Wednesday 11th October 2017
(7 years, 2 months ago)
Commons ChamberFinance (No.2) Act 2017 View all Finance (No.2) Act 2017 Debates Read Hansard Text Amendment Paper: Committee of the whole House Amendments as at 11 October 2017 - (11 Oct 2017)
15:00 - The Committee divided: - Ayes: 269 / Noes: 311 - Question accordingly negatived.
15:20 - The Committee divided: - Ayes: 272 / Noes: 312 - Question accordingly negatived.
15:36 - The Committee divided: - Ayes: 281 / Noes: 312 - Question accordingly negatived.
16:16 - The Committee divided: - Ayes: 274 / Noes: 309 - Question accordingly negatived.
16:51 - The Committee divided: - Ayes: 231 / Noes: 308 - Question accordingly negatived.
Peter Dowd
The only people who are scaremongering are this Government who are threatening to tax people’s redundancy payments—that is the scaremongering in this House.
Perhaps the Minister would like to withdraw this proposal. I will happily give way to him if he wants to reconsider his decision—he might have discussed it with the Prime Minister. In some instances, a job loss can be even worse if individuals lose their employment because of base and nasty discrimination, whether because of their age, gender, race, religion or sexuality.
The amendments speak directly to the question of how much money an employee who has lost their job should receive in tax-free redundancy pay, and how much an employee who is discriminated against should receive in tax-free compensation from an employment tribunal.
The Financial Secretary to the Treasury (Mel Stride)
Is the hon. Gentleman not aware that when a tribunal has granted an award on the grounds of discrimination, that is automatically exempt from tax, despite what this clause may or may not be doing?
Peter Dowd
That will be dealt with later, but it is not the case for many multinationals. The papers are strewn with examples of the Government’s sweetheart deals with multinationals, so the hon. Lady cannot tell me that that is the case.
Mel Stride
I thank the hon. Gentleman for generously giving way. The latest figure for the tax gap is 6.5%, which he will know is lower than that in any year under the last Labour Government. It was over 8% in the financial year 2005. He will also know that our record on avoidance and evasion is that we have raised £160 billion since 2010. What amount did his party achieve by clamping down on avoidance, evasion and non-compliance when it was in office?
Mel Stride
What a pleasure it is to serve under your chairmanship, Dame Rosie, and to respond to the first of what I am sure will be a series of lively and exciting debates on the Finance Bill. Before I respond to some of the more detailed points raised, as well as the amendments, let me remind the Committee of the overall purpose of clause 5.
The clause is designed to tighten and clarify the tax treatment of termination payments to make the rules fairer and to prevent manipulation. Our tax treatment of termination payments is one of the most generous in the world. That is something of which we can be proud and something that this clause does not change, but the current rules can also be unclear and complicated, as many hon. Members have suggested. Some payments are taxed as earnings, others are taxed only above £30,000 and others are completely exempt from income tax and national insurance contributions. Most employers use the rules as intended, but the complexity in the system leaves it open to manipulation. Indeed, a small minority of individuals and employers, particularly those with the most generous pay-offs—this is an important point—have thought to manipulate the rules by categorising large pay-offs as termination payments, rather than earnings.
Kelvin Hopkins
My hon. Friend the Member for Lewisham West and Penge (Ellie Reeves) made the point that the tax-free amount has not been indexed for many years. Had it been indexed properly, it would now be £71,000, not £30,000. Would not that be a way of avoiding any of these difficulties, as the lump sum would be so much bigger?
Mel Stride
This is one of the most generous thresholds in the world. In fact, there is no threshold at all in Germany and the United States of America, because none of these payments is treated as being tax-exempt.
Such categorisation means that payments qualify for the £30,000 tax exemption and an unlimited employer national insurance contributions exemption. The situation is clearly unfair for the vast majority of employees, who are unable to manipulate their payments in this way. Clause 5 makes changes to prevent such manipulation in the future, while still ensuring that the vast majority pay no income tax on their payment. The first £30,000 of all termination payments will remain exempt from tax.
The hon. Member for Bootle (Peter Dowd) made a general point about the Conservative party’s treatment of workers, and I make no apologies for the way this Government have stood up for workers up and down our country. We are committed to enhancing workers’ rights. We introduced the national living wage, and we doubled fines for firms that break the rules in that respect. We appointed the first director of labour market enforcement, and we are committed, as we have constantly said, and as our Prime Minister has made clear, to protecting workers’ rights as we leave the European Union.
Nearly 85% of payments are below £30,000, so retaining the threshold will ensure that the vast majority of people going through the difficult experience of being made redundant will still pay no tax whatever. That means that the UK continues to have one of the most generous tax exemptions for termination payments, and I have mentioned Germany and the United States having no tax exemption at all.
Clause 5 tightens the tax rules for termination payments to prevent manipulation—a point made by my right hon. Friend the Member for Forest of Dean (Mr Harper) in an excellent contribution. He highlighted our overall record on bringing in taxes where attempts are made to avoid tax, and I referred to the £160 billion raised since 2010. He referred to our being at the forefront of the OECD base erosion and profit shifting project, and we have also brought in the diverted profits tax to clamp down on the kind of behaviour he referred to.
Let us not lose sight of the purpose of bringing in tax, which is to raise public finances so that we can employ doctors, nurses, paramedics, police and soldiers and pay for all those great public services that all of us hold so dear. That is why I am so proud of this Government’s record on clamping down on tax avoidance more generally.
The Office of Tax Simplification has said:
“the well-advised can often end up better off than the unadvised, as they are more able to structure their employment contract (or, indeed, their termination payment) to achieve the better tax treatment.”
The hon. Member for Bootle said in this House only last month:
“If there is genuine evidence of the abuse of payments in lieu of notice, that needs to be acted on”—[Official Report, 6 September 2017; Vol. 628, c. 206.]
It is fair to say that, while the hon. Gentleman is a very amiable fellow, he is not right about everything, but on this point he is actually very right. This clause is to deal with the very abuse about which he has previously expressed concern. We will prevent employers from categorising large pay-offs as tax-free payments, rather than earnings. Instead, employers will now be required to tax what the employee would have earned if they had worked their notice period in full. All payments in lieu of notice will now also be taxable as earnings to equalise the treatment of those with and without a contractual right to such a payment.
Finally, clause 5 clarifies that there is a total tax exemption for payments on account of injury or disability of an employee. In 2014, the Office of Tax Simplification raised the possibility of removing this exemption. It recognised that that would be a draconian approach, but it noted that interpretation is
“often a problem area for employers and their advisers.”
However, we have not pursued that approach. Instead, we have provided certainty by confirming the current position established by case law in statute. The total exemption relates to termination payments provided on account of a physical or psychiatric injury that prevents the employee from carrying on the duties of the employment, which hopefully addresses the point raised by the hon. Member for Aberdeen North (Kirsty Blackman). Therefore, employees with evidence of an identified medical condition will pay no tax on related termination payments.
Some Members raised concerns in previous debates that the Government would be taxing compensation paid to employees where it is proven that they have been discriminated against. Once again, I am happy to reassure them. All compensation for awards for proven discrimination during work will continue to remain completely exempt from tax. There was an interesting interaction between my hon. Friend the Member for Reddich (Rachel Maclean) and the hon. Member for Lewisham West and Penge (Ellie Reeves) on this point. We accept that, where there is a tribunal award in respect of injury to feelings, it is treated in exactly the same way as when an employer accepts that discrimination has actually occurred. All the clause seeks is to confirm the long-standing position that genuine compensation payments are tax exempt, while ensuring there is no loophole that can be used to reduce the tax that is owed.
Let me now turn to the amendments. As the hon. Member for Bootle set out, amendment 1 would remove the power to amend the meaning of basic pay for the purposes of calculating post-employment notice pay by regulation. When we consulted on this measure, we listened to responses that asked us to make the basic pay definition more simple. It now excludes overtime, bonuses, commission and tips. However, we introduced this power to allow the Government to act quickly and to remain flexible if there is manipulation in the future. Any amendment to the meaning of basic pay would be subject to a statutory instrument under the affirmative procedure, so the House would have to expressly approve any change to the meaning. I therefore urge the House to resist the amendment.
Amendment 2 and consequential amendment 3, also tabled by the Labour party, would remove the power to reduce the £30,000 threshold by regulation. Some Members have raised concerns during the debate that the Government intend to reduce this tax-free amount. We have no intention to do so. If we were to do so, we would, as my hon. Friend the Member for Braintree (James Cleverly) pointed out in his excellent speech, be required to do so by an affirmative statutory instrument. However, I repeat that we have no intention of reducing this tax-free amount. I therefore urge the House to resist the amendment.
Amendment 4 would include injured feelings within the definition of injury. As I outlined earlier, clause 5 confirms that termination payments provided on account of physical or psychiatric injury will be completely tax exempt—an important point raised by the hon. Member for Aberdeen North. However, the clause also confirms the established position that injury to feelings is not covered by this definition. The reason for this restriction is clear: without it, there would be a large loophole—as identified by my hon. Friend the Member for Braintree and my right hon. Friend the Member for Forest of Dean—allowing payments to be routinely reclassified on account of injury to feelings, and without medical evidence, simply in order for people to pay no tax. These things are hard to prove or disprove, and would be difficult for HMRC to police. However, it remains the case that payments on account of an injury to feelings, like any normal termination payment, will qualify for the £30,000 tax exemption. I therefore likewise urge the House to resist the amendment.
Kirsty Blackman
The Minister is concerned that some people might be exploiting a loophole, but as a result he has decided to disadvantage everybody who is subject to termination as a result of injury to feelings, rather than giving them the benefit of the doubt, which seems pretty unfair to me.
Mel Stride
The problem is that one cannot escape the possibility that the employer and the employee, who could both gain from reduced tax, will work together to suggest that there has been an injury to feelings, even when in fact there has not been. How does one prove whether or not there has been an injury to feelings? That is why there is a loophole.
Amendment 12, tabled by the hon. Member for Aberdeen North, would require a review of how these changes will affect low-income workers. That is unnecessary because only 85% of the payments are below £30,000. As I have explained, the provisions do not affect awards for discrimination at work, for example. We have also maintained the £30,000 income tax exemption. We have considered the impact on low-income workers throughout, and we will continue to do so.
In conclusion, the Government recognise that losing a job is a challenging time, but we must remain vigilant to opportunities for the tax rules to be manipulated. That is why clause 5 sets out a fair and proportionate set of changes that will continue to protect the vast majority of employees. The first £30,000 of a termination payment will remain tax-free, as will the whole of the compensation payment for discrimination during employment. However, where there were opportunities for manipulation, the loopholes must be closed, and they now will be. I therefore urge hon. Members to reject the amendments and agree to clause 5.
Peter Dowd
The Government seem to have taken a scattergun rather than forensic approach to this matter, affecting everyone regardless of the circumstances. Time after time they go for easy targets. If they have no intention of revising thresholds downwards, what is the point? Why are they wasting the Committee’s time? The key point is whether people who have been made redundant should have further worries about their financial future vis-à-vis redundancy, and that sets a hare running, whether the Government like it or not.
Mel Stride
Clause 15 expands the scope of the business investment relief scheme because it supports economic growth and investment by encouraging foreign individuals to invest in UK businesses. Business investment relief was introduced in April 2012 and is aimed at individuals who are taxed on the remittance basis. As Members will be aware, a remittance basis taxpayer is subject to UK tax on their overseas income or gains only if they bring them to the UK. That can discourage them from bringing their overseas money into the country, even when doing so would benefit the UK economy by investing in UK business. The business investment relief scheme seeks to address this by allowing those who are taxed on the remittance basis to bring their income and gains to the UK without incurring a tax charge, provided those funds are invested in a qualifying UK business. In other words, the scheme enables overseas funds that would otherwise remain outside the UK to be invested in UK businesses.
The independent Office for Budget Responsibility has confirmed in the costings that, without this scheme, this money would simply be left offshore, and so the UK would not benefit from it. Any UK gains and income arising from the investment will be fully taxable in the UK. It is worth noting that elsewhere in the Finance Bill—contrary to the views expressed by the hon. Member for Enfield, Southgate (Bambos Charalambous)—the Government have introduced the most fundamental change to non-dom taxation in history, ending permanent non-dom status. That is more than the Labour party managed the last time it was in government. This clause supports these wider reforms by ensuring that the UK remains attractive to those people who want to live here and use their foreign income and gains to invest in Britain.
Clause 15 expands the types of businesses in which investment can be made. The new rules widen the relief so that it can be used to purchase existing shares, not just new shares. The changes also lengthen the time before a new start-up company has to become a trading business from two to five years. That will enable investment in large infrastructure projects, which can take a long time to complete. Finally, clause 15 updates the anti-avoidance rules to ensure that genuine investment is not discouraged.
Let me turn to the amendment and new clause tabled by the Scottish National party. As the hon. Member for Aberdeen North (Kirsty Blackman) outlined, amendment 13 and new clause 3 would delay the commencement of these provisions until the Government had laid before the House a review of the efficacy of the conditions for BIR. I can be clear that the Government are confident of the effectiveness of this scheme. Investment using BIR increased from £197 million in 2012-13 to £837 million in 2014-15. In only three years, that has meant total investments of more than £1.6 billion in our economy since the scheme was first introduced.
Kirsty Blackman
I would very much appreciate it if the Treasury would commit to publishing that information and details of the sectors in which the money has been invested. If it does that, we will all be much happier, across the House.
Mel Stride
I thank the hon. Lady for her intervention, and I will come on to deal with the information that the Treasury is already publishing, which is very comprehensive.
As I was saying, that includes investment in the hospitality and energy sectors, and in many different types of businesses, including small and medium-sized ones. It includes investment in manufacturing and pharmaceutical science businesses in the midlands and north of England, and a £3 million investment in aerospace businesses in the north-west of England. As I outlined earlier, the independent OBR has certified that these changes do not have any cost to the Exchequer. In other words, this is money coming to this country which would not otherwise have done so. I am sure that these are investments in our country that the whole House wants to see—investment in British businesses right across the country. I therefore urge Members to reject new clause 3 and amendment 13.
Let me also address new clause 1, tabled by the official Opposition. In a similar vein to new clause 3, it would require the Government to review the conditions under which BIR is available, including estimates of the value of the relief and an analysis of the characteristics of those using it. Such a review is wholly unnecessary, as Her Majesty’s Revenue and Customs publishes much of this information already. As my hon. Friend the Member for Wealden (Ms Ghani) pointed out, in August HMRC published official statistics on non-domiciled taxpayers in the UK, which includes a commentary document and tables. This publication contains statistics on the number of individuals who are non-domiciled, and on the total income tax, capital gains tax and national insurance contributions of the non-domiciled population. Moreover, it includes information on the current number of investments and the amount invested in the UK by non-domiciled individuals using business investment relief.
To provide the report, HMRC uses information provided by taxpayers through the self-assessment process. It is impossible to determine from an individual’s tax return whether or not they have characteristics that are protected under the Equality Act. HMRC does not have the capacity or the resource to acquire such information, so it would be unduly burdensome to place on HMRC a statutory obligation that it would be incapable of meeting. For those reasons, I urge Members to reject the new clause.
Mel Stride
As with my contributions earlier this afternoon, I will set out why the Government have included this measure in the Bill, before turning to new clause 2.
Clause 25 and schedule 7 make amendments to the Northern Ireland corporation tax regime. The Government are committed to supporting growth across all parts of the UK. Creating a stronger Northern Ireland economy will benefit the entire United Kingdom.
Northern Ireland faces a unique set of circumstances and challenges. That was why, in 2015, this House legislated to devolve corporation tax rate-setting powers to the Northern Ireland Assembly, subject to commencement regulations. The introduction of the regime received nearly unanimous support from Northern Ireland’s political leaders and business community. The rate-setting powers given to the Northern Ireland Assembly are another tool to help to rebalance the Northern Ireland economy by revitalising private enterprise and attracting new investment.
This clause and schedule amend the regime to allow all small companies with trading activity in Northern Ireland the opportunity to benefit from future changes in the Northern Ireland corporation tax rate. They also make changes to ensure that the regime is robust against abuse and ready for commencement once a restored Northern Ireland Executive demonstrate that their finances are on a sustainable footing.
It may help the House if I set out how the devolved rate regime has been designed to focus on incentivising genuine investment in Northern Ireland. The regime was set out in the Corporation Tax (Northern Ireland) Act 2015.
Jonathan Edwards (Carmarthen East and Dinefwr) (PC)
The Minister is making a powerful case as to why the devolution of corporation tax is a good thing for the Northern Ireland economy, but should the same case not apply to Wales and Scotland, because it creates an imbalance if one devolved Government have a set of fiscal powers that the other devolved Governments do not have?
Mel Stride
I thank the hon. Gentleman for his intervention, but there is, of course, one key distinction between Wales and Northern Ireland, and that is that Northern Ireland has a land border with the Republic of Ireland, which has a corporation tax rate of just 12.5%. It is particularly important in that context that we make these provisions.
Jonathan Edwards
The Minister makes a fair point about the land border, but large parts of Wales, including my part of Wales—the west of Wales—have a sea border with the Republic of Ireland.
Mel Stride
I do not think it is within the scope of this particular clause to start getting too much into the devolutionary settlement for Wales.
The regime was set out in the 2015 Act, which, subject to commencement regulations, will devolve corporation tax rate-setting powers to the Northern Ireland Assembly. The Government have committed to working with an incoming Northern Ireland Executive on options for commencement, including on timing and adjustments to the Northern Ireland Executive block grant to reflect tax revenues forgone by the UK Government.
There are two key features to the regime’s design. First, the devolved rate will apply only to a company’s trading profits; investment activities, which are highly mobile, are not in scope. Secondly, the Act requires large companies with a substantial trading presence in Northern Ireland to calculate their Northern Ireland profits separately from the rest of their profits. That calculation must follow internationally accepted principles for attributing cross-border profits. Broadly, that means that companies with profits generated in different tax jurisdictions must calculate their branch profits as though each branch were an independent entity. These profit attribution rules are important to make sure the regime works as intended.
An SME with 75% or more of employment time and costs in Northern Ireland would have all its trading profit taxed at the Northern Ireland corporation tax rate. An SME below the 75% threshold would have all its trading profits, including those generated in Northern Ireland, taxed at the UK corporation tax rate.
Ian Paisley (North Antrim) (DUP)
Does the Minister accept that the introduction of this will allow for the rebalancing of the Northern Ireland economy in a very beneficial way? It will allow us to generate more investment and, potentially, more private sector jobs. Of course, this corporation tax will not apply to the financial service sector, so it will not wrongly attract businesses away to Northern Ireland.
Mel Stride
My hon. Friend makes the very powerful point that this is not about brass-plating and shifting profits; it is about generating growth in a very important part of the United Kingdom.
Since we legislated in 2015, we have heard that some small businesses want the option to benefit from the Northern Ireland corporation tax rate on the proportion of their profits generated by trading activity in Northern Ireland. The changes made by clause 25 will give all SMEs trading in Northern Ireland the potential to benefit from the devolved rate, should they choose to do so. That will be done without watering down the rules, and it will ensure that the regime is focused on incentivising genuine economic activity in Northern Ireland. Like large companies, those SMEs that opt to take advantage of this measure will be required to calculate their Northern Ireland profits according to well-established principles. These changes deliver a fair outcome for small companies.
Let me be clear that under these rules a company’s trading profits will be taxed at the Northern Ireland rate only if the company has a substantial physical presence in Northern Ireland and if that is where the economic activity that generates the profit takes place.
New clause 2 would require HMRC to conduct a review of the impact of the changes in schedule 7 on the corporation tax system, the location of companies and the levels of employment across Northern Ireland and Great Britain. A mandated formal review is not an appropriate response to a regime that has been carefully designed to be robust in relation to avoidance and abuse, and one that, as I have said, builds on tried and tested rules when doing so. As with all policies, the Government will monitor the regime closely once it is commenced to ensure that it operates as intended. I urge the Opposition not to press the new clause.
Ian Paisley
Does the Minister accept that those who espouse the peace process also want to see an economic dividend post that process? Therefore, why would anyone want to vote against something that allows that economic dividend, building upon the peace in Northern Ireland?
Mel Stride
My hon. Friend makes a powerful point. This is about strengthening Northern Ireland’s economy, society and infrastructure, to the end that we all seek, which is a stronger and more united Northern Ireland.
In conclusion, these provisions include changes that will ensure that the regime is robust against abuse, in order to maintain the regime’s focus on encouraging genuine additional economic activity in Northern Ireland.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I thank the Financial Secretary for introducing this group. This is an important debate, not only for the future of Northern Ireland, but for this country’s overall approach to taxation and devolution.
We know—we have discussed it frequently throughout this process—that our country faces a substantial tax gap. The official estimate of the UK’s tax gap is at least £36 billion, up from £33 billion in 2010, but that is at best a conservative estimate, given that the Government’s definition of the tax gap excludes convoluted corporate structures, which we know are used by multinationals to minimise their tax liabilities. The view that the tax gap is underestimated is shared by the Institute for Fiscal Studies and the Public Accounts Committee. I think that we all agree that that £36 billion, and possibly more, is money that should be used to fund our public services, and that everybody should pay their fair share.
Corporation tax is an important part of the UK’s tax revenue. In 2016-17, HMRC collected £56 billion in corporation tax receipts. Although it is important that we keep the rate competitive, particularly in the light of the UK’s exit from the European Union, it is worth noting that we face a law of diminishing returns in this regard. At 19%, the UK’s corporation tax rate is already one of the lowest in Europe. We should be confident that we do not need to plunge the rate to rock bottom in order to encourage businesses to invest and domicile here. The UK plays host to a wealth of resources that enable it to be globally competitive, including our legal system, our language, our time zone, our infrastructure, our regulatory bodies and, most of all, our people.
It is equally important that Northern Ireland is equipped with the tools to compete in that international landscape, as has been brought to the fore recently with the punitive tariffs aimed at Bombardier in the United States. As the Financial Secretary has explained, the corporation tax rate has already been devolved to the Northern Ireland Assembly, through the Corporation Tax (Northern Ireland) Act 2015. Now that that legislation has been decided, it is for Northern Ireland’s politicians to work together and use those powers to see where the line lies between a lower tax rate and the broader appeal of Northern Ireland as a business destination. At present, the decision has been that 12.5% best achieves those ends. It is not my intention to revisit those arguments today, and nor would it be appropriate to do so, given the reasons already outlined.
What is relevant, and the reason Labour has proposed new clause 2, is the relationship between that rate and the rest of the UK. The gap between 12.5% and 19% represents a significant potential for arbitrage between Northern Ireland and the rest of the UK. Some businesses might base their decisions on where to domicile purely with regard to taxation, and that is a risk that we accept—indeed, we already compete with the rest of Europe on that basis. Our concern is that the Government are introducing measures that could be exploited by companies that will seek to abuse the proximity between Northern Ireland and the UK simply to divert profits and benefit from a lower tax regime, which would benefit neither the UK nor Northern Ireland.