15:50 - The Committee divided: - Ayes: 256 / Noes: 323 - Question accordingly negatived.
16:06 - The Committee divided: - Ayes: 254 / Noes: 321 - Question accordingly negatived.
17:49 - The Committee having divided: - Ayes: 251 / Noes: 322 - Question accordingly negatived.
19:50 - divided: - Ayes: 246 / Noes: 312 - Question accordingly negatived.
20:03 - The Committee divided: - Ayes: 260 / Noes: 295 - Question accordingly negatived.
20:15 - The Committee divided: - Ayes: 262 / Noes: 287 - Question accordingly negatived.
20:28 - The Committee divided: - Ayes: 258 / Noes: 293 - Question accordingly negatived.
21:05 - The Committee divided: - Ayes: 9 / Noes: 312 - Question accordingly negatived.
Owen Smith
It is a great pleasure to be under your chairmanship, Mr Hoyle.
The legislation we deal with in this House can sometimes appear rather obscure or require a significant amount of interpretation. For financial legislation that is often true in spades, but not so with this Bill, because what do we have, straight off the bat, on page 1, in part 1, chapter 1, clause 1? A tax cut for millionaires—£40,000 for 14,000 millionaires, signed away in one short line, in subsection (2)(c), which cuts the additional top rate of tax from 50p to 45p. Let me be clear: our amendment would get rid of that provision. It would do what we as the Opposition are able to do and strike out from the Bill the change from 50p to 45p. Let there be no doubt whatever: we will be voting to remove paragraph (c) later today.
Owen Smith
But for now I look forward to the intervention that I am about to receive from the Exchequer Secretary.
Owen Smith
No; which is why I wanted to nose off on this point. Let us clear out of the way this obscurantist nonsense that we are hearing from those on the Treasury Bench—first from the Prime Minister earlier today and now from the Exchequer Secretary. He will know that protocol dictates that we cannot table an amendment that would straightforwardly put the rate back to 50p. That is what colleagues on the nationalist Benches attempted to do, and they were ruled out of order. However, what has been ruled in order by the senior Clerk responsible for this Bill is precisely what we have done, to try to get rid of the Government’s shift from 50p to 45p. The Government would then need to decide exactly what they would do with that rate, but our view is clear: it should be 50p, as it was previously. That is why we have tabled what we have tabled, on the Clerk’s advice.
Owen Smith
I will give the Minister one more chance, but I warn him that he will listen to the country, and the country is telling him that it knows where Labour stands on this issue. We are in favour of keeping the rate at 50p. The Government are getting rid of the 50p rate; the rest is complete nonsense, and smoke and mirrors. If he wants to blow some more smoke, come on up.
Mr Gauke
The country is aware that Labour did not vote against the change to the 50p rate in our debates on the Budget resolutions, although the nationalists did. It is indeed the case that there would be two income tax charges as a consequence of the amendment that the hon. Gentleman is moving. I do not want to do his job for him, but if he wanted to achieve the objective that he is setting out, he could have tried to remove subsection (2) entirely, but he did not. He has kept the charge at 20% and 40%. If his amendment succeeds, we will have those two rates of income tax next year.
Owen Smith
I am not going to indulge in this procedural nonsense much longer, because frankly the country is interested in the substance of the debate. However, if the Exchequer Secretary wants to intervene on me one more time, he can take the opportunity that the Prime Minister eschewed earlier today and correct the misleading comments that he made about the 50p rate, which he said raised no money. We know that it did raise money. We know that page 52 of the Her Majesty’s Revenue and Customs report makes clear how much money it raised and how much it would have raised in future. If the Exchequer Secretary wants to intervene on that point he can, but as for our amendment, drafted on the Clerk’s advice, we are confident in it, we are happy about it and we will debate the substance rather than the nonsense.
Owen Smith
I am not going to give way again to hear more obscurities of protocol. They are nonsense and are just being used to distract attention from the measures.
Mr Gauke
The hon. Gentleman has referred to the academic debate. May I refer him to page 20 of the HMRC document, which relates to the IFS study? It states that Brewer, Saez and Shephard estimated a TIE of 0.46 in 2008, and Gruber and Saez estimated a TIE of between 0.5 and 0.7. It also states:
“The TIE estimate of 0.35 used in the Budget 2010… estimate”
—which the hon. Gentleman described as “standard”—
“was deliberately at the low end of the academic elasticities surveyed.”
The 0.45 TIE is much more consistent with the academic position than the claims of the last Government.
Owen Smith
I am thrilled to have given way to the Minister, because his intervention has revealed that, although he may have read the dodgy dossier, he has not read the academic literature. If he had done so, he would have read more recent publications such as that of Saez, Slemrod and Giertz, which is a review of all the pieces of work done on TIE. It concluded that many of the earlier studies, including the HMRC study, had relied on estimates that were excessively high owing to flaws in the data and the methodology used. Saez et al suggested that
“the best available estimates range from 0.12 to 0.40”.
That is the same Saez from whose earlier paper the Minister quoted. In his most recent paper, he changed his mind and concluded that between 0.12 and 0.4 was the generally accepted estimate. The Treasury has cooked the figures on the basis of one academic study produced as part of the Mirrlees review.
Mr Gauke
May I help the hon. Gentleman? The motion on which he voted against the Government related to the tax charges for 2013-14. With apologies to the hon. Member for Pontypridd (Owen Smith), it would not have wiped out all the tax rates for this year. It was specifically for next year. The hon. Member for Carmarthen East and Dinefwr (Jonathan Edwards) is right. It would not have had the impact that the hon. Member for Pontypridd suggested.
Jonathan Edwards
I am grateful for that clarification.
The idea that the Tories would offer a tax break to millionaires would surprise nobody in my constituency—in fact, they would expect it—but that Labour would abstain after announcing it would vote against it has led to a great deal of confusion. I have had a lot of fun on the doorstep in the past few weeks explaining that, while campaigning for the local authority elections. It is similar to the way the official Opposition announced the policy of a temporary cut in VAT last June, then two weeks later abstained on the Finance Bill when I and my colleagues proposed such a measure. A lack of consistency and clarity on economic matters explains why it is so easy for the Government to continue to pin the blame on the official Opposition for the UK’s economic mess in spite of the flawed and ideological cuts programme which is destroying the fabric of the economy.
Charlie Elphicke
That is a really interesting question. In practice, it is incredibly difficult to distinguish between the person who is setting up a personal service company simply to play the system and the person who is in business and is genuinely using such a company so as not to go bankrupt. It is difficult to draw the dividing line to distinguish the husband and wife who are simply trying to play the system—that often happens—from the genuine business that is acting for true commercial purposes. It is quite invidious to separate the two.
It is better to set the rate at a level where, as the OBR would put it, the willingness of high-earning individuals is such that they regard it as slightly more socially acceptable to pay. Indeed, the OBR was not just the Exchequer’s patsy on this issue; rather, it was independent. As the OBR says on page 109 of its report, it reviewed in considerable detail what the HMRC report said about what the revenues would be, in considering whether to reduce the tax rate to 45p. It looked at the methodology used by the Institute for Fiscal Studies in the Mirrlees review, at the work of Brewer et al, while also adjusting for forestalling—a point the hon. Member for Pontypridd raised—and at the HMRC study on the underlying behavioural response. Therefore, a lot of work has been done on what exactly the position is.
It is true, of course, that things are quite uncertain. The cost to the Exchequer might not be £100 million. Indeed, students of tax history will know that when the rate originally went from 80% to 60%—a massive cut—the revenues did not fall, but rose dramatically. Did receipts fall when the tax rate was then cut from 60p to 40p? No, they rose dramatically. My understanding of the history, therefore, is that if we reduce the rate, we up the take. There is real risk and massive uncertainty. Indeed, rather than costing the Exchequer £100 million, this measure may well make the Exchequer up to about £500 million. From the history, it seems far more likely that we will have an increase in the take, which will mean improvements for our schools and hospitals, and in our ability to pay down the massive debt that the previous Government saddled us with. I therefore think this is the right policy at the right time.
Mr Gauke
As we all know, the previous Government were reluctant to take any meaningful steps to reduce the deficit. However, they could point to the imposition of an increase of more than 10% in the additional rate in three months, even though there was scepticism at the time about the projected levels of revenue. It is also worth pointing out that the then Chancellor, the right hon. Member for Edinburgh South West (Mr Darling), accepted that the increase was “a temporary measure”. He recognised some of the difficulties with the policy. He accepted that the behavioural effect would steeply reduce potential revenues—the estimate at the time was that the measure would reduce revenues by two thirds. That is about £4 billion of revenue that he accepted would never materialise, owing to behavioural adjustments, such as individuals deciding to work less or not remain in the United Kingdom. He also accepted that the 50p rate would damage the UK’s international standing, giving us the highest statutory income tax rate in the G20. He also accepted, I am sure, the fact that although the measure was temporary, it would be politically difficult to reverse.
However, I have to say to the Opposition, and to the many hon. Members who have participated in this debate, that although Labour may claim to want to raise taxes on the wealthy, the reality is that the 50p rate was not succeeding in getting the money in. I do not think that it is a coincidence that the 50p rate was in place for only 36 of the 4,758 days for which the previous Labour Government were in power. When we came into office, we inherited a tax rate that we were told would damage our competitiveness, that would bring in questionable levels of revenue and that was always expected to be temporary.
Owen Smith
The Minister has repeated the line that the 50p rate was not getting the money in. What exactly does he mean by that? His own HMRC report says, in paragraph 5 on page 2, that the yield was
“around £1 billion or less”.
It does not say by how much less. Page 39 of the report states that the figure for the yield is £1.1 billion.
Mr Gauke
The hon. Gentleman cites the report; let me give him the full quote. On page 2, the summary gives the estimate that the yield from the 50p rate could be
“around £1 billion or less…and that it is quite possible that it could be negative.”
We need to compare that with the previous Government’s estimate of a yield of £2.6 billion—[Interruption.] Ah! The hon. Member for Pontypridd (Owen Smith) says that it was £1.3 billion in the first year. Let me explain why the figure was £1.3 billion in the first year. He is presenting that as a great triumph. Most of the money that comes in from wealthy individuals comes in through the self-assessment system, and most of the money raised from the top rate will be collected in the year after the rate is introduced. Only a certain proportion will come in through PAYE. The reason the figure was £1.3 billion in the first year was purely one of cash flow. If the hon. Gentleman is claiming that the revenue was only ever expected to be £1.3 billion, that is not a fair representation of the previous Government’s estimate, which was of a steady rate of £2.6 billion and rising.
Owen Smith
I simply want to ask the question one more time. If the yield was less than £1 billion, how much less was it? Surely the Minister knows how much the top rate got him.
Mr Gauke
The central estimate, which the OBR has confirmed, is £700 million. We are reducing the rate to 45%, and the central estimate of the cost of that is £100 million. Were we to take it down to 40%, which would be the consequence of the hon. Gentleman’s amendment, the central cost would be £700 million.
Mark Reckless
I think the Minister is being rather too modest. On page 21, the report states that
“most of the studies…produce TIEs”—
taxable income elasticities—
“in the range of 0.4 to 0.7”.
Let us take a central estimate of 0.55 from within that range. If we look at page 51, we see a graph that suggests that a reduction in the additional tax rate—whether to 45% as proposed by the Government, or to 40% as proposed by the Opposition—would raise £600 million. Could the Minister use some of that money to enable him to accept our amendments on child benefit?
Richard Harrington
Does the Minister agree that the Opposition are missing the point by talking about the amount that was raised by the 50p rate? The real point is the money that was not raised, owing to the disincentive that it created for people to set up businesses and to spend to create jobs and provide the growth that the country needs.
Mr Gauke
My hon. Friend is absolutely right. Let us put away some of the rhetoric that we have heard this afternoon and focus on the disagreement over the previous Government’s assessment of the behavioural impact of the 50p. Their assessment was that about 66% would be lost through behavioural impact. On the basis of the additional evidence that has emerged following the HMRC study, which is consistent with the consensus of the academic studies in this area, the estimate that the OBR has signed off is that the behavioural impact is closer to 83%. No reasonable case can possibly be made that there is no behavioural impact, yet the shadow Chancellor’s consistent argument that this is a £3 billion tax cut for the rich implies a behavioural impact of zero—miles away from any realistic case.
Mr Love
The Minister quotes research that is primarily associated with the United States rather than the United Kingdom. British research under the Mirrlees project related to events occurring 20 or 30 years ago. The reality is that there is great uncertainty in these areas; the Government’s claim that that is not the case simply ignores the reality. We can pick out whatever number we choose, but the reality is that we are losing taxable income as a result of this change.
Mr Gauke
The hon. Gentleman is right that the assessment of Her Majesty’s Revenue and Customs, signed off by the Office for Budget Responsibility, is very similar to that of the Mirrlees review, which looked at evidence from the 1970s and the 1980s. Given that the big behavioural impact owes much to the mobility of international labour at that end of the scale—the highest earning individuals in the world are very mobile—and given that the mobility of labour has clearly increased, particularly in that sector, since the 1980s, it would appear that the hon. Gentleman is making a case to suggest that the elasticity we are using is too low, not too high, so he might like to have a conversation with my hon. Friend the Member for Rochester and Strood (Mark Reckless).
Chris Bryant
On a point of order, Mr Hood. You may not be aware of it, but the media are reporting that, contrary to what was announced to the House yesterday afternoon, Abu Qatada might have been arrested by the Home Office illegally because it had not consulted the European Court of Human Rights on the last available date to—
The Temporary Chair (Mr Jim Hood)
Order. I have heard enough of the hon. Member’s contribution to give him a ruling. That is not a point of order for me. He can request that the Government make a statement to the House on the media or television report to which he refers, and if the Government agree, they can do so. As I said, it is not a point of order for me to deal with in this debate.
Mr Gauke
I do not have much time, so I would be grateful to the hon. Member for Edmonton (Mr Love) if he would allow me to press on.
The Chancellor made it clear in a pragmatic way that we wish to see the evidence. HMRC conducted a review, making use of the self-assessment returns that became available in January this year. They provide the most complete source of data on high earners’ tax affairs, which only HMRC can analyse as they contain confidential taxpayer information. In this report, we have seen that the additional rate is distorted, that it is damaging to international competitiveness and that it is an economically inefficient way of raising revenue. These conclusions are based on that analysis of self-assessment data and international studies. The report finds that the behavioural response has been substantially larger than expected. The previous Government had estimated the revenue from the 50p rate to be approximately £2.5 billion each year. The HMRC analysis states that the yield would be £1 billion at best, and at worst might raise nothing at all. That is because of the much greater than anticipated behavioural effect.
We have seen huge levels of forestalling, and HMRC estimates that between a third and a half of the behavioural effect comes from genuine reductions in income through such changes as reduced hours worked or reductions in participation in the UK labour market. This suggests that total income fell by £2.9 billion and £4.4 billion as a result of the 50p rate, and that gross domestic product is between 0.2% and 0.3% lower. So this is not just a loss of tax revenue, but a loss to the economy as a whole through lower productivity and economic activity. Those are the conclusions of HMRC’s analysis.
It is very clear that the 50p rate has failed. It has been criticised by business, it has posed the risk of lasting damage to the UK economy, and it has raised considerably less for the Exchequer than expected, possibly costing rather than raising revenue.
Mark Durkan
The Minister has said that the Chancellor wants to work on an evidence basis. He has previously told us that the Chancellor wants to pursue tax avoidance. Will he therefore accept amendment 76, which focuses on ensuring that the House is given the evidence relating to both tax avoidance and the effects of the additional rate of tax?
Mr Gauke
We have a report that produces evidence. I can also assure the hon. Gentleman that the Government have made clear their determination to reduce tax avoidance, and have taken a number of steps to do just that.
Amendment 1 has created some confusion. The Opposition Members who tabled it propose that the additional rate for 2013-14 should be left out altogether. Unlike the 45p rate proposed by the Government, the higher rate of 40% would apply to income over the higher-rate threshold. I understand that Labour sources have been briefing this afternoon that the amendment deliberately leaves the top rate undecided. It does not leave it undecided; it abolishes it. The Labour party has found itself in an extraordinary position.
We have heard astonishing suggestions that we should accept the “static” argument, although, to be fair to the hon. Member for Pontypridd, he has been somewhat hesitant about simply quoting the static numbers as if they were acceptable. We must take account of the behavioural impact, and as we have seen more evidence, it has become clear that it has been greater than was anticipated.
The effect of the 50p rate has been damaging not just to the Exchequer in failing to raise the money that was anticipated, but to competitiveness. There has been a 29% increase in Britain’s—[Interruption.]
The Temporary Chairman (Mr Jim Hood)
Order. I apologise for interrupting the Minister, but I cannot hear a word he is saying because of the noise made by his colleagues who are sitting on my right. I ask Members to give their own Minister some order when he is winding up a debate.
Mr Gauke
Thank you, Mr Hood.
As I was saying, there has been a 29% increase in the number of Britons given permission to work long-term in Switzerland, and the United Kingdom has become less competitive. As a result of our reforms—the additional measures that we are taking to cap charitable and other reliefs, and the measures we are taking to deal with avoidance—27% of revenue from income tax will come from the top 1%, who paid between 20% and 25% under the Labour party.
The reduction in the additional rate is understandably controversial, but we should look at the evidence, not the Opposition’s rhetoric. The 50p rate did not raise the revenues that it was intended to raise, and what money it did raise came with a cost of damage to growth and competitiveness. This is not a sustainable position, so we are reducing the rate to 45p, providing certainty and clarity for those affected. That will mean a relatively small cost to the Exchequer and a significant boost to our competitive position. As the CBI has said,
“Reducing the 50p income tax rate will send a clear signal that the UK is open for business. We must continue to encourage top talent to live and work in the UK.”
This change is good for our long-term tax revenues, it is good for our economy, and it is good for the UK as a whole. I therefore ask hon. Members not to press their amendments, and propose that the clause should stand part of the Bill.
Owen Smith
Labour Members do not believe that the cut from 50p to 45p is good for the economy, and we do not think for a moment that the Minister has justified it today. Nor do we think that he has justified the claim that the rate raised practically nothing, which is what the Prime Minister, rather curiously, told the House earlier today. The Minister himself contradicted the Prime Minister in conceding that it raised perhaps £1 billion. In fact, I think the Minister definitively said £700 million whereas the Prime Minister said it raised nothing. I do not know which of them is right, but I am assuming the Minister is right.
Owen Smith
I do not think I have time to give way, as I want to press the amendment to a Division.
Nor do I think the Government have succeeded in persuading any Member of this House that it is anything other than voodoo economics to suggest that the cost of this rate change will be only £100 million. It is very likely to be closer to £3 billion than to £1 billion.
As we remain wholly unpersuaded, we shall press the amendment to a vote—
Owen Smith
I will keep going for a moment and then happily give way.
The bank levy currently impacts on banks only after the first £20 billion in equities and liabilities is taken into account, capturing, in effect, the millionaires of the corporate world. When the idea of the levy was first mooted—initially by Labour Members and then after being picked up by the International Monetary Fund— [Interruption.] I am afraid that that is true. My right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) first mentioned a bank levy, and then the IMF picked up on it. It is a simple point, but I will happily give way if the Minister wants to intervene.
The Financial Secretary to the Treasury (Mr Mark Hoban)
May I point out that the previous Government ruled out a bank levy because they did not want to introduce one unilaterally? This Government had the courage to do that, and to do the right thing so that banks could pay their fair share to the Exchequer, whereas the previous Government ran away from the issue completely.
Owen Smith
When the IMF first talked about a bank levy, it thought that an equitable, sensible amount to get from the banks in this country was £6 billion—not the £2.5 billion that the Government claim to be raising. The reality—people out there ought to understand this—is that by the end of the current spending period, the Government will be raising as much from people who eat pasties, buy or sell caravans, sit in caravans, do up listed buildings and do all the other things that have been changed under the VAT rules as they will be raising through the bank levy. That is the real comparison. The right hon. Member for Wokingham (Mr Redwood) laughs, but it is a fairly accurate comparison, and people out there will not think that it is fair or equitable. They will not understand why caravan users and pasty eaters—even if the pasties are not eaten at an ambient temperature—should bear the same degree of pain as the bankers, who, as I think many people would concede, were at the very least involved in the global crisis that paved the way for the recession of recent years.
Mr Hoban
The hon. Gentleman said that the VAT changes will raise as much as the bank levy. If he looks at table 2.1 on page 50 of the Red Book, he will see that in 2016-17 closing loopholes and correcting anomalies will raise about £350 million, but the bank levy will raise £2.5 billion. How can he square the two statements that he made?
Owen Smith
May I take this opportunity, Sir Roger, to apologise to you, to the Minister and to the House for misleading you all? Of course, I misspoke; I should have factored the granny tax into all the VAT changes. If the Minister does the maths, I am sure he will find that when one adds in pensioners on top of caravanners, those eating pasties, and those affected by the other VAT changes—
Owen Smith
I am afraid that I have been getting my facts right all afternoon: it is Government Members who have been getting their facts wrong. [Interruption.] No, amendment 1 was not wrong; it was absolutely spot on. To say that it was wrong is nonsense.
Owen Smith
The Minister gives the lie to the argument that the Government have made about this figure, which allows them to state that it is £2.3 billion, not £3.5 billion, and is therefore lower than the £2.5 billion that they are ostensibly raising through the bank levy. Of course, both the £2.3 billion figure and the £2.5 billion figure are open to question. It is not just me who thinks that; many commentators have said so.
How did the Government manage to reduce the yield of £3.5 billion that is written in black and white on page 101 of the blue book to £2.3 billion? I could tell the Committee, but I will go one better and read out a comment piece from the Financial Times from earlier this year:
“The Treasury reached its £2.3bn figure for last year by lopping off £1.2bn from the original £3.5bn figure—citing the income tax and NI which the exchequer may have lost due to banks paying lower bonuses than they might have done. (A speculative behavioural assumption).”
As anybody who has read “The Exchequer effect of the 50 per cent additional rate of income tax” will know, highly speculative behavioural assumptions are the bedrock of this Government’s economic policies. The article went on to forecast that the bank levy, which was meant to reach £2.5 billion in 2012, would actually reach only £1.3 billion. In truth it reached £1.8 billion, but it certainly did not reach the £2.5 billion that is claimed repeatedly by Government Members.
Owen Smith
At the danger of being ruled out of order for repeating today’s earlier debates—[Interruption.] The Financial Secretary says from a sedentary position that I am on the back foot, but I am absolutely not. I have been pointing out to his colleagues for the past couple of hours that the volume of behavioural change anticipated in the Exchequer analysis is fundamentally flawed. The taxable income elasticity point chosen by the Exchequer to derive that volume of behavioural change is completely outwith the normal delta used by economists to assess the elasticity of top incomes. [Interruption.] No, we are talking about the future. We are talking about what behavioural change there will be and what the yield will therefore be in future.
That takes us to the central question of the Government’s competence. There are questions to be asked about the competence of the way in which they set up the bank levy. Why on earth did the Government choose in the first instance a rate of 0.045%, only to have to increase it five times in the past 18 months to hit their annual yield target of £2.5 billion? I would be delighted to hear the Financial Secretary explain that to us. Why did the Government do it that way around? It does not make any sense to me. It would have been more sensible either to have stuck with the payroll tax, as we suggested, or to have arrived at a hard figure and allowed the yield to set the rate, not the rate to set the yield.
Thus we come to the question of how the Government can keeping saying that they are certain that the bank levy will yield £2.5 billion each year. It did not in its first year, when it hit £1.8 billion. The reason the Treasury team is continually having to tweak the rate is that it is not certain how much money it is going to yield.
Owen Smith
I am absolutely not against the rate going up. My question is about the Government’s competence and whether they know what they are doing. They clearly do not know what they are doing about the granny tax, the 50p rate, VAT—
Owen Smith
No, you’re all over the place, with the greatest respect, as this car crash of a Budget has shown not just to the House but to the whole country over the past three weeks. As an editorial in The Times said on Monday, when the Budget is still leading the headlines three weeks after the Chancellor has sat down, we know something has gone wrong, and it ain’t just one thing that has gone wrong but just about everything.
Mr Bailey
I believe that the right hon. Gentleman introduced a paper on reducing regulation which subsequently disappeared and sank without trace in the light of the financial crisis.
In conclusion, we can argue about the behavioural changes but one thing that is absolutely certain is that the bank bonus tax raised a lot of money, that it was consistent with the principles of responsible capitalism and that it may well have affected the behaviour of bankers in the long-term if they had known that the tax would be in place as long as their behaviour justified it. The fact that the Government have removed it has meant that the bonus culture has continued. There is still a sense of unfairness and outrage within the community at large that they will have to pay for the excesses of the banking community and that the Government are not prepared to do anything about it. Even at this late stage, if the Government believe that we are all in it together, that is one thing they could do that would both benefit the Treasury and demonstrate their commitment to that principle.
Mr Hoban
This has been a useful debate and the clause and schedule that we are debating legislate for a change in the rate of the bank levy, increasing the full rate to 0.088% from January 2012 and making a further increase to 0.105 % from 1 January 2013. The rate changes are intended to ensure that the levy will raise the £2.5 billion a year that we said that it would and ensure that the additional corporation tax rates do not benefit the banks, a point that the hon. Member for Pontypridd (Owen Smith) did not seem to recognise.
The amendment looks remarkably familiar, as it was proposed last year, and it is good to see it being given another outing this year, but in the shadow spokesman’s 43-minute speech we heard remarkably little about it. We saw him dig himself out of a few holes of his own making, but we did not hear anything about whom it was targeting, what measures would be taken into account or, indeed, how much it would raise.
I say that because I have been going through some transcripts of radio interviews, and so far the Opposition have claimed that their measure would be used to finance £29.6 billion of additional spending or taxation. That is 10 times the amount the bank payroll tax raised when the Labour party was in government, but that is not just protestation on my part. The Leader of the Opposition, when quizzed by Jeremy Vine on 6 January 2011 about how the Labour party would pay for its VAT rise reversal, replied:
“I said for example we should have a higher bank levy.”
He was asked in a Fresh Ideas question and answer session—we have not heard many fresh ideas in today’s debate—on 25 March 2011 about how to cut the deficit, and he said that there should be “another bankers’ bonus tax”.
That is not a concoction; those are the words of the hon. Gentleman’s party leader, and I am afraid to say that the starting bid is £29.6 billion—[Interruption.] The hon. Gentleman should not question people’s arithmetic when his own was earlier found to be flawed. He should be very careful what he says. I suggested to him last night that he should have spent more time on his speech and less time in the Members’ Dining Room, but he ignored that advice. He should have followed it, shouldn’t he, really?
So we do not know how much the Opposition’s proposal would raise or at whom it would be targeted, and there is a stark difference between it and the levy that we introduced when we came into office. The bank levy is a tax on the balance sheets of banks, banking groups and building societies, and it complements wider regulatory reforms aimed at improving financial stability, including higher capital and liquidity standards. The levy ensures that the banking sector makes a fair and substantial contribution, reflecting the risks that it poses to the financial system and to the wider economy. The levy is also intended to encourage banks to move away from risky funding models.
From the outset, the Government have clearly stated that they intend the levy to raise at least £2.5 billion each year. That is an appropriate contribution, which was set with consideration to the wider environment, and it reflects the international programme of regulatory reform, the global economic conditions and the need to maintain the competitiveness of the UK financial sector.
The forecasts produced by the Office for Budget Responsibility implied that, if we did not adjust the rate, receipts for future years would fall short of the expected £2.5 billion. We will undertake a full assessment, before next year’s operational review of the bank levy, of the reasons why there is a shortfall, but fragility in the eurozone will inevitably have had a greater than the previously expected impact on last year’s balance sheets. The rate increase introduced in the clause puts us back on track to ensure that from 2013 and in future years the levy will raise at least £2.5 billion.
The target yield was set out in this Government's first Budget, when we also announced our intention to make significant cuts to the main rate of corporation tax. We were clear at the time, as we are now, that the bank levy yield far outweighs the benefit that banks receive from the corporation tax change. Other sectors, including manufacturing, will benefit from the reduction in corporation tax, but the banks will not benefit because the bank levy rate increase will offset it.
Since our first Budget, we have gone further: we have announced additional reductions in the main rate of corporation tax, so that it now stands at 24%; and we will continue with the two further cuts planned next year and the year after. As a consequence, Britain will have a 22% rate of corporation tax—the lowest in the G7. To offset the benefits to the banking sector, and to maintain the same incentives on the banks to move to less risky funding, the increase in the levy rate in this clause takes into account additional cuts in corporation tax.
The Opposition’s amendment seeks to reintroduce the bank payroll tax, and, as I said earlier, this is not the first time that we have heard it suggested. The House disagreed with it last year, and now, as then, the Government believe that such a tax would be counter-productive and unnecessary. The tax was introduced in the last Parliament as a one-off interim measure ahead of changes in remuneration practices from corporate governance and regulatory reforms. As the previous Chancellor clearly stated, it could not be repeated. The net yield of this one-off tax, accounting for the impact that it would have on income tax and national insurance contribution receipts, was £2.3 billion—less than our annual target for the permanent bank levy. The previous Government told us that they would apply the bank bonus tax only until changes in remuneration practices were put in place.
Mr Hoban
I am trying to deal with the point that the hon. Gentleman made. It is clear that the bank payroll tax had a negligible impact on bonuses paid, whereas this Government’s action has led to bonus pools falling year on year. For example, RBS’s bonus pool fell by 40% compared with the previous year’s, and Barclays’ bonus pool was down by 25% compared with that in 2010. Real changes in remuneration practice are coming through as a result of measures that this Government have championed.
Mark Durkan
I wanted to ask about a previous point that the Minister made. He said that he hoped there would be shareholder activity to help to restrain bank bonuses. Would putting a bank payroll tax window into the permanent bank levy that the Government are introducing not be an aid to shareholders’ interests, because it would mean that the level of bank bonuses affected the overall levy that the bank was paying?
Mr Hoban
I think shareholders are well aware that bonus pools affect banks’ profitability and the amount that they are able to pay to their shareholders by way of dividends. I am demonstrating that the reforms that we have introduced since we have been in office have been far more effective in curbing behaviour in bank boardrooms than the bank payroll tax.
Let me deal now with youth unemployment, which is highlighted in the Labour amendment. The Government have introduced a wide range of measures to tackle the problem. We have improved the support that is available to jobseekers. We have introduced a more flexible jobseeker’s allowance regime better to support a jobseeker in the search for work. In June last year, we launched the Work programme, providing specialist support over the next five years to help to support the longer-term unemployed and help the most vulnerable jobseekers to keep in touch with the labour market. Later this year, we will run a pilot to find the best way to introduce a programme of enterprise loans to help young people to set up and grow their own business. We are taking other actions to tackle the problem.
We are strongly of the view that it is right that banks should make a fair contribution that reflects the risks they pose to the UK financial system and the wider economy. That is why we introduced the permanent bank levy—a move that Labour Members chose to disregard when they were in government. We need to balance fairness and competiveness and raise the revenue that we need. The actions that we are taking demonstrate that we have a clear strategy in place to enable economic recovery and create jobs. The bank levy is the right course of action. I ask the hon. Member for Pontypridd to withdraw his amendment, and I move that clause 209 and schedule 33 stand part of the Bill.
Owen Smith
There are still 1 million unemployed young people in this country. That is the highest rate since records began. Long-term youth unemployment is growing as never before. In my constituency of Pontypridd, there has been a 333% increase in long-term youth unemployment in the last year alone. The point of the amendment is to highlight that problem in the real economy. We are trying to connect this out-of-touch Government to the reality of youth unemployment, and to get them to do something to tackle it and to get growth in our economy. I have not been persuaded to withdraw the amendment and we will press it to a vote.
Question put, That the amendment be made.
The Committee proceeded to a Division.
Frank Dobson (Holborn and St Pancras) (Lab)
As the chair of the all-party parliamentary group on historic places of worship, I have been approached by people from all over the country and asked to come out against the proposal to take away the zero VAT rating on alterations to listed places of worship. Such alterations include improved access for the disabled, the installation of toilets and small kitchens, the provision of better heating and lighting and the introduction of more energy-efficient measures. They are not just for the congregation; they are for the whole community. They encourage the community use of religious buildings and make an increasing contribution to attracting tourists all over the country. These church buildings are vital, whether they be vast edifices like York Minster, of which as a York lad I am immensely proud, or small parish churches all over the country. The Government need to look again at this silly, stupid, unprecedented and unconsulted-on proposal.
Mr Gauke
We have had a thoughtful and impassioned debate this evening, and I am pleased to have the opportunity to set out the Government’s case for addressing some of the anomalies within the VAT system. In the time available, I will try to address as many points as possible, but I hope the Committee will forgive me if I do not take many interventions, so that I can cover as much ground as possible.
Let me begin with hot takeaway food. The current rules on the VATability of such food have been made complex and unfair by a patchwork of different legal decisions taken over the decades. The definition of hot takeaway food has been in place since 1984, and it applies to food that
“has been heated for the purposes of enabling it to be consumed at a temperature above ambient air temperature”
and that is
“above that temperature at the time it is provided to the customer”.
There have been repeated efforts since the 1980s, however, to chip away at this boundary. A number of businesses have argued in litigation that although the food they may provide to their customers is hot and is taken away, it should not be taxed as hot takeaway food, but should instead be zero-rated. Some have argued successfully that their intention was not to provide their customers with food to be eaten hot, but that they heated their food for other reasons instead—for hygiene reasons, or to finish the cooking process, or to provide evidence of freshness, or to create an aroma or to improve appearance, crispiness or texture.
Mr Gauke
No. As I said, I am not going to give way very often.
Those arguments have not always been successful, but they have resulted in some businesses being able to secure VAT-free treatment for a range of hot products, such as hot rotisserie chickens, meat pies, pasties and panini. Other businesses, however, have continued to apply VAT to the similar hot-food products that they sell. They have accepted or the courts have ruled that their intention is to heat their food products so that their customers can eat them hot. Under the current rules, a small independent fish and chip shop will have to charge VAT on its hot chicken, but a major supermarket will argue that its rotisserie chickens are zero-rated. One baker who keeps his sausage rolls in a hot cabinet to provide his customers with a hot snack will charge tax, but the baker next door who keeps them hot and argues that the purpose is to maintain an appealing aroma will claim that they are zero-rated. The current rules mean that many customers simply do not know whether they are being charged VAT on their hot food because the treatment depends on the particular supplier’s purpose in heating the food. The new rules will ensure a level playing field, and we are removing the subjective element.
Mr Gauke
Let me make a point about the arguments surrounding ambient temperature. This test has been in place since 1984. We do not expect staff to take detailed temperature readings every time they sell a pasty. HMRC will take a pragmatic approach, and provide businesses with guidance, taking into account the responses of businesses on how to implement the change. I have to point out that existing simplification schemes are already available to allow businesses to calculate their VAT liability by reference to a fixed percentage of their turnover without requiring staff to consider the temperature of every product sold. This is a pragmatic approach, already in existence.
Mr Gauke
No, I really want to make some progress.
None of that has been changed by the Budget announcement. There is a borderline that causes confusion between repairs and alterations. The Budget decision also reflects the view that grants provide a more flexible mechanism than VAT for providing specific financial support for heritage—
Mr Leigh
This is a key point. The Government have announced that they will increase the listed places of worship grant scheme by £5 million, but they have cut it from £23 million to £7 million, so that is totally inadequate. What we want tonight is a commitment from them that they will resolve the problem. Half the ancient buildings in this land are run by the Church of England, by ordinary people who want to support their local communities. The Government must compromise on this issue.
Mr Gauke
I refer my hon. Friend to the comments that I made before his intervention.
Let me respond briefly to what was said by the hon. Member for Wrexham (Ian Lucas). We are restricted in regard to what we can do for public transport. If we provided a reduced rate for passenger transport, we would not be able to focus it entirely on charities; it would apply more widely to taxis.
Taxing static holiday caravans and larger touring caravans will bring their treatment into line with that of other holiday accommodation. VAT is already paid on mobile caravans, camper vans, canal narrow boats and camping equipment. We therefore propose to replace the current definition of a zero-rated caravan, which is based on size, with a new definition based on whether the caravan is designed for residential use. We are considering applying British Standard 3632, and are also considering an additional test. However, I have received representations from, among others, my hon. Friend the Member for Boston and Skegness (Mark Simmonds) arguing against that, and we will examine those arguments closely.
Mr Gauke
I cannot, because I have only about two minutes left, but my hon. Friend has expressed his views to me very strongly.
We have heard a number of forceful and impassioned arguments this evening. The Government think it right to address anomalies in the tax system, but some of the arguments that we have heard outside the House and some of the media commentaries have not been terribly well informed, and we want a proper, informed debate and consultation. I have heard the arguments in favour of extending the consultation period and I think that that is reasonable in the circumstances, so rather than closing the period on 4 May, we will extend it to 18 May. We want people to respond to the consultation, although it is right for us to address the anomalies. For example, those with static caravans and those who run park homes or caravan sites are registered for VAT, but can recover—
Mr Graham Stuart
A two-week extension is not a large extension, but it is an extension none the less. However, the Government and the Chancellor must ensure that this is a genuine consultation. Ministers have heard what has been said tonight. They must think again, and reverse their proposal. If they say that they will do so, I shall be happy to take that at face value, but we do not want to see thousands of jobs in east Yorkshire axed as a result of this measure.
Mr Gauke
My hon. Friend continues to make his case very strongly. We are, of course, listening to the arguments, but we think it right to have a VAT system that deals with some of the anomalies, and that is why we have finally addressed some of the problems that have remained in our VAT system for too long.
Cathy Jamieson
At the outset of this debate there was a bit of laughing and joking, but the tone quickly changed as people realised the seriousness of the issues under discussion. The Minister’s contribution reminded me of the well-known phrase, “When you’re in a hole, you’d better stop digging”—particularly when Members on the Government Benches are looking so miserable.
I hope the Minister has listened to what has been said. In order to be helpful—and recognising that it was, perhaps, lack of attention to detail and unintended consequences, rather than malevolence, that prompted the Government to introduce these proposals, which would affect jobs and the economy—I beg to ask leave to withdraw the clause, but I shall press other new clauses in this group to a Division.
Clause, by leave, withdrawn.
The First Deputy Chairman of Ways and Means (Mr Nigel Evans)
We come now to new clause 6. I call Mr Stuart to move it formally.
The Economic Secretary to the Treasury (Miss Chloe Smith)
To ensure that all hon. Members who wish to do so can speak in this debate, I intend to lay out extremely briefly what clause 189 and schedule 23 do and reprise at the end of the debate.
The clause and schedule make four changes to air passenger duty. First, they set APD rates for 2012-13, which took effect from 1 April this year, as announced in the autumn statement of 2011. Secondly, they extend APD for the first time to business jets and flights taken aboard other small aircraft. Thirdly, they give statutory effect to the reduced rate of APD on all direct long-haul flights from Northern Ireland, which was introduced in November. Fourthly and finally, they introduce the long-term solution of granting the Northern Ireland Assembly the power to set APD rates for all direct long-haul flights in future.
The changes provide certainty to both industry and the consumer. I commend them to the Committee and look forward to a brief debate.
Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP)
I rise to speak to amendment 8 in my name and those of my colleagues, and I should like to press amendment 61 to a Division.
I am short of time, so I shall keep interventions to a minimum. There has been co-operation among the parties to try to give hon. Members time to speak, and I shall try to keep my part of the bargain.
In fact, I have risen to speak in favour of a Government policy—a well-thought-out policy that would do wonders for the economy. I am speaking, of course, of the devolution of air passenger duty to Northern Ireland. I like that great idea so much that I should like APD devolved to Scotland as well. We want equality of treatment and opportunity for Scotland.
In reality, I and many in Scotland, and the aviation industry, feel that APD is unfair and that it places an undue burden on business and travellers at a time when the Government should be encouraging the movement of people and goods to spur economic growth. The amendments in my name and those of my hon. Friends therefore propose to halt the rise in APD and devolve the power to Scotland, which is a recommendation not only of the Scottish Government, but of the Calman commission.
The idea of the cut in APD is simple: the UK already has the highest APD in the world, which surely cannot boost economic growth. The industry has had its say. Derek Provan, managing director of Aberdeen airport has said:
“Aberdeen, Edinburgh and Glasgow airports issued a joint letter to the Chancellor ahead of the Budget calling on the UK Government to create a level playing field for the UK aviation industry, which is subject to the highest aviation taxes in the world…The leaders of BA, EasyJet, Ryanair and Virgin Atlantic also jointly warned that the double inflation increase would hit ‘millions of hard working families in the UK.’ They said a family of four flying economy class to Australia would pay £500 in APD, whereas in 2005, they would have paid just £80. BA also recently revealed that it had plans to halve the number of new recruits in 2012 as a result of APD.”
Jim O’Sullivan, managing director of Edinburgh Airport, has said:
“APD is already costing Scotland passengers and having an impact on tourism revenues. We know from discussions with our airline partners that it is a major factor in their decision to connect further routes to Scotland. We would urge the Westminster Government to see Scotland as it does Northern Ireland and understand the need to both reduce and devolve this unfair and damaging tax.”
Phil Wilson
I will not give way, as I do not have much time.
Will the Minister look into whether there is a way of varying air passenger duty? I understand that there might be some European issues to deal with, but we must consider the congestion around Heathrow and Gatwick. Perhaps there could be two variations in the duty, and a small congestion charge to encourage the growth of regional airports around the country.
Miss Chloe Smith
I thank hon. Members for the breadth, and the brevity, of their comments in the debate, and I shall endeavour to cover all the relevant points in the few minutes available to me. Of course the Government firmly believe—as I think all hon. Members do—that aviation plays a vital role in the UK economy, by which I mean all the UK economy. I have taken on board the regional aspects of tonight’s debate. As hon. Members know, recent economic conditions have been difficult for airlines, but the UK remains internationally competitive and there are positive signs for the air industry, as shown by the growth in passenger numbers at major British airports—including Heathrow, but not limited to the south-east of England.
Bob Stewart
I thank the Minister. I have just one thing to add to the argument—that there are small airports in the south-east of England, too, and they also require support. These are not the big airports that everyone talks about.
Miss Smith
My hon. Friend makes a fine point, and I acknowledge it in what I am saying about the regional aspects of the debate and the necessity of aviation in many different parts of the United Kingdom.
Cathy Jamieson
Briefly, I heard what the Minister said about looking again at the whole issue of devolution. Does she accept that there is also a need to look at aviation taxation generally in the round? Does she have any plans to do that, as well as looking further at the question of devolution?
Miss Smith
In brief, all taxation is, of course, kept under review. If the hon. Lady will allow me, I will proceed and I shall endeavour to answer her other points in doing so. My main point about the potential devolution of APD is focused on the wider-ranging impact such a move might have across the whole of the UK economy. We should not run the risk of replicating the same problems that Northern Ireland has faced with its land border and lower taxes in the Republic.
Let me reiterate here today the Government’s determination to examine the full range of effects that the devolution of APD could have on Scotland, Wales and the UK as a whole before any final decision is taken. As I think the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) knows, this sits in context with a number of other pieces of work that the Government are doing on aviation.
Let me briefly deal with the issue of rates, which the lead amendment is designed to alter. Hon. Members will know that the Government were able to freeze APD for a year in March 2011. At the high cost to the Exchequer of £140 million, I think people will appreciate that this was not easy. Looking to the future, if we are to stay on course with our deficit reduction plans, it is necessary for APD rates to rise. The fact of the matter is that, over the two years 2011-12 and 2012-13, the increase in APD rates equates to a rise of no more than inflation. Indeed, most passengers will pay only £1 more on their flights. That increase is necessary. To provide greater certainty, we have also set out in this Budget the APD rates for two years up to 2013-14.
Let me move on briefly to other issues in the amendments. As I said earlier, passengers on business jet flights currently do not pay APD, whereas ordinary passengers aboard commercial flights do. We have recognised that anomaly, and are introducing fair changes to include business jet flights for the first time.
I have touched briefly on the changes that we are making in relation to Northern Ireland. I think that they have been welcomed by Northern Ireland Members here tonight, and by others outside the House.
The Government have listened, and have taken on board many of the concerns that were expressed during the recent consultation. I believe that we are striking the right balance—