Finance Bill (First sitting)
(8 years, 6 months ago)
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The Committee divided: - Ayes: 10 / Noes: 13 - Question accordingly negatived.
The Chair
Good morning, ladies and gentlemen. I have a few housekeeping announcements before we start the formal business of the day. Members may remove their jackets, if they wish to do so; normally we wait until the Chair has given permission. I remind Members that the only liquid allowed in the Committee Room is water. Please do not try to smuggle in—
The Chair
—coffee, because the Treasury will tax it. Please ensure that mobile phones are switched to silent mode or, preferably, off. I also remind all hon. Members that electronic devices are to be used for the purposes of Committee work, not for general communication with the outside world, however tempting that might be.
Mr Howarth and I will not, as a rule, call starred amendments—that means amendments that have been tabled without adequate notice. The notice period for Public Bill Committees is three working days. Any Member, whether a Front Bencher or a Back Bencher, who wishes to table an amendment should do so 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 procedures in Public Bill Committees, and even those who think they are sometimes find that they are not. I hesitate to say this, but that includes the occupants of the Chair, which is why we have the service of excellent Clerks to guide us through this stuff.
Yesterday, the Programming Sub-Committee met and agreed a programme for consideration of the Bill. It must be approved by the whole Committee, so the first thing that we will do is consider the programme motion, as on the amendment paper. The debate on that is limited to half an hour. Do not feel obliged to speak; the programme has been agreed by the usual channels, but if anyone wishes to make any opening remarks, that is fine.
The selection list for today’s sittings is available and shows how the amendments have been selected for debate. This is quite an arcane process. Amendments are grouped for discussion by content, and are not considered in sequence. In a group, you will therefore find amendments that relate to a clause much further on in the Bill but that are to be debated much earlier, because of the subject matter. You will find that the Chair—particularly if it is me—rattles through stuff, and you will want to say, “Hang on, I’ve missed this”, or “I wanted to vote on that.” Do not worry about it; we will ensure that you are told exactly. Some amendments will be debated early in the proceedings, but the votes on them—if there are any—will be taken much later, when we reach that part of the Bill.
We will call the leading name on any amendment, followed by anyone else who wishes to speak. If any Member wishes to catch my eye, or that of Mr Howarth, please try to indicate that; we do not have second sight. Given the timescale we are working to, we have to move quite fast. Once we have moved on, we cannot go back, so if you want to speak, please make sure that we know.
I am working on the assumption that the Government wish the Committee to reach a decision on all Government amendments. Where the selection list states “stand part”—that is, that that clause or whatever should stand part of the Bill—that permits a general debate, as well as debate on the individual amendments in the group. Mr Howarth may have his own views, but my view is that where there are only amendments in a group, we do not necessarily have to have a stand part debate. I much prefer people to get what they have to say off their chest early on, rather than to have a stand part debate, which tends to mean a rerun of what has been debated for the past two hours. We will try to avoid that.
There is one other thing, which is absolutely vital—almost more important than anything else—and that is these boxes behind me. You will find that you accumulate paper over the course of these sittings; that is why there are no rainforests left. These boxes are for you to store your papers in. They are named. They used to be red for the Finance Bill Committee—that was the only opportunity that some of us ever got to get our hands on a red box—but apparently we have run out, so I am afraid that they have to be green. Completely seriously, these boxes are for your use. Any papers left in them will be put in the cupboard and locked, so you do not have to lug them around the building with you. We aim to serve.
Finally, if anyone has any queries, do not be frightened; the Chair is not going to eat you, and neither are the Clerks. None of us has a monopoly on wisdom. If there is something that you do not understand, for goodness’ sake please ask, and we will try to take you through it. I, at least, will probably make mistakes.
Without further ado, I call the Minister to move the programme motion in the terms agreed by the Programming Sub-Committee.
Ordered,
That—
(1) the Committee shall (in addition to its first meeting at 11.30am on Thursday 30 June) meet—
(a) at 2.00 pm on Thursday 30 June;
(b) at 9.25 am and 2.00 pm on Tuesday 5 July;
(c) at 11.30 am and 2.00 pm on Thursday 7 July;
(d) at 9.25 am and 2.00 pm on Tuesday 12 July;
(e) at 11.30 am and 2.00 pm on Thursday 14 July;
(2) the proceedings shall be taken in the following order: Clauses 1 to 5, Schedule 1, Clause 6, Clause 19, Schedule 4, Clauses 20 to 22, Schedule 5, Clauses 23 to 39, Schedule 6, Clause 40, Clause 45, Schedule 7, Clauses 46 to 50, Schedule 8, Clauses 51 to 60, Schedule 9, Clauses 61 and 62, Schedule 10, Clauses 63 and 64, Clause 82, Schedule 15, Clauses 83 to 122, Schedule 16, Clauses 123 to 128, Clauses 130 and 131, Clauses 137 to 141, Schedule 17, Clauses 142 and 143, Clause 155, Schedule 23, Clauses 156 to 168, Schedule 24, Clauses 169 to 172, Schedule 25, Clauses 173 to 179, 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 14 July. —(Mr Gauke.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Mr Gauke.)
The Chair
Copies of any written evidence that the Committee receives will be made available to Committee members. We now commence line-by-line consideration of the Bill.
Clause 1
Income tax charge and rates for 2016-17
Rob Marris
I beg to move amendment 6, in clause 1, page 1, line 9, at end insert—
“(3) The Chancellor of the Exchequer shall, within three months of the passing of this Act, publish a report on the impact of setting the additional rate of income tax at 45% and at 50%.
(4) The report must estimate the impact of setting the additional rate for 2016-17 at 45% on the amount of income tax currently paid by someone with a taxable income of—
(a) £150,000 per year;
(b) £500,000 per year; and
(c) £1,000,000 per year.
(5) The report must estimate the impact of setting the additional rate for 2016-17 at 50% on the amount of income tax currently paid by someone with a taxable income of—
(a) £150,000 per year;
(b) £500,000 per year; and
(c) £1,000,000 per year.”
Rob Marris
On your opening remarks, Sir Roger, I wish that when I entered the House in 2001—I look around with some shock; I think that I entered the House before any other Committee member—someone had given me that explanation. That is not to say that I know it all, but it would have been helpful to have had that explanation when I started as a Member.
The amendment relates to the Chancellor publishing reports. To Committee members who are not familiar with the procedure—as ever, I stand to be corrected by the Chair on this—I say that the Opposition cannot table amendments that would put up taxes. It is therefore quite a common device for the Opposition to express disquiet about a particular course of action being proposed by a Government by means of an amendment asking the Government—often in the person of the Chancellor of the Exchequer, obviously—to prepare a report on a given subject some months or years down the line, so that there might be some evidence of the efficacy or otherwise of the disputed measure. That is, of course, what we seek to do through amendment 6.
It will not surprise Committee members that we on the Labour Benches—I cannot speak for the Scottish National party, of course—think that the highest rate of income tax should be 50%, as it used to be. We do not accept the overall medium-term accuracy of the figures propounded by the Government that suggest that the drop in the top rate from 50% to 45% was subject to a Laffer curve, whereby a greater sum was brought in even though the rate was lower. We do not accept that because, due to the change in rate, there was tax shifting, such that there was a bulge in receipts in one year, which was offset by lowered receipts in later years.
In our view, the Government have on occasion mistakenly cited the bulge year as evidence that a lower top rate of tax brought in a higher amount than a higher top rate of tax would have. They do that simply by quoting one year rather than a sequence of years, which is unfortunate in terms of getting clarity when discussing taxes. I could produce all kinds of evidence of that, but I do not wish to detain the Committee. However, we think that the top rate should be 50%, and amendment 6 seeks to pursue that point using the mechanism available to us as the official Opposition. [Interruption.]
The Lord Commissioner of Her Majesty's Treasury (Mel Stride)
You may take your jacket off, Sir Roger.
The Financial Secretary to the Treasury (Mr David Gauke)
It is a great pleasure to serve under your chairmanship, Sir Roger, and I welcome you to the Chair. It is a great relief to see you here today; your guidance will be much appreciated by all the Committee members from right across the House.
Let me take this opportunity to say a bit about clause 1 as well as responding to amendment 6. Income tax is the Government’s biggest revenue source, making up 32% of revenues in 2015-16. The annual charge legislated for by Parliament in the Finance Bill is essential for the tax’s continued collection.
Clause 1 states that UK taxpayers will pay income tax at the same rates as in 2015-16, meaning that we meet our commitment to ensuring that there will be no increases to the main rates of income tax in this Parliament. When that is taken together with commitments on the personal allowance and the higher rate threshold, which I will come to, it means that we are delivering an income tax system in which working people on low and middle incomes receive tax cuts. The latest statistics show that the top 1% of earners have paid over 27% of income tax receipts—more than in any year under the last Labour Government.
Let me turn to amendment 6, which was tabled by the Opposition. As Finance Bill regulars will know, it is a familiar one. The amendment proposes that the Chancellor publish a report reviewing the impact of setting the additional rate of income tax at 45p and 50p within three months of the passing of the Act, and on the effect on the tax liabilities of typical individuals with annual incomes of over £150,000.
As I have said on a number of occasions, for such analysis to be credible, it needs to look at how such different income tax rates affect individual behaviour, for example through affecting work incentives. Simply looking at theoretical income tax liabilities when changing taxes is not enough. Further, this is something that anyone can do if they have the time and inclination.
The Government already consider the behavioural impact of decisions taken, as did the report by Her Majesty’s Revenue and Customs on the additional rate, which was published at the 2012 Budget. That report concluded that the underlying yield from the introduction of the 50p rate was much lower than originally forecast, due to large behavioural effects. It even said that it is quite possible that the 50p rate could have reduced income tax revenue instead of increasing it. Indeed, the evidence so far is that despite the reduction of the additional rate, the top 1% of income tax payers are contributing a greater share of income tax receipts than in any year under the last Labour Government. In addition, the 50p rate was one of the most uncompetitive income tax rates in the G20. It would be illogical to re-introduce a tax rate that is ineffective at raising revenue from high earners.
On a practical level, the Government need to spend their resources effectively. The Treasury and Her Majesty’s Revenue and Customs have no plans to introduce rolling annual reports on the impact of changes to tax rates. That notwithstanding, the Government always keep tax rates under review and monitor receipts. On that basis, the amendment is unnecessary
We accept that income tax receipts can move from one year to another, and that there is a degree of flexibility as a consequence of changes to rates. We have always been clear that there is some income shifting in response to the changes to income tax rates, just as there was under the previous Government, when they introduced the additional rate of tax. We made it clear that we expected that to happen. However, it is clear that the 50p rate was distorting and an economically inefficient way of raising revenue. The latest statistics show that, following the reduction in the top rate of tax to 45p, the amount of tax paid by additional rate taxpayers is expected to grow from £46 billion in 2013-14 to £47.3 billion in 2016-17.
Clause 1 ensures that the Government can collect income tax for the year 2016-17. It means that the main rates of income tax faced by UK taxpayers will remain unchanged, and will help the Government to achieve their aim of a tax system that is fair for everyone, while rewarding those who want to work hard and progress. I therefore propose that the clause stands part of the Bill without the amendment proposed by the Opposition.
Rob Marris
I have nothing more to say on the clause, but I wish to press amendment 6 to a vote.
Question put, That the amendment be made.
Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)
I beg to move amendment 3, in clause 2, page 2, line 4, at end add—
“(3) The Chancellor shall assess the effect on taxation revenue of increasing the basic rate limit in line with the Consumer Prices Index for 2017-18 and by no more than increases in that index until 2021-22.”
It is a great pleasure, Sir Roger, to be with you again in this Public Bill Committee. Last year I served on this very same Committee, and it led to one of the great interventions, which was of great assistance to me at the time. I hope that there is not the same occurrence this time. I can see that some hon. Members are rather confused; I will explain it to them later.
Some hon. Members will be aware that I raised a point of order in the House about whether, in the current circumstances—after the referendum—we should be proceeding as we are with the Bill. To my mind, more important things have occurred that need debating. None the less, we are here. I intend to adopt the rather rare, for me, practice of speaking in this Committee only when I have something to say. Our contributions may be slightly fewer than they were in the past, but they will be no less worthy—[Interruption.] How helpful I am.
This is a rather simple amendment, which we will not press to a Division, probing the Government on the proposed increase in the basic rate limit. Particularly at a time of austerity, when people are having to make such great sacrifices, the decision to give this boost to those with significantly above-average earnings strikes us as worthy of further explanation from the Government. The amendment is a sensible proposal that the Government report on and model what would happen if the rise in the basic rate limit was restricted to consumer prices index levels year after year. It is so self-explanatory that I need not detain the Committee any longer.
Mr Gauke
It is a great pleasure to respond to the hon. Gentleman. I note that he will speak only when he has something to say—an approach that he contrasted with that of the previous year. I feel that that is a little harsh on his contributions last year, which were always valuable and welcomed by the Committee. No flies on him; that is the recollection of one or two of us.
Before turning to the amendment, let me say a word about clause 2, which sets the income tax basic rate for 2017-18. The change takes a significant step towards meeting my party’s manifesto commitment to increase the threshold at which people pay the higher rate of tax. It will ensure that the Government continue to encourage those who want to progress, while lifting over half a million people out of the higher tax band altogether. This Government have already made significant progress on cutting taxes for working people and ensuring that those on the very lowest incomes pay no income tax at all.
In addition to supporting the low-paid, the Government are committed to supporting those on middle incomes who want to progress. The number of families who have to pay the higher rate of income tax has grown almost without fail over the past three decades. Upon its introduction in 1988, it was paid by around one in 18 taxpayers. Without the action taken at Budget 2016, it was projected to rise to one in six—that is more than 5 million individuals paying income tax at 40%. That is why we committed to increasing the point at which the higher rate of income tax is applied to £50,000 by the end of this Parliament. Summer Budget 2015 took the first steps to meeting that commitment, increasing the higher rate threshold from £42,385 in 2015-16 to £43,000 from April this year.
This Finance Bill goes further. Clause 2 will increase the basic rate limit from £32,000 in 2016-17 to £33,500 in 2017-18. That is the amount of income on which the 20% tax is due. The income tax higher rate threshold, which is the sum of the personal allowance and the basic rate limit, will therefore increase from £43,000 in 2016-17 to £45,000 in 2017-18. Above that level, 40% tax is due. That increase to the higher rate threshold will be the biggest above-inflation cash increase since it was introduced by Lord Lawson in 1988-89. By 2017-18, some 585,000 fewer individuals will be paying the higher rate of tax than did in 2015-16—a reduction of more than 10%. As a result, a higher number of taxpayers on modest incomes will benefit from a lower rate of tax, including our most highly qualified and experienced nurses and teachers.
The amendment requests that the Government report on the impact of increasing the basic rate limit in line with inflation, rather than increasing the basic rate limit as set out in clause 2. I can confirm that the cost to the Exchequer of increasing the basic rate limit to £33,500 was published in the 2016 Budget. As such, the relevant information is already freely available to the hon. Gentleman and to members of the public. I can also confirm, however, that not implementing the clause would mean increasing the income tax paid by some families by £220 in 2017-18, dragging more middle earners into paying the higher rate of tax and breaking an important manifesto commitment that the British people elected the Conservative party to deliver. I urge the Committee to reject the amendment.
The clause will allow the Government to make progress on our commitment to increasing the threshold at which people pay the higher rate of tax, while supporting those on middle incomes who want to progress. It will ensure that there are more than half a million fewer higher rate taxpayers in 2017-18, compared with 2015-16, and will cut the income tax bill of millions of taxpayers on modest incomes. I commend the clause to the Committee.
The Chair
Mr Mullin, you now have the opportunity to respond. You must also indicate whether you wish to press your amendment to a vote or withdraw it.
Rob Marris
I did say at the beginning, Sir Roger, that there are always things to learn. I appreciate your understanding.
The Labour party welcomes clause 2 because there has been considerable fiscal drag under this Government. The Minister said that, without the clause correcting things, one in six taxpayers would pay the higher rate. When the previous Government, of which the Minister was a prominent part and in which he played a prominent role, took over, the proportion was around one in 12. Fiscal drag meant that the number of people paying higher rate tax doubled. Clause 2 will correct that, or at least move things in the right direction, so we support it.
Roger Mullin
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 2 ordered to stand part of the Bill.
Clause 3
Personal allowance for 2017-18
Question proposed, That the clause stand part of the Bill.
Mr Gauke
Clause 3 sets the income tax personal allowances for 2017-18. The change will help working people to keep more of what they earn, and it is a big step towards keeping our manifesto commitment to a £12,500 tax-free personal allowance by the end of the Parliament. The Government’s record on personal allowances is already strong. Over the previous Parliament, the personal allowance increased by more than 60%, from £6,475 in 2010-11 to £10,600 in 2015-16. Our reforms have already taken 4 million people out of paying income tax altogether.
The Government want to go further by increasing the personal allowance to £12,500 by the end of the Parliament and by ensuring that no one working 30 hours a week on the national minimum wage pays any income tax at all. Clause 3 marks another significant step towards our meeting those commitments by raising the personal allowance from £11,000 in 2016-17 to £11,500 in 2017-18 —an increase of £500. The change made by the clause will ensure that 30 million people pay less tax in 2017-18 than at the start of this Parliament, with 1.3 million taken out of paying income tax altogether. Therefore, by April 2017, a typical basic rate taxpayer will pay over £1,000 less income tax than when we took office six years ago.
Clause 3 builds on the Government’s determination to support those in work by ensuring that people can keep even more of the money they earn. It takes a significant step towards meeting our commitment to raise the personal allowance to £12,500 and means that more of the lowest-paid are taken out of paying income tax altogether. I commend the clause to the Committee.
Rob Marris
We support the clause, but I caution the Government that, in terms of the benefits it will produce for lower-income families, there is a law of diminishing returns, particularly for those who are in part-time paid employment. They will already be below the income tax threshold of £11,200, which the clause will raise to £11,500. That rise will not benefit such families at all.
I urge the Minister to look at reviewing national insurance contribution thresholds, so that there is greater alignment. I am not suggesting complete alignment, because it is a national insurance scheme and people receive certain benefits or prospective benefits in the comfort of knowing that, having paid national insurance contributions, they have a health service, unemployment benefits and disability benefits, were they to be injured at work and so on. They benefit from that insurance, even if they do not need to draw upon it, as they would hope not to—who wants to be unemployed or in hospital, or whatever?
The Government need to review the thresholds, because there is a growing discrepancy for low-income families between the relatively benign nature of the income tax regime and how national insurance contributions bite at much lower levels of income.
Question put and agreed to.
Clause 3 accordingly ordered to stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clause 39 stand part.
That schedule 6 be the Sixth schedule to the Bill.
Mr Gauke
Clause 4 will introduce a personal savings allowance that means basic rate taxpayers can receive up to £1,000 of interest or other savings income without any tax being due. Higher rate taxpayers can receive up to £500. Because the vast majority of taxpayers will have no tax to pay on any of their savings income, clause 39 will remove the requirement for banks and building societies to deduct tax from the account interest they pay.
As the Committee will be aware, over recent years low interest rates have helped households and businesses through difficult economic times by keeping mortgage payments down, but at the same time, low rates have made it difficult for people’s savings to grow. Economists, including Nobel prize-winning economist James Meade and Sir James Mirrlees, have long pointed out that ordinary savings are over-taxed compared with other types of investment. The Government believe that in such circumstances it is right to reward and support savers by cutting the tax they pay on their savings. In addition, customer research has shown that individuals do not understand how their savings are taxed. As a result, many low-income savers were paying too much tax by not registering bank accounts for gross interest, even though they were eligible to do so. Simplification of the system is therefore long overdue.
The changes will benefit 18 million savers. From this year, 95% of taxpayers will no longer need to pay tax on their savings. With the personal allowance, dividends tax allowance and 0% starting rate for savings, it is now possible for a taxpayer to receive up to £22,000 of income without paying any tax at all, and that is on top of any income from ISAs. As well as providing a tax cut for millions of savers, the change also simplifies the rules. The vast majority of savers will have no tax deducted from their savings income and will have no tax to pay or reclaim. Most will therefore have no need to contact HMRC about their savings. Crucially, the change removes the possibility that lower-income savers will pay too much on their account interest.
For the minority who do still have tax to pay, most will declare their savings income by completing a tax return, as they currently do. In other cases, where a taxpayer does not complete a return, HMRC will collect tax through pay-as-you-earn, where possible. That will involve changing tax codes based on the information that customers or banks and building societies provide about account interest received or paid.
Clause 4 will introduce a new nil rate of tax for savings income within an individual’s savings allowance. Each individual will have an annual savings allowance of £1,000, unless they have any higher rate income for the year, in which case their allowance will be £500, or any additional rate income, in which case their allowance will be nil. The allowance can be used for any of the individual’s savings income. It also includes income from alternative finance arrangements, income equivalent to interest, purchased life annuity payments and gains from certain contracts for life insurance.
Clause 39 will remove the requirement for banks and building societies to deduct tax from the account interest they pay. The clause will add bonds offered by National Savings and Investments, including its highly successful 65-plus guaranteed growth bonds, to the list of products that pay interest without tax being deducted.
The changes made by those clauses will provide the most significant reform to the taxation of savings for a generation. That will reward and support millions of savers by reducing the tax they pay and provide a long-overdue simplification of tax rules that have been poorly understood in the past. I therefore hope that the clauses will have the support of both sides of the Committee.
Rob Marris
I thank the Minister for that lucid explanation. I fear that this measure may not be the simplification that he prays in aid. Taken in reverse order, clause 39 is, in a welcome sense, rough and ready, with a £1,000 allowance or nil rate for basic rate taxpayers—call it what one will, but that is important for the accountants and I concede that I do not entirely understand the difference. For a higher rate taxpayer, that figure drops from £1,000 to £500. My understanding from a press release issued in February by the Low Incomes Tax Reform Group, to which I am indebted, is that the drop is a cliff edge, so someone who moves into the higher rate tax band finds their allowance suddenly drops from £1,000 to £500 on the tax at source proposals under clause 39.
If there is a cliff edge, I urge the Government to look at that again, though I appreciate that that is difficult when going for the rough and ready simplification that we broadly support. However, taking these sorts of measures together, it is not clear that there will be the simplification that the Opposition and the Government would wish for. There is often a balancing act when various measures interact, and we will come on to that.
On simplification, the Low Incomes Tax Reform Group fears—I understand this fear—that a number of taxpayers will find it difficult to disaggregate, work out and understand the interconnection between the tax-free savings allowance, the starting rate for savings and the tax-free £5,000 dividend allowance, which is all to do with what we used to call unearned income. That is a problem.
The cliff edge is a problem, though it may be one we have to accept for simplification. However, in terms of the interaction, I start to get quite questioning when the Minister helpfully gives us an example—he will correct me if I have got it wrong—where, in a certain confluence of circumstances, someone could have an income of £22,000 plus ISA income on top and be paying no income tax at all. In particular, later in the Bill—I cannot remember the clause but the Minister will—we will get on to heritable ISAs, which allow surviving spouses to take over ISAs and therefore have the benefit of the tax advantage of the deceased’s ISAs.
We would all like those at the lower end of the income scale to get a better deal on income tax. That is what progressive tax is about. We might interpret how progressive it should be, as we did in clause 1, and so on, but as an overall concept, I think there is broad support for the progressive nature of income tax in our society as a measure of those with the broadest shoulders and so on. However, we have that example of someone who could have an income well above £22,000: because ISAs have been around for so long, there are people with £1 million in ISAs and all the income on that is tax free. That is quite legitimate and not immoral at all as any of us would see it; they just built it up year on year, using the ISA allowance for however many years ISAs have existed, which is perhaps 25 years. Because of the interaction of various measures, people can now have quite a substantial income and pay no income tax at all on it. I get a little bit uneasy about that, but overall we support clause 4 and clause 39.
Roger Mullin
This is a very important move by the Government, and we broadly welcome it for two main reasons. First, as the Minister has already rightly indicated from comments by people such as Professor Mirrlees and others, ordinary savings have been overtaxed for many years. Ordinary savings are increasingly important for a lot of people who have lived their working lives on modest incomes. For example, there was a demonstration yesterday by Women Against State Pension Inequality—the so-called WASPI women, many of whom have very modest savings. The measure is of some assistance, albeit small, to many of the people who are in the most vulnerable of circumstances. That must be welcomed.
Secondly, there is always the dilemma of simplification. When moving towards something that is relatively sophisticated, trying to simplify it normally introduces some hazards, so I am particularly interested in the Minister’s response to the questions posed by Labour Front Benchers in that regard. On the whole, we think the right thing is being done, so we will support it.
Mr Gauke
I am grateful to both hon. Gentlemen for the points raised on these measures, and I am grateful to the hon. Member for Kirkcaldy and Cowdenbeath for his strong support. He is absolutely right on the concerns of the overtaxing of ordinary savings. The hon. Member for Wolverhampton South West essentially raised two concerns—one about cliff edges and one about circumstances that could involve a substantial amount of income on which no tax is paid. My first point is that both circumstances are likely to be pretty unusual.
First, the allowance has been set at a level at which 95% of savers will not have tax to pay on their savings income, so the question of a cliff edge simply does not apply for the majority of savers. Had we not designed it in such a way, and had there been a differential treatment in terms of the size of allowance for higher rate taxpayers versus basic rate taxpayers, I suspect the Committee would criticise us for the fact that the largest beneficiaries, in terms of the cash benefit, would be higher rate taxpayers and not basic rate taxpayers.
The design of the personal savings allowance means that no one can gain by more than £200 a year, regardless of their circumstances, which is an important means to ensuring that there is no disproportionate benefit to higher rate taxpayers. That is why there is a difference. Our concern is that trying to address the cliff-edge problem would add a degree of complexity to the tax system that would be unfortunate and disproportionate, given the nature of the issue that has been identified.
Secondly, I certainly do not deny that someone could have £22,000 of tax-free income with a combination of all the various policies in this area. That is absolutely true if we take into account the tax-free personal allowance, the starting rate for savings, the personal savings allowance and the dividend allowance. However, in reality that is an uncommon set of circumstances that we believe will be extremely rare. Again, it is not apparent to me how we could try to address that problem without adding considerable further complexity—for example, a system in which, if someone made use of one allowance, they could not use another allowance—and we would be rightly open to criticism for adding that unnecessary complexity to the system.
We are trying to end the distortive effects that we have had up to now, to come back to the comments of Professor Mirrlees and others on the effect of the existing taxation system on savings. That is why we have taken these decisions. I hope that that helps the Committee and that, notwithstanding the perfectly fair points made by the hon. Member for Wolverhampton South West, it will support these clauses.
Clause 4 ordered to stand part of the Bill.
Clause 5
Rates of tax on dividend income, and abolition of dividend tax credits etc
Roger Mullin
I beg to move amendment 4, in clause 5, page 8, line 28, at end add—
“(12) The Chancellor of the Exchequer shall commission a review of how the changes to the tax on dividend income implemented by this Act affect directors of micro-business companies, to include—
(a) the impacts across the distribution of directors’ net income;
(b) whether company failure rates have been affected; and
(c) whether the law could be amended to minimise the impact on directors with low income.
(13) The Chancellor shall report to Parliament about his findings within six months of the passing of this Act.”
The Chair
With this it will be convenient to discuss the following:
Clause stand part.
Government amendments 127 to 133.
That schedule 1 be the First schedule to the Bill.
Roger Mullin
I have been very co-operative thus far, but we now come to an amendment that we feel very strongly about. Sir Roger, I need some advice on matters of procedure. We have very recently become aware of further information that we want to explore, so we will probably want to return to this amendment on Report, rather than fully deal with it here.
The Chair
In that case, let me advise the hon. Gentleman that, although it is perfectly proper to debate the amendment now, if he wants to return to it on Report he will need to withdraw it. If it is voted on here, the likelihood is that the Chairman of Ways and Means—it is not in my gift—will not select it for further debate. The trick is to talk about it now, withdraw it and see whether you can get a second bite of the cherry.
Roger Mullin
I am indebted to you once again, Sir Roger, for your very helpful explanations of the wonderful procedures of this House.
Let me explain, rather more briefly, precisely what our concerns are. Our concerns are predominantly about the effect that the clause will have on microbusinesses—businesses that employ between one and nine people. I was really surprised to find out that HMRC does not model for different sizes of businesses in this area. I believe it has confirmed that in discussions. According to research that has been done by accountancy companies such as Crunch, there will be harm, or potential disbenefits, to some people who get very modest incomes indeed from running very small businesses. We want to ensure that, in encouraging proper taxation and an entrepreneurial climate, we do not unwittingly, through unintended consequences, put at hazard very new microbusinesses that are earning very modest sums of money indeed.
As I said, information is coming our way that we would like to explore further and do modelling on, so our intention is to withdraw the amendment and return to it on Report. I will leave my comments there.
The Chair
The withdrawal will come at the appropriate moment. [Interruption.] He really cannot have it all ways. For the moment, the question is that the amendment be made. It is even possible that another Member might wish to move it.
Rob Marris
If we are debating clause stand part, I have some remarks to make. As the hon. Member for Kirkcaldy and Cowdenbeath said, clause 5 will have potential effects on microbusinesses, which are referred to in the soon-to-be-withdrawn amendment. I have had a meeting with Jason Kitcat, who is a microbusiness ambassador for Crunch. I think the Minister is aware of that gentleman. My hon. Friend the Member for Hove (Peter Kyle) has met him, as has the hon. Member for Brighton, Pavilion (Caroline Lucas), because his business is in Brighton. He is a very persuasive individual. He is concerned about the effects of this measure on microbusinesses. People who are running a successful microbusiness and who have an income of that kind of level would see a much greater drop than those who are further up the income scale. I am not an accountant, but Mr Kitcat’s analysis is that the proposals in clause 5 and schedule 1 are regressive. If that is the case, it is worrying.
As I understand it, that is also the position of the Federation of Small Businesses. Its submission to the Economic Affairs Finance Bill Sub-Committee in the other place stated that these measures had
“caused substantial disquiet amongst FSB members. This is especially acute from members on modest incomes who, unlike their employed counterparts, will now see a rise in their tax liabilities. Despite these impacts, FSB is yet to see the distributional analysis work and we understand that unlike with previous Budgets, this information will not be released.”
There is a broader point here, to which the Library research helpfully draws attention, about changes in the way the Government release information about the distributional analysis of impacts of Budgets. For this Chancellor’s first Budget in June 2010, the coalition Government published the distribution analysis of its projected impact. That approach from the Treasury has changed. There is a new analytical framework that uses different metrics, which is troubling because it discloses less information than the old methodology.
I hope that, in response, the Minister will comment on the possible effects on microbusinesses, particularly the apparently regressive nature of this measure, and will allay the concerns of the Federation of Small Businesses.
Mr Gauke
Clause 5 and schedule 1 make changes to the taxation of dividends by abolishing the dividend tax credit and introducing a new £5,000 tax-free dividend allowance. They will also set the tax rates charged on dividend income above the dividend allowance at 7.5% for dividend income within the basic rate band, 32.5% for dividend income within the higher rate band, and 38.1% for dividend income within the additional rate band. The dividend trust rate will also be increased to 38.1% and so will continue to mirror the highest rate of dividend tax. These changes will raise more than £2.5 billion a year by the end of this Parliament. As well as helping to reduce the deficit, these reforms have enabled the Government to reduce corporation tax by addressing the growing incentive for individuals to incorporate in order to lower their tax bill.
The reforms also offer much-needed simplification to an outdated, opaque and complex system. The current system of tax credits on dividends is a legacy from the days of advance corporation tax, which some Members may remember. That system was designed more than 40 years ago, when corporation tax was more than 50% and the total tax bill on dividends for some people was more than 80%. Tax rates have fallen significantly since then and advance corporation tax has been abolished. Since the dividend tax credit was made non-payable, leaving it as a notional tax credit for use only in tax computations, it has been an outdated and complex feature of the tax system. The Government, along with the Office of Tax Simplification, have worked hard to simplify the tax code across a wide range of areas, and we will continue to do so over the remainder of this Parliament. Clause 5 forms part of that agenda.
The reforms enacted by clause 5 also play their part in the Government’s long-term economic plan. Since 2010 the Government have presided over significant reductions in corporation tax in order to support investment and growth. That is a central part of the Government’s economic strategy. The strategy is working: 2.25 million jobs have been created by the private sector since 2010. Overall, cuts to corporation tax delivered since 2010 will be worth almost £15 billion a year to business by the end of this Parliament.
However, lowering corporation tax does increase the incentive for people to incorporate and remunerate themselves through dividends rather than salary. That behaviour already creates a significant cost to the Exchequer. The Office for Budget Responsibility estimates that new incorporations will cost an additional £2.4 billion a year by the end of the Parliament. Without these changes to dividend tax, the OBR estimates that the cost of the new incorporations will be nearly £800 million higher a year by 2020, making these reforms an important part of this Government’s fiscal plan to reduce the deficit.
Clause 5 will spell the end of the dividend tax credit, replacing it with a much simpler tax-free dividend allowance. In practice, that means that, beyond that allowance, the headline rates of dividend tax will be the rates of tax that are actually paid. Clause 5 will also set the dividend tax rates, as outlined in my introduction, and schedule 1 will make consequential amendments required to introduce these changes.
As a result of these changes, around one million individuals will benefit from a tax reduction on their dividend income and 95% of all taxpayers will either gain or be unaffected. The new £5,000 dividend allowance will protect ordinary investors, meaning that only those with significant amounts invested in shares, or who take a significant part of their income as dividends, will pay more tax.
The Government have tabled seven amendments to schedule 1. The amendments result from technical oversights during the drafting process and will not materially affect the measure. Amendment 127 will stop tax being treated as paid on certain types of income received on shares held in an estate. That will align the taxation of that income with other taxpayers and other types of income received by the estate. Beneficiaries will be given a credit for the tax relief paid on their income. Overall, the change will not increase the tax that is due.
Amendment 128 will ensure that all company distributions received by members of partnerships will continue to be taxed on the tax year basis, rather than by reference to the partnership’s accounting period. That will provide consistency of treatment for all partnerships receiving that type of income, and remove the need for more complicated transitional rules.
Amendment 130 will ensure that the beneficiary of a trust receives full credit for all the tax already paid by the trustee. That will prevent income being taxed twice. Amendments 129, 131 and 133 are consequential amendments following those first three changes.
Amendment 4 would require the Chancellor to report to Parliament on the impact of the dividend tax reforms on the incomes of directors of microbusinesses within six months of the passing of the Bill. That would require information from the self-assessment process that would not be available until 2018, so the amendment would be impossible to deliver in practice.
More fundamentally, small company owners have benefited from a range of recent tax changes made by the Government, including, for example, cuts to corporation tax and business rates, and the introduction of the employment allowance. The Government therefore believe that it would paint only a partial picture to examine just the impact of the dividend tax changes. Of course, the Government keep all tax policy under review and assess its impact on an ongoing basis.
It is customary at this point for me to try to urge the hon. Member for Kirkcaldy and Cowdenbeath to withdraw his amendment. Perhaps on this occasion I should not urge him to withdraw the amendment but urge the Committee to reject his amendment. That is very much in his hands.
I will briefly pick up a couple of points made by hon. Members. I was asked why we have not undertaken a full assessment of the impact on owners of microbusinesses. I would just point out HMRC does not have ready access to data on owners of microbusinesses as a specific group of firms to enable a separate assessment for this group in advance of the measure taking effect. However, the Government have considered the general economic impact of the changes. As the tax information impact note sets out, the measure is not expected to have any significant macroeconomic impacts.
Ruth Cadbury
It is a pleasure to serve under your chairmanship, Sir Roger. I certainly do not want to cause the Minister any further pain; I sympathise with him about the state of his back.
Many people in my constituency run microbusinesses. I am pleased to hear that the Minister and his advisers do not believe that the measure will have any fiscal impact. However, I am concerned, and I look forward to hearing from him about the likely impact on the behaviour and choices of people running microbusinesses. We all want those businesses to succeed and thrive, and to move on to employ more people. I hope that the Treasury is doing research and is taking advice from organisations such as the Federation of Small Businesses.
Mr Gauke
I am grateful for the hon. Lady’s concern about my back, which is appreciated.
I want to reiterate a point I made earlier, which is that one behavioural impact of the current tax system is that it tends to encourage people to incorporate. The tax system tends to favour incorporated microbusinesses over those that are unincorporated. It is not obvious that that should happen.
The other point, of course, is that we continue to be engaged with organisations such as the FSB, and the Government have done a lot to support microbusinesses. However, one behavioural effect in the light of what has happened with corporation tax reductions, which I strongly defend, is that people who otherwise would not incorporate have been doing so. Often they face burdens and form-filling that they probably do not want, but they incorporate for an understandable reason: to take advantage of a more beneficial tax regime. However, I think that we should seek to rebalance that, if I may put it that way.
I, too, have met Jason Kitcat of Crunch Accounting. We have looked at his analysis and there are some complicated issues with regard to the impact of the changes. However, I reiterate that the dividend tax remains progressive overall. Those with higher incomes will pay more tax on their dividends than those on lower incomes. Achieving a perfectly smooth result would require a more complex system, and that is why we have not gone down that route. However, we continue to be engaged. I hope that I have provided the Committee with some reassurance.
Roger Mullin
I thank the Minister for his comments, some of which have been helpful, although they have not fully persuaded me that the Government have fully thought through the impact on microbusinesses. There are many reasons why very small business operators might choose to move from being unincorporated to being incorporated. For example, if such businesses have wide seasonal fluctuations in income, it is one way of adapting their way of taking income out of the business—without having to take out a regular income in the traditional way. That is only one of many reasons why a company might make that decision.
I am grateful to the Minister for his explanation. Although I shall withdraw the amendment, I intend to return to the matter on Report. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 5 ordered to stand part of the Bill.
Schedule 1
Abolition of dividend tax credits etc
Amendments made: 127, in schedule 1, page 259, line 20, at end insert—
In section 651 (meaning of “UK estate” and “foreign estate”)—
(a) in subsection (4), for “680(3) or (4) (sums” substitute “664(2)(c) or (d) or 680(4) (sums not liable to tax and sums”, and
(b) in subsection (5), for “680(3) or (4)” substitute “664(2)(c) or (d) or 680(4)”.
In section 657 (tax charged on estate income from foreign estates), for “680(3) or (4)”, in both places, substitute “680(4)”.
In section 663 (applicable rate for purposes of grossing-up under sections 656 and 657), after subsection (4) insert—
(5) The aggregate income of the estate, so far as it consists of income within section 664(2)(c) or (d), is treated for the purposes of this section as bearing income tax at 0%.”
In section 670 (applicable rate for purposes of Step 2 in section 665(1)), after subsection (4) insert—
“(4A) The aggregate income of the estate, so far as it consists of income within section 664(2)(c) or (d), is treated for the purposes of this section as bearing income tax at 0%.”
In section 680 (income of an estate that is treated as bearing income tax)—
(a) in subsection (2) omit “(3) or”, and
(b) omit subsection (3) (sums treated as bearing tax at the dividend ordinary rate).
In section 680A (estate income treated as dividend income), in each of subsections (1)(a) and (4)(a), after “at the dividend ordinary rate” insert “or as bearing tax at 0% because of section 663(5)”.”
Amendment 128, in schedule 1, page 259, line 20, at end insert—
In section 854(6) (carrying on by partner of notional business: meaning of “untaxed income”)—
(a) omit the “or” at the end of paragraph (b), and
(b) after paragraph (c) insert—
“(d) income chargeable under Chapter 5 of Part 4 (stock dividends from UK resident companies), or
(e) income chargeable under Chapter 6 of Part 4 (release of loan to participator in closed company).””
Amendment 129, in schedule 1, page 265, line 31, at end insert—
( ) in paragraph (b), for “680(3)(b) or (4)” substitute “680(4)”, and”
Amendment 130, in schedule 1, page 265, line 39, at end insert—
‘( ) In section 498 (discretionary payments by trustees: types of tax to be included in trustees’ tax pool)—
(a) in subsection (1)—
(i) in Type 1 (tax at special rates for trustees on income not attracting tax credits), omit “2, 3 or”, and
(ii) omit Types 2 and 3 (tax at dividend trust rate on income attracting dividend tax credits), and
(b) omit subsection (2) (interpretation of Types 2 and 3).”
Amendment 131, in schedule 1, page 269, line 8, at end insert—
( ) the amendments in section 854(6) of ITTOIA 2005,”
Amendment 132, in schedule 1, page 269, line 9, leave out “sections 425,” and insert “section 425 except the amendment in section 425(5)(b), and the amendments in sections 498,”
Amendment 133, in schedule 1, page 269, line 33, at end insert—
‘( ) The amendments in sections 651 to 680A of ITTOIA 2005 (but not the repeal of section 680(3)(a) of that Act) and the amendment in section 425(5)(b) of ITA 2007—
(a) so far as they relate to income within section 664(2)(c) of ITTOIA 2005 (stock dividends), have effect in relation to stock dividend income treated as arising in the tax year 2016-17 or at any later time, and
(b) so far as they relate to income within section 664(2)(d) of ITTOIA 2005 (release of loans), have effect in relation to amounts released or written off in the tax year 2016-17 or at any later time.”—(Mr Gauke.)
Schedule 1, as amended, agreed to.
Clause 6
Structure of income tax rates
Question proposed, That the clause stand part of the Bill.
Mr Gauke
Clause 6 separates the rates of income tax that apply to savings income from the main rates of income tax. These changes ensure that the Government meet their commitment to guaranteeing that MPs representing constituencies in England, Wales and Northern Ireland are given the decisive say on any income tax rates that affect only their constituents. As hon. and right hon. Members are aware, earlier this year the Scotland Act 2016 received Royal Assent. It provides the Scottish Parliament with unprecedented powers over income tax, including the ability to determine the rates of income tax on earned income at the points at which those apply to Scottish taxpayers.
The fiscal framework agreed by the UK and Scottish Governments confirms that the powers will take effect in 2017-18. This means that from April 2017 Members of the Scottish Parliament will have the final say on Scottish income tax. As a matter of fairness, it is only right that, once these powers come into force, MPs in England, Wales and Northern Ireland are given the decisive say over rates of income tax that affect only their constituents.
The clause separates out the main rates of income tax into three distinct groups in order to meet this objective. The main rates will continue to apply to non-savings, non-dividends income, such as employment, pensions and property income, for taxpayers in England, Wales and Northern Ireland. The savings rates will apply to savings income of all UK taxpayers. The default rates will apply to a limited category of income tax payers who will not fall into either of these two categories; the category is made up primarily of non-residents and some trustee income. This will mean that, from April 2017, changes to the main rates of income tax will no longer affect Scottish taxpayers. Changes to the savings rates or default rates will continue to remain a reserved matter for the UK Government, in line with the recommendations of the Smith commission.
The clause will meet the Government’s commitment to ensuring that English votes for English laws applies to income tax. As a result, following the Finance Bill 2017, MPs representing constituencies in England, Wales and Northern Ireland will have a decisive say on the main rates of income tax that affect only their constituents.
Rob Marris
I appreciate the recommendation of the Smith commission, but the clause simply introduces a further layer of complication to the overall tax regime in the United Kingdom—we are still the United Kingdom, of course. As I understand it, we are now almost back to how it was in my youth—and, I suspect, yours as well, Sir Roger—with the differential rates on earned and unearned income and all that sort of stuff, because EVEL is now bleeding into the income tax regime, depending on whether a certain source of income is a reserved or a devolved matter.
I tend to agree with my hon. Friend the Member for Rhondda (Chris Bryant), the former shadow Leader of the House, who called the current EVEL procedure an “incomprehensible mess”. I also tend to agree with the Chair of the Procedure Committee, the hon. Member for Broxbourne (Mr Walker), who described the proposals as “over-engineered”. It will get incredibly messy unless there is full fiscal devolution—another debate we may or may not get on to today.
On a technical matter, I am indebted to the Chartered Institute of Taxation, as I suspect many hon. Members are, for its helpful suggestions, and this is an arena in which we get to put forward some of its suggestions. One of its technical suggestions is about the table in clause 6. It wonders whether including a table of rates in the statute, which is introduced as having a general effect, might as a matter of statutory interpretation cause issues if the general effect conflicts with a specific effect of other provisions. I hope the Minister can come up with a short piece on that, as regards statutory interpretation.
Kirsty Blackman (Aberdeen North) (SNP)
We argued against English votes for English laws all the way through. It was a dreadful initiative. The Government intend to reassess English votes for English laws at the end of this year and look at how it has worked, so I think we might be jumping the gun on some of the income tax measures. I will not move against them, but this is possibly doing things a bit too soon. Obviously, we will have our own Scottish rate of income tax, which we can set; it is fabulous that the devolved Administration will be able to do that. However, Scottish MPs will be excluded from discussions on income tax—a major, serious part of the Finance Bill—and that further compounds the difference between Scottish MPs and English and Welsh MPs in this House. The impression given to the general public by the change in the law to enable that to happen will be even worse, and that will hasten the break-up of the United Kingdom.
Mr Gauke
First, I will respond to the hon. Lady. I have certainly heard the comment by the likes of the hon. Member for Perth and North Perthshire (Pete Wishart) that the people of Scotland could not care less about English votes for English laws. He changed his position, and then found himself somewhat outraged by EVEL.
It is perfectly reasonable that when measures affect one part of the UK but not another, those MPs who represent the constituencies affected by it are able to express their views on it and vote on it, and that any such measure should have the support of people representing that part of the UK.
Kirsty Blackman
I understand that the issue is whether or not a measure affects people in those areas, but will the Minister not concede that changes on income tax rates might have a knock-on effect, albeit indirect, on people in Scotland, particularly those who live around the borders?
Mr Gauke
I suppose that is true, but if one wanted to follow the logic of that argument through, independence for Scotland would certainly have a very significant knock-on effect on people living south of the border, and I suspect that the hon. Lady does not advocate any future referendum on that issue requiring the consent of the whole of the United Kingdom. Sir Roger, we could debate this matter for some time, but I suspect the Committee’s appetite to do so is not great.
I do not think that this measure particularly adds to complexity. Non-savings income and non-dividend income, such as employment income, are already taxed differently from other sources of income, such as savings and dividends, so separating out in legisation the rates of income tax on non-savings and non-dividend income from savings will not introduce any real additional complexity. Employees, individuals and pension providers will see no changes to the level of tax paid or the way they pay tax as a result of legislation being introduced in the Finance Bill to separate out the main rates of income tax.
On the specific technical point made by the hon. Member for Wolverhampton South West, if I may, I will write to him on that.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 19
Standard lifetime allowance from 2016-17
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 4 be the Fourth schedule to the Bill.
Mr Gauke
Clause 19, together with schedule 4, reduces the lifetime allowance from £1.25 million to £1 million from April 2016. This change will restrict the benefits of pensions tax relief for the wealthiest pension savers, ensuring that the pensions tax system is fair, manageable and affordable.
Pensions tax relief is one of the Government’s most expensive reliefs. In 2013-14, the Government spent or forwent revenue of more than £34 billion on income tax relief for pensions. That has increased from £17.6 billion in 2001. About two thirds of pensions tax relief currently goes to higher and additional rate taxpayers. In the last Parliament, we took steps to control that cost, in order to ensure that pensions tax relief is appropriately targeted. This clause takes further significant steps to help us achieve that.
As I have said, the changes made by clause 19 will reduce the lifetime allowance from £1.25 million to £1 million. As I have also said, the lifetime allowance is the maximum amount of tax relief on pension savings that an individual can build up over a lifetime. Only 4% of individuals who are currently approaching retirement have a pension pot worth more than £1 million; reducing the allowance will make sure that the wealthiest pension savers do not receive a disproportionate benefit from the pensions tax system. However, it would be unfair for the lifetime allowance to be eroded by future inflation, so the clause also makes provision for the lifetime allowance to be uprated in line with the CPI from 2018, which will maintain fairness between those retiring this year and those retiring in the future.
Rob Marris
Oh, I do wish I could declare an interest in this clause.
We welcome the transitional protections—the fixed protection and the individual protection—and, indeed, the clause’s overall architecture. Schedule 4, though—not many of us are that technical about this stuff, but schedule 4 runs to 17 pages. Talk about complexity in the tax regime!
On the overall approach, I am delighted that the Government are moving in a direction that I urged on the Labour Government back in 2002, when the forgone revenue was £18 billion a year, from memory—it was £17.6 billion in 2001, as the Minister said—first because the pension tax regime is very regressive, and secondly because there was no evidence then that that tax relief encouraged people to save for pensions. Earlier this year I checked with the Library for an update on the situation, and it could find hardly any evidence that the forgone tax revenue, which is now £34 billion per year, encourages the very behaviour it is intended to encourage. It is probably the biggest single tax relief in the whole tax regime; it is regressive; and it does not do what it is intended to do. This pottiness continues, though clause 19 and schedule 4 make some welcome steps in the right direction.
I have a more minor point, connected to HMRC’s cuts in staff numbers—although those have increased a bit—and its unfortunate proposal to close a whole load of offices. The tax information and impact note published on 9 December 2015 estimated that the additional cost to HMRC of administering and monitoring the protection regimes would be £2.4 million for IT and—get this—£500,000 for staff resources over a five-year period. On average, that is £100,000 a year in extra staffing costs due to the protection regime.
Perhaps the Minister can assure me that I am misinterpreting the situation. If not, HMRC is living in a different world. As he pointed out, 4% of individuals might be caught by having a pension pot approaching or exceeding £1 million, and therefore might face the protection regime, whether fixed or individual. That 4% of pensioners is not just a whole lot of people, but people with around £1 million in their pension pot. They are likely to be some of the most educated and articulate pensioners, or prospective pensioners, and are certainly some of the most prosperous. I may be misinterpreting this, but does HMRC really think that an average of £100,000 a year in additional staffing costs will deal with the protection regime, the queries arising from it and so on? How will that 4% of pensioners or prospective pensioners who are likely to raise queries, quite properly, with HMRC be dealt with on £100,000 a year?
Mr Gauke
This is an area where HMRC has some experience, from making changes to the lifetime allowance. It is therefore in a position to assess how many customer contacts it will receive and is well placed to assess the various demands likely to result from the transitional arrangements. It is also worth pointing out that HMRC is moving to digital processes, allowing the organisation to reduce numbers and making processes simpler and easier to use, so that individuals can self-serve. I argue that the assessment was made in good faith, based on previous experience.
Rob Marris
I will enable the Minister to gather his thoughts. The figure that I have devolved upon—I appreciate that it is an average; £500,000 over five years is £100,000 a year—is, very roughly, three members of staff, depending on their seniority and so on. That is three members of staff dealing with, potentially, thousands of prospective pensioners of the sort who will, quite properly, get in contact. It does not seem enough. Am I missing something in the equation? Technology alone will not solve it.
Mr Gauke
On the ability to cope with additional phone calls and so on, let us remember that in some cases these people will be well advised. The hon. Gentleman makes the point that, often, they will be the people best placed to understand the changes, and many will also be well placed to make use of new technology. On the demands likely to be placed on HMRC over the next few years, it is difficult to argue that they are likely to be particularly significant. To make a point that applies more widely than the transitional regime, this is similar to what we have done in the past and there is some experience of how it will operate, so I think that it is reasonable.
HMRC will keep the matter under review. If there is evidence that further resources are needed to deal with it, then of course resources will be redeployed in that area. With that reassurance, I hope that this measure will have the support of the Committee.
Question put and agreed to.
Clause 19 accordingly ordered to stand part of the Bill.
Schedule 4 agreed to.
Clause 20
Pensions bridging between retirement and state pension
Question proposed, That the clause stand part of the Bill.
Mr Gauke
Clause 20 makes changes to help align the tax rules on the payment of bridging pensions for the introduction of the single-tier state pension. As the Committee will know, bridging pensions are paid by some occupational pension schemes for members who start to receive their scheme pensions but are yet to reach state pension age. The purpose is to level the amount of regular income that some members receive from the date they retire. When the individual reaches state pension age, their scheme pension is reduced by approximately the level of the state pension, thereby providing the individual with a level income throughout retirement.
Currently, the maximum amount by which the bridging pension can decrease is calculated by reference to the old state pension applied prior to April 2016. If no change were made to the legislation, any reductions made for members entitled to the new single-tier pension could result in unintended tax consequences for the individual concerned. The changes made by the clause, together with forthcoming regulations, will therefore enable schemes to reduce bridging pensions in an appropriate way when the members concerned become entitled to the single-tier state pension. The clause will allow pension schemes to continue to provide their members with a bridging pension from retirement to state pension age, which will provide individuals with a level income throughout retirement and prevent any unintended tax charges.
Question put and agreed to.
Clause 20 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Mel Stride.)
Finance Bill (Second sitting)
(8 years, 6 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Financial Secretary to the Treasury (Mr David Gauke)
Welcome to the Chair, Mr Howarth; it is a great pleasure to see you again. I am pleased to see the Gale-Howarth team reunited.
The clause makes changes to simplify the administration of dependants’ scheme pensions. At present, when an individual who is entitled to a scheme pension dies, their dependants may be entitled to receive a scheme pension from the deceased’s registered pension scheme. The value of that dependant scheme pension must be tested annually to ensure that an individual has not avoided paying a lifetime allowance charge by setting aside excessive amounts to fund a pension for their dependants.
That test applies to all members who died on or after 6 April 2006, having reached age 75 and either started to take a scheme pension on a date from 6 April 2006 onwards or died without starting to take their scheme pension. That is the case even if their pension savings are small or with modest benefits for dependants where there is little chance of manipulating the lifetime allowance. As a result, the industry faces a substantial administrative burden, carrying out unnecessary tests on modest pension savings where the risk from abuse is low.
The changes made by the clause will remove the vast majority of dependants’ scheme pensions from the current test, thereby reducing the administrative burden for industry. New and simpler tests will be applied to determine whether the total of all the deceased’s pensions savings used to fund dependants’ scheme pensions are below a certain threshold. The threshold for this tax year will be either the total amount of the individual scheme pension at their death or, if higher, £25,000.
The clause also makes provision for an annual increase in both thresholds by 5%, or the rate of inflation if that is higher, so that more dependants’ scheme pensions are not drawn back into the current tests over time. The clause will exempt those cases where the deceased had already had all their pension savings tested against the lifetime allowance at age 75, before their death, or where the deceased had had enhanced protection since 2006, so that they are not subject to the lifetime allowance charge on their pensions during their lifetime. As a result of those changes, more than 90% of dependants’ scheme pensions will fall within the exclusions provided by the clause, which will mean that the current tests will focus on the larger dependants’ scheme pensions that remain, reducing administrative costs and making the scheme easier to operate.
The current tests serve a useful purpose as they prevent individuals from avoiding the lifetime allowance charge, but we want to reduce the administrative burdens where we can. The clause has been introduced to make the alteration of dependants’ scheme pensions simpler and to support the Government’s policy to reduce the administrative burden on UK industry. I hope the Committee will agree that the clause should stand part of the Bill.
Question put and agreed to.
Clause 21 accordingly ordered to stand part of the Bill.
Clause 22
Pension flexibility
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Government amendment 134.
That schedule 5 be the Fifth schedule to the Bill.
Mr Gauke
The clause makes changes to ensure that the historic pension flexibility measures that we introduced last April are working as intended for everyone. As the Committee will be aware, from April 2015 individuals with defined contribution pension savings have been able to access their entire pension flexibly, subject to their marginal rate of tax. The Government introduced that historic reform because they believe that individuals who have worked hard and saved responsibly throughout their lives should be trusted to make their own decisions with their pension savings. In general, the flexibilities have been working well, and so far more than 230,000 people have benefited from pension flexibility in the first year of operation. However, there are a few minor points in the legislation that have not been working as intended. The Government therefore propose a series of small changes to ensure the new pension flexibility works for everyone.
The first change being introduced by the clause relates to serious ill health lump sums. Serious ill health lump sums are paid when an individual can produce medical evidence that they are expected to have fewer than 12 months to live. Before the introduction of pension flexibility, those lump sums were paid tax-free if the individual was under 75 and taxed at 45% if they were aged 75 or over. That was in line with the taxation of certain lump sum death benefits and was intended to ensure that tax considerations did not drive whether pension lump sums were taken before or after an individual dies.
From 6 April this year, the rules around death benefits have changed. Now, when someone dies having reached age 75, the lump sum death benefit is taxable at the marginal rate of the individual who receives it, not 45%. Under the clause, where someone takes a serious ill health lump sum having reached age 75, it will be taxed at the recipient’s marginal rate instead of 45%. The clause will therefore realign the tax treatment of serious ill health lump sums with that of the lump sum death benefits.
In addition, the clause makes changes to help people with a pension who have become seriously ill. Under the current rules, serious ill health lump sums can only be paid from the pension savings that have not been accessed at all. The current legislation was appropriate for a world in which people could either access the whole of their pension or not access it at all, but it now means that people could be disqualified from taking a serious ill health lump sum if they take a small lump sum from their pension and then become seriously ill later in life. The clause will remove the rule that prevents serious ill health lump sums being paid from the unaccessed portion of partially accessed funds. The changes bring the taxation of such lump sums into line with the treatment of comparable lump sum death benefits, while ensuring that there is flexibility in the system.
The second change relates to charity lump sum death benefits. Under current rules, when a pension scheme member dies leaving certain unused pension savings and uncrystallised funds, a lump sum death benefit can be paid to any beneficiaries, including a charity. That is tax-free if the member is under 75 at death, but the payment needs to be made within a two-year period, or it is taxed at a separate rate of 45% if paid to a charity. The changes being made by the clause will ensure that unused funds at the member’s death can be used to pay a charity lump sum death benefit completely tax-free, whatever the age of the member or length of time taken to pay.
The third change relates to dependants’ flexi-access drawdown funds. Before pension flexibility was introduced, children of a deceased member who wanted to claim funds from a drawdown account had to use all of this fund by the age of 23. Any remaining funds paid to them after reaching that age would be taxed at rates of up to 70%. The reforms last year enabled any nominated beneficiary, including a member’s child aged 23 or over at their parent’s death, or a member’s step-child of any age, to inherit their parent’s pension and receive drawdown pension payments at any age. However, the current legislation still means that children aged under 23 at their parent’s death have to draw all of their funds before they turn 23 in order to avoid paying 70% tax on those funds. Schedule 5 will amend legislation to allow dependants with drawdown accounts to access their funds as they wish without incurring a 70% tax charge from their 23rd birthday.
The fourth change relates to trivial commutation lump sums. Before pension flexibility, the option of trivial commutation existed for both defined-contribution and defined-benefit pensions. That allows individuals aged 60 or over with total pension savings of £30,000 or less to withdraw all of their savings as a lump sum, with the first 25% of any previously untouched savings paid tax-free. Since April 2015, pension flexibility changes allow anyone aged 55 or over to withdraw some or all of their funds that they have yet to access as a lump sum, 25% of which is tax-free. Trivial commutation was therefore removed for defined-contribution pensions and limited to defined-benefit arrangements, which were not affected by the introduction of pension flexibility.
Under the defined-benefit arrangement, the only kind of pension possible is a scheme pension, although some people have scheme pensions that come from a defined-contribution fund. As such, under current rules, if a defined-contribution scheme pension is already in payment, it cannot be taken as a trivially commuted lump sum. Schedule 5 will allow defined-contribution scheme pensions that are already in payment to be paid as a lump sum, if they satisfy all the other requirements of trivial commutation.
The fifth change brought about by this legislation relates to the top-up of dependants’ death benefits. Some pension schemes specify a minimum amount that dependants are entitled to receive when the member dies. If there is not enough money in the member’s pension pot when they die, their employer will top it up to ensure that it reaches the minimum amount. Under current rules, certain lump sum death benefits funded by an employer top-up will count as an unauthorised payment and be taxed at rates of up to 70%. Schedule 5 will address that issue by allowing employer top-ups to fund certain dependants’ death benefits to be paid out as authorised payments and therefore not be taxed at those rates.
The sixth and final change introduced by the clause relates to inheritance tax in respect of alternatives to annuities for dependants. At present, some schemes can pay an annuity to a deceased member’s surviving spouse, civil partner or dependant if the deceased had the option for a lump sum to be paid to personal representatives instead. The lump sum is not included in the estate of the deceased member for inheritance tax purposes. Pension flexibility changes mean that, after an individual’s death, an annuity may be paid to someone other than a spouse or partner or dependant, such as a nominee. However, nominees are currently not included in the inheritance tax exclusion, so if an annuity is payable to a nominee, any alternative lump sum payment could be subject to inheritance tax. The changes made by the clause will provide for the same treatment as in April 2015 and keep annuities for nominees out of inheritance tax.
Government amendment 134 to schedule 5 clarifies that the sums or assets available to fund a lump sum death benefit are valued immediately after the member’s death. The change is a minor, technical one to provide clarity and to ensure that the legislation works.
To conclude, the Government introduced pension flexibility because we believe that individuals who have worked and saved responsibly throughout their life should be trusted to make their own decisions about their pension savings. The changes made in the clause will help to ensure that the flexibilities work for everyone. I hope that it may stand part of the Bill.
Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to appear before you again, Mr Howarth.
The Labour party supports clause 22, schedule 5 and the amendment, which will come as no surprise. Pension flexibility was in the manifesto on which you and I got elected, Mr Howarth, and we support it. I have a few technical questions that the Minister may wish to write to me about, or not. As ever, I was helped by the Chartered Institute of Taxation briefing, which, in reference to paragraph 6(3) of schedule 5, on page 297 of the latest print edition of the Bill, states: “This is complicated, although we agree that it achieves the stated aim. However, it is not clear to us what exactly paragraph 6(3) is trying to do, and it is unclear whether the ‘person’ is the dependant or the original member.” Perhaps the Minister will clarify that.
More importantly, the CIOT goes on to state: “It will be very complicated in future to determine who might be a dependant for various legislative purposes.” Thirdly, it said that it contacted Her Majesty’s Revenue and Customs about various typographical errors. Perhaps the Minister will reassure the Committee about that, or look into it to ensure that any of the errors CIOT discovered have been tidied up, or will be on Report, if necessary. Notwithstanding all that, we welcome the five small changes to which the Minister referred.
Mr Gauke
I thank the hon. Gentleman for his support for pension flexibility, which I debated with some of his colleagues and predecessors over many months in the previous Parliament. Inevitably, when a fundamental change is undertaken in how we address these matters, there will be areas that require refinement and correction, and that is what we are doing.
Rob Marris
Sometimes it is helpful to sort this out in Committee, because it goes on the record in Hansard. However, if the Minister is unable immediately to bring the answer to mind, I appreciate that he might clarify later the contents of paragraph 6(3).
Mr Gauke
For paragraph 6(3), guidance will be produced dealing specifically with that point. I hope that is helpful and that the clause will be accepted by the Committee.
Question put and agreed to.
Clause 22 accordingly ordered to stand part of the Bill.
Schedule 5
Pension flexibility
Amendment made: 134, in schedule 5, page 299, line 9, after “immediately”, insert “after”.—(Mr Gauke.)
Schedule 5, as amended, agreed to.
Clause 23 ordered to stand part of the Bill.
Clause 24
Fixed-rate deductions for use of home for business purposes
Question proposed, That the clause stand part of the Bill.
Mr Gauke
Clause 24 makes changes to ensure that businesses that operate through a partnership have clarity on how they should apply the simplified expenses regime. The Finance Act 2013 introduced a new simplified expenses regime for small unincorporated businesses. Two of the simplifications relate to the expenses of premises used for both personal and business use. As originally enacted, it could be difficult to interpret how a partnership business should apply the provisions. The changes made by clause 24 will enable unincorporated partnerships to apply these rules with clarity and in line with the original policy objective.
The changes will achieve two things. First, where partners occasionally work from home, they can also apply the fixed-rate deductions, subject to the partnership applying the provision consistently and ensuring that any hour worked at the home is counted only once, no matter how many people work at the home at the same time. Secondly, if only some members of the partnership live on the business premises—for example, a pub, restaurant or B and B—the partnership can apply the fixed-rate adjustments for the non-business costs based on the number of occupants in the same way as for individual traders.
The clause will clarify the rules and ensure that partnerships can apply the simplification as intended. Overall, the clause will put partnerships on the same footing as businesses operated by individuals and I hope it stands part of the Bill.
Rob Marris
I have one or two minor technical issues to raise, the first of which has been brought to my attention by the ever helpful Association of Taxation Technicians. It tells me, and I quote, “The current wording of section 94H(4)”—this is set out on page 32 of the Bill —“is silent on how any overlap of hours worked should be treated,” so there may be a technical issue when more than one person is working in the premises under consideration.
The Chartered Institute of Taxation says: “It would appear that clause 24 is actually restricting the claim that can be made for use of a home by an individual, compared to what is in existing 94H.” Proposed new section 94H(4B) of the Income Tax (Trading and Other Income) Act 2005 states:
“Where more than one person does qualifying work in the same home at the same time, any hour spent wholly and exclusively on that work is to be taken into account only once”.
The CIOT continues: “There was no similar restriction in existing section 94H, which defined number of hours worked.” Will the Minister look at those two technical points, if he does not have the answer immediately to hand? Will he also give us an indication of what take-up there has been of these deductions and so on, since they were introduced in 2013?
Mr Gauke
Let me turn first to section 94H(4). The simplified expenses option is designed to cover all the expenses of the home. Many of those are not affected by the number of people working in the home at any one time. Some other expenses, such as telephone and broadband costs, can be claimed separately. In line with the desire to provide simplicity, any hour is counted only once, no matter how many people are working in the home at the time. It is also worth bearing in mind, in the context of these provisions, that this regime is optional. Nobody needs to make use of it if they do not want to or if they find themselves disadvantaged by it.
It was also asked whether the need to record the actual hours worked in the home would make things more complicated, especially where individuals work in the home at different times. Ensuring that any overlap hours are counted only once does require some element of calculation, but we still believe that simplified expenses is an easier calculation for businesses to make than measuring the actual expenses incurred and then correctly apportioning these between business and private use. In any case, where a home is used extensively for business, it is likely that simplified expenses will not be appropriate. It is also worth drawing the Committee’s attention to the fact that the gov.uk website has a straightforward, simplified expense checker, which allows a business to quickly see whether using the fixed-rate amounts would be to their benefit.
As for whether we should backdate this change to the start date of the simplified expenses regime in 2013-14, it is three years since the option to use simplified expenses became available. This measure is a clarification, and Her Majesty’s Revenue and Customs will accept partnerships applying the pre-existing legislation in the same way when making tax returns covering a period before the legislation has effect. I hope that is helpful.
On wider issue of take-up, I am not sure how much information I can provide at this point—[Interruption]—although if I think long and hard about it, my recollection is that we have no analytical data available to answer that question. The self-assessment returns used by unincorporated businesses do not require businesses to separately identify if they have used the simplified expenses or not. Information from HMRC’s customer call handlers is that some callers found the simplified expense approach useful, in particular the fixed-rate deductions for working from home. I am not sure I can provide any more information than that. I hope that provides useful clarification for the Committee and that the clause will stand part of the Bill.
Question put and agreed to.
Clause 24 accordingly ordered to stand part of the Bill.
Clause 25
Averaging profits of farmers etc
Question proposed, That the clause stand part of the Bill.
Rob Marris
I have a couple of technical points and an opening comment. Clause 25 is about averaging profits of farmers. I am a great believer in averaging income. I first filled in an income tax form many years ago—I think it was called a T4 then; it might still be called that in Canada—in the days of automatic income tax averaging. As a fairly impecunious student, I benefited from that as my income rose over the years. I do not know whether it was done by computers in those days, but income tax averaging makes a lot of sense and the clause will extend it from two to five years. I gather there was a consultation on it, which closed on 27 September last year, but that there were only 26 respondents, 17 of whom thought the two-year option should be retained.
The Chartered Institute of Taxation has raised a technical issue. It likes the idea of retaining both the two-year system and the five-year system. That was its suggestion, and fair enough: the CIOT is not always right, but it is very helpful to all parts of the House. The CIOT cross-references clause 25 with HMRC’s “Making tax digital” approach, with its quarterly reporting or quarterly records being lodged, or whatever term we used to use—I realise they are technically not quarterly returns. The CIOT says: “We wonder how something like farmers’ averaging is going to work, given that taxable profits will depend on averaging calculations over a number of years, so rendering quarterly figures pretty much meaningless.” Perhaps they are meaningless; perhaps they are not. Will the Minister say a little about that?
Mr Gauke
Clause 25 will give self-employed farmers the option to average their profits over five years as well as the existing option to average over two years. Farmers typically have volatile profits, often due to uncontrollable factors such as the weather, disease or fluctuating product prices. Farming is a highly capital-intensive sector, the volatility of which makes it difficult for farmers to plan and invest for the future. It is a long-standing feature of our income tax system to allow farmers to average their profits over two consecutive years for income tax purposes, smoothing their tax bills over consecutive good and bad years, which prevents them from having to pay significantly higher amounts of tax in the good years. The clause will give farmers additional flexibility and protection from volatile profits by allowing them to choose to average their profits over a two-year or five-year period. More than 29,000 self-employed farmers could benefit from the additional option, with an average saving of around £950 on their income tax bill each year.
As for online digital accounts, it is expected that annual claims such as the averaging of profits will be incorporated into the design of the “Making tax digital” programme as it develops. However, I stress that quarterly reporting is not a quarterly calculation or a quarterly return. It is not about being taxed on the basis of what is earned in the quarter; it is about the provision of information. HMRC is well aware that issues such as seasonal work mean that one quarter may be very different from the next—it is certainly alive to that. As more information on HMRC’s thinking is put into the public domain, people will be reassured that the “Making tax digital” programme should not in any way undermine the policy objectives set out in clause 25.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
Clause 26 ordered to stand part of the Bill.
Clause 27
Individual investment plans of deceased investors
Question proposed, That the clause stand part of the Bill.
Rob Marris
I would like to make a general comment, which is partly related to clause 26, which we have just covered. With all the changes to inheritance tax—this is tangentially related to that, of course, and I referred to it this morning when I spoke about inheritable individual savings accounts—it is time to look at the whole issue of taxes related to death, if I can put it that way. Because of the huge changes to inheritance tax there is now effectively a £1 million threshold for those who own an expensive house. It is time to look again at the whole panoply of death-related taxes, to which the clause relates.
Mr Gauke
I shall not run through all the aspects of the clause. The change it contains builds on earlier individual savings account changes we have made. It will allow us to remove unfair tax charges and simplify the tax-advantaged transfer of ISA savings after death. I note the hon. Gentleman’s remarks about the tax treatment of death and look forward to Opposition Front Benchers putting forward their policy proposals, which we will no doubt scrutinise closely.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Clause 28
EIS, SEIS and VCTs: exclusion of energy generation
Rob Marris
I beg to move amendment 135, in clause 28, page 2, line 42, at end add—
‘(7) The Chancellor of the Exchequer shall, within one year of the passing of this Act, publish a report giving the Treasury’s assessment of the effect of excluding energy generation from EIS/SEIS/VCT schemes on—
(a) the renewable energy sector,
(b) community energy projects, and
(c) the energy sector”.
Rob Marris
I hope the amendment is fairly clear. It is a standard amendment of the sort we are all used to, requiring the Chancellor of the Exchequer to publish a report. There is concern that the leverage afforded by the three types of tax advantage scheme referred to in the clause will be completely removed if all energy-generation schemes are removed from those fiscal schemes. I appreciate that the risk factor of several types of energy-generation schemes has dropped so much that the use of such tax measures is no longer efficacious, because they are giving people a tax break for doing something that used to be very risky but no longer is—namely, the development of technology—but it seems a little strange to remove tax breaks for energy generation completely. Will the Minister say something about that?
Mr Gauke
The clause makes changes to exclude all remaining energy-generation activities from the tax advantage venture capital schemes, thereby ensuring that the schemes continue to be well targeted towards high-risk companies and that the tax reliefs are in keeping with the original policy intent.
The venture capital schemes offer generous tax reliefs to encourage investment in small and growing higher- risk companies that cannot otherwise access finance. In recent years, there has been a significant increase in tax-advantaged investment in energy-generation companies. Such activities are generally lower risk, with predictable, reliable and regular income streams. The Government have previously made changes to exclude from the schemes those companies that have benefited from guaranteed income streams for the generation of energy. However, those exclusions have resulted in investment shifting to other forms of energy generation, rather than to the higher-risk investment that the schemes are intended to support. The changes made by this clause will ensure that the Government remain consistent in their approach by keeping the venture capital schemes targeted at higher-risk companies.
The clause will exclude all forms of energy generation from qualifying for the venture capital schemes, including the seed enterprise scheme, the enterprise investment scheme and venture capital trusts. The Government also intend to apply the exclusions to the social investment tax relief once it is enlarged. The measure is expected to yield £95 million annually from 2016-17 onwards, helping the Government to deliver on their commitment to tackle the budget deficit.
Amendment 135 would require a report to be published on the impact of the exclusion of energy generation from the venture capital schemes on the renewable energy sector, community energy projects and the energy sector. Such a report would need to be published within one year of the Bill becoming an Act. The Government provide a range of support for renewable energy, and that support will double over this Parliament, reaching more than £10 billion in 2020-21. That represents a sixfold increase in spend since 2011-12. The relief schemes I have mentioned serve a different purpose: to help smaller, higher-risk companies across a range of sectors to access the investment they need to grow and create jobs.
Energy generation is typically a lower-risk activity for which investment can be secured without tax relief. Allowing it to qualify for tax relief diverts investment away from the companies that need it most. In addition, from a practical perspective, companies that raised investment for the purpose of energy generation before its exclusion have up to two years to spend the money. A report in just one year’s time would therefore serve little purpose.
A report as suggested by the amendment would have little value from a practical point of view. The exclusion of energy from the venture capital schemes is a principled decision based on the lower risk profile of the activity. The Government therefore believe the amendment is unnecessary, and I hope it will be withdrawn.
Kirsty Blackman (Aberdeen North) (SNP)
With all the changes the Government are making to the support of energy policy and with the lack of a pot 1—established technologies—contracts for difference round in the near future, does the Minister not feel that projects such as onshore wind are much less likely? This measure has to be taken in the round. It may cause problems because the Government are doing many other things that go against, in particular, onshore wind generation.
Mr Gauke
Where I agree with the hon. Lady is that these things should be looked at in the round. The Government are committed to supporting the investment and innovation needed to achieve a cost-effective transition to a low-carbon economy while ensuring security of energy supply and avoiding unnecessary burdens on businesses and households. We are making great strides towards our commitments, with emissions down 30% since 1990. Support for renewables from taxpayers and bill payers will double over this Parliament, reaching more than £10 billion in 2020-21, as I mentioned. That is a sixfold increase in spend since 2011-12. We have more than trebled our renewable electricity capacity since 2010. In the round, the Government’s record is strong.
We are committed to supporting small and growing businesses. The presence of low-risk, asset-backed investments such as those described today crowds out investment in higher-risk propositions. It is right that the Government act to exclude such investors.
Rob Marris
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 28 ordered to stand part of the Bill.
Clauses 29 to 32 ordered to stand part of the Bill.
Clause 33
Transactions in securities: company distributions
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clause 34 stand part.
Amendment 7, in clause 35, page 57, line 2, at end add—
‘(4) The Chancellor of the Exchequer shall, within one year of the passing of this Act, publish a report on the impact of this section on deterring tax avoidance during the procedure of distributions during a winding up.”
Clause 35 stand part.
Rob Marris
I will refer first to amendments 7 and 8, which I think we are dealing with in this group.
Rob Marris
I beg your pardon, Sir—I am shuffling a lot of papers—and I am grateful to you for your guidance.
Amendment 7 is the usual amendment—no doubt the Minister will say the timeframe is too premature—to have a report from the Chancellor of the Exchequer within one year, on how efficient or otherwise the provisions in clause 35 are at deterring tax avoidance during wind-ups.
Clause 33 relates to transactions and securities. We welcome the tax avoidance measures introduced by the Government. I understand from a response from HMRC that guidance is due to be published on these sorts of issues. Can the Minister say when that is likely to be?
Mr Gauke
Clauses 33 and 34 will amend the transactions in securities legislation, which focuses on transactions where one of the main purposes is to obtain a tax advantage. Clause 35 will introduce a new targeted anti-avoidance rule aimed at preventing an unjustified tax advantage being obtained from distributions in the winding up of a company. Together, these changes will raise £80 million by the end of this Parliament. As well as helping to reduce the deficit, they will protect revenue raised from the reform of dividend taxation by ensuring that those who should pay income tax on dividends cannot convert their income into capital, which is chargeable at lower capital gains tax rates.
Companies usually distribute profits to shareholders by way of dividends, which are subject to income tax when received by individuals. There is an incentive for some people, particularly those running owner-managed companies, to convert this income into a capital receipt, which would attract lower capital gains tax rates. This incentive will be increased by the proposed reform to dividend taxation.
Clauses 33 and 34 deal with the changes to the transactions in securities legislation, strengthening and modernising those rules. They will apply where there is a transaction in securities, such as a disposal of shares, and where one of the main purposes of the transaction is to obtain a tax advantage by manipulating the border between income and capital. They will ensure that people who should pay income tax on distributions do so.
Clause 35 addresses the phenomenon of “phoenixism”, whereby a person carries on the same trade or activity through a succession of companies, extracting the profits as capital by winding the companies up rather than paying dividends. The new rule is carefully targeted and will not affect the vast majority of companies that are being wound up—for example, where a shareholder sells the trade or is retiring—but it will spell the end of companies being wound up by people seeking to obtain an unfair tax advantage.
The changes will introduce additional safeguards, including a connected parties rule, and modernise the way in which the rules are applied. They remove some of the archaic mechanisms that applied to the compliance process. Like the new “phoenixism” rule, the changes will not affect transactions that are undertaken for normal commercial reasons and they will only apply to transactions that have as one of their main purposes the aim of obtaining a tax advantage. Without these changes, the owners of some companies would be able unfairly to reduce their income tax liability simply by changing the form in which they take money out of a company, which would put at risk revenue from the dividend tax reform.
The Opposition’s amendment to clause 35 seeks to explore how the Government will determine the effectiveness of the measures to deter tax avoidance that it contains. I quite understand the hon. Gentleman’s interest in this issue; it is an interest that I share. The Government expect that the clause will be effective in closing off the great majority of tax avoidance in this area, as it involves very specific arrangements that the legislation has been carefully designed to address.
In practice, determining the clause’s deterrent effect will require information from the self-assessment process that would not be available until 2018 at the earliest. [Laughter.] Again, the hon. Gentleman anticipates the point that I was going to make. For that reason, we will be unable to report within a year on its effectiveness as the amendment proposes we should, so I hope that he will understand if we are not minded to accept the amendment. HMRC will publish guidance on the new rules as soon as possible and before the end of the year, when any tax that is due under the new rules will first become due.
In summary, this reform strengthens and modernises the rules that prevent tax advantages from being unfairly obtained by a minority of shareholders who artificially convert income into capital. It also protects revenue accruing from the dividends tax reform and makes the UK a fairer place to do business. Therefore, I hope the clause will stand part of the Bill.
Question put and agreed to.
Clause 33 accordingly ordered to stand part of the Bill.
Clauses 34 and 35 ordered to stand part of the Bill.
Clause 36
Disguised investment management fees
The Chair
With this it will be convenient to discuss the following:
Amendment 8, in clause 37, page 58, line 26, leave out from “is” to end of subsection and insert “100%”.
Government amendments 43 to 49.
Clauses 37 and 38 stand part of the Bill.
Mr Gauke
With your permission, Mr Howarth, my remarks will cover clauses 36, 37 and 38, and amendments 43 to 49. I will also touch on amendment 8.
These clauses introduce a test to limit the circumstances in which performance-based rewards paid to asset managers will be taxed as chargeable gains. The main test will be introduced by clause 37. Clause 36 will change some related definitions in the disguised investment management fees rules. Clause 38 sets out how the rules will work with regard to individuals coming to the UK. Taken together, these clauses will ensure that only fund managers engaging in long-term investment activity pay capital gains tax on their performance-related reward or carried interest; otherwise, that form of remuneration will be fully charged to income tax.
In 2015, we legislated to ensure management fees are always subject to income tax. Where carried interest is taxable as a chargeable gain, the full amount will be taxable without reduction through arrangements such as base cost shift. These clauses build on the previous legislation. They will ensure that capital gains treatment for carried interest is reserved only for those managing funds that are genuinely long-term investments. Treating carried interest as a capital gain rather than an income is the right approach and keeps the UK in step with other countries. It is also the approach that has been adopted consistently by previous Governments in this country over a long period. However, to ensure the regime is fair and not open to abuse, these changes limit capital gains tax treatment to those managers who can demonstrate long-term investment activity by the fund they manage.
Clauses 37 and 38 will insert a test that applies to all payments of carried interest. On receipt of carried interest, asset managers will be required to calculate the average holding period of the investments in the fund. If the average holding period is less than 36 months, the payment will be subject to income tax. If the period is more than 40 months, the payment will be subject to capital gains tax. There is a taper in between those two time limits, and targeted anti-avoidance rules to ensure that the rules cannot be exploited. The rule is slightly different for managers of debt funds, turnaround funds or venture capital funds, reflecting the specific investment strategies of those kinds of funds.
Clause 38 specifically sets out how individuals who move to the UK will be taxed in certain situations. It will apply in the first five years after an individual moves to the UK when he or she receives a reward that is taxable to income under the time held test, which I referred to earlier. Where the reward relates to services performed outside the UK, before they were resident in the UK, it will be charged to UK tax only when it is remitted to the UK. That reflects the fact that the reward relates to work done before the individual lived in this country, and it will help to ensure these rules do not make it harder for UK asset managers to attract the best talent in the global labour market.
Clause 36 will amend definitions in the disguised investment management fees rules to ensure the rules introduced by clauses 37 and 38 work as intended, especially in relation to more complicated investment fund structures.
The Government tabled seven amendments to clause 37. They are technical changes to ensure the provisions operate as intended. Amendments 43, 46 and 48 make the same technical change in three of the specialised rules we have included in clause 37. Each rule will apply a targeted calculation rule to a particular type of fund investment strategy—for example, a fund that invests in real estate or provides venture capital—thus ensuring that the average investment holding test accurately captures a fund’s underlying activity.
A fundamental concept in all these rules is that of a relevant disposal. A relevant disposal is, in effect, a disposal that is taken into account when calculating a fund’s average holding period. These changes will ensure that the legislation uses a consistent definition throughout the various specialised regimes that is clear and understood by industry and its advisers.
Amendments 44, 45 and 47 will correct a technical error that would have prevented the relevant provisions from working in practice.
Amendment 49 will expand the definition of a secondary fund to include the acquisition of investment portfolios from unconnected investment schemes. Stakeholders have informed us that many secondary funds undertake that type of activity, and that amendment is necessary to ensure that the relevant rules still apply to those funds.
The Opposition’s amendment 8 would remove the taper rule that I have described. The decision to introduce a taper rule followed extensive engagement with interested parties to examine the impact of such a measure on the market. Removing that rule would create a cliff edge—a concern that the Opposition raised in another context—so that marginal differences in the average time for which a fund held its assets could lead to radically different tax treatment for its managers. That cliff edge would lead to a market-distorting incentive for fund managers to dispose of assets earlier than was optimal, to the detriment of investors and with no policy benefits. For those reasons, I urge that that amendment is not pursued.
Clauses 36 to 38 will ensure that only those managers engaged in genuinely long-term investment activity pay capital gains tax on their performance-related rewards, and I therefore hope that those clauses stand part of the Bill and amendments 43 to 49 are made.
Rob Marris
This series of clauses is an interesting mixture of the technical, the conceptual and the political. Technically, the clauses are complex and lengthy, and the Government have been forced to table several amendments because of the complexity of these issues and the way that they have gone about dealing with them.
The conceptual point is about whether we go for a simpler and more rough and ready approach or a lengthy one. Professor Sol Picciotto at Lancaster University said about these clauses that instead of going for a broad provision to allow carried interest to be treated as income, the Treasury and HMRC had, typically for them, preferred long and complex statutory provisions that would keep tax lawyers happy and spawn more avoidance. These provisions are very lengthy.
The political point is highlighted by amendment 8. Our wording of that amendment may well be deficient, but it is not designed to create a cliff edge; it is designed to remove the table on page 58 completely, so that there is no taper and all carried interest is treated at 100%—that is, taxed as if it were income. As I understand it, that is in line with the OECD recommendations. Ministers properly say that when we engage in double taxation agreements, which the Minister and I have discussed on several occasions in different Committees, Her Majesty’s Government’s starting point is the OECD model, and I quite understand that, but suddenly we are not going along with an OECD suggestion when it comes to carried interest. That is obviously guidance and has no direct statutory relevance, but it is issued by the OECD, which is made up of our sister advanced countries. Instead of going for a simpler approach in which carried interest is straight income—that is what amendment 8 is designed to introduce—we have ended up with 21 pages of complex provisions in the Bill, which necessitate 10 pages of explanatory notes.
I hope that the Minister will say a little more about that conceptual point and why we do not just follow the OECD guideline. To those of us who are politicians and not tax experts, it appears quite just for carried interest, which has on occasions been used for legitimate tax avoidance, to be knocked on the head simply by being treated and taxed as income, as the OECD suggests.
As far as my excellent researcher Imogen Watson could find, there is no tax information and impact note. If that is the case, I hope that the Minister will outline—or perhaps write to members of the Committee to outline—what the Government think the impact on the Exchequer will be, and the number of taxpayers the Government expect to be affected by the provisions.
Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)
It is a pleasure to serve under your chairmanship again, Mr Howarth. I will be brief. We on the Scottish National party Benches support the amendment. The issue of carried interest has also been of interest to us, as the Minister knows only too well. I commend the amendment, and if the Labour party wishes to press it to a vote, we will certainly support it.
Mr Gauke
Let me address the issue of complexity; I hope I can be helpful to the Committee on that. The new rules replace the badges of trade that previously outlined the tax treatment of carried interest. The badges of trade are based on complex case law, which means that the law was determined by a wide range of varied and outdated judicial decisions. Bringing these new rules into legislation removes ambiguity and makes the tax code easier to follow. Furthermore, much of the detail of the legislation comprises bespoke rules that apply to specific types of funds. Those specialised rules will help reduce the compliance burden for funds in practice. Asset managers are sophisticated taxpayers who often have personal advisers; we therefore anticipate it being easy for those individuals to follow these rules.
Very often, the measure of tax complexity is taken to be the length of the tax code. I confess that I have sat where the hon. Member for Wolverhampton South West is sitting and made that point myself; he has heard me make it. In this example, there are additional pages of legislation; however, they are replacing legislation that took up fewer pages but was based on case law, which can be very complicated. It is worth pointing out the limitations of pages as a measurement of complexity.
On the OECD recommendations, treating carried interest as a capital gain rather than income is the right approach. It keeps the UK in step with other countries and, as I said, it is the approach adopted consistently by previous Governments in this country over a long time. There is nothing particularly unusual about the way in which we treat carried interest in this country. I am conscious that this is a matter that we debate on a fairly regular basis; it is the second time we have debated it in a week. We are being consistent with what we have done in this country for some time and with what other countries do. I hope those points are helpful, but if the hon. Gentleman presses amendment 8, I will urge my colleagues to oppose it.
Question put and agreed to.
Clause 36 accordingly ordered to stand part of the Bill.
Clause 37
Income-based carried interest
Amendments made: 43, in clause 37, page 67, line 45, leave out “value” and insert “amount”.
Amendment 44, in clause 37, page 68, line 41, leave out “company” and insert “underlying scheme”.
Amendment 45, in clause 37, page 68, line 43, leave out “a company” and insert “an underlying scheme”.
Amendment 46, in clause 37, page 68, line 47, leave out “value” and insert “amount”.
Amendment 47, in clause 37, page 70, line 15, leave out “company” and insert “underlying scheme”.
Amendment 48, in clause 37, page 70, line 21, leave out “value” and insert “amount”.
Amendment 49, in clause 37, page 70, line 34, at end insert
“, or the acquisition of portfolios of investments from,”.— (Mr Gauke.)
The Chair
With this it will be convenient to discuss the following:
Government amendment 21.
Clause stand part.
Government new clause 7—Receipts from intellectual property: diverted profits tax.
Government new clause 8—Deduction of income tax at source: intellectual property.
Government new clause 9—Receipts from intellectual property: territorial scope.
Mr Gauke
For the benefit of the Committee, I will discuss clause 40 together with new clauses 7 to 9, as they collectively implement the royalty withholding tax policy that the Government announced at Budget 2016.
Together with the new clauses, clause 40 strengthens our regime for the deduction of income tax at source from payments of royalties overseas. It introduces a rule to prevent the abuse of the UK’s tax treaties. It will prevent multinational enterprises using conduit arrangements and other schemes to exploit the provisions of tax treaties to avoid UK taxes on royalties.
New clause 8 broadens the categories of royalties from which tax must be deducted at source in the UK when they are paid abroad. Going forward, all payments considered to be royalties under internationally recognised criteria will be subject to withholding tax in the UK unless a specific exemption applies.
Mr Speaker—sorry, Mr Howarth.
The Chair
I am sure that there will be lots of changes of personnel over the next few days, but I can assure the Minister that that will not be one of them.
Mr Gauke
Thank you, Mr Howarth, although such is the fast-moving nature of British politics at the moment that who knows?
New clause 9 introduces rules to ensure that royalties paid by non-residents have a UK tax charge if they are paid in connection with a trade carried on in the UK through a permanent establishment. New clause 7 introduces consequential changes to the diverted profits tax to ensure that no advantages accrue to entities within its charge as a result of the changes I have described.
Taken together, the clauses mean that all payments of royalties from the UK will now be subject to withholding tax, unless we have explicitly given up our taxing rights under an international agreement or domestic law. The new regime will provide a robust defence against those wishing to use royalty payments to shift profits to jurisdictions where there is little, if any, taxation.
Most countries tax non-residents on royalties that arise in that country. They generally require the payer of the royalty to withhold tax from the payment and account for it to the tax authorities. The UK is no exception to this practice. The withholding requirement is subject to tax treaties, of which the UK has more than 120, and the EU interest and royalties directive. Many of those treaties provide that royalties are taxable only in the country where the royalty payment is received. The Government think that that is an appropriate treatment, as it removes tax obstacles from cross-border investment and provision of services.
However, the UK gives up its taxing rights under tax treaties only in the expectation that the royalties will be paid for the benefit of a resident of a treaty partner country. It is a frustration, and not the intention of a tax treaty, that a person resident in a third country can use a bilateral tax treaty with the UK to extract tax-free royalties from the UK, especially if no tax is paid on the receipt and no substantive activity is taking place in that third country.
It has become increasingly prevalent for multinational groups to derive large sums from the exploitation of intellectual property and cross-border royalty payments. The need to ensure that they are taxed appropriately is more important than ever. Some multinational groups have put in place arrangements under which intellectual property is held in jurisdictions where no tax is paid and no substantive activity takes place. They structure the payments of royalties to such companies in a way that takes advantage of the UK’s tax treaties with other countries, depriving the UK—the country in which the royalty arises from sales or other activity—of the right to tax. Had the royalty been paid direct to that ultimate jurisdiction, the UK would have retained its taxing rights on the basis that there was no treaty in place between the UK and that jurisdiction.
For that reason, many tax treaties in the EU interest and royalties directive contain anti-abuse provisions to prevent so-called treaty shopping and other abuses by third country residents. The OECD has recognised such abuses as a problem and, as part of its recent work to counter base erosion and profit shifting, has recommended that countries adopt regimes, either in their tax treaties or in domestic law, to counter such treaty shopping.
Not all of the UK’s tax treaties contain anti-abuse provisions that frustrate treaty shopping arrangements and other abuses. The Government have therefore introduced a targeted domestic anti-abuse rule based on the rule recommended by the OECD and aimed at royalty payments between related parties that seek to take advantage of the UK’s tax treaties. The rule took effect for royalties paid on or after 17 March 2016. As part of this approach to tackling tax avoidance, new clause 8 will bring the definition of royalties on which non-residents are required to withhold tax into line with the OECD definition of royalties used in tax treaties. At present, payments for the right to use trade names and trademarks are subject to UK withholding tax only if they are annual payments. New clause 8 will ensure that all such payments will be subject to withholding tax.
The third part of the Government’s reform, which goes hand in hand with the anti-abuse element introduced by clause 40, is to change what is meant by royalties arising in the UK—that is, to define whether they come from a source in the UK. At present, there is no statutory definition of what constitutes a UK source for royalties. As a result, it is not clear that all royalty payments connected to a permanent establishment that a non-resident has in the UK have a UK source. New clause 9 will introduce a new rule to ensure that all royalties have a UK source where the payment is connected with activities taking place through a permanent establishment that the payer has in the UK. Royalties paid by a non-resident to another non-resident that are connected to a UK permanent establishment of the payer will now be taxable in the UK, and the non-resident payer will be expected to withhold tax and account for it to Her Majesty’s Revenue and Customs.
However, where there is a tax treaty between the UK and the country of residence of the beneficial owner, that treaty will govern the taxation of the payment. Where that treaty follows the OECD model and the anti-abuse rule does not apply, the taxation rights will continue to belong exclusively to that other country. New clause 7 is being introduced to ensure equal treatment between cases where a non-resident company maintains an actual permanent establishment in the UK, and cases where a person has contrived to avoid a taxable presence in the UK in circumstances that bring them within the diverted profits tax.
The changes made by the clauses are fairly simple. Clause 40 inserts a rule that denies the benefit of a tax treaty in the face of abuse. New clauses 8 and 9 extend the definition and territorial scope of royalty payments within the charge to tax in the UK. Finally, new clause 7 amends the diverted profits tax to ensure that entities within the scope of that tax are subject to the changes being made. The changes bring the UK into line with accepted international practice in respect of the taxation of royalty income arising in a state. The benefits of tax treaties and the interest and royalties directive will remain available, except where taxpayers have entered into transactions internationally recognised as abusive.
Before I conclude, I will speak briefly to amendments 20 and 21, also tabled by the Government. The amendments are being introduced to ensure that royalty payments subject to the anti-abuse rule include those payments brought within the scope of withholding tax by new clause 8. Together, the proposed new clauses will protect the UK from arrangements that seek to avoid UK tax through the use of royalty payments.
I hope that my explanation helps the Committee to understand the issues set out both on the odd-numbered pages and on the even-numbered pages.
Amendment 20 agreed to.
Amendment made: 21, in clause 40, page 81, line 12, at end insert—
‘(3) In relation to payments made (under any such arrangements) on or after 17 March 2016 and on or before the day on which this Act is passed, section 917A of ITA 2007 as inserted by subsection (1) has effect as if the definition of “intellectual property royalty payment” in that section were as follows—
““intellectual property royalty payment” means—
(a) a payment of a royalty or other sum in respect of the use of a patent,
(b) a payment specified in section 906(1)(a) (as originally enacted), or
(c) a payment which is a “qualifying annual payment” for the purposes of Chapter 6 by virtue of section 899(3)(a)(ii) (royalties etc from intellectual property);”.
(4) In relation to payments made (under any such arrangements) on or after 28 June 2016 and on or before the day on which this Act is passed, section 917A of ITA 2007 as inserted by subsection (1) has effect as if “intellectual property royalty payment” also included (so far as it would not otherwise do so) any payments referred to in section 906(2)(a) or (3)(a) of ITA 2007 as substituted by section (deduction of income tax at source: intellectual property).’—(Mr Gauke.)
Clause 40, as amended, ordered to stand part of the Bill.
Clause 45
Loan relationships and derivative contracts
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Amendment 9, in schedule 7, page 305, line 3, leave out
“the preceding provisions of this section”
and insert
“Part 4 of TIOPA 2010”.
Amendment 10, in schedule 7, page 305, line 9, leave out
“the preceding provisions of this section”
and insert
“Part 4 of TIOPA 2010”.
That schedule 7 be the Seventh schedule to the Bill.
Rob Marris
I rise to address amendments 9 and 10, which are technical amendments. Schedule 7 is a technical area about which I know little.
Rob Marris
That is indeed the case. I will now proceed to address the Committee at some length—well, appropriate length.
The amendments have been suggested by our old friends at the Chartered Institute of Taxation. The schedule is designed to address three particular scenarios in which I understand previous legislation has had unintended consequences in relation to notional finance costs, credits arising on reversal of debits—of course, you are intimately familiar with that part of the financial world, Mr Howarth—and, finally, amounts excluded from taxation under our old friends, the transfer pricing rules. On the first two issues—non-market loans and transfer pricing—the world has changed since the legislation was introduced. The UK accounting standards have changed and the Bill, in a sense, is matching up the standards with what will be in statute.
On the third area—exchange gains and losses—the explanatory notes helpfully state:
“A particular concern has been identified with those provisions, as a result of which they can introduce a foreign currency exposure for corporation tax purposes even though none exists commercially or in the accounts.”
It seems a strange state of affairs that a company can suddenly have notional foreign currency transactions that do not really exist. Such things can happen in the wonderful and weird world of finance, but it is not a good idea and the Bill will helpfully sort that out.
The amendments were suggested by the CIOT, and the Minister, with his excellent knowledge and information, will no doubt say whether they will work as intended—they might not. That is not to doubt the CIOT, as I may have mixed things up in translation when tabling the amendments. I have a whole page of technical information, Mr Howarth, but you will be pleased to know that I do not propose to read it out unless members of the Committee wish me to do so.
The excellent research by Imogen Watson shows that the amendments would make it clear that, in each case, the references in paragraphs 3 and 4 of schedule 7 are to debits that have been left out of accounts for the purposes of sections 446, on loan relationships, and 693—as all hon. Members will recall, section 693 is on derivative contracts—of the Corporation Tax Act 2009 as a result of the application of part 4 of the Taxation (International and Other Provisions) Act 2010. I am told that the amendments are not controversial, although the Minister may tell me otherwise, and they are intended merely to refer to the provisions that have resulted in debits not being brought into account as debits.
It is unusual for the Government to accept Opposition amendments. It may be that I get a result today because of the technicalities, but after looking at the Minister’s face I am not optimistic. No doubt he will explain, with his usual patience and helpfulness, either why he thinks they should not be made, or that what I am seeking to do does not need doing or would not, in fact, be done by the amendments.
Mr Gauke
Clause 45 introduces schedule 7, which deals with three different issues that can arise from interactions between accounting rules and tax rules. These changes will prevent some unintended and unfair outcomes. I welcome the opportunity to debate amendments 9 and 10, tabled by the hon. Member for Wolverhampton South West, which are linked to the clause and which I will turn to later.
All three of the issues being addressed arise when loans made by companies are interest-free or otherwise involve financial instruments on non-market terms. Typically, those will happen in the context of commercially driven funding arrangements where loans are between companies that have some connection. Some of the issues have come about because of recent changes to accounting standards. The changes will support the Government’s policy of simplifying taxation, ensuring businesses pay the right tax at the right time.
Accounting standards can now require an interest-free loan, or other loan taken out on non-market terms, to be recognised in accounts at a lower value than the actual amount of the loan. That can lead to an interest cost being shown in the accounts of the borrower, even when no interest has actually been paid. This cost can lead to a tax deduction for the borrower, but no matching tax liability for the lender. That is an unfair outcome. The changes made by schedule 7 address this unfair situation by putting the borrower back in the position that applied before the changes to accountancy rules, to make sure that they do not benefit unfairly from the new rules.
The second issue also involves adjustments that apply when a loan or financial derivative is not made at arm’s length. Tax law means that an adjustment is made to the amount brought into account for tax on the loan. The adjustments can have the effect of restricting the deductions that can be claimed by the company for tax purposes. However, under the current rules a corresponding amount can be taxed in full later. The changes made by schedule 7 ensure that in these circumstances the company will not be taxed on amounts if it has not been given a tax deduction for corresponding amounts previously. Again, this restores the position before the accounting changes were made.
The final issue addressed by schedule 7 concerns the application of the transfer pricing divisions to exchange gains and losses. In some circumstances these provisions can give companies a tax charge or benefit from foreign exchange movements, even when there is no commercial exposure to foreign exchange. Schedule 7 will make minor technical changes so that the transfer pricing will not create an overall foreign exchange exposure for tax purposes in cases where the company is commercially hedged.
The changes made by schedule 7 ensure that the rules operate as intended. The impact on the Exchequer will be negligible. Only companies or other corporate bodies will be affected by the changes, and the impacts will be negligible as companies learn the new rules. Moving forward, we expect companies’ costs to be reduced as the legislation will be simpler to use in practice.
Let me take the opportunity to discuss amendments 9 and 10, which concern paragraphs 3 and 4 of schedule 7 respectively. They propose that the new legislation dictating the tax treatment of loan relationships and derivative contracts be linked directly to the transfer pricing rules. The Government have looked closely at that suggestion but concluded that the amendments are unnecessary.
Transfer pricing adjustments in respect of loans and derivatives are already given effect by sections 446 and 693 of the Corporation Tax Act 2009 respectively. That includes a situation in which deductions are decreased. This point was considered and confirmed by the tax tribunal last year, in the case of Abbey National Treasury Services plc v. Her Majesty’s Revenue and Customs. It is therefore right that the changes introduced by clause 45 do not refer directly to the transfer pricing rules but instead refer to sections 446 and 693, which apply them to loans and derivatives. To be clear, the exclusion of credits as a result of paragraphs 3 and 4 of schedule 7 applies to cases where deductions have been reduced as a result of the transfer pricing rules operating through sections 446 and 693 respectively. The rules therefore work as currently drafted.
The amendments could give rise to problems. In particular, they could have the effect of the exclusions applying more widely than intended. In addition, the amendments would go against the decision in the Abbey National case. For those reasons, it is important that the limitations link through sections 446 and 693.
Schedule 7 addresses three situations in which the interaction of accounting and tax rules may lead to unintended and unfair outcomes. It supports the Government’s policy of simplifying taxation by giving certainty to the rules and making them easier to comply with, and I therefore invite the hon. Gentleman to withdraw the amendment. I am grateful for the opportunity to provide some clarity to the Committee on the technical concerns that have been expressed. I hope that clause 45 and schedule 7 will stand part of the Bill.
Rob Marris
I had forgotten about the legal case to which the Minister referred. I will not press either of my amendments.
Question put and agreed to.
Clause 45 accordingly ordered to stand part of the Bill.
Schedule 7 agreed to.
Clauses 46 to 49 ordered to stand part of the Bill.
Rob Marris
On a point of order, Mr Howarth. I want to put on record my thanks to the Chartered Institute of Taxation, the Association of Tax Technicians, members of the Committee and my researcher, Imogen Watson. I thank the Minister for the patience he has shown and the excellent support and help he has given me. I thank you, Mr Howarth, and Sir Roger Gale, because I am resigning as the shadow Financial Secretary to the Treasury forthwith, and I will not be before this Committee unless there is a change of leadership in the Labour party.
The Chair
I am grateful to the hon. Gentleman. He has effectively taken himself out of the Committee. Strictly speaking, it is not a point of order, but the Committee is grateful for the information he has given, because obviously it will affect the future conduct of the Committee.
The Chair
Strictly speaking, that was not a point of order and there should not even be a “Further to that point of order”, but in these exceptional circumstances I will stretch the point.
Mr Gauke
Further to that non-point of order, Mr Howarth. I want to put on the record my thanks to the hon. Member for Wolverhampton South West. He has performed his role with great diligence, good humour and common sense. He has performed the role extremely well in sometimes difficult circumstances. Whatever the future holds for his party, I wish him well. I am sure he will continue to be an excellent and dedicated Member of Parliament.
The Chair
On behalf of Sir Roger Gale and myself and the Officers of the House, I thank the hon. Member for Wolverhampton South West for his kind words.
The Lord Commissioner of Her Majesty's Treasury (Mel Stride)
May I also associate myself with the generous comments that have been made?
Ordered, That further consideration be now adjourned. —(Mel Stride.)