new penalty for any person who enables the use of tax avoidance arrangements which are later defeated by HMRC. Tax avoiders face significant financial costs when HMRC defeats them, but those who enable them to bear little risk; they gain financially as their clients foot the bill. One of the purposes of this legislation is to tackle that injustice.
The noble Baroness asked whether there would be a general anti-avoidance rule rather than a general anti-abuse rule. The Government are legislating on the general anti-abuse rule, drawing on the recommendations of an independent expert study group led by Graham Aaronson QC. It is robustly founded. The Bill takes forward a number of specific and significant provisions that will tackle areas of tax avoidance.
My noble friend Lord Leigh referred to some of the issues raised by the committee’s report, and raised concerns regarding the administrative burden of making tax digital for VAT. As VAT already requires quarterly digital returns, no business will need to provide information to HMRC more regularly that it does now; nor will it need to provide extra information.
The noble Baroness, Lady Kramer, mentioned the difficulties of filling in VAT tax returns, and I can empathise with that, having filled them in myself. It is a tortuous process. But digitisation of this, we believe, can actually make tax recording simpler in the long term by making use of the technology that is available.
My noble friend Lord Leigh also asked about spreadsheets. Businesses can continue to use spreadsheets as part of maintaining digital records and performing tax calculations to meet making tax digital requirements. Any business choosing to keep its digital records in performing tax calculations using spreadsheets must ensure that it meets the making tax digital requirements, including automatically sending the required digital updates and other recording to HMRC. As part of the pilot started earlier this year, HMRC has already received the first update from someone keeping their records on a spreadsheet. It is also worth saying, more generally, that the Government will not force the system on anyone who cannot handle it—a point which the noble Lord, Lord Turnbull, rightly led on. Indeed, 3 million businesses under the VAT threshold will be able to move forward towards making tax digital at a pace that works for them. Even larger businesses will be asked to use making tax digital for VAT only from 2019.
My noble friend also brought the attention of the House to Clauses 48 to 59 on fulfilment houses and the previous Finance Act 2016 provision that allows HMRC to make online marketplaces jointly and severally liable for the unpaid VAT of their non-EU sellers. Together, this package of measures, first announced in the Budget, is expected to raise £875 million by 2021.
I, too, enjoyed the contribution of the noble Lord, Lord Campbell-Savours; it was a thoughtful contribution on the wider issue of taxation. It was nice to see cross-party consensus between him and my noble friend Lord Leigh. The noble Lord, Lord Davies, also mentioned talking more about the principles of taxation, and I agree.
The noble Lord asked whether inheritance tax should be paid by the beneficiary rather than from the estate. This would be a very large-scale reform, with significant impacts across a wide range of situations and would need careful consideration. He raises the example of Germany. That was not one that I was aware of, but I am keen to look at that. The Government keep all taxes under review, and I will ensure that the noble Lord’s remarks are brought to the attention of my colleagues in the Treasury.
The noble Lord, Lord Turnbull, asked when a revised impact assessment will be published. It will be released shortly, following the Budget. He also asked whether there will be at least one year of systems testing before introduction. The making tax digital for VAT pilot will commence by the end of the year, starting with small-scale technical testing, followed by a wider live pilot in the spring. This will allow for more than a year of testing before any businesses are mandated to use the system, and testing of all MTD elements and processes. I hope he will feel that that is a step towards what he was asking for.
Lord Campbell-Savours
The Minister referred to the specific issue of inheritance tax, but what about stamp duty?
Lord Campbell-Savours
Fair enough. I thought he had dealt with me—that was all. Forgive me.
Lord Bates
I would never be so pompous as to pretend that I should deal with the noble Lord, but I shall certainly be responding to his comments. I said earlier that because I have not been able to sort my papers into chronological order, I was just taking them as they came, but I will certainly come to his point on stamp duty.
The noble Lord, Lord Turnbull, asked about businesses that have difficulty in engaging digitally. The noble Baroness, Lady Kramer, also referred to this. The Government have been clear from the outset that those businesses which are unable to go digital will not be required to do so. We are legislating to exempt taxpayers who cannot engage digitally. All businesses currently digitally exempt for VAT will continue to be so under MTD. This will be based on existing VAT online filing exemptions, which stakeholders have recognised as a sensible definition.
I turn now to the question raised by the noble Lord, Lord Campbell-Savours, about whether the stamp duty surcharge was harming the market and should be reformed. He referenced a report by Newham Council. I have not seen it, but I will certainly make sure that it is drawn to colleagues’ attention. Since 1 April 2016, higher rates of stamp duty have been charged on purchases of additional residential properties, such as buy-to-let. This is part of the Government’s commitment to supporting home ownership, alongside other measures on both the supply and demand side of the market. This Government keep all taxes under review.
I thank the noble Lord for his contribution. He asked specifically about Newham, which is an issue that the Government take seriously. HMRC reduced the tax gap in 2015-16 to an historic low. On the time-specific matter raised by the noble Lord, I shall be happy to write to him and endeavour to answer his questions on the Newham experience. That applies to all other points raised by noble Lords which I may not get the chance to cover in my remarks.
My noble friend Lord Wakeham asked about the wider lessons for HMRC’s consultation arrangements. I was almost tempted to say that I would be delighted to invite him back to his former parish at the Treasury where he could meet us and talk about the consultation exercise. I think that that would be a very good thing, so I put it on the record, and my colleagues will ensure that that happens. He talked about the informal conversations and people talking through particular problems. That would be helpful. There are standard guidelines on how consultations are now supposed to be undertaken in operation across government, and there are areas where that could be improved.
The decision to move to a single, annual autumn Budget allows more time to consult before tax changes take effect. The Government have made significant commitments to improve tax policy-making since 2010, and we remain committed to them. On a point raised by the noble Lord, Lord Davies, I recognise that the Bill is a very substantial piece. He rather unkindly referred to parts of it being somehow dealt with in the wash-up before the general election.
There is a general point here. I know that there is always a tension: do you make changes explicit in law, and therefore run the risk of criticism for producing a Bill of 664 pages, or do you establish general principles? Because that often leads to contested cases going through the courts, trying to determine what was in the mind of the legislators, we recognised that we should try to be explicit about our intentions wherever possible. We are introducing some significant changes, and 70% of the clauses in this Finance Bill were announced prior to the spring Budget in 2017 and consulted on extensively. Effectively, we will continue that discussion, including through the publication of draft legislation. There are over 390 pages of draft legislation: 98 clauses and 22 schedules were published for technical consultation in December 2016. Further draft legislation was published for technical consultation in January 2017: seven clauses and six schedules in over 200 pages of new draft legislation.
The noble Lord, Lord Leigh, asked about the Office of Tax Simplification, which was established by the Government last year, and placed on a statutory footing. It is dedicated to reducing tax compliance burdens on both businesses and individual taxpayers. It investigates where the tax system is overly complex and advises government on how to reduce that complexity.
I am conscious that time is moving on and that I have addressed a number of the points raised by noble Lords, though not all. A number of the points were worthy of more detailed consideration so, with the leave of the House, I undertake to reflect on the debate, which has been thoughtful and of a very high quality, and to write, perhaps following the Budget, to update colleagues as we go forward. With that, I commend the Bill to the House and beg that the House grant this Bill a Second Reading—or words to that effect.
Royal Assent
Thursday 16th November 2017
(7 years ago)
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