The Committee divided: - Ayes: 5 / Noes: 11 - Question accordingly negatived.
The Committee divided: - Ayes: 5 / Noes: 11 - Question accordingly negatived.
Rebecca Long Bailey (Salford and Eccles) (Lab)
These clauses relate to the rates of stamp duty and stamp duty reserve tax that are to be applied to share transactions and to options to buy and sell shares. Once again we are in the realm of financial derivatives, which members of the Committee will know I get quite excited about, given my remarks earlier in the week. I said that the Government need, for the national good, to identify the principles that will apply to the taxation and regulation of those markets after we leave the EU.
The clauses take steps to tackle tax avoidance by putting a stop to option arrangements that are being used to pay a lower rate of tax on the sale of shares. Such option arrangements are known as deep-in-the-money options—DITMs—which provide an option to buy shares with a strike price far below market value. DITMs are being used for tax avoidance purposes, as the Government’s tax information and impact note explains. Her Majesty’s Revenue and Customs is aware of an increasing amount of avoidance in which DITMs are created in order to transfer shares to depository receipt issuers and clearance services. The result of that avoidance is that tax is payable only on the very low strike price, rather than the full market value of the shares. The measure makes the tax system fairer by removing the opportunity for avoidance arising from the transfer of shares using a DITM.
In order to tackle that kind of avoidance, clauses 126 and 127 ensure that shares transferred to a depository receipt issuer or clearance service as a result of the exercise of an option will now be charged the 1.5% higher rate of stamp duty or SDRT based on either their market value or the option strike price—whichever is higher. The change has effect from 23 March 2016 and applies to options exercised on or after 23 March 2016 that were entered into on or after 25 November 2015. I am pleased that the Government have taken the time to consult on the provisions, which they did between 9 September 2015 and 3 February this year. However, a summary of the responses does not appear to be available. Will the Minister therefore provide some assurance that the legislation will reflect comments made by respondents in the consultation?
The Government’s impact note expects the measure to generate £200 million in Exchequer revenue by 2020-21. Given that Treasury receipts from stamp taxes on shares are expected to total £3 billion in this financial year, rising to £3.5 billion by 2020-21, the measure is relatively small fish. However, the Opposition really support it, along with any other measures to tackle tax avoidance, especially those that Ernst and Young suggests will have a significant impact on deep-in-the-money options activity. We therefore support clauses 126 and 127.
Finally, will the Minister address what appears to be something of a peculiarity of the modern age and tell me the rationale for having a lower rate of duty for transactions that involve certificates than for transactions that are completed digitally?
The Financial Secretary to the Treasury (Mr David Gauke)
As we have heard, clauses 126 and 127 make changes to stop the avoidance of stamp duty on shares, which will raise £155 million over the rest of this Parliament. They will ensure that the tax system operates fairly by closing an increasingly exploited loophole in which deep-in-the-money options are used to transfer shares to financial institutions or clearance services that then issue depository receipts that represent those shares and can be traded. The measure was announced by the Chancellor in the autumn statement. Stamp duty or stamp duty reserve tax, together referred to as stamp tax on shares, are charged on the purchase of shares in UK companies at 0.5% of their price. When shares are transferred to a depository receipt issuer or clearance service, a higher rate of 1.5% applies, reflecting the fact that subsequent transactions will no longer be taxed.
HMRC has become aware of a practice of deep-in-the-money options being used to avoid the higher rate charge and the Government have acted to stop it. A call option over shares gives their holder the right to buy the shares at a given price—the strike price—on or before a specified date. The price paid for the option is its premium. Deep-in-the-money call options have a strike price significantly below their market value and a high premium, which means the premium reflects the vast majority of the underlying value of the shares. When shares are transferred using an option, stamp tax is currently charged on the strike price and not on the premium, with the result that when purchasing shares using a deep-in-the-money option, tax could be based on the strike price of only a few pence when each share is really worth much more.
Deep-in-the-money options are being artificially created and then exercised immediately to transfer shares to depository receipt issuers or clearance services, avoiding a significant tax charge. Clearly that is not fair. As a result of the changes being made, the 1.5% higher rate stamp tax charge now applies to either the market value of the shares or the option strike price, whichever is greater. The measure applies to all options entered into on or after 25 November 2015 if they were exercised on or after 23 March 2016. This is a targeted response that will apply to a relatively small number of transactions where HMRC has identified clear evidence of tax avoidance. The change will apply only to transfers of shares to clearance services or depository receipt issuers and only when options are settled with shares, not cash. HMRC carried out public consultation following the autumn statement and no wider market impacts were identified.
The technical consultation was open from 9 December 2015 to 3 February 2016 and received three responses. Stakeholders questioned whether there was evidence of avoidance and the magnitude of the costing. HMRC has clear evidence that the Office for Budget Responsibility certified the costing so no changes were made as a result. Separately, meetings with industry bodies and depository receipt issuers have not indicated wider issues with the measure.
The rationale for costs for the differential rates is that stamp duty and stamp duty reserve tax apply the same rates to paper and electronic share transfers. I hope that that provides some clarity.
In conclusion, the Government have acted quickly to close a new tax loophole. Clauses 126 and 127 will stop avoidance of stamp tax on shares, raising a significant sum for the Exchequer and ensuring that the tax rules operate fairly.
Question put and agreed to.
Clause 126 accordingly ordered to stand part of the Bill.
Clauses 127 and 128 ordered to stand part of the Bill.
Kirsty Blackman (Aberdeen North) (SNP)
On a point of order, Mr Howarth. Should we not be dealing with new clauses 3 and 6 with clause 128, or will we vote on them at the end? You have taken clauses 127 and 128 together.
Rebecca Long Bailey
I will be very brief. Clauses 130 and 131 increase the rates of landfill tax in line with retail prices index inflation from 1 April 2017 and 1 April 2018. We have no issues with that change and support the clauses. However, it would be helpful if the Minister could provide the latest figures for the levels of waste being sent to landfill in comparison with last year. After all, the purpose of the tax is to reduce the amount of waste sent to landfill, so it would be good to know if it is working in practice.
On a similar note, the 2016 Budget announced a consultation on landfill tax reform over the summer. I understand that there is an intention to consult on amending the definition of a taxable disposal of waste at a landfill site and clarifying the scope of the tax. According to the ENTRUST website, full proposals are being set out in a document later in 2016 and any changes legislated for in the Finance Bill 2017. Will the Minister confirm the exact timetable, if he is aware of it, for that consultation?
Finally, as the Financial Secretary and the Exchequer Secretary will no doubt be aware, the Government carried out a consultation on reforming the landfill communities fund last year. The LCF provides funding for certain specified projects in an area affected by a landfill site. Draft regulations were then published that would make a detrimental change to the way the fund operates. The regulations proposed the removal of provisions for third parties to contribute 10% of landfill operators’ contributions to projects, and instead make it compulsory for landfill operators to fund the 10% themselves.
As the scheme is voluntary, stakeholders were rightly concerned that landfill operators would simply withdraw from the scheme and that an important funding stream would be lost. I wrote a submission to the consultation on the regulations, and I am pleased to say that the Government withdrew that particular part of the regulations, which were subsequently laid before the House on Budget day. I would like to take this opportunity to thank the Ministers for taking my advice.
The Exchequer Secretary to the Treasury (Damian Hinds)
It is a pleasure to serve under your chairmanship once again, Mr Howarth. As the hon. Lady said, clauses 130 and 131 increase both the standard and lower rates of landfill tax in England, Wales and Northern Ireland in line with RPI from April 2017 and again from April 2018. She asked how successful landfill tax has been in reducing the amount of waste sent to landfill. Although I do not have the year-on-year figures in front of me, since 1996, when landfill tax was introduced, the amount of waste disposed of at landfill sites has nearly halved, while recycling rates have increased threefold. Of course, reducing landfilling of waste benefits the economy, as we make better use of valuable resources rather than throwing them away. At the same time it helps us reduce greenhouse gas emissions from decomposing waste and meet our climate change targets.
When disposed of at a landfill site, each tonne of standard-rated material is currently taxed at £84.40. Less environmentally damaging waste pays the lower rate of £2.65 per tonne. The clauses make amendments to the Finance Act 1996 to increase the standard and lower rates of landfill tax in line with inflation, based on the RPI, rounded to the nearest 5p. The changes will therefore see rates per tonne of £86.10 and £2.70 respectively from 1 April 2017 and £88.95 and £2.80 respectively from 1 April 2018.
Landfill tax already provides a disincentive to landfill by making it an expensive waste treatment method compared with alternatives. By increasing rates in line with inflation, we maintain the incentive for industry to continue the move towards a more sustainable circular economy. In addition, we know that certainty is important to the waste management industry. The clauses will mean that businesses can have the confidence to invest in new facilities and technology, knowing that those will offer a long-term, economically viable alternative to landfill. That is why the changes will set rates as far ahead as March 2019. The clauses provide certainty on both the standard and lower rates of landfill tax, confirming that they will not be eroded by inflation and maintaining the incentives to invest in more sustainable waste treatment.
I note the hon. Lady’s comments on the landfill communities fund. Of course, the Government decided to retain and reform that fund, and she is correct about the changes made and then adapted on the 10% contribution. The guidance from ENTRUST does encourage operators to make that type of contribution. The hon. Lady also asked about the consultation on the definitions for types of waste. The consultation runs from 26 May until 18 August.
Christian Matheson (City of Chester) (Lab)
It is a pleasure to see you in the chair once again, Mr Howarth. I wish to speak only briefly. My hon. Friend the Member for Salford and Eccles reminds us that the Scottish National party Government in Scotland have chosen to reduce APD. It is nice to hear that for once they have actually done something with the tax powers they have been given, because of course they have been dodging other tax powers despite having the authority to exercise them.
May I echo the words of my hon. Friend the Member for Salford and Eccles? The tourism industry across the UK is crying out for clarity on APD, because of the devolution issues. The differences in air passenger duty now make it financially viable for a family of five to drive from the north-west of England, the area that I—and your good self, Mr Howarth—represent, up to Scotland to save money. Those price differentials now mean that that makes sense, so they are damaging the tourism industry and the airport sector outside London.
The impression of the tourism industry—fairly held, I think—is that Treasury Ministers have been kicking the issue into the long grass for a long while. They have been looking for a solution, not finding one and then having a further review. My hon. Friend has outlined some of that. I therefore stress to Ministers again that there has to be a long-term and sustainable answer to those variables in air passenger duty. The existing situation is not sustainable, so the sooner we get a consistent and sustainable balance that the tourism industry can live with, the better for our economy as a whole.
Damian Hinds
Clause 137 makes changes to ensure that the rates of APD for 2016-17 increase in line with RPI, so that the aviation sector continues to play its part in contributing towards general taxation and reducing the deficit.
As the hon. Member for Salford and Eccles rightly said, APD raises a little more than £3 billion annually, so it is an important part of Government revenue. The increase in rates has effect from 1 April this year and was announced at Budget 2015 to give the industry sufficient notice of the change in rates. The low level of inflation and the rounding of APD rates to the nearest £1 mean that short-haul rates will remain frozen for a fifth year in a row, which will be to the benefit of about 80% of passengers.
The hon. Members for Salford and Eccles and for City of Chester raised the important subject of APD devolution and the options that the Government have been considering. To be clear, APD will be under the control of the Scottish Parliament, but the Scottish Government are still consulting, so no change has yet been made. The three options in the discussion paper published at summer Budget 2015 were correctly identified by the hon. Lady: to devolve the setting of APD within England; to vary the rates within England; or to provide aid to regional airports. The issues are complex and we continue to consider the various options. I am not in a position to give a specific date, but we will of course respond in due course.
APD is a fair and efficient tax, where the amount paid corresponds to the distance and class of travel of the passenger. The changes under the clause will ensure that the aviation sector continues to play its part in contributing towards general taxation.
Question put and agreed to.
Clause 137 accordingly ordered to stand part of the Bill.
Clause 138
VED: rates for light passenger vehicles, light goods vehicles, motorcycles etc
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
The clause increases the rate of vehicle excise duty on certain vehicles in line with RPI for the financial year 2016-17. This is standard practice, as VED rates have increased in line with inflation since 2010. Labour has not opposed that and I have no intention of doing so today, but I have some issues to take up with the Minister.
I want to repeat on the record how opposed we were to the last raft of changes to VED made in the previous Finance Bill. These changes put a stop to the link between the level of carbon dioxide emissions and the rate of vehicle excise duty. There is now simply a flat rate after the first year, with a surcharge on cars that cost more than £40,000. We simply do not see the Government’s justification for removing incentives for lower-polluting cars. I would be grateful if the Minister clarified that. Aside from that issue, I am happy for this clause to stand part of the Bill.
Damian Hinds
Clause 138 makes changes to vehicle excise duty rates for cars, vans and motorcycles, with effect from 1 April 2016. For cars first registered prior to 1 March 2001, vehicle excise duty is based on the car’s engine size. The rates of duty for those cars and vans before 1 March 2001 increase by £5 only as a result of this clause. For cars first registered on or after 1 March 2001, vehicle excise duty is based on the car’s carbon dioxide emissions. There are currently 13 CO2 bands. One rate is payable in the first year, and a separate, standard rate is payable in all subsequent years. For about 98% of those cars, the payment will be no more than £5 extra in 2016-17. That means that a motorist already owning a popular family Ford Focus will pay only £5 more.
First-year rates influence the purchasing choices of drivers buying brand-new cars. They act as a signal at the point of purchase that people can save money by choosing a cleaner car. In response to what the hon. Lady said about the 2017 reforms, it is not true that we have removed the incentives on CO2. First-year rates have an extra effect: the so-called “sticker price” effect. There is also the zero rate for zero-emission cars.
We had a fairness and a sustainability challenge on vehicle excise duty. The sustainability challenge was due to the projected decline in revenues as more and more cars come into the lowest charging bands, and the fairness challenge was due to the fact that people who can afford only an older, second-hand car would pay more than those who can afford to change their car every couple of years.
This measure will mean that the highest-emitting new cars will pay first-year rates of £1,120—an increase of £20—and rates for the cleanest cars will remain unchanged at zero. The clause also increases the standard rate of duty for vans first registered from March 2001 onwards by £5 only. Finally, rates for motorcycles will also increase in line with inflation. Motorcyclists will see an increase of no more than £2.
Question put and agreed to.
Clause 138 accordingly ordered to stand part of the Bill.
Clause 139
VED: extension of old vehicles exemption from 1 April 2017
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
This clause extends the exemption from vehicle excise duty to vehicles constructed 40 or more years ago on an automatic rolling basis on 1 April each year. The VED exemption is intended to support classic vehicles, which the Government consider—and I agree—to be an important part of the nation’s heritage. It appears to be a simple legislative change to create a rolling 40-year exemption, rather than requiring separate legislation year by year. We did not oppose the equivalent measure in the Finance Act 2014 when the Budget 2014 proposal for a rolling exemption was debated, and we do not oppose this clause today.
However, the Minister is not going to get off that lightly. I would like him to address a couple of my concerns. The policy paper indicates that the clause has no Exchequer impact, but the tax information and impact note for the original measure in Budget 2014 projected an impact of £5 million in 2016-17, £10 million in 2017-18 and £15 million in 2018-19. Will the Minister clarify whether there has been a change in the Treasury’s assessment of the impact of the measure, or whether the zero impact assessment relates purely to the technical change to the legislative mechanism, rather than the underlying policy?
Furthermore, the original note stated that in 2014-15 the measure will
“have an advantageous impact for the owners of around 10,000 classic vehicles...Every year thereafter, the number of classic vehicles will increase as additional cohorts of vehicles are included in the exemption. It is estimated that an additional 10,000 classic vehicles will be affected in each year of the scorecard.”
As of 30 September 2011, 162,734 cars and 152,836 other vehicles were exempt from VED on the grounds of age. Will the Minister confirm that the figure of 10,000 vehicles in the HMRC policy paper is additional to the figures in previous years, and will he give us an update on the total number of vehicles, either today or later in writing?
Damian Hinds
I rise to speak to a fairly uncontroversial clause on the exemption of classic vehicles from VED. The Government believe that classic vehicles are an important part of the nation’s heritage. According to the Historic Vehicle Research Institute, the historical car industry employs about 28,000 people in the UK. The VED exemption is designed to support the maintenance and use of classic vehicles.
The classic vehicles VED exemption was first introduced under the Conservative Government in 1996 on a rolling 25-year basis. The Labour Government froze the exemption in 1998 so that it applied only to vehicles built after 1 January 1973. The Government announced in Budget 2013 that they would extend the exemption to vehicles built before 1 January 1974. Budget 2014 went further, announcing the introduction of a new rolling 40-year VED exemption for all vehicles, which extended the exemption to vehicles constructed before 1 January 1975 and 1 January 1976, to come into effect on 1 April 2015 and 1 April 2016 respectively.
Clause 139 places the VED exemption on a permanent basis so that, from 1 April each year, vehicles constructed more than 40 years before 1 January of that year will be automatically exempt from paying VED. In 2016-17, the exemption is worth £145 or £235 depending on the vehicle’s engine size. As the hon. Lady said, the Government estimate that about 10,000 owners of classic vehicles will benefit each year, and that is additional to previous figures.
The operational cost of the programme to the DVLA is the negligible cost of updating its IT systems, which will need to be done each year. The standard in the financial statements and in setting out projections rounds down to the nearest £5 million, which means that the cost of a single year is less than £5 million and is therefore classed as negligible. However, the tax information and impact note refers to a rolling programme, so we have to add up the less than £5 million each time.
This measure ensures administrative and legislative efficiency by automatically extending the classic car exemption on a permanent basis. I hope the clause stands part of the Bill.
Question put and agreed to.
Clause 139 accordingly ordered to stand part of the Bill.
Clause 140 ordered to stand part of the Bill.
Clause 141
Fuel duties: aqua methanol etc
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 17 be the Seventeenth schedule to the Bill.
Damian Hinds
The clause will introduce a reduced duty rate for aqua methanol that is set aside for use as fuel in any engine, motor or other machinery. Aqua methanol is a new, greener fuel that is 95% methanol and 5% water. The reduced duty rate is intended to incentivise the uptake of aqua methanol, as the hon. Lady said, as a greener alternative fuel to petrol and diesel.
The Government are committed to improving air quality in the UK through the reduction of carbon dioxide and nitrogen dioxide emissions. Every year, around 50,000 people die prematurely due to poor air quality. Road vehicles account for around 92% of UK transport carbon dioxide emissions and 80% of nitrogen dioxide emissions in roadside locations.
Successive Governments will need to de-carbonise the road transport sector in the UK if we are to deliver on our commitments to reduce greenhouse gas emissions —as I know both the hon. Lady and I are committed to doing. Indeed, the fourth carbon budget requires successive Governments to reduce greenhouse gas emissions by 51% relative to their 1990 levels by 2027. Any action to meet those targets will need to include the deployment of new greener alternative fuels, and aqua methanol is one of those. Incentivising its use has the potential to contribute to the UK meeting its air quality targets through reductions in the use of diesel, which is the largest source of nitrogen dioxide emissions.
In the 2013 autumn statement, the Government announced that the differential between the lower duty rate for alternative road fuel gases and the main duty rate for petrol and diesel would be maintained until 2024. In the 2014 Budget the Government went further, announcing that we would also apply a reduced fuel duty rate to aqua methanol. The clause follows through on that commitment. It introduces a reduced duty rate of 7.9p per litre for aqua methanol to the main rate of 57.95p per litre. The decisions on aqua methanol were outlined in the autumn statement in 2014 and the costings of the policy remain consistent with our forecasts at that time, although the delay to the introduction of the new rate means costs to the Exchequer have also been delayed.
The reduced duty rate was recalculated based on fuel duty changes and the energy content. The clause legislates for the reduced rate of excise duty for aqua methanol, which will incentivise the uptake of that alternative fuel and help us to deliver on the commitment to reduce greenhouse gas emissions and improve air quality in our towns and cities.
Question put and agreed to.
Clause 141 accordingly ordered to stand part of the Bill.
Schedule 17 agreed to.
Clause 142
Tobacco products duty: rates
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
The Committee will be pleased to hear that I have just a few sentences to say about this clause. For the benefit of the Committee, the clause simply deals with increases in the rates of tobacco duty. I will not go into detail because I am sure the Minister will cover the specifics, but I want to illustrate some of the issues I noticed in the HMRC policy paper. The policy paper refers only to the 5% increase for hand-rolling tobacco and states that this measure alone is expected to raise £10 million each year to 2020-21. Will the Minister provide us with the expected Exchequer impact for all the measures in the clause, either now or later in writing?
Alistair Darling announced in the last Labour Government’s final Budget that tobacco duty would rise by 1% above inflation in 2010 and by 2% above inflation for the following four years thereafter. The Opposition therefore support the introduction of the escalator in the Finance Act 2014 and we will certainly support this clause today.
Damian Hinds
Clause 142 makes changes to ensure that the tobacco duty regime continues to work as part of the Government’s wider health agenda to reduce smoking prevalence. The clause implements tobacco duty increases of 2% above the RPI rate of inflation for all products and an additional 3% increase for hand-rolling tobacco, meaning a 5% increase in total for hand-rolling tobacco. The Government are committed to reducing smoking rates, especially among young people. Smoking is the single largest cause of preventable illness and premature death in this country. It accounts for around 100,000 deaths a year and kills around half of all long-term users. Reducing the affordability of tobacco products through taxation is widely acknowledged to be effective in reducing smoking prevalence.
The changes that have already come into effect have added 21p to a packet of 20 cigarettes and 44p to a 30g pouch of hand-rolling tobacco. Research shows that, as well as establishing high tobacco duty rates, maintaining those high rates is also important in reducing smoking prevalence. That is why, as was announced in the 2014 Budget, annual duty increases of 2% above inflation will continue until the end of the Parliament. I should clarify for the hon. Lady that that means they are already in the projections for the public finances and that the overall impact of the two changes is as published in the Budget scorecard. The clause implements the tobacco duty rate increase of 2% above inflation and an additional 3% for hand-rolling tobacco, which supports our wider health agenda.
Question put and agreed to.
Clause 142 accordingly ordered to stand part of the Bill.
Clause 143
Alcoholic liquor duties: rates
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
The clause increases the rates of alcohol duty on wine and some ciders and perries in line with inflation. The changes took effect on 21 March. In discussing the clause, I want to touch on one type of alcohol duty that is notably not being increased in line with inflation.
Damian Hinds
Clause 143 sets out changes to alcohol duty rates from 21 March this year. It was announced in the Budget that the duty on beer, spirits and most ciders would be frozen this year and that the duty on most wines and higher-strength sparkling cider would rise with inflation. With those changes, we continue to support the pub industry, which plays such an important part in British cultural life. To respond to the hon. Lady’s point about what is most advantageous to the on-trade—to pubs—beer is considered to have a greater price sensitivity effect than wine, by a number of estimates.
The British Beer and Pub Association estimates that about 30 million adults visit a pub at least once a month. As I think all hon. Members would acknowledge, pubs are important community assets that promote responsible drinking in a generally friendly atmosphere. In the Budget, the Government therefore took further action to support the sector. Given that about two thirds of alcohol sold in pubs is beer, we froze duty on a typical pint of beer, following three consecutive beer duty cuts that were widely welcomed. The Government’s support for pubs means that a typical pint of beer is now 10p cheaper than it would have been if we had not ended the beer duty escalator in 2013. I am sure that is welcome news to many, many pub goers. In the BBPA’s assessment, the three beer duty cuts have created 19,000 jobs. The duty freeze will offer further support to pubs. The duty on high and low-strength beer will also be frozen, which offers the sector a continued incentive to expand the choice of those drinks to consumers.
The Government’s key priority for this Parliament is to restore the public finances to a sustainable position. We outlined in the Budget our commitment to fiscal sustainability, and the decisions taken on duty rates must, of course, reflect that.
The clause provides for duty on most wines to increase by RPI only. Under these changes, the duty on beer and wine will remain broadly similar, and the duty rate on wine above 22% ABV will continue to be the same as that for spirits. The hon. Lady may have a particular interest in this point: the price of a bottle of wine is now 7% lower than it would have been if we had not ended the wine duty escalator in 2014.
The clause also sets out that duty on high-strength sparkling cider is increased by RPI only, which means that it continues to be the same as for sparkling wine of equivalent strength. It was also announced in the Budget that the duty on all other ciders would be frozen. That means that a typical litre of cider is now 4p cheaper than it would have been if we had not ended the cider duty escalator in 2014. The freeze in cider duty supports the industry, which has high production costs and plays an important role in many local economies, particularly in some of our rural areas.
The Budget also froze duty on spirits. As Scottish National party Members and others will acknowledge, Scotch is one of the great British success stories. Its exports are estimated to be worth nearly £4 billion, and account for about 20% of total food and drink exports. The freeze in spirits duty will provide further support to the Scotch industry. It means that a 70 cl bottle of whisky is now 87p lower in price than it would have been if we had not ended the spirits duty escalator.
The freeze will help elsewhere, too, including by supporting the global thirst for British gin. According to the Wine and Spirit Trade Association, 140 million bottles were exported in 2014, which is an impressive 37% increase in five years. Government statistics also show that between 2010 and 2015 a total of 174 new spirit distilleries opened in the UK, with 56 new licences issued in the past year alone. The announcements made in this year’s Budget and in 2014 and 2015 have increased the confidence in the sector.
The changes to alcohol duty rates in the clause ensure that responsible drinkers are not penalised. It is right to point out the Government’s continuing care and concern for the wider health agenda on alcohol consumption, but it is important not to penalise responsible drinkers. We recognise that not everyone is a responsible drinker, and we have taken a targeted approach to tackling alcohol-related harm. For example, to encourage the consumption and production of lower-strength beer, the Government place higher duties on super-strength beer and cider. Licensing rules are also in place to help to tackle irresponsible alcohol consumption. For example, local authorities can now introduce early morning restriction orders more easily.
The clause reaffirms the Government’s commitment to supporting the pubs industry and responsible drinkers.
Question put and agreed to.
Clause 143 accordingly ordered to stand part of the Bill.
Clause 155
Simple assessments
Question proposed, That the clause stand part of the Bill.
The Chair
Having considered alcoholic liquor duties, we now stagger towards clause 155, with which we will consider the following:
That schedule 23 be the Twenty-third schedule to the Bill.
Clauses 156 and 157 stand part.
Mr Gauke
As we have heard, clause 155 and schedule 23 will provide a new power to allow HMRC to make an assessment of an individual’s income tax and capital gains tax liability without their first being required to complete a self-assessment return. Clause 157 will allow HMRC to withdraw a notice to file or cancel any related penalty for failure to make a return. Clause 156 will ensure that the time allowed for making a self-assessment when HMRC has served notice to file a return is clear.
I will speak first to clause 155 and schedule 23. In March 2015, HMRC published “Making tax easier: The end of the tax return”, which set out its vision to modernise the tax system by introducing digital tax accounts for individuals and businesses. That will lead to millions of HMRC customers no longer needing to fill in tax returns. At present, hundreds of thousands of people have to fill out a self-assessment tax return every year simply because they have a tax liability that cannot be collected through pay-as-you-earn. This is expensive and time-consuming for both the customer and HMRC. The measure will allow HMRC to send a tax calculation to customers along with a request for payment when HMRC already has enough information to make an accurate assessment of the tax due.
HMRC already holds a wide range of information, such as employment, pay and pension income, child benefit payments and savings income. That comes from a range of sources such as Government Departments, banks, building societies, employers, pension providers and information provided directly by taxpayers. Furthermore, HMRC already uses that information held on its systems to calculate an individual’s tax liabilities on an annual basis.
From 2016-17, this measure will allow HMRC to send customers with the simplest affairs a simple tax calculation and request for payment, meaning that they will not have to fill out a tax return. HMRC will consult on using the power to create tax bills for customers with more complicated affairs. It estimates that in time, up to 2 million individuals will benefit from the simple assessment. Individuals will have a simple customer experience, and fewer customers will incur a penalty or have to pay interest because they have not sent their return in on time.
HMRC intends the process for customers to be online and as simple as possible, and as such has aligned simple assessment with the payment dates and interest provisions that already exist for self-assessment. The current processes for hardship will continue. There will also be assistance for customers who have difficulty going online, including a paper process for customers who are unable to access digital accounts. As is the case now, customers should check that the information in their simple assessment tax calculation is correct. Customers will be able to challenge figures, and there will be a right of appeal if disputes cannot be resolved informally.
Furthermore, customers will still be able to fill out a self-assessment return if they wish or if they have to declare changes to their circumstances. Simple assessments will be used to collect the tax that is due based only on information already known about income and circumstances.
In order for the Government to facilitate the change that I have just discussed, and to enable as many people as possible to benefit from that simplification, clause 157 makes amendments to the Taxes Management Act 1970 and consequential amendments to one of its schedules to allow HMRC to withdraw a notice to file or to cancel related penalties. Under the income tax self-assessment system, anyone sent a notice to file a self-assessment tax return by HMRC is required to complete and return the assessment. HMRC does not want to unnecessarily oblige customers to complete a tax return if they do not need to be within self-assessment.
Rebecca Long Bailey
These clauses relate broadly to judgment debts, and they make the same provisions for Scotland, Northern Ireland, England and Wales. The Chartered Institute of Taxation has had no representations or comments from its members on the three clauses, apparently because they are completely uncontroversial. The legislation, however, seems complex, so I wondered whether the Minister has had any representations at all about its drafting. Otherwise, we have no issues with the clauses.
Mr Gauke
The clauses, as we have heard, deal with the rates of interest for all tax-related debts involving HMRC, ensuring that they are at the appropriate level, in accordance with tax legislation.
By way of background, section 52 of the Finance Act 2015 provided a set rate of judgment debt interest for England and Wales. Where HMRC is involved with a tax-related debt, the requirement is for the rates of interest to be those in tax legislation, and not those set out in a judgment debt or by a county court or others. Last summer, in the Finance Bill, we set out the rates of interest for England and Wales, but interest payable by or to HMRC following a court action in Scotland and Northern Ireland is set at a different rate. That is because we sought to consult with Scotland and Northern Ireland before extending the changes to them. They have since indicated that they are content for the legislation to be extended UK-wide.
To answer the hon. Lady’s question, we have not received any representations on the measure. It may be complex, but it appears to be uncontroversial, so I hope it can stand part of the Bill.
Question put and agreed to.
Clause 158 accordingly ordered to stand part of the Bill.
Clauses 159 and 160 ordered to stand part of the Bill.
Clause 161
Gift aid: power to impose penalties on charities and intermediaries
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
The clause relates to gift aid and will allow HMRC to impose penalties on intermediaries that fail to comply with new requirements on gift aid declarations, as set out in secondary legislation that has not yet been published. A technical consultation on those draft regulations is apparently being carried out later this year. To understand the clause, therefore, the Committee might find some background useful.
The Government want to make it easier to claim gift aid on donations given through digital channels. At the moment, a charity requires a gift aid declaration from a donor in order to be able to claim gift aid. Where donations are made by an intermediary—through a website such as justgiving.com, or by text—the situation is difficult, because the intermediary has to collect the declaration from the donor and then pass it on to the charity.
The Government therefore carried out a consultation on digital giving, which ran from July to September 2013, and published their response in April 2014. The consultation received more than 100 responses, and I understand that meetings have been held with representatives of both charities and intermediaries. The Government’s intention, as I understand it, is to allow gift aid declarations to be made by intermediaries representing individuals, and to allow charities to use such declarations to claim gift aid. The primary legislation that gave the Government the power to do that was enacted in the Finance Act 2014. Clause 161 simply amends that legislation so that the regulations, when published, may also include a penalty for intermediaries who fail to comply with the requirement, as well as a right of appeal against those penalties. Regulations for the requirements and penalties will be published later this year.
According to the policy paper, the Exchequer impact of the changes are not known, but the measure is expected to decrease net receipts, as there will be a higher level of gift aid on donations. The paper also states that the measure will affect only intermediaries who fail to comply with legislation, and that they may incur one-off costs to put systems in place to implement the changes. However, estimates of the impact will be made when details of the measure have been finalised.
We completely agree with making it easier for gift aid to be claimed on donations where it is complicated to do so, and we are happy to support the clause, but perhaps the Minister will provide more detail of what the regulations will contain and what the requirements on intermediaries will be.
Damian Hinds
I am grateful to the hon. Lady for this opportunity to put on the record a little more of the detail and some of the reasoning behind the measure. Clause 161 gives HMRC the power to impose penalties on intermediaries operating in the charity sector if they fail to comply with new requirements to be set out in regulations. These regulations are designed to make it easier for charities to claim gift aid through digital channels, and draft regulations have been made available to the Committee.
Clause 161 lays the groundwork for delivering the Government’s commitment to giving intermediaries working in the charity sector a greater role in administering gift aid, which allows charitable donations to be made tax-free. Donors can now give through multiple digital channels, including SMS text donations, online portals and, more recently, Twitter. Gift aid legislation has not always kept up with these developments, so in autumn statement 2013, the Government announced plans to explore ways in which charity intermediaries could be given a greater role in administering gift aid. We have worked closely with representatives of charities and intermediaries to develop proposals to give additional flexibility in claiming gift aid through digital channels. The clause is a necessary step in delivering those proposals. It gives HMRC the ability to charge penalties to intermediaries that do not operate within the new rules. This will help to ensure that the additional flexibility for claiming gift aid is not misused, and so help to protect the income and reputation of charities throughout the country.
It may be helpful if I briefly set out how the new proposals will work. Before a charity can claim gift aid on a donation it has received, the donor must have completed a declaration stating both that the donation is eligible for gift aid and that they want the charity to be able to reclaim the tax paid on that donation. Essentially, this allows the donor to give an intermediary permission to complete a gift aid declaration on his or her behalf in respect of donations made through that intermediary. That permission will last for the rest of the tax year, negating the need to complete a gift aid declaration every time a donation is made. Donors will, of course, have the right to cancel that permission at any time. As with any tax relief, the Government must ensure that the gift aid is claimed only when it is right to do so, and clearly rules must be in place to ensure that.
These rules are in everyone’s best interests. They protect the use of taxpayers’ money and the reputation of those charities that benefit from gift aid relief, and encourage intermediaries to act responsibly. For example, it is only right that intermediaries should let donors know the total value of gift aid claimed on their donations over the course of a tax year, as this could affect their tax liability. Consequently, there will be new obligations on intermediaries who choose to offer the new process set out in regulations. Failure to comply with those obligations could result in intermediaries facing a penalty.
If a penalty is imposed, it will be £50 per failure to comply, up to a limit of £3,000 a year. I should stress that although there must be a sanction against those who are careless or negligent, it is not anticipated that HMRC will charge these penalties routinely. There will be scope to suspend them to enable intermediaries to rectify any shortcomings in processes, and of course there will be a right of appeal against a decision to impose a penalty. I want to make it clear that the Government do not propose applying new penalties on charities; they will apply only to intermediaries.
Clause 161 amends the Income Tax Act 2007 to set out when a penalty may be imposed, and the maximum amount that can be imposed for failure to comply, and it confers appeal rights. It also provides that the clause will take effect from a date appointed in regulations. The Government recognise that intermediaries can and indeed do play an important role in assisting charities to get the benefit of gift aid. It is necessary to ensure that the processes under which they operate are robust and not misused to the detriment of charities or their generous donors.
Question put and agreed to.
Clause 161 accordingly ordered to stand part of the Bill.
Clause 162
Proceedings under customs and excise Acts: prosecuting authority
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
Clause 162 amends part XI of the Customs and Excise Management Act 1979 to remove reference to the commissioners from the definition of “prosecuting authority” for Scotland and Northern Ireland. It will also insert the Director of Public Prosecutions for Northern Ireland as the relevant prosecuting authority for Northern Ireland.
We see the clause as a minor amending clause that tidies up the measures in the 1979 Act relating to Scotland and Northern Ireland. We believe that it is sensible to ensure that the time limit for summary offences does not start to run before the date at which the prosecuting authority has knowledge of sufficient evidence to warrant the proceedings.
We have no concerns about the clause and are happy to support it, but I will stray slightly from the exact detail of the clause and ask the Minister what initial consideration the Treasury has given to the future of customs checks on the border between Northern Ireland and the Republic of Ireland following the EU referendum. I am sure that he is aware that the Irish border has been free of customs checks since 1993 as a result of the single market. A return to customs checks would be damaging to the British and Irish economy, and may well have implications for the Office of the Director of Public Prosecutions for Northern Ireland. Perhaps the Minister can address that concern, either today or in writing at a later date.
Damian Hinds
As the hon. Lady and all members of the Committee know, a number of issues will have to be addressed in due course. The clause does not relate to the subject of the question she asked.
Clause 162 amends the Customs and Excise Management Act 1979 to correct outdated references to the prosecuting authorities in Northern Ireland and Scotland. By doing so, it will ensure that time limits for starting proceedings will apply only to the correct authorities. The clause is purely technical and is not a change of policy.
Question put and agreed to.
Clause 162 accordingly ordered to stand part of the Bill.
Clause 163
Detention and seizure under CEMA 1979: notice requirements etc
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
Again, I have just got a few comments, because the clause is largely uncontroversial. It simply amends the 1979 Act to permit Border Force officers to treat the driver of a vehicle or someone comparable as if they were representatives of the goods being seized. It seems uncontroversial, but it has implications for vehicle drivers, including road haulage drivers. I am not aware of any concerns expressed by potential stakeholders, but what consultation has taken place with the Road Haulage Association in particular, the British International Freight Association and the office of the independent chief inspector of borders and immigration?
Damian Hinds
Clause 163 makes provision for an officer of HMRC to treat a person, when seizing or detaining goods, as if they are a representative of the owner of the goods, wherever that person has or appears to have possession or control over those goods.
Under current legislation, when detaining or seizing goods, there is no requirement for an officer to serve a notice of detention or notice of seizure on the person present if the officer believes that that person is a servant or agent of the owner of those goods. Whether a driver can be considered an agent or servant of the owner affects the processes that the officers seizing or detaining goods must follow. However, drivers of vehicles carrying such goods often claim distance from the owner, making it difficult for HMRC successfully to consider them to be an agent or servant of the owner. That leaves HMRC trying to find an owner in what is usually a complex, fraudulent supply chain.
The changes made by clause 163 will allow officers to treat the driver, or a person in a comparable position, as if he or she were a representative of the owner and, therefore, not legally entitled to a notice of detention or a notice of seizure. It will make the operational duties of officers of Her Majesty’s Revenue and Customs more effective. Currently, those who purport to be owners are arguing that they have not had their legal right to appeal because they were not served with a notice.
HMRC has a duty to take robust action to deal with those who smuggle illicit goods of any description into the UK. By making explicit provision for the driver to be treated the same as an agent or servant, it will reduce the resource required in trying to identify the owner of the goods in what is usually a fraudulent and potentially complex supply chain.
The measure was consulted on in December 2015 for eight weeks. One response was received, and an individual reply was sent. The main thrust of the response was a request for clarification on the rights of appeal, and on whether the legislation would affect the rights of the owner to appeal against the seizure. HMRC was able to explain that the legislation would not affect those rights; appeal rights were not compromised. It was a consolidated response from industry, including hauliers.
To conclude, the measure removes the need for an officer to serve a notice on someone who has, or appears to have, possession or control of anything that is detained or seized. By doing that, the measure clarifies procedure for officers and those from whom the goods are detained or seized. It also removes significant operational barriers for HMRC in its pursuit of reduced excise tax gaps.
Question put and agreed to.
Clause 163 accordingly ordered to stand part of the Bill.
Clause 164
Data-gathering powers: providers of payment or intermediary services
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
Clause 164 looks at extending HMRC’s data-gathering powers for the growing digital economy, which we are happy to support. HMRC’s existing data-gathering powers were set out in schedule 23 to the Finance Act 2011. HMRC subsequently obtained new powers in section 228 of the Finance Act 2013 to request data from merchant acquirers—businesses—that process credit and debit card transactions.
More recently, HMRC completed a consultation, “Tackling the hidden economy: extension of data-gathering powers”, between July and October 2015, which has led to the detail of this clause. The clause recognises the rapid development of the digital economy and payments made through it, and the Government wish to enhance their ability to obtain data by adding two new categories of data holders to the existing legislation on data gathering.
Those categories are identified as electronic stored-value payment services—or digital wallets—and as other business intermediaries operating offline. The Financial Times recently reported research by Worldpay that asserted that the rise of digital wallets would mean that credit cards and debit cards would fall from accounting for two thirds of all payments to just half by 2019.
The same report found that $647 billion of consumer payments to businesses will be made globally through digital or e-wallets that year. It is in that context that the Government wish to cast their data-gathering net wider to include that growing sector. I am particularly interested in the Minister’s view of the possibility of increasing tax revenue through these powers. The economic impact in the policy paper suggests an increased take of approximately £200 million per year once these powers are embedded.
Roy Maugham, tax partner at UHY Hacker Young, said:
“The new powers HMRC are seeking indicate that they believe there is large-scale tax evasion in the ‘app economy’.”
Is the expectation that these powers will reveal new instances of tax evasion or tax avoidance? Will the Minister indicate what initial scoping or research has been possible to determine the likelihood of that? In the light of the consultation response from the Low Incomes Tax Reform Group, will the Minister guarantee that the powers will not be used in a way that disadvantages those on low incomes who run owner-managed businesses and who will find them a significant new administrative burden?
A number of submissions to the consultation and responses to the draft legislation, including from the Chartered Institute of Taxation and Payments UK, expressed concern about the definition of the two new categories. I believe that the comments from Payments UK on the definition of “providers of digital wallets” have largely been taken on board, with them now being referred to as
“providers of electronic stored-value payment services”.
The Chartered Institute of Taxation would like further clarification on the definition of “business intermediaries” as it is concerned that that will catch not only websites such as eBay, Etsy and Airbnb but traditional businesses such as insurance brokers and letting agents. Can the Minister shine some light on that today?
We are also happy to support clause 165, which addresses HMRC’s power to levy daily penalties on data holders that do not comply with a data information notice request. Under existing legislation, if a person fails to comply with a data holder notice, they are liable for an initial fixed penalty of £300 and daily default penalties of up to £60 a day. If that is unsuccessful, a tribunal can decide the amount of an increased daily default penalty, which cannot be more than £1,000 a day. The clause clarifies that the tribunal will be responsible for determining the maximum amount of an increased daily penalty, but HMRC will determine the penalty that applies.
Our main concern, once again raised by the Low Incomes Tax Reform Group, is that the proposed change to the law in clause 165 might move significant numbers into the scope of data holder notices and a penalty regime intended for large companies involved in established modes of transaction, such as companies that facilitate credit card transactions. Under the current data request regime, the requirement for the parties subject to a notice to produce the information demanded within 30 days, under threat of instant penalties, may be particularly demanding for lower-resourced parties. On that basis, I hope the Minister can give such companies some reassurance.
Aside from the points that I have outlined, we are more than happy to support clauses 164 and 165.
Mr Gauke
Clause 164 will extend HMRC’s existing bulk data-gathering powers, allowing it to require data from two additional categories of data holder. The first category relates to business intermediaries that facilitate transactions, particularly online, between a supplier and a customer. The category covers providers of electronic stored-value payment services, also known as digital wallet transactions, a method of transferring payments to a retailer or trader. Comparing those new data with information that it already holds will enable HMRC to identify businesses that have failed to register with it or that are not declaring the full amount of tax they owe. HMRC will not seek data about individual transactions.
Clause 165 makes minor technical corrections to schedule 23 to the Finance Act 2011, which covers the bulk data-gathering powers mentioned in clause 164. Businesses are increasingly using intermediaries to provide custom or take payments, in some cases without registering for tax. New payment models are evolving quickly and are moving away from cash and card transactions towards other electronic payment groups, which means that some businesses can trade digitally while remaining beyond HMRC’s view.
Clause 164 updates HMRC’s data-gathering powers to keep pace with those changes and futureproofs legislation by including emerging new data sources of a similar type. Those data will help HMRC to crack down on the hidden economy, which the Government are committed to addressing. The powers that enable HMRC to collect third-party data from a range of data holders is subject to appeal. When a data holder does not comply with a notice, HMRC may levy penalties.
Clause 165 corrects provision by which increased daily penalties can be approved and assessed. As drafted, the existing provisions are not sufficiently clear and may lead to confusion for data holders and obstacles to the administration of the penalties. Clause 165 gives clarity to the legislation regarding HMRC’s application to the first-tier tribunal and adds an appeal right for the data holder over the number of days the increased penalties can be assessed.
Rebecca Long Bailey
Clause 167 introduces a raw tobacco approval scheme for users of and dealers in raw tobacco. Raw tobacco is not subject to excise duty or possession controls when it is not yet in a smokable form. The Government state that tobacco duty evasion is becoming increasingly prevalent through raw tobacco, which is freely and legally imported and either processed into smoking products in unregistered premises or sold in small quantities to consumers for home processing. To try to combat that, the Government carried out a consultation on the control of raw tobacco, and proposed an approval scheme.
The clause introduces a raw tobacco approval scheme that requires a person undertaking any activity involving raw tobacco to be approved and registered with HMRC. If a person is found to be undertaking an uncontrolled activity without registering with HMRC, the penalties that can be issued are either £250 or an amount equal to the duty that would have been charged on the relevant quantity of smoking tobacco at the lowest rate of duty. On that point, will the Minister confirm why the Government set the penalty at the lowest rate of duty? They could have gone for the hand-rolling rate, which would have doubled the penalty.
The clause allows exemptions to be granted to those who have a legitimate use of raw tobacco that does not involve the manufacturing of smoking products. HMRC expects that 20 to 24 businesses—mainly tobacco product manufacturers, importers, brokers and testing centres—will register. I understand that the Government are going to undertake a post-implementation review, which we welcome.
The aim is to address tobacco duty evasion by prohibiting the use of raw tobacco by unapproved persons to prevent the illegal manufacture of tobacco products. The clause will also make it a lot easier for border forces to seize tobacco and check whether it is destined for an approved person.
I understand that the new scheme will be largely built on existing registration processes, minimising the administrative impact on legitimate users of raw tobacco. For example, tobacco manufacturers already have duty approval, which will just be extended to include raw tobacco approval. Does the Minister feel that that addresses the Tobacco Manufacturers Association’s concerns that the measure will place additional burdens on legitimate users of raw tobacco?
The Labour party welcomes any measures to crack down on tax evasion and avoidance. We will therefore support the clause.
Damian Hinds
Clause 167 makes changes prohibiting any unapproved person from carrying out any activity involving raw tobacco. That will reduce the risk of evasion of tobacco excise duty and prevent the illegal manufacture of tobacco products. The approval scheme will be set out in regulations made under powers in this clause, and tailored to reflect a proportionate response to the risk presented. It will build on existing approval processes where appropriate to minimise the impact on legitimate users of raw tobacco.
Raw tobacco that is not yet in a smokable form is not subject to excise duty and the associated movement controls in the UK. There is a significant risk of tobacco products duty evasion through raw tobacco being freely and legally imported. It can be processed into illicit tobacco products in unregistered premises or sold in small quantities to consumers for home processing. We have identified no legitimate use for significant quantities of raw tobacco in the UK, other than for the manufacture of smoking products.
The Government are aware that raw tobacco is occasionally used in very small quantities for non-smoking purposes, such as beekeeping, pigeon bedding and fertiliser production. We have identified no significant non-smoking uses for large volumes of raw tobacco in the United Kingdom. Dialogue has been sought with the representatives of the potential niche uses, and the scheme has been designed with an understanding of those alternative uses and the extent of the risk presented.
The illicit manufacture of cigarettes and hand-rolling tobacco in the UK from raw tobacco deprives the Exchequer of the duty that should be paid, upon which we rely to fund our public services. It also makes cheaper illicit tobacco products more accessible, undermining the Government’s public health objectives.
The clause will assist in preventing the evasion of excise duty through the use of raw tobacco. It amends the Tobacco Products Duty Act 1979, prohibiting any person from carrying out any activity involving raw tobacco unless the person holds approval from HMRC. The changes will give HMRC powers to set out the details of the approval scheme in regulations, including how to apply for approval and what conditions and restrictions might apply to an approval. The clause will enable HMRC and Border Force officers to identify and seize raw tobacco if there is no evidence to show that the raw tobacco is destined for either an approved person or a premises that is specified in an approval. It also provides appropriate sanctions, including penalties and forfeiture, where any unapproved person has any involvement with raw tobacco.
From the consultation responses, it is expected that between 20 and 40 businesses will apply for approval. The one-off costs of familiarisation with the scheme and of making the application will be negligible. The raw tobacco scheme will protect £10 million of revenue per year by 2017-18, as certified by the Office for Budget Responsibility. The tobacco rate that applies to other smoking tobacco can be charged only until a tobacco product is produced, and if that happens, the correct tobacco rate will of course apply from that point. The clause will reduce the risk of evasion of excise duty by prohibiting activities involving raw tobacco by an unapproved person, to prevent the illegal manufacture of tobacco products.
Question put and agreed to.
Clause 167 accordingly ordered to stand part of the Bill.
Clause 168
Powers to obtain information about certain tax advantages
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
That schedule 24 be the Twenty-fourth schedule to the Bill.
Clauses 169 and 170 stand part.
Rebecca Long Bailey
These clauses give HMRC the power to collect and publish data relating to claimants of certain tax reliefs listed in schedule 24; I will not detail them all. The aim is essentially to make it easier for the European Commission to assess whether any such reliefs constitute state aid, in accordance with relevant EU obligations that commence on 1 July 2016. Information will be published only for beneficiaries who are in receipt of aid above €500,000, and the specific amount of tax advantage will not be published.
State aid is defined by the European Commission as
“an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities.”
We do not have any issue with the principle behind the clauses—despite the obvious question of whether they will all need to be repealed in a few years’ time—but I have a question about clause 170(3) to (5), which allows the Treasury to amend the list of reliefs in schedule 24 by statutory instrument made under the negative procedure, meaning that it will not be debated. That raises the issue of scrutiny. Under what circumstances will the list be updated? I hope the Minister can provide some clarity on that. However, overall there does not appear to have been much reaction to the measures in these clauses, and we will not oppose them today.
Mr Gauke
Clauses 168 to 170 and schedule 24 introduce new powers to allow HMRC to collect information on certain tax reliefs and exemptions. They will allow HMRC to improve its ability to monitor and evaluate the effectiveness and value of those reliefs, which constitute state aid. The powers will also allow some of that information to be shared with the European Commission through a legal gateway and published on a public website.
Improved the monitoring and evaluation of state aid provided to UK businesses via tax reliefs and advantages is a sensible step forward. It may help if I provide hon. Members with some background. State aid is an advantage granted to an undertaking by public authorities through state resources on a selective basis. The Government support improved monitoring and evaluation of aid, to ensure that tax reliefs or advantages are well targeted and of value to the UK.
The provisions will allow HMRC to determine what information should be included in any claim for tax relief, to collect information from relevant persons in receipt of state aid and to publish and disclose relevant information about state aid received by beneficiaries. The changes will only affect UK businesses in receipt of state aid in the form of certain tax reliefs, and we will engage with those affected to ensure that they are ready.
Rebecca Long Bailey
This clause provides a power, first, to define by regulations a qualifying transformer company, and secondly, to determine by regulations the tax treatments of QTCs, investors in QTCs and transactions involving QTCs. The Committee will be aware from my comments earlier in the week that transformer vehicles are used by insurance companies to transform receivables, such as the repayments for a bundle of mortgages from a group of mortgage borrowers, into a security. It is right to express extreme caution about that procedure, given that it was the process of securitisation in the US sub-prime mortgage market that led to the financial crisis in 2007-08.
The provision appears to be broadly unobjectionable, but it provides a power for the Treasury to create regulations. If memory serves me correctly, the issue was discussed recently during the passage of the Bank of England and Financial Services Act 2016. Securitisation structures operate by transferring assets, whether sub-prime mortgages, credit card receivables or similar cash flows, into off-balance-sheet special purpose vehicles. Ordinarily, the profits or cash flows received from those assets pass through the special purpose vehicle to the investors who have acquired bonds in it. Usually, the residual amounts—the focus of clause 61, which I spoke about at length earlier in the week—that are left in the special purpose vehicle are small amounts compared with the sums that are paid to the investors.
However, as with all such artificial financial structures, it is possible to manipulate those amounts. If the residual amounts held by special purpose vehicles are to be saved from withholding tax, as clause 61 provides, and treated in a different manner for tax purposes, that makes it possible for the payment flows through a special purpose vehicle to be artificially raised so that larger sums can benefit from that different tax treatment.
What concerns me is as follows. What is stopping an unscrupulous financial institution involved in the industry of off-the-peg tax avoiding derivatives from passing large sums that would otherwise be subject to withholding tax—for example as payments of interest—through special purpose vehicles? Have the Government considered in detail how such cash flows should be treated so as to prevent artificial or abusive tax avoidance? Are the Government satisfied that they have done enough work to identify contexts in which transformer vehicles might be used for tax avoidance purposes? For example, subsection (4)(c) acknowledges that the regulations must consider attempts to obtain a tax advantage using transformer vehicles.
I understand that from 1 March to 29 April, the Treasury ran a consultation on insurance-linked securities, to which there is not yet a Government response. The website still says:
“We are analysing your feedback”.
Will the Minister say why a response to the consultation was not published before this clause came before the Committee?
Mr Gauke
To address directly the points raised by the hon. Lady, the regime does not present significant avoidance opportunities. The tax approach will be contingent on regulatory rules being met, which will ensure that the tax rules are appropriately targeted. In addition, the clause allows for a tailored avoidance rule, specific to the regime. That will be in addition to other anti-avoidance rules that are in place, such as the general anti-abuse rule.
The hon. Lady raised the familiar issue of securitisation and the risks involved. It is worth pointing out that insurance-linked securities deals are not the kind of financial asset securitisations that were a contributory factor in the financial crisis. ILS deals are essentially specialist reinsurance deals that are fully funded to meet the risks that they take on. That full funding requirement will be a crucial safeguard in the new UK framework. Insurance-linked securities were an asset class that performed very well during the financial crisis, and they continue to do so. I hope that that provides some reassurance to her.
I should say a word about the consultation on this matter. A formal consultation was launched in March 2016. The Government consulted the London Market Group’s ILS taskforce and a range of market participants on the development of a framework that will allow vehicles that issue ILS deals to locate in the UK. Respondents were supportive of the general approach outlined in the consultation, and the comments received will inform the drafting of secondary legislation made under this power. As for why those comments are unpublished, detailed rules will be included within regulations, which will be subject to further consultation over the summer, in addition to ongoing discussion with the industry taskforce.
I hope that those points are helpful to the Committee and that the clause will stand part of the Bill.
Question put and agreed to.
Clause 171 accordingly ordered to stand part of the Bill.
Clause 172
Office of Tax Simplification
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Amendment 140, in schedule 25, page 569, line 2, at end insert
“, subject to subsection (4A).
(4A) The chair of the OTS will be appointed by the Chancellor of the Exchequer with the consent of the Treasury Committee of the House of Commons.”
Amendment 141, in schedule 25, page 570, line 21, leave out from “considers” to end of line 22 and insert
“sufficient for the OTS to fulfil its duties.”
That schedule 25 be the Twenty-fifth schedule to the Bill.
Amendment 142, in clause 173, page 254, line 32, after “contributions” insert “and tax reliefs”.
Clause 173 stand part.
Amendment 137, in clause 174, page 255, line 5, after “Exchequer” insert
“or as the OTS considers appropriate”.
Amendment 138, in clause 174, page 255, line 13, leave out “Chancellor of the Exchequer” and insert “OTS”.
Clause 174 stand part.
Amendment 139, in clause 175, page 255, line 26, leave out “Chancellor of the Exchequer” and insert “OTS”.
Clauses 175 to 177 stand part.
Mr Gauke
Clause 172 and schedule 25 place the Office of Tax Simplification and its governance arrangements on a permanent statutory footing. I will also cover the other clauses in this group. The Government are making these changes to reinforce the OTS’s independence, ensure that it can play a greater role in public debate, and expand its role and capacity to advise the Government on tackling complexity in the tax system.
I would like to provide hon. Members with some background to the changes. The Government established the OTS as a temporary, non-statutory office of the Treasury in July 2010 to provide the Chancellor with independent advice on options for addressing existing complexity in the tax system. Since then, the OTS has made more than 400 recommendations to simplify the tax system, almost half of which have been implemented by the Government. To ensure that the OTS continues that important work, the Chancellor announced at summer Budget 2015 that the Government intended to put the OTS on a permanent statutory footing in this Bill.
The changes made by clause 172 and schedule 25 put the OTS on a statutory footing and strengthen its governance and operations. The OTS board must include the OTS chair and tax director and representatives from the Treasury and HMRC. In addition, the chair may nominate up to four further non-executive members to be approved by the Chancellor to provide the board with additional challenge and guidance.
Clauses 173 to 175 specify the enhanced functions and operations of the OTS. As part of the OTS’s expanded role, it will be able to provide advice on the simplification of the tax system as it considers appropriate, which is something that it has never been able to do before, as well as undertake reviews on areas of the tax system at the request of the Chancellor of the Exchequer. Where the OTS has conducted a review at the Chancellor’s request, he must publish a response.
The new OTS will also be more accountable and transparent. Clause 175 requires the OTS to publish an annual report on the performance of its functions. To ensure the OTS’s long-term effectiveness, clause 176 requires the Treasury to review its work every five years and stipulates that such reviews must be published. Clause 177 gives the Treasury power to appoint the day when the legislation establishing the OTS will take effect. That will be done by the end of 2016.
If I may, I would like to respond briefly to amendments 137 to 142, which would amend clauses 174 and 175 and schedule 25. Amendment 137 would allow the OTS to conduct reviews on aspects of the tax system as it considers appropriate. Clause 173 makes a provision for the OTS to provide advice to the Chancellor on aspects of the tax system as it considers appropriate, which is a power that the OTS has never had before. That is appropriate to its advisory role.
Amendments 138 and 139 would provide for the OTS to lay reports before Parliament. The OTS’s role is to advise the Chancellor on aspects of the tax system. It does not have a scrutiny function. It is therefore right that the Chancellor, who is accountable for the Treasury and its independent offices, should publish and lay the OTS reports in Parliament. The Chancellor also has the ability to make statements regarding OTS reports when laying them in Parliament. The OTS does not have that ability.
Amendment 140 would require the Chancellor to seek the approval of the Treasury Committee before appointing a new OTS chair. The role of the OTS is to advise on the simplification of the tax system; it does not have an Executive function. It is for the Chancellor to make the final decisions on tax policy while balancing the competing objectives of simplification, fairness and growth. The Government are nevertheless clear that the independence of the OTS is critical to its success and that is why we have strengthened the OTS’s board and introduced legislation that will put it on a statutory footing. The Bill will allow the OTS to advise the Chancellor on the simplification of the tax system as it considers appropriate, which it has not been able to do before. The Government believe that these measures, as well as the Treasury Committee’s right to hold a post-appointment hearing for the OTS’s chairman and tax director, are sufficient to achieve the independence proportionate to the function of the OTS.
Amendment 141 seeks to ensure that the OTS has the funding it needs to carry out its functions. The amendment is not necessary. The Treasury has increased the OTS’s budget by nearly 50%, expanding its capacity with up to 10 full-time employees—an increase from six in the previous Parliament. Finally, amendment 142 looks to include tax reliefs in the OTS’s remit. That is not needed as tax reliefs are already in the scope of the OTS’s remit. Clause 173 provides for the OTS to give advice on the simplification of the tax system, which encompasses tax reliefs. I therefore urge Members to reject the amendments.
May I take this opportunity to thank John Whiting for his services to the OTS as tax director and congratulate him on his recent appointment as a CBE? He has served the OTS with much distinction and he will be greatly missed when he moves on. He has put a huge amount of effort into getting the OTS not only up and running but functioning well over a number of years.
The Government are committed to a tax system that is simple to understand and easy to comply with. The OTS has a key role to play in that. By tackling the big complexities in the system, the OTS can make a genuine difference to taxpayers. Establishing the OTS on a permanent, statutory footing will reinforce its independence and ensure that it can continue to provide robust and independent recommendations to the Government on simplifying the tax system. I hope that the clauses and schedule will stand part of the Bill.
Rebecca Long Bailey
We will not press our amendments to a vote, but I want the Minister to understand our rationale for tabling them. As he has already explained, these clauses and schedule 25 make provisions for the OTS’s governance, operation and functions. We support the measures, as we believe that the OTS made some valuable contributions during the previous Parliament to informing debate about taxation and challenging the Government, but we believe strongly that it should be clearly independent. As such, we have tabled amendments to try to beef up the Bill in that regard.
Amendment 140 would amend schedule 25 to specify that the chair of the OTS should be appointed by the Chancellor of the Exchequer with the Treasury Committee’s consent, as is the case with the Office for Budget Responsibility. We think that that is a sensible approach to ensure the impartiality of the OTS. I am sure that the Minister is aware that Labour has placed on record its concerns about the OTS being used for political purposes. We therefore think that the consent of the Treasury Committee to the appointment of the OTS’s chair would be beneficial, and it would be helpful to hear the Minister’s thoughts about that idea in principle.
Amendment 141 would ensure that the Chancellor was not able to refuse to provide funding for OTS inquiries that he did not deem to be within its remit, as I understand could be the case as the Bill currently stands. The amendment would make it harder for the Chancellor to refuse to fund inquiries.
Amendment 142 would insert tax reliefs specifically into the OTS’s functions, allowing it to review the best way to simplify the ever-growing number of tax breaks and reliefs. The Opposition are concerned that there does not seem to be an effective process to review the efficacy of those tax breaks and reliefs in achieving their desired aims, and it would therefore be sensible to insert tax reliefs directly into the functions of the OTS.
Amendments 137 and 138 relate to the reports and reviews that the OTS will produce. Amendment 137 would clarify that the OTS could produce reports as it considered appropriate, not just at the request of the Chancellor, and amendment 138 would allow the OTS directly to lay reports before Parliament. As the Bill currently stands, the OTS will report to the Chancellor, who can then lay those reports before Parliament. The amendments would give the OTS greater independence and accountability to Parliament, not just to the Chancellor.
We will not press the amendments to a vote, but I hope that the Minister will take time to consider and address the Opposition’s concerns about the Bill as drafted and that the Government will be willing to move on those issues in due course.
Mr Gauke
I am grateful for the hon. Lady’s remarks in support of the OTS. I addressed many of her points in my earlier remarks, but let me briefly come back to the point about independence. The role of the OTS is fundamentally different from that of the OBR. The OBR is a scrutinising body. Rather than the OTS having an Executive function, its role is to provide advice to the Chancellor on simplification of the tax system. Ministers then make the final decisions on tax policy and are held accountable for those decisions.
The hon. Lady expressed concern that the OTS’s independence is at risk because the Chancellor could withhold funding because the Treasury do not like what the OTS is doing. I do not think that is a real risk. It is worth making the point that the OTS budget has been expanded, providing it with the funding that it needs. It is also worth highlighting the OTS’s expanded role in providing advice on the simplification of the tax system as it considers appropriate, as opposed to where it has been given a specific remit.
I touched on many of those points in my earlier remarks, but I wanted to take this opportunity to reiterate them. I am pleased that there is cross-party support for the existence and role of the OTS and welcome that this afternoon.
Question put and agreed to.
Clause 172 accordingly ordered to stand part of the Bill.
Schedule 25 agreed to.
Clauses 173 to 179 ordered to stand part of the Bill.
The Chair
We now come to new clauses. Before I start with Government new clause 7, it might be helpful to point out to the hon. Member for Aberdeen North that we will take the free-standing new clauses in the name of her hon. Friend the Member for Kirkcaldy and Cowdenbeath at the end of the Government new clauses. She has been very patient and if she hangs on a bit longer, her moment will come.
New Clause 7
Receipts from intellectual property: diverted profits tax
‘(1) Part 3 of FA 2015 (diverted profits tax) is amended as follows.
(2) In section 79 (charge to tax), at the end insert—
“(6) But banking surcharge profits and notional banking surcharge profits, to the extent that they are determined by reference to notional PE profits (or what would have been notional PE profits) for an accounting period, do not include any amount which is (or would have been) included in notional PE profits for that period by virtue of section 88(5)(b).”
(3) In section 88 (which relates to the calculation of taxable diverted profits), for subsection (5) substitute—
“(5) “Notional PE profits”, in relation to an accounting period, means an amount equal to the sum of—
(a) the amount of profits (if any) which would have been the chargeable profits of the foreign company for that period, attributable (in accordance with sections 20 to 32 of CTA 2009) to the avoided PE, had the avoided PE been a permanent establishment in the United Kingdom through which the foreign company carried on the trade mentioned in section 86(1)(b), and
(b) an amount equal to the total of royalties or other sums which are paid by the foreign company during that period in connection with that trade in circumstances where the payment avoids the application of section 906 of ITA 2007 (duty to deduct tax).
(5A) For the purposes of subsection (5)(b) a payment of a royalty or other sum avoids the application of section 906 of ITA 2007 if—
(a) that section does not apply in relation to the payment, but
(b) that section would have applied in relation to the payment had the avoided PE been a permanent establishment in the United Kingdom through which the foreign company carried on the trade mentioned in section 86(1)(b).”
(4) In section 100 (credit for UK or foreign tax on same profits), for the heading substitute “Credits for tax on the same profits”.
(5) In section 100, after subsection (2) insert—
“(2A) Subsection (2)(b) does not allow a credit against a liability to diverted profits tax if or to the extent that the liability arises by virtue of section 88(5)(b) (payments of royalties etc).”
(6) In section 100, after subsection (4) insert—
“(4A) Subsection (4B) applies where—
(a) a company’s notional PE profits for an accounting period include an amount under section 88(5)(b) determined by reference to a royalty or other sum,
(b) the company’s liability to diverted profits tax for the accounting period is determined by reference to taxable diverted profits calculated under section 91(4) or (5), and
(c) those taxable diverted profits include an amount of relevant taxable income referred to in section 91(4)(b) or (5)(b) determined by reference to the same royalty or other sum.
(4B) A credit equal to the company’s liability to diverted profits tax for that accounting period which arises by virtue of section 88(5)(b) in respect of the royalty or other sum, to the extent that it is included in relevant taxable income for the purposes of section 91(4)(b) or (5)(b), is allowed against the company’s total liability to diverted profits tax for that period.
(4C) Subsection (4D) applies where—
(a) by reason of the payment of a royalty or other sum a company’s liability to diverted profits tax for an accounting period includes liability arising by virtue of section 88(5)(b),
(b) the royalty or other sum is paid to a person who is resident in a country or territory outside the United Kingdom, and
(c) under any relevant provision relief would have been due to that person had the avoided PE been a permanent establishment in the United Kingdom through which the company carried on the trade mentioned in section 86(1)(b).
(4D) Such credit as is just and reasonable having regard to the amount of the relief referred to in subsection (4C)(c) is allowed against the company’s liability to diverted profits tax.
(4E) In subsection (4C)(c) “relevant provision” means—
(a) the provision of a double taxation arrangement (as defined by section 2(4) of TIOPA 2010), or
(b) section 758 of ITTOIA 2005 (exemption for certain interest and royalty payments).”
(7) The amendments made by this section have effect in relation to accounting periods ending on or after 28 June 2016.
(8) For the purposes of section 88(5)(b) of FA 2015 as inserted by this section, a royalty or other sum which would not otherwise be regarded as paid during an accounting period ending on or after 28 June 2016 is to be regarded as so paid if—
(a) for the purposes of section 906 of ITA 2007 it is regarded as paid on a date during that period by virtue of section (deduction of income tax at source: intellectual property)(6), or
(b) for the purposes of section 577A(1) of ITTOIA 2005 it is regarded as paid on a date during that period by virtue of section (receipts from intellectual property: territorial scope)(5).”’—(Mr Gauke.)
Brought up, read the First and Second time, and added to the Bill.
New Clause 8
Deduction of income tax at source: intellectual property
‘(1) Part 15 of ITA 2007 (deduction from other payments connected with intellectual property) is amended as specified in subsections (2) and (3).
(2) In section 906 (certain royalties etc where usual place of abode of owner is abroad), for subsections (1) to (3) substitute—
“(1) This section applies to any payment made in a tax year where condition A or condition B is met.
(2) Condition A is that—
(a) the payment is a royalty, or a payment of any other kind, for the use of, or the right to use, intellectual property (see section 907),
(b) the usual place of abode of the owner of the intellectual property is outside the United Kingdom, and
(c) the payment is charged to income tax or corporation tax.
(3) Condition B is that—
(a) the payment is a payment of sums payable periodically in respect of intellectual property,
(b) the person entitled to those sums (“the assignor”) assigned the intellectual property to another person,
(c) the usual place of abode of the assignor is outside the United Kingdom, and
(d) the payment is charged to income tax or corporation tax.”
(3) For section 907 substitute—
‘907 Meaning of “intellectual property”
(1) In section 906 “intellectual property” means—
(a) copyright of literary, artistic or scientific work,
(b) any patent, trade mark, design, model, plan, or secret formula or process,
(c) any information concerning industrial, commercial or scientific experience, or
(d) public lending right in respect of a book.
(2) In this section “copyright of literary, artistic or scientific work” does not include copyright in—
(a) a cinematographic film or video recording, or
(b) the sound-track of a cinematographic film or video recording, except so far as it is separately exploited.”’
(4) The amendments made by subsections (2) and (3) have effect in respect of payments made on or after 28 June 2016.
(5) In determining whether section 906 of ITA 2007 applies to a payment, no regard is to be had to any arrangements the main purpose of which, or one of the main purposes of which, is to avoid the effect of the amendments made by this section.
(6) Where arrangements are disregarded under subsection (5) in relation to a payment which—
(a) is made before 28 June 2016, and
(b) is due on or after that day,
the payment is to be regarded for the purposes of section 906 of ITA 2007 as made on the date on which it is due.
(7) In determining the date on which a payment is due for the purposes of subsection (6), disregard the arrangements referred to in that subsection.
(8) In this section “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable and whether entered into before, or on or after, 28 June 2016).”’—(Mr Gauke.)
Brought up, read the First and Second time, and added to the Bill.
New Clause 9
Receipts from intellectual property: territorial scope
‘(1) In section 577 of ITTOIA 2005 (territorial scope of Part 5 charges), at the end insert—
“(5) See also section 577A (territorial scope of Part 5 charges: receipts from intellectual property).”
(2) After that section insert—
‘577A Territorial scope of Part 5 charges: receipts from intellectual property
(1) References in section 577 to income which is from a source in the United Kingdom include income arising where—
(a) a royalty or other sum is paid in respect of intellectual property by a person who is non-UK resident, and
(b) the payment is made in connection with a trade carried on by that person through a permanent establishment in the United Kingdom.
(2) Subsection (3) applies where a royalty or other sum is paid in respect of intellectual property by a person who is non-UK resident in connection with a trade carried on by that person only in part through a permanent establishment in the United Kingdom.
(3) The payment referred to in subsection (2) is to be regarded for the purposes of subsection (1)(b) as made in connection with a trade carried on through a permanent establishment in the United Kingdom to such extent as is just and reasonable, having regard to all the circumstances.
(4) In determining for the purposes of section 577 whether income arising is from a source in the United Kingdom, no regard is to be had to arrangements the main purpose of which, or one of the main purposes of which, is to avoid the effect of the rule in subsection (1).
(5) In this section—
“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable);
“intellectual property” has the same meaning as in section 579;
“permanent establishment”—
(a) in relation to a company, is to be read (by virtue of section 1007A of ITA 2007) in accordance with Chapter 2 of Part 24 of CTA 2010, and
(b) in relation to any other person, is to be read in accordance with that Chapter but as if references in that Chapter to a company were references to that person.”’
(3) The amendments made by subsections (1) and (2) have effect in relation to royalties or other sums paid in respect of intellectual property on or after 28 June 2016.
(4) It does not matter for the purposes of subsection (4) of section 577A of ITTOIA 2005 (as inserted by this section) whether the arrangements referred to in that subsection are entered into before, or on or after, 28 June 2016.
(5) Where arrangements are disregarded under subsection (4) of section 577A of ITTOIA 2005 (as inserted by this section) in relation to a payment of a royalty or other sum which—
(a) is made before 28 June 2016, but
(b) is due on or after that day,
the payment is to be regarded for the purposes of subsection (1) of that section as made on the date on which it is due.
(6) In determining the date on which a payment is due for the purposes of subsection (5), disregard the arrangements referred to in that subsection.
(7) Where—
(a) an intellectual property royalty payment within the meaning of section 917A of ITA 2007 is made on or after 28 June 2016,
(b) the payment is made under arrangements (within the meaning of that section) entered into before that day,
(c) the arrangements are not DTA tax avoidance arrangements for the purposes of that section,
(d) it is reasonable to conclude that the main purpose, or one of the main purposes, of the arrangements was to obtain a tax advantage by virtue of any provisions of a foreign double taxation arrangement, and
(e) obtaining that tax advantage is contrary to the object and purpose of those provisions,
the arrangements are to be regarded as DTA tax avoidance arrangements for the purposes of section 917A of ITA 2007 in relation to the payment.
(8) In subsection (7)—
“foreign double taxation arrangement” means an arrangement made by two or more territories outside the United Kingdom with a view to affording relief from double taxation in relation to tax chargeable on income (with or without other tax relief);
“tax advantage” is to be construed in accordance with section 208 of FA 2013 but as if references in that section to “tax” were references to tax chargeable on income under the law of a territory outside the United Kingdom.
(9) Where—
(a) a royalty is paid on or after 28 June 2016,
(b) the right in respect of which the royalty is paid was created or assigned before that day,
(c) section 765(2) of ITTOIA 2005 does not apply in relation to the payment, and
(d) it is reasonable to conclude that the main purpose, or one of the main purposes, of any person connected with the creation or assignment of the right was to take advantage, by means of that creation or assignment, of the law of any territory giving effect to Council Directive 2003/49/EC of 3rd June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different member States,
section 758 of ITTOIA 2005 does not apply in relation to the payment.”’—(Mr Gauke.)
Brought up, read the First and Second time, and added to the Bill.
New Clause 10
Stamp duty: acquisition of target company’s share capital
‘(1) Section 77 of FA 1986 (acquisition of target company’s share capital) is amended as follows.
(2) In subsection (3), omit the “and” at the end of paragraph (g) and after paragraph (h) insert “, and
(i) at the time the instrument mentioned in subsection (1) is executed there are no disqualifying arrangements, within the meaning given by section 77A, in existence.”
(3) In subsection (3A) for “(3)” substitute “(3)(b) to (h)”.
(4) In subsection (4) after “this section” insert “and section 77A”.
(5) After section 77 of FA 1986 insert—
“77A Disqualifying arrangements
(1) This section applies for the purposes of section 77(3)(i).
(2) Arrangements are “disqualifying arrangements” if it is reasonable to assume that the purpose, or one of the purposes, of the arrangements is to secure that—
(a) a particular person obtains control of the acquiring company, or
(b) particular persons together obtain control of that company.
(3) But neither of the following are disqualifying arrangements—
(a) the arrangements for the issue of shares in the acquiring company which is the consideration for the acquisition mentioned in section 77(3);
(b) any relevant merger arrangements.
(4) In subsection (3) “relevant merger arrangements” means arrangements for the issue of shares in the acquiring company to the shareholders of a company (“company B”) other than the target company (“company A”) in a case where—
(a) that issue of shares to the shareholders of company B would be the only consideration for the acquisition by the acquiring company of the whole of the issued share capital of company B,
(b) the conditions in section 77(3)(c) and (e) would be met in relation to that acquisition (if that acquisition were made in accordance with the arrangements), and
(c) the conditions in paragraphs (f) to (h) of section 77(3) would be met in relation to that acquisition if—
(i) that acquisition were made in accordance with the arrangements, and
(ii) the shares in the acquiring company issued as consideration for the acquisition of the share capital of company A were ignored for the purposes of those paragraphs;
and in section 77(3)(e) to (h) and (3A) as they apply by virtue of this subsection, references to the target company are to be read as references to company B.
(5) Where—
(a) arrangements within any paragraph of subsection (3) are part of a wider scheme or arrangement, and
(b) that scheme or arrangement includes other arrangements which—
(i) fall within subsection (2), and
(ii) do not fall within any paragraph of subsection (3),
those other arrangements are disqualifying arrangements despite anything in subsection (3).
(6) In this section—
“the acquiring company” has the meaning given by section 77(1);
“arrangements” includes any agreement, understanding or scheme (whether or not legally enforceable);
“control” is to be read in accordance with section 1124 of the Corporation Tax Act 2010;
“the target company” has the meaning given by section 77(1).”
(6) The amendments made by this section have effect in relation to any instrument executed on or after 29 June 2016 (and references to arrangements in any provision inserted by this section include arrangements entered into before that date).’—(Mr Gauke.)
Brought up, and read the First time.
Mr Gauke
I beg to move, That the clause be read a Second time.
I will speak briefly about new clause 10, unless there are questions. The new clause stops an unfair stamp duty advantage where takeovers are brought about through share-for-share exchanges with no stamp duty becoming due. It will ensure that the tax system operates fairly by preventing share-for-share relief from being claimed in situations for which it was not intended. The change made by the clause will catch the insertion of a new company above another by way of a share-for-share exchange as part of a wider transaction involving transfer of a controlling stake in the new company. The change will mean that no share-for-share relief will be available where arrangements are in place, at the time of the share-for-share exchange, for a change of control of the new company. The measure will apply to any instrument exercised on or after 29 June 2016.
New clause 10 will stop share-for-share relief being claimed inappropriately on takeovers. The Government have acted quickly to prevent an unfair tax advantage and to protect significant tax revenue.
Question put and agreed to.
New clause 10 accordingly read a Second time, and added to the Bill.
New Clause 11
Corporation tax: territorial scope etc
“(1) Section 5 of CTA 2009 (territorial scope of charge) is amended in accordance with subsections (2) to (4).
(2) For subsection (2) substitute—
‘(2) A non-UK resident company is within the charge to corporation tax only if—
(a) it carries on a trade of dealing in or developing UK land (see section 5B), or
(b) it carries on a trade in the United Kingdom (other than a trade of dealing in or developing UK land) through a permanent establishment in the United Kingdom.’
(3) After subsection (2) insert—
‘(2A) A non-UK resident company which carries on a trade of dealing in or developing UK land is chargeable to corporation tax on all its profits wherever arising that are profits of that trade.’
(4) In subsection (4), after ‘(1)’ insert ‘, (2A)’.
(5) After section 5 of CTA 2009 insert—
“5A Arrangements for avoiding tax
(1) Subsection (3) applies if a company has entered into an arrangement the main purpose or one of the main purposes of which is to obtain a relevant tax advantage for the company.
(2) In subsection (1) the reference to obtaining a relevant tax advantage includes obtaining a relevant tax advantage by virtue of any provisions of double taxation arrangements, but only in a case where the relevant tax advantage is contrary to the object and purpose of the provisions of the double taxation arrangements (and subsection (3) has effect accordingly, regardless of section 6(1) of TIOPA 2010).
(3) The relevant tax advantage is to be counteracted by means of adjustments.
(4) For this purpose adjustments may be made (whether by an officer of Revenue and Customs or by the company) by way of an assessment, the modification of an assessment, amendment or disallowance of a claim, or otherwise.
(5) In this section “relevant tax advantage” means a tax advantage in relation to corporation tax to which the company is chargeable (or would without the tax advantage be chargeable) by virtue of section 5(2A).
(6) In this section—
“arrangement” (except in the phrase “double taxation arrangements”) includes any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable;
“double taxation arrangements” means arrangements which have effect under section 2(1) of TIOPA 2010 (double taxation relief by agreement with territories outside the United Kingdom);
“tax advantage” has the meaning given by section 1139 of CTA 2010.
5B Trade of dealing in or developing UK land
‘(1) A non-UK resident company’s “trade of dealing in or developing UK land” consists of —
(a) any activities falling within subsection (2) which it carries on, and
(b) any activities from which profits, gains or losses arise which are treated under Part 8ZB of CTA 2010 as profits or losses of the company’s trade of dealing in or developing UK land.
(2) The activities within this subsection are—
(a) dealing in UK land;
(b) developing UK land for the purpose of disposing of it.
(3) In this section “land” includes—
(a) buildings and structures,
(b) any estate, interest or right in or over land, and
(c) land under the sea or otherwise covered by water.
(4) In this section—
“disposal” is to be interpreted in accordance with section 356OQ of CTA 2010;
“UK land” means land in the United Kingdom.”
(6) In section 3 of CTA 2009 (exclusion of charge to income tax), in subsection (1), for paragraph (b) substitute—
“(b) the company is not UK resident and—
(i) the income is profits of a trade of dealing in or developing UK land, or
(ii) the income is within its chargeable profits as defined by section 19.”
(7) In section 18A of CTA 2009 (exemption for profits or losses of foreign permanent establishments), after subsection (2) insert—
“(2A) But profits and losses are not to be left out of account as mentioned in subsection (2) so far as they are, or would if the company were non-UK resident be, profits of the company’s trade of dealing in or developing UK land (as defined in section 5B).”
(8) In section 19 of CTA 2009 (chargeable profits)—
(a) in subsection (2) for “company’s chargeable profits” substitute “company’s “chargeable profits””;
(b) after subsection (2) insert—
“(2A) But the company’s “chargeable profits” do not include profits of a trade of dealing in or developing UK land (and accordingly such profits are not attributable to any permanent establishment of the company).”
(9) In section 189 of CTA 2009 (post-cessation receipts: extent of charge to tax), in subsection (4), at the end insert “other than a company’s trade of dealing in or developing UK land”.
(10) In section 107 of CTA 2010 (restrictions on losses etc surrenderable by non-UK resident), in subsection (1), for the words from “non-UK resident” to the end substitute “non-UK resident company—
(a) carrying on a trade of dealing in or developing UK land, or
(b) carrying on a trade in the United Kingdom through a permanent establishment.”
(11) In section 1119 of CTA 2010 (definitions for purposes of Corporation Tax Acts), at the appropriate place insert—
““trade of dealing in or developing UK land”, in relation to a non-UK resident company, has the meaning given by section 5B of CTA 2009,”.”—(Mr Gauke.)
Brought up, and read the First time.
The Chair
With this it will be convenient to discuss the following:
Government new clause 12—Corporation tax: transactions in UK land.
Government new clause 13—Income tax: territorial scope etc.
Government new clause 14—Income tax: transactions in UK land.
Government new clause 15—Pre-trading expenses.
Government new clause 16—Commencement and transitional provision: sections (Corporation tax: territorial scope etc), (Corporation tax: transactions in UK land) and (Pre-trading expenses).
Government new clause 17—Commencement and transitional provision: sections (Income tax: transactions in UK land) and (Income tax: territorial scope etc).
Mr Gauke
New clauses 11 to 17 will introduce the legislation announced in the 2016 Budget for a specific charge to income tax or corporation tax on profits from the disposal of land in the UK. The new clauses will ensure that offshore structures cannot be used to avoid UK tax on profits generated from dealing in or developing land in the UK.
New clauses 11, 12 and 15 will introduce new rules to ensure that profits generated by a company from dealing in or developing land in the UK will be chargeable to UK corporation tax. Those rules will apply regardless of the residence of the person carrying on the trade and regardless of whether the developer has a permanent establishment in the UK.
New clauses 13 and 14 will ensure that the profits generated by an individual from dealing in or developing land will always be chargeable to UK income tax. To prevent avoidance, the new charge will also apply where, instead of dealing in land, a developer sells shares in a company that carries on such developments. It will also apply where arrangements are put in place to split profits from development activity between the developer and related entities that could otherwise reduce chargeable allowance. In addition, the Government have strengthened long-standing rules on transactions in land to ensure that they can effectively counter abuse of the new rules.
To support those new rules, the Government are introducing an anti-avoidance rule to prevent manipulation between the policy announcement on Budget day 2016 and the introduction of the new clauses. The anti-avoidance rule is in new clause 16 for corporation tax and new clause 17 for income tax, along with other commencement and transitional rules. We have taken steps to amend our double taxation treaties; I am grateful to our partners in Guernsey, the Isle of Man and Jersey for agreeing to make changes to those treaties, taking effect from Budget day 2016. These measures will raise £2.2 billion over the scorecard period and take effect from 5 July 2016; they will affect developers of UK property who choose to operate from somewhere other than the UK to reduce their tax bills. There will be no effect on companies, based in the UK or elsewhere, whose profits are already fully taxed in the UK.
The changes made by new clauses 11 to 17 will continue the Government’s fight against aggressive tax planning and profit shifting. They will bring the UK in line with other major economies and ensure fair treatment between UK and overseas developers.
Rebecca Long Bailey
The measures appear to be closing a tax loophole. On that basis, we do not oppose them, especially as they are estimated to bring in £130 million in this financial year, rising to a peak of £640 million in 2019-20. I must say, however, that this important addition to the Bill was tabled rather late in the day, even if the outline of the measure itself was announced for consultation at the Budget. It could be argued that the Opposition and stakeholders have been given insufficient time to go through the detail of the legislation.
None the less, the Chartered Institute of Taxation has identified two areas of concern on which it would like some clarification. First, will the Minister confirm that the Government do not intend pure investment structures to be affected by the new measures? Secondly, will he confirm that new clause 16 is simply a timing rule dealing with the opposition of pre-trading expenditure that would not be deductible under normal principles and where reliance needs to be placed on section 61 of the Corporation Tax Act 2009? The concern is that the clause seeks to restrict normal trading expenses incurred prior to the company’s falling within the new charge. Some clarification from the Minister on those points would be appreciated.
Mr Gauke
I will of course address the questions that the hon. Lady has raised, but it might be helpful if I first provide a bit of background. Stamp duty is usually payable at 0.5% on instruments that transfer shares—no, I do not want to give that background. [Interruption.]
Kirsty Blackman
I beg to move, That the clause be read a Second time.
My apologies for causing confusion earlier. If I am ever lucky enough to be on a Finance Bill again, I promise to try hard not to cause so much confusion.
The Government will not be surprised that we have tabled this new clause, because it concerns an ongoing issue between the Scottish and UK Governments. We feel that it still requires attention. To give a little background, before the incorporation of the police and fire authorities, regional authorities were gifted VAT exemption for the fire and rescue and police services. In 2013, when the single Scottish police force and the fire service were brought in, the VAT exemption failed to be carried over to the new services.
The Government argue that the exemption should not apply because national non-departmental public bodies are outside the exemptions under the Value Added Tax Act 1994. Since the issue has arisen, however, HMRC and HM Treasury have decided that tax breaks should be given to the new transport agency Highways England, which is a national non-departmental public body, and that the exemption should be given to the UK-wide Olympic legacy organisation, London Legacy Development Corporation. Those are comparable organisations in terms of territorial extent and they are national bodies, but they have been given the exemption. The Conservative Government can no longer say that the issue is one of fairness, when it is clearly one of unfairness.
The VAT charge, which is being levied unfairly, is costing Scotland’s emergency services tens of millions every year. We would appreciate the opportunity to spend the money on front-line services instead. We have tabled the new clause in the hope that the Government will look at the issue, particularly in the light of the fact that they have permitted exemptions for Highways England and London Legacy. The Government should consider fairness and parity.
Mr Gauke
This is a familiar debate. The new clause requests that the Treasury reviews the VAT treatment of the Scottish police and fire and rescue services, reporting the cost of VAT and what the change would be if they were eligible for a refund. I am tempted to refer the Committee to the speech I have given on numerous occasions previously, as well as to the history of this. Furthermore, the Scottish Government made the decision to reform their public services knowing full well about the VAT implications.
As was explained last year, any use of Treasury resource to review and produce a report into the financial position of Police Scotland and the Scottish Fire and Rescue Service would be unjustified. Neither is eligible to receive VAT refunds under existing legislation, and the Treasury has no intention of amending principles of the VAT refund scheme to change that. I recognise that the SNP has raised the issue before, and I dare say that it will again. However, we cannot support the new clause and, if pressed to a vote, I recommend that the Committee rejects it.
Kirsty Blackman
We wish to return to the matter on Report, so I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 4
Fuel duty regulator regime
‘The Chancellor of the Exchequer shall undertake a review of fuel duty to establish the form of fuel duty regulator regime which would best ensure stability of pricing, and report to Parliament within six months of the passing of this Act.’—(Philip Boswell.)
Brought up, and read the First time.
Philip Boswell
I apologise for any confusion, Mr Howarth. It is a pleasure to serve under your chairmanship.
I rise to ask the Minister to review the need for a fuel duty regulation regime that could mitigate the worst excesses of fuel price fluctuations and best ensure the stability of pricing. It should be obvious to even the most casual observer that fuel prices fluctuate, but it is perhaps not so obvious that the oil price typically runs through a cycle of approximately seven or eight years. As sure as oil prices go down, they inevitably go up. The fluctuation of the price between $125 per barrel in 2012 to under $30 per barrel earlier this year has had a massive impact on producers and users alike. It is good news for some that oil prices appear to be on the rise again, with oil sitting at around $50 per barrel today.
The fluctuations seriously affect road haulage companies, private road users and other transport services, as well as domestic fuel users across the country. Some of the most severely affected are those who are subject to fuel poverty. As a responsible fuel-duty regulator should, the Government could protect the most vulnerable people from the worst vagaries of the markets. In Scotland, 35% of households are affected by fuel poverty, which I am sure the Minister will agree is unacceptable. I urge him to consider a review with the objective of regulating fuel prices via a fuel duty regulator. I advise the Committee that we will press new clause 4 to a vote.
Mr Gauke
The Government oppose the inclusion of the new clause in the Bill. We recognise that, even with the recent fall in fuel prices, fuel costs remain a significant part of business and household costs, which is why it was announced at Budget 2016 that fuel duty would remain frozen for the sixth year in a row, thereby saving the average driver £75 a year and the average haulier £2,400 a year, relative to the pre-2010 fuel duty escalator. Our policy has provided greater certainty for consumers and businesses and has left pump prices much lower than they would have been.
The hon. Member for Coatbridge, Chryston and Bellshill is asking the Chancellor to undertake a review of fuel duty to establish a form of fuel duty regulatory regime that would ensure the stability of pricing. Members will remember that at Budget 2011 the Chancellor put forward a proposal for a fair fuel stabiliser that would have linked fuel duty rates more closely with oil prices. That policy would have meant that if oil prices were high, fuel duty rates would increase by RPI only, as the Government would have more revenues from the supplementary charge levied on oil and gas production. If oil prices were below the trigger price, fuel duty would have been increased by RPI plus 1p per litre, and the supplementary charge cut back to 20%. The fair fuel stabiliser was abolished in 2014 so that the Government could support the oil and gas industry without raising the tax burden on motorists. Had it been maintained, we would have had to raise fuel duty at the Budget.
A fuel duty regulator that links fuel duty to changes in oil prices would destabilise public finances by making receipts collected from the Government’s fifth-largest tax more volatile. Since 2010, oil prices have shown significant volatility, with the price per barrel ranging from between $30 to $130. By contrast, pump prices have not shown the same level of volatility.
Kirsty Blackman
I beg to move, That the clause be read a Second time.
The new clause would allow the taxation of allowances payable to Members of the House of Lords to be reviewed. Members of the House of Lords receive a tax-free allowance of £300 for every day that they pitch up and sign in. They do not all claim it, but many of them do. In 2014-15, the House of Lords sat for 126 days. That was a low number of days—normally they sit for more—but I have done some calculations on the basis of that. If one peer was there for all 126 days, they would receive £37,800 tax-free for that year. If we imagine that a lot of peers are on the 40% tax rate—many will be in the 45% bracket; not many will be on a lower tax rate—we are looking at a tax loss to the Treasury of £15,120 per peer. If 798 peers pitched up on all those days, that is a tax loss to the Treasury of £12 million.
Most peers do not turn up every day. The average attendance last year was 483 peers on any given day, which means that the loss to the Treasury is more like £7 million every year. That is quite a lot of money, and considering that the majority of those who sit in the House of Lords probably do not have a huge need for that money, I believe, as a member of a progressive party, that it would be better for some of that wealth to be redistributed. Will the Government seriously consider examining whether those people sitting in the House of Lords should, in times of austerity, receive a tax-free payment? The Treasury could easily do something on this issue; it could decide to tax the £300-a-day allowance at the appropriate level, depending on what the Member earns in other income. This is not a good use of taxpayers’ money. The money could come to the Treasury, but we are using it instead for a tax-free allowance for peers.
Mr Gauke
The Government oppose new clause 5. We are committed to ensuring a fair and more sustainable tax system for everyone, but the Finance Bill is not the appropriate vehicle to review the system of financial support for Members of the House of Lords. The new clause says that the Chancellor of the Exchequer
“shall undertake a review of the tax-free status of allowances payable to members of the House of Lords”.
The Government recognise the importance of keeping the general system of tax reliefs and allowances under review. That is done routinely by the Treasury and HMRC, who consult on changes to the tax system as part of the policy-making process, but the House of Lords introduced the present system of financial support in 2010. That system and its basis have not changed, and therefore we do not consider that the tax treatment needs to be re-examined at this time. In addition, such a review could not be carried out in isolation; the system would need to be considered as a whole, and the Finance Bill is not the vehicle to consider such constitutional reform.
Finally, this cannot be a matter solely for the Commons; we must respect the constitutional position. For the Commons to intervene on House of Lords reform without any involvement of the other House would not be the right process. It is simply not the place of the Finance Bill to legislate for such a review.
Kirsty Blackman
Given that we are asking for a review, it is quite possible that peers and the House of Lords could be consulted and have input into that review. I think the very place to discuss taxation and allowances in taxation is the Finance Bill. That is what we did with respect to workers who work through intermediaries. This is a totally sensible place to discuss this issue.
Mr Gauke
As I said, this has to be looked at in the context of the system of financial support for Members of the House of Lords in the round; we cannot look at the tax system in isolation, which is what a review under the Finance Bill would have to do. This is not the right way in which to consider the system of financial support for Members of the House of Lords. Any review of that system would need to be done in the round, and the new clause is not appropriate for the Finance Bill. I therefore urge hon. Members to oppose new clause 5, if it is pressed to a Division.
Rebecca Long Bailey
I understand that the Review Body on Senior Salaries published a review of financial support for Members of the other place in November 2009. Our position is that there needs to be a broader review of House of Lords salaries and allowances. We are happy to support the Scottish National party if the new clause is pressed to a vote; it certainly deserves consideration.
Mr Gauke
Before we conclude, I would like to make one or two remarks and thank a number of people. I am pleased that Finance Bills continue to receive excellent scrutiny, even if we have had dramatic changes in the Committee’s composition over the course of the past few days. The hon. Member for Salford and Eccles has continued the diligence and common sense of her predecessor. In the circumstances—I speak from experience, having held the Opposition Front Bencher role on Finance Bills—she has acted with great thoroughness and determination, and I congratulate her on providing scrutiny in slightly difficult circumstances, particularly as I understand she did not inherit any notes.
I should also thank the hon. Member for Wolverhampton South West (Rob Marris) for his work in the earlier stages of the Committee. I thank the SNP Members; rather remarkably, they had a larger Front-Bench team working on this Bill than the Labour party. I thank you, Mr Howarth, and Sir Roger for your guidance and wisdom in steering all Members through what can be a complex process. I owe you a particular debt for your chairing, with regard to chairs and your generosity in allowing me to stand and sit in accordance with the needs of my back, rather than the usual standards of procedure. Without that, this Committee might have been my last. As it is, I can highly recommend the curative effects of debating deep-in-the-money options.
I thank all Members on the Committee for their contributions and, indeed, non-contributions. I thank Members on the Government Benches for their patience and, above all, attendance. The Finance Bill has been considered against the backdrop of significant and dramatic events elsewhere in the Palace of Westminster. I would hesitate to suggest that the Finance Bill Committee is ever anything other than the very centre of the country’s public and political life, but I am not even sure it has been the centre of public life on this corridor. However, excitement and substance can be very different things.
I pay tribute to the Committee’s diligence and expertise in considering the wide range of issues before it. The hon. Member for Salford and Eccles shot straight to the first rank of Finance Bill humourists by observing that a clause does what it says on the tin. I will not attempt to compete with that, beyond observing that fellow Members of the Commons owe a debt to Committee members—the people who love the jobs you hate.
I thank the usual channels, my hon. Friend the Member for Central Devon and the hon. Member for St Helens North. I am particularly grateful for the assistance I received from the Exchequer Secretary to the Treasury, my hon. Friend the Member for East Hampshire. Finally, I thank the interested parties who submitted evidence to the Committee, as well as our Clerks, the Hansard Reporters and the Doorkeepers, who have ensured the smooth running of the Committee. I thank the HMRC and Treasury officials without whose inspiration this job would be much harder, and the Office of the Parliamentary Counsel, without which none of this would be possible. I look forward to us all meeting again at some point on Report.
The Chair
On behalf of the co-Chair, Sir Roger, and myself, I thank the Minister for his kind words. I particularly thank him for promoting me at one point in our proceedings to the lofty position of Speaker. I mentioned this to Mr Speaker, and he gave me a very frosty look.
I thank all Committee members, including those from the Scottish National party and the official Opposition, for the cordial way in which they conducted themselves, making it a pleasure for Sir Roger and me to chair the Finance Bill Committee. On behalf of both of us, I particularly thank the Clerks, Hansard and the Doorkeepers for ensuring that we conducted our proceedings efficiently, while still ensuring ample opportunity for the democracy of the Committee to function. In all those thank-yous, I am sorry if I missed anybody out.
Question put and agreed to.
Bill, as amended, accordingly to be reported.