Finance (No. 2) Bill (First sitting)
(6 years, 10 months ago)
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The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Chair
Good morning and happy new year to you all. I have a few announcements to make; as there are a number of new Members on the Committee, they will be quite lengthy announcements, but they will set out the procedure for the whole Committee stage.
I remind Members that only water is to be drunk in the Committee Room—no hot drinks. I will pretend that I have not seen the one at the end of the room. That is a strict rule from the Chairman of Ways and Means. Mobile phones and iPads should be switched to silent. There are document boxes behind me, which people may find useful for storing their documents when the Committee is not sitting. I would appreciate it if Members followed those rules, so that I do not have to make many more speeches.
Neither I nor my fellow Chair will call Members to speak to starred amendments—amendments tabled without adequate notice. The notice period is three working days, so amendments should be tabled by the rise of the House on Monday for consideration on Thursday, and by the rise of the House on Thursday for consideration the following Tuesday.
Not everyone is familiar with Committee procedures, so let me explain them briefly. The Committee will be asked first to consider the programme motion. The Minister will move that motion, and we will then consider the amendments to it. There is a strict time limit of 30 minutes for that. We will proceed to a motion on written evidence and then begin line-by-line consideration of the Bill.
The selection list for today’s sitting is available at the end of the room. Amendments selected for debate have been grouped. Grouped amendments generally relate to the same or similar issues. The Member who tabled the lead amendment in a group will be asked to speak first. Other Members will then be free to catch my eye and speak to the amendments in that group only. A Member may speak more than once, depending on the subjects under discussion. At the end of debate on a group of amendments, I will call the Member who moved the lead amendment to speak again. They will need to indicate before they sit down whether they wish to withdraw that amendment or seek a decision on it. If any Member wishes to press an amendment in that group to a Division, they will need to let me know. I will work on the assumption that the Government wish the Committee to reach a decision on all Government amendments—we will nod at each other, Minister.
Please note that decisions on amendments will be taken not in the order on the selection list—the order in which they are debated—but in the order in which they appear on the amendment paper. Decisions on new clauses will therefore be taken after the conclusion of line-by-line consideration of the Bill. Where a group includes the words “clause stand part”, Members may make any remarks they wish to make on the content of the clause during the debate, and there will be no separate debate on the question that the clause stand part of the Bill. Where those words are not included on the selection list, Sir Roger and I will use our discretion in deciding whether to allow a separate stand part debate on individual clauses and schedules. Clause stand part debates begin with the Chair proposing the question that the clause stand part of the Bill; there is no need for a Minister or another Member to move that the clause stand part of the Bill.
As I indicated, I will first call the Minister to move the programme motion, as agreed by the Programming Sub-Committee, formally. I will then call Kirsty Blackman to move amendment (a). There will be a single debate on the selected amendments.
Motion made, and Question proposed,
That—
(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 9 January) meet—
(a) at 2.00 pm on Tuesday 9 January;
(b) at 11.30 am and 2.00 pm on Thursday 11 January;
(c) at 9.25 am and 2.00 pm on Tuesday 16 January;
(d) at 11.30 am and 2.00 pm on Thursday 18 January;
(2) the proceedings shall be taken in the following order: Clauses 1 to 7; Clauses 9 to 11; Schedule 1; Clause 12; Schedule 2; Clause 13; Schedule 3; Clauses 14 to 16; Schedule 4; Clause 17; Schedule 5; Clause 18; Schedule 6; Clauses 19 to 23; Schedule 7; Clause 24; Schedule 8; Clauses 25 to 32; Clauses 34 and 35; Schedule 10; Clauses 36 to 39; Clause 42; Schedule 12; Clauses 43 to 50; new Clauses; new Schedules; remaining proceedings on the Bill;
(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 18 January.—(Mel Stride.)
Kirsty Blackman (Aberdeen North) (SNP)
I beg to move amendment (a), leave out line 4.
The Chair
With this it will be convenient to consider the following: Date Time Witnesses Thursday 11th January Until no later than 12.15 pm HM Treasury; HM Revenue and Customs Thursday 11th January Until no later than 1.00 pm The Office for Budget Responsibility Thursday 11th January Until no later than 3.30 pm The Institute for Fiscal Studies Thursday 11th January Until no later than 5.00 pm The Chartered Institute of Taxation”
Amendment (b), in line 7, at end insert—
“(1A) The Committee shall hear oral evidence in accordance with the following Table—
Amendment (c), in line 15, at end insert—
“(4) The Committee recommends that the programme order of the House [11 December 2017] should be amended in paragraph 7 by substituting ‘25 January’ for ‘18 January’.”
Kirsty Blackman
I appreciate the chance to speak, Mr Owen, and I thank you for being our Chairperson.
Last year, the Chartered Institute of Taxation, the Institute for Government and the Institute for Fiscal Studies produced the “Better Budgets” report about the parliamentary process for dealing with the Budget. They raised a number of concerns, some of which have already been dealt with by the Chancellor, such as the fact that there are two fiscal events a year; he has moved to having one fiscal event a year, which is welcome.
The beginning of the report summary says:
“During conversations with people across the tax system, from officials and experts through to practitioners and representative groups, we have heard that the exceptional processes around tax policy making—in particular, secrecy, more limited scrutiny and challenge, and the power of the Treasury—have led to an ever-lengthening tax code, beset by a series of problems: confusion for taxpayers, poor implementation, political reversals and constrained options.”
Some of those are issues with the Budget, but others are issues with the Finance Bill process. One of the report’s key suggestions, which I have been pursuing in this House, and will continue to, even if I do not win today, is about the fact that the Finance Bill Committee does not take evidence. We have been told that that is due to lack of time, and that scrutiny of the Finance Bill needs to be curtailed and completed in a very short period. However, measures in the Finance Bill are very technical, and we have a short time in Committee. If we added just one extra day, we could take evidence.
The “Better Budgets” report said:
“The lack of stages in the House of Lords should mean that the Finance Bill is subject to particularly intense scrutiny in the House of Commons. But the reverse tends to be true”.
It also said:
“debate on the Finance Bill could be improved by using some of the committee sessions to take oral evidence”.
The three programme motion amendments that I have tabled allow us to do that. The Bill has already been in Committee of the whole House. I think it is reasonable, after Committee of the whole House, to take evidence on the generally more technical measures debated in Public Bill Committee.
The three amendments that my hon. Friend the Member for Glasgow Central and I tabled suggest that this Thursday we take evidence from the Treasury, Her Majesty’s Revenue and Customs, the Office for Budget Responsibility, the Institute for Fiscal Studies and the Chartered Institute of Taxation. All those organisations will know more about tax, and probably about the impact of the measures, than most of us in this room. Obviously, the Minister will have briefings, and a whole team who can explain the issues to him, but we need to hear from those organisations and to be able to question their representatives. I have been frustrated in the past when asking the Minister questions during debates on the Finance Bill. Perhaps I have had a bit of an answer towards the end of his speech—the Minister is quite good at attempting to give answers—but that is too late. If we had had that conversation with many other people at the beginning, we would all have been in a much better position. That would have meant much better scrutiny.
Alison Thewliss (Glasgow Central) (SNP)
My hon. Friend makes a very good point on the need for evidence. Some of the written evidence submitted to the Committee —it was made available very late, I must say; it came yesterday at around 4 pm, which gives us very little time to read a huge amount of evidence—suggested that there are things that need to be changed and that people would like to see tweaked. However, without having oral evidence and being able to interrogate people for it, it is very difficult to weigh up the evidence in the context of the Bill.
Kirsty Blackman
I would go so far as to bet that all Committee members have not read all the written evidence that has been provided. I bet that they have not had time, given that the customs Bill is running at the same time, and the majority of us who are Front-Benching for that Bill are also Front-Benching for today’s Bill.
The timescale is not working. If we were to allow evidence sessions this Thursday, and then allowed the Public Bill Committee stage to stretch slightly—I am not sure it would even end up stretching as far as 18 January, because we could have a number of sittings before then—that would be a really positive change for the Committee. We would all be better informed, and it would be a good step for scrutiny and transparency, which the Government and the ministerial code suggest that we should have.
Peter Dowd (Bootle) (Lab)
It is a pleasure, as ever, to serve under your chairmanship, Mr Owen. I have sympathy with the Scottish National party on their amendment to the programme motion, which would require the Government to ensure that there was an evidence sitting this week. This is my third Finance Bill since becoming shadow Chief Secretary to the Treasury, and I have made the point on each one that we should have evidence sittings. The argument might be made, “We have had three Bills; what’s the point?” However, there is a pretty compelling argument that having had three Finance Bills is all the more reason to not just pause for breath but catch up, and get some people in to give evidence. The point is well made, and it was also part of the context for the debate in the House yesterday.
This is not simply an event; it is part of a process. Most of the traditions or protocols that we follow in the House have a perfectly rational basis, but there are occasions—I think this is one, in the light of the three Finance Bills this year—when we might want at the very least to step back from them. Every other piece of legislation that passes through the House gets its day in court, so to speak, as regards giving evidence, and of course the complex changes made to UK tax laws and systems have far-reaching consequences for everyone and for the economy.
It is important that when matters are incredibly complex—and, let us be frank, many of the matters in question are complex—we should be able to tease out issues with experts. It is not that I do not believe the Financial Secretary to the Treasury and everything that he tells us; I do, implicitly. However, I am sure that he would like us to test his assertions, and we might want to do that with other people—and with other experts.
Several provisions in the Bill, and in previous Finance Bills, rewrite earlier measures and close loopholes. It is important for us to tease out those things, too. Why are we where we are, and what could we have done differently? Possibly we could not have done anything differently, but I am sure that if there had been evidence sittings for previous Finance Bills, the experts offering testimony might have pointed out to the Government technical pitfalls in some of the measures they wanted to introduce.
The amendment is in the spirit of attempting to move things on; it is not a wrecking proposal. I acknowledge that we will not win the debate, but it is important to state the need to push for evidence sittings. I do not think that I am alone in that view. Not only does the SNP take it, but so do many outside the House: the Institute for Fiscal Studies, the Institute for Government and the Chartered Institute of Taxation made a similar case in the report “Better Budgets: making tax policy better”, published in April 2016. Its authors pointed out that Finance Bills could be improved by oral evidence sittings, with little disturbance to the parliamentary timetable. I am sure that the Opposition would be more than happy to discuss parliamentary timetable issues with the Government.
Dan Carden (Liverpool, Walton) (Lab)
Andrew Tyrie, the former Chair of the Treasury Committee, also supports the idea of oral evidence sittings for the Finance Bill. Does my hon. Friend agree that there is widespread support for that across the House of Commons?
Peter Dowd
I think there is. I suspect that there are Members who would like to listen to the views of others besides parliamentarians on occasion. My hon. Friend makes an important point.
The authors of “Better Budgets” comment:
“This could be enhanced by ensuring effective liaison between the experts working to support the three committees that have a role in tax scrutiny—the Treasury Select Committee, which has hearings on the Budget and Autumn Statement”—
as was—
“the House of Lords Economic Affairs Committee and the Finance Bill Committee—to make sure that the results of pre-legislative work inform legislative scrutiny.”
That is not an unreasonable position to take.
As my hon. Friend said, the former Chair of the Treasury Committee made the same point, and the Committee’s current Chair, the right hon. Member for Loughborough (Nicky Morgan), followed it up in a letter to the Minister on 7 November, in which she wrote that she was not convinced by the point made—namely, that we should not have evidence sessions. She rightly pointed out that the consultation was limited, and that it is important to try to tease some of these issues out separately. She also added that she sees no reason at all why a Finance Bill Committee cannot hear oral evidence, even on clauses that have already been debated in Committee of the whole House. I would appreciate it if the Minister commented on that—I know he will.
There seems to be developing consensus across the House that oral evidence sessions on the Finance Bill would greatly improve the quality of parliamentary scrutiny of it. I think they would do good, but frankly even if they did not, they would certainly do no harm. It is time to move away from outdated and arcane parliamentary measures, especially in this area.
I am not in any way suggesting that the Government have anything to hide. I do not think it is a question of hiding; it is often a case of, “We have always done it this way; let’s carry on doing it this way.” Maybe it is time for a rethink on this matter. I exhort the Minister to give careful consideration to this. I suspect that we will not get much movement on the issue, because we would be breaking a relatively long-held tradition by having evidence sessions on the Finance Bill, but we have to start pushing the matter at some point, and this is as good a time as any.
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure to serve under your chairmanship, Mr Owen. I look forward to vigorous debate on the Bill, today and in the sittings that will follow, as we take the Bill through the normal process.
The amendments from the hon. Member for Aberdeen South—
Mel Stride
North; how could I get that wrong? The amendments would introduce a day for oral evidence sessions, and would extend the period over which we debated the Bill in Committee. I understand why the hon. Lady tabled them, but I am afraid that the Government will resist them, for several reasons, not least because there was a Programming Sub-Committee, at which at least Labour party Members were present, in which we discussed the programme motion, and it was agreed unanimously.
Kirsty Blackman
The Government changed the rules because they do not have a majority, so Scottish National party Members no longer have places on Programming Sub-Committees. We were therefore not able to make our case. We opposed that rule change, partly because we want to be on Programming Sub-Committees. If we had had the opportunity to make our case earlier, we would have done so.
Mel Stride
I thank the hon. Lady for her intervention. That is partly why I welcome her having the opportunity to have this debate today, as I said earlier. Let me start with the comment that the hon. Member for Bootle made about the Chair of the Treasury Committee. He urged me to engage with her on this matter, and of course I will do precisely as he asks.
Notwithstanding the fact that we had the opportunity in the Programming Sub-Committee to agree the programme motion or otherwise, several measures already give us a very high level of scrutiny of Finance Bills. We brought in a Government framework in 2010, under which, in a typical cycle, a Budget is followed by policy consultations, and much of the legislation that is to follow is then published in draft. In fact, around 60% of the Bill that we are looking at has been out there for consultation as draft legislation, despite the fact that this has been a rather unique cycle; the hon. Member for Bootle pointed out that this was his third Finance Bill.
These Bills have a very high level of scrutiny. We are moving to the new single fiscal event in the coming year; we will then have even more time to scrutinise Bills, because there will be more breathing space in that process, and obviously we will not have the interruption that we had last year.
Kirsty Blackman
I thank the Minister for his response. He did not give a reason not to take evidence; he gave the reason why he thinks the status quo is okay. I still have not heard anybody say why evidence would be a bad thing. The Government have previously said that timescales would be an issue, but they are not. As we have a single fiscal event, putting an extra week—an extra day, actually—on to the Finance Bill Committee would not be a problem. Having evidence sessions would be better for the Committee and for the rotating Back Benchers on the Committee—we have people here who have not sat on a Finance Bill before. As I said previously, having an evidence session after the Committee of the whole House is not a problem, because generally we discuss the more technical parts of the Bill after that. What the Minister said about 60% means that 40% of the Bill has not been consulted on.
Mel Stride
I need to clarify that point. I said that 60% of the draft legislation was out there and was therefore consulted on. That certainly does not mean that 40% of the Bill was not consulted on, albeit that the legislation was not out there in draft.
Kirsty Blackman
In a number of places in the written evidence, various organisations said, “This was not consulted on in draft; we would have suggested these changes, if it had been.” The Committee is losing out because it does not take evidence. It would be better if it did. I do not understand why the Government are scared to take evidence.
Peter Dowd
Does the hon. Lady agree that it is important to understand the position that Parliament is in? The Government do not have an overall majority, notwithstanding the arrangement with the Democratic Unionist party. Their position has changed. Given that, and given that the Government have taken control of the Committees, again notwithstanding the fact that they do not have the majority as a party, the question of scrutiny has changed a little.
Kirsty Blackman
Absolutely. An added dimension is that because the Government do not have a majority, and because all the Brexit legislation is going through, there is an incredibly heavy legislative timetable with an incredible number of incredibly technical pieces of legislation. Therefore, it would be better for Members to have the opportunity to inform themselves. I do not think this is about increasing external organisations’ scrutiny, because, as the Minister said, there are a number of opportunities to do that. This is about giving Members the opportunity better to inform themselves and ask questions of those incredibly knowledgeable organisations so that we can make better decisions about tax law, and so that the Treasury does not create tax law that is not good and that it has to go back and fix a couple of years later. It would be better for everybody if members of the Committee were more informed and therefore able to take better decisions and make better laws.
Question put, That the amendment be made.
The Chair
Copies of any written evidence that the Committee receives will be made available to Committee members.
We now move to the line-by-line consideration of the Bill.
Clause 1
Income tax charge for tax year 2018-19
Question proposed, That the clause stand part of the Bill.
Mel Stride
We come to the first clause of the Bill, which provides for the charge for income tax for 2018-19. That is legislated for annually in the Finance Bill, and it is essential because it allows for the collection of income tax to fund our vital public services, on which we all rely. The clause ensures that the Government can collect income tax for the tax year 2018-19 to fund key spending commitments, and I therefore commend it to the Committee.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clause 2
Corporation tax charge for financial year 2019
Question proposed, That the clause stand part of the Bill.
Mel Stride
Clause 2 charges corporation tax for the financial year beginning on 1 April 2019. Corporation tax is an annual tax approved by Parliament each year, and this is an essential provision that enables us to collect taxation. I suspect that most Members agree that we ought to charge corporation taxes, so I will not revisit the rationale for the collection of this tax, but I will take the opportunity to set out the Government’s corporation tax strategy.
The Government want a fair and competitive tax system, and we want taxes to be paid. Changes to the corporation tax regime since 2010 have enabled us to make progress towards those goals. Corporation tax has been cut from 28% in 2010 to 19% today, delivering the lowest main rate in the G20 and by far the lowest in the G7. The rate is legislated to fall further to 17% in 2020. Low corporation tax rates enable businesses to increase investment, employ new staff, increase wages or reduce prices. The rate cuts make Britain a more competitive place to set up and grow a businesses, and they support the investment that is vital for improving our productivity.
The Government understand that a growing economy means more tax revenues to support our vital public services, and our strategy is working. Since 2010, despite the rate cuts, onshore corporation tax receipts have increased by 50%, rising from £36.2 billion in 2010-11 to £55.1 billion in 2016-17. There are 3 million more people in employment than there were in 2010, and business investment has grown by 25%. However, the Government have always been clear that although taxes should be low, they must be paid where they are due. Those revenues have been supported by the significant measures taken by the Government to clamp down on tax avoidance and aggressive tax planning. The UK has been at the forefront of multilateral action through the G20 and OECD to reform the international tax standards, including through the agreement and implementation of the base erosion and profit shifting project, or BEPS, as it is known.
Building on that, the Government announced a package of measures at the autumn Budget to tackle avoidance, evasion and non-compliance. They included closing loopholes exploited by large businesses—by, for example, tackling avoidance schemes involving transactions of intellectual property—as well as ensuring that large digital multinationals pay their fair share from profits made in connection with UK sales.
The Government are delivering on their objectives for a tax system that is fair and competitive, and in which taxes are paid. I therefore commend the clause to the Committee.
Question put and agreed to.
Clause 2 accordingly ordered to stand part of the Bill.
Clause 3
Main rates of income tax for tax year 2018-19
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clause 4 stand part.
New clause 10—Analysis of effect of income tax rates on incentives into employment—
‘(1) The Office for Budget Responsibility must review the impact of the rates of income tax specified in sections 3 and 4 in accordance with this section within six months of the passing of this Act.
(2) A review under this section must consider the impact of the rates of income tax specified in sections 3 and 4 on the incentives for individuals to seek employment, including—
(a) whether those rates create, or detract from, an incentive for those not employed to enter into employment,
(b) whether those rates create, or detract from, an incentive for those currently in employment entering into new employment at a different level of income, and
(c) to what degree those rates create, or detract from, any such incentive.
(3) A review under this section must also consider those rates in the context of—
(a) National Insurance contributions,
(b) tax credits, and
(c) social security benefits.
(4) A review under this section must give separate analyses in relation to the impact of the rates of income tax specified in sections 3 and 4 in different parts of the United Kingdom.
(5) In this section—
“parts of the United Kingdom” means—
(a) England,
(b) Scotland,
(c) Wales, and
(d) Northern Ireland.
(6) The Chancellor of the Exchequer must lay before the House of Commons the report of the review under this section as soon as practicable after its completion.”
Mel Stride
Clauses 3 and 4 set the main, default and savings rates of income tax for 2018-19. The clauses keep the basic, higher and additional rates of income tax at the same level as last year. We are also supporting lower and middle earners by increasing the tax-free personal allowance and the point at which people pay the higher rate of tax in line with inflation next year, locking in previous rises and helping hard-working people with the cost of living.
By keeping rates the same while increasing the personal allowance and higher rate threshold, we are delivering on our manifesto commitment to cut taxes for working people. We are protecting our fair and progressive tax system, in which those who can contribute the most shoulder the greatest burden. The latest figures show that the top 1% of taxpayers contribute nearly 28% of all income tax. We have already cut taxes for 31 million people since 2015 and taken more than 1 million of the lowest-paid out of income tax altogether. We have promised to go even further to increase the personal allowance to £12,500 and the higher rate threshold to £50,000 by 2020.
New clause 10 would require the OBR to analyse the effect of the income tax rates set out in clauses 3 and 4 on incentives into employment. An important part of the OBR’s role is to subject the Government’s policy costings to detailed challenge and scrutiny at each fiscal event. As the Committee would expect, the impact of tax policy changes on employment is an important judgment that the OBR makes when certifying a costing. The OBR sets out its judgments clearly in its publication “Economic and fiscal outlook”. Detailed distributional analysis of the kind requested is not in line with the OBR’s remit to examine and report on the sustainability of the public finances. Extending its remit to include undertaking distributional analysis would risk diverting the OBR from an already challenging task. I therefore urge the Committee to resist new clause 10.
Ruth George (High Peak) (Lab)
In speaking to new clause 10, I will address the points that the Minister has just made. Employment incentives and employment rates are a key part of our economic outlook and of securing the prosperity of working people throughout the UK. We accept that the headline rate of income tax in the Bill will stay at 20%, and that the personal tax allowance has risen over the last seven years by more than inflation. However, underlying that, and underlying the tax cuts for 31 million people, there have been huge increases in the marginal tax rates that effectively apply to working people. Under the tax credits system, the clawback rate was 39% of gross income, but it has been raised to 41%. The clawback of 63% of net income under universal credit particularly affects people whose income falls below the personal tax allowance rate.
Those are the groups of people whom it is important to encourage into work, such as single parents and second earners in families with children. The Child Poverty Action Group predicts that as a result of the roll-out of universal credit, a further 1 million children will fall into poverty. That increase will mean that 37% of all children in the UK are in poverty. Surely, the best way out of poverty for those children is to ensure that their parents can move into work. That is the best route out of poverty for all those households, in both the short term and the long term.
Peter Dowd
I welcome the opportunity that my hon. Friend’s new clause presents to discuss the rate of income tax set by the Government, and its effect on the wider economy and on families.
At the general election, we clearly outlined our position: as a Government, we would not ask ordinary households to pay more. We would guarantee that there would be no rises in income tax for those earning less than £80,000 a year and no increase in personal national insurance contributions or the rate of VAT. Under our plans, 95% of taxpayers would be guaranteed to face no increase in their income tax contributions and everyone would be protected from any increase in personal national insurance contributions. Only the top 5% of earners would be asked to contribute more in tax to help fund our public services. That is in contrast to the Government, who have spent the last seven years offering tax breaks to the wealthy and large multinational corporations, and who continue to do so. That goes to the heart of the difference between the two parties.
In 2012, the former Chancellor declared—I have to say, with a certain amount of alacrity—that he was cutting the 50p rate by 5p. He claimed at the time that it would not cost the Exchequer a penny. In fact, analysis carried out by Unison shows that between 2013-14 and 2017-18, income tax cuts for those earning more than £1 million have saved the nation’s super-wealthy on average £554,000 each. Those tax cuts have cost the British taxpayer £8.6 billion over the last five years, in stark contrast to the concerns raised by my hon. Friend the Member for High Peak. The Government have not tackled that.
The money that has been lost could have paid for an extra 20,000 nurses—topical in the current climate, and crucial given the stresses and strains on the NHS; the lack of those 20,000 nurses is a proxy for the state of the NHS—as well as 10,000 extra police community support officers, 10,000 extra police officers and 20,000 newly qualified teachers for each of those five years. That money could have paid for 60,000 bursaries for nurses, midwives, other health professionals and so on. Instead, it was used to give a tax cut to the richest 15,000 taxpayers in the country—those who are least in need. In 2013, the cut to the top rate of income tax was the largest tax cut in the world, and as a result the level of income tax in the UK dropped from the fifth highest in the world to the 13th.
As if that cut was not enough, it was paired with cuts to corporation tax, the bank levy, inheritance tax and capital gains tax. Together, they amount to about £70 billion by 2022. In the meantime, public services are beginning to decay and atrophy. As I alluded to earlier, the NHS is in a bit of a state, and the police are in chaos and crisis. That is the context for our debate. Instead of the swashbuckling we see in the Chamber, we must deal with very precise issues.
It is fair to say that since 2010, the Government have made a political choice to pursue austerity at all costs. The hon. Member for Cheltenham may shake his head, but that is the reality. Let us go back to the phrase, “We’re all in it together”. It is demonstrably clear, and history will show, that we have not all been in it together. It does not matter how much hon. Members shake their heads or roll their eyes; that is the reality, and it is coming home to roost—not on me, but on our public services. We have a social contract with our people across the country to the effect that we will take care of everybody, not just those who have the most.
I will give the Government credit for the fact that they have pursued their policies persistently and doggedly. These policies and choices are the Government’s, not mine. The Government have persisted with them, and I think they have to fess up to that. The national debt has ballooned. The cost of household essentials is spiralling, with inflation at 3.1%; I think it is now 4.6% on food. Services across the country are being slashed and the OBR predicts a 17-year period of wage stagnation. That is the high cost of austerity, which is a political choice made without any economic basis.
My hon. Friend the Member for High Peak seeks to highlight the fact that the Government could have made different political choices, and I agree with her on that one. It is a fact that increases to the lower threshold of income tax are no longer targeted towards the poorest in our society, whose earnings have long since been below that threshold. That is the reality. Had the Government changed tack sooner, there would have been little need for the self-defeating cuts to the work allowances of universal credit—those allowances are by far the best way of improving work incentives for the poorest in our society and driving positive employment outcomes, as the new clause alludes to. That is why Labour set aside £10 billion to improve the Government’s failing universal credit system at the last election. We have also repeatedly called for change from all four Secretaries of State who have occupied the office in the past two years—there have been four so far and there might be another one; I think that includes the one yesterday, but it might not, as I do not keep up with the machinations that go on in Downing Street. The right hon. Member for Chingford and Woodford Green (Mr Duncan Smith) resigned over the variation, and he was the architect of the plan.
It is clear that, while the Government talk the talk on tackling inequality, they are not capable of matching those words with action. Time and again, the Chancellor has failed to improve work incentives under the programme by investing in the work allowances, and I have no doubt that our demands will continue to go unheard. All that is an opportunity for the Government to change tack, and they will not.
Dan Carden
My hon. Friend is my constituency neighbour in Bootle. He will know that while the tax threshold may have been raised under this Government, an alternative economy has been created in which people have insecure employment, precarious work—sometimes two, three or four jobs on the lowest pay—and no guarantee of a weekly or monthly income to pay the bills or raise a family. While we talk about figures, facts and economic outcomes in this place, the reality of people’s lives in north Liverpool, which I represent, and in Bootle, which he represents, is very different. Those words and numbers mean little to them.
Peter Dowd
My hon. Friend makes an important point. The whole point of a social security system in tandem with a tax system is to ensure that those who can afford to pay do so, and those who cannot afford to pay do not. We are now in a topsy-turvy world, where things are being twisted around and the people who can least afford it pay and the people who can most afford it do not pay. That is the direction of travel, and it is affecting people day in, day out. I agree with my hon. Friend.
Ms Karen Lee (Lincoln) (Lab)
We hear a lot about the NHS; my hon. Friend has referred to it. I am a nurse, and I did a shift in my local hospital on Saturday. Last Wednesday, I went out for most of the day with the local ambulance service. The NHS is indeed in crisis, and until people pay a proper rate of tax and it is properly funded, that will remain the same. As a new Member, I am a little taken aback at the number of people who are simply not listening to this debate. They are on their iPads and phones. It would be good if people paid attention—
Peter Dowd
My hon. Friend the Member for Lincoln makes an important point. Her passion and concern, which many of us share, sometimes stray beyond the remit of our debates, but the point is well made. The bottom line is that my hon. Friend the Member for High Peak makes an important point in her new clause, and no doubt that is something we will come back to in due course.
Mel Stride
I thank the hon. Member for High Peak for speaking so thoroughly to her new clause. While I recognise many of the challenges she has rightly raised, which families up and down the country are facing— nobody belittles those—I do not recognise the picture she paints of eternal gloom and night of what this Government have achieved with our economy and for hard-working families. We have done a great deal to help those who are less well off. The hon. Lady herself raised the issue of the increase in the personal allowance, which has rocketed since 2010 to over £11,000 today. Indeed, that has taken 3 million low-paid workers out of tax altogether. They pay no income tax at all. Those are 3 million low-paid workers who paid income tax under the last Labour Government and are no longer paying that tax under this Government.
We have just had a Budget in which we took a number of specific measures to help those who are less well off. We froze fuel duty for the eighth year in a row. We increased the personal allowance for the seventh year, as the hon. Member for High Peak pointed out, taking even more people out of tax. We will increase the national living wage, a measure that this Government have brought in, by over 4% in the coming April.
Alison Thewliss
Does the Minister accept that the national living wage is not a real living wage, as set by the Living Wage Foundation, and it is not available to those under the age of 25? How will they be helped?
Mel Stride
I would say to the hon. Lady that it was not available to anybody under the last Government. That is the point—it is available now. One of the consequences of these measures and others the Government have introduced in our stewardship of the economy is near-record levels of employment. That is a staggering statistic: we have the lowest level of unemployment since around 1975, or for over 40 years. We have more women in the workforce than at any time in our history. While the hon. Member for Bootle would say that we do not believe we are all in it together, we do. There is clear evidence for that, as under this Government, the wealthiest 1% pay almost 28% of all income tax. Under the last Labour Government, that figure was lower and that is a demonstrable fact: it was around 23%. There has been a huge proportional increase in the burden carried by the wealthiest in this country.
Dan Carden
What we see under this Government is the rich getting richer, so the fact that they pay more tax is not a great indication of what this Government are doing.
Mel Stride
The level of income inequality is at its lowest in more than 30 years.
Anneliese Dodds (Oxford East) (Lab/Co-op)
Not after a housing adjustment, it isn’t.
The Chair
Order. If Members wish to intervene on the Minister, they should do so in the proper manner.
Mel Stride
I will not, and the reason I will not is that we have a great deal of business to cover, as well as the fact that we might be straying slightly broader than the clause. I have given my reasons why I believe we should reject new clause 10—[Interruption.]
Anneliese Dodds
Thank you, Chair. I apologise for intervening at the very end of the Minister’s speech. I know he is a thoughtful person, and in response to the specific point made by my hon. Friend the Member for High Peak, he maintained that the OBR could not do an analysis of the marginal tax rate on low-income or low-hours working people because it was not the appropriate body. Can he tell us which body would be the appropriate one? I noticed that he did not contest what my hon. Friend said about the marginal tax rate for very low-income people. Which body would be available to do that analysis?
Mel Stride
There are many bodies out there that could take on that kind of analysis, including the Institute for Fiscal Studies. There are many, even the House of Commons Library—
Mel Stride
If I could just finish: a number of bodies might look at those particular issues.
When we look at the marginal rates, under the last Labour Government, if someone worked beyond 16 hours per week they were in a situation where the marginal rate of tax they were facing when going into employment was far greater than under this Government.
Anneliese Dodds
My hon. Friend the Member for High Peak has explained that under the tax credits system, people were able to take home much more of their income. She has also provided a concrete example whereby people could be working for a short period of time and take home very little of that amount under the universal credit system. I was hoping we could get some commitment for a Government body to look at this issue, which has already caused enormous problems and, potentially, poverty for some low-income people. It would be wonderful if the Minister could give us a commitment that he will look into this issue.
Mel Stride
We will always look at the kind of issues the hon. Lady has highlighted. We will do that as a matter of good Government policy and to produce the policies we look at going forward. However, this is not the forum to begin looking for commitments on new reports, new investigations and new analysis. As the hon. Lady will know, there are many bodies out there that conduct that kind of analysis.
Ruth George
I thank the Minister for his response. I am surprised he does not think it is the role of Government or this Committee to ask for reviews on matters as important as a marginal tax rate. Given the limitations on amendments we can make to the Bill, reviews are practically the only thing we can ask for. I am sure the Minister would prefer that no amendments at all could be made to the Bill, because that would make his life an awful lot easier. As that is one of the few things that, under the constitution, we are allowed to do, I hope that the Minister will agree that looking at marginal tax rates for people on low pay is one of the most important things that the Government should be doing to alleviate poverty.
In spite of the numbers that have been taken out of income tax, we have actually seen rising numbers of working people in poverty. The fact that three million people are no longer paying income tax does not offer a lot of comfort to those who cannot afford to pay for food and heating because eight million working people are now in poverty. That has the knock-on effect on children, on households and on long-term poverty.
All we are asking for is some transparency. The Minister says that this Government have brought in a fair and progressive tax system. We simply want the Government and the OBR to be able to show how fair and progressive the system is by producing the figures on the marginal tax rates which affect almost a third of all working people.
The Chair
For clarification, there will not be any votes on new clauses until we reach the end of Bill.
Question put and agreed to.
Clause 3 accordingly ordered to stand part of the Bill
Clause 4 ordered to stand part of the Bill.
Clause 5
Starting rate limit for savings for tax year 2018-19
Question proposed, That the clause stand part of the Bill.
Mel Stride
Clause 5 maintains the starting rate limit for savings income at its current level of £5,000 for 2018-19. As members of the Committee will be aware, the starting rate for savings applies to the taxable savings income of individuals with low earned incomes. The Government made significant changes to the starting rate for savings in 2015, lowering the rate from 10% to 0%, as well as extending the band to which it applies from £2,800 to £5,000. This welcome reform has done much to support savers on low incomes by reducing the tax they pay on the income they receive from their savings. Since then, savers have been further supported by the introduction of the personal savings allowance, which offers up to £1,000 of tax-free savings income.
The changes made by clause 5 will maintain the starting rate limit for savings at its current level of £5,000 for 2018-19 tax year. This change is being made to reflect the significant reforms made to support savers over the last couple of years, in addition to the substantial increases in the personal allowance. Most notably, in April 2016, the Government introduced the personal savings allowance, which will remove 18 million taxpayers from paying tax on their savings income in 2018-19. In April 2017, the annual individual savings account allowance increased by the largest ever amount, to £20,000.
Kirsty Blackman
It is admirable that the Government are making changes to make it easier for people to save. Would the Minster let us know how many people have begun saving as a result, and how much saving has increased for families? If there are now so many people who are employed, and so many who are using the personal allowance, surely they have loads of extra cash that they are now saving?
Mel Stride
The hon. Lady is right: it is certainly the case that the more people there are in work, the better they are supported; and the less tax to which they are subject, the more disposable income they will have with which to save. That is self-evident, which is why it is this Government’s mission to keep economic growth going, employment high, and unemployment and taxes low to facilitate exactly the point that the hon. Lady is making.
Taken together, these reforms mean that today, 98% of adults in the UK pay no savings tax. This Government remain committed to supporting savers of all incomes, and at all stages of life. These reforms, coupled with the significant increases to the starting limit in 2015, mean that we do not believe that a further increase in the starting rate for savings is necessary. I therefore commend the clause to the Committee.
Question put and agreed to.
Clause 5 accordingly ordered to stand part of the Bill
Clause 6
Transfer of tax allowance after death of spouse or civil partner
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to consider new clause 3—Review of the effects of changes to the transferable tax allowance for married couples and civil partners—
‘(1) Within six months of this Act receiving Royal Assent, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects and cost of changes made by section 6 of this Act to Chapter 3A of Part 3 of ITA 2001 (transferable tax allowance).
(2) The Chancellor of the Exchequer shall lay the report of this review before the House of Commons.’
This new clause would require HMRC to carry out a review of the effects of changes to the transferable tax allowance for married couples and civil partners arising from changes to Chapter 3A of Part 3 of ITA 2007 made by Clause 6 of the Bill.
Mel Stride
Clause 6 makes changes to allow marriage allowance to be claimed and backdated on behalf of deceased spouses and civil partners. Marriage allowance was introduced in 2015. It allows individuals to transfer 10% of their personal allowance to a spouse or civil partner if they are a basic rate taxpayer. Marriage allowance can currently be claimed and backdated by up to four years if taxpayers meet the qualifying condition. Currently, taxpayers cannot claim after a partner is deceased, even if they may have qualified in the current or previous years since its introduction.
I have heard representations from the Low Incomes Tax Reform Group highlighting the fact that it is unfair that this financial support is not available for people going through a period of considerable distress that accompanies the death of a partner. The changes made by clause 6 will put marriage allowance on a footing with other tax reliefs, where claims can be made by a personal representative after death on behalf of the deceased.
As a result, bereaved partners can now claim on behalf of their spouse or civil partner in the current year and any previous years where they were eligible, up to a maximum of four years. That will enable of thousands of extra people to claim the marriage allowance, worth £230 this year in tax relief, or up to £662 if backdated to its introduction. That will have a negligible cost to the Exchequer.
New clause 3 would include a review in six months’ time of the effects of the costs of the extension of the marriage allowance made by clause 6. It is the Government’s view that there is no need for a formal review of these changes. First, the new clause asks for a review of costs. As I have said, clause 6 is forecast to have a negligible cost, a judgment with which the independent Office for Budget Responsibility was content. Her Majesty’s Revenue and Customs also publishes the Exchequer cost of the main tax reliefs, including the marriage allowance, on an annual basis. The House will be able to examine the overall change in costs at that time.
Secondly, the new clause calls for a review of the effects of these changes. As the Committee would expect, we keep the effectiveness of the marriage allowance under review. Indeed, the clause was developed in response to concerns raised by the Low Income Tax Reform Group, a sign that the Government are willing to listen when concerns are raised. After six months, it will be too soon to tell how effective the policy has been, so a formal review would be a disproportionate response. I therefore urge the Committee to resist the new clause.
A total of 2.6 million couples have successfully applied for the marriage allowance and thousands more apply each week. That is a tax cut worth more than £400 million to couples on lower incomes. The changes being made by clause 6 mean that thousands more will be able to claim, recognising that bereaved partners going through extremely distressing times deserve all the support that they can get. I therefore commend the clause to the Committee.
Kirsty Blackman
The Scottish National party has a long-documented opposition to the married couples allowance, with which we have disagreed for a long time. The change the Minister suggests makes it slightly better and gets rid of one of our concerns, but it remains a tax relief that overwhelmingly benefits men. It remains a tax relief that leaves abused women out in the cold. Because they have to hand over part of the personal allowance, it is difficult for them to go back to work in some circumstances.
It remains a change that benefits only traditional nuclear families, whether people are in a civil partnership or are a heterosexual couple. Only those couples who choose to live together as married benefit. When the measure was first introduced, it was made clear that couples with children were less likely to benefit, because of the working structure that tends to exist with those couples. Apparently, only 15% of those who benefit from the scheme are women; it may even be less.
This issue has been raised by the Women’s Budget Group as one that creates further gender disparity in a society where we are trying to reduce the gender pay gap and make matters better by trying to create a situation where women can more easily go back to work and earn a reasonable amount of money.
The married couples allowance is incredibly flawed. Although this change makes it slightly better, it still has a huge number of problems. We will continue to support new clause 3 and press Government to get rid of the married couples allowance.
Anneliese Dodds
It will not surprise anyone to learn that Labour has similar concerns to the SNP about the married couples allowance. We would obviously all want families who have experienced a bereavement to be supported. The problem remains that bereavement has a severe impact, whether or not a family is composed of two people who are married or in a civil partnership. It also has a huge impact on lone-parent families, or on those who live together but do not have a formalised relationship such as a marriage or civil partnership. We are concerned about the allowance because, as was mentioned, it privileges certain family forms over others, and that is a particular concern when many families are under severe pressure.
Mel Stride
I am pleased that the hon. Member for Aberdeen North welcomed the clause in so far as it extends these benefits to those whose partner—either civil partner or married partner—is deceased. I understand that she has fundamental reservations about the entire policy of having such tax reliefs for those who are married, but personally I do not think we should be shy about supporting those who are either married or in a civil partnership. As I said earlier, the problems with the hon. Lady’s new clause are, first, that the costs are negligible—the Treasury would view them as being below £5 million in total. As a responsible team in the Treasury we will review the policy in future, and on that basis I would like to think that the clause can be accepted, and I commend it to the Committee.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7
Deductions from seafarers’ earnings
Question proposed, That the clause stand part of the Bill.
Mel Stride
Clause 7 would provide certainty that employees of the Royal Fleet Auxiliary—the RFA—can claim seafarers’ earnings deduction. Most UK residents pay UK tax on all their earned income wherever it arises, but seafarers are entitled to a 100% deduction from income tax for their foreign earnings in certain circumstances. The deduction is available provided that at least half of the qualifying period of 365 days is spent outside the United Kingdom, and that no more than 183 consecutive days are spent in the UK during that period. The tax treatment recognises the importance of the maritime industry to our country, and helps to maintain the competitiveness of the UK in an international market. Around 20,000 seafarers currently claim the deduction each year, and of those around 900 individuals are from the RFA.
The civilian-manned RFA delivers worldwide logistical and operational support for tasks undertaken by the Royal Navy, and it plays a crucial role supporting counter-piracy, humanitarian relief, disaster relief and counter-narcotics operations. Currently those individuals claim the deduction, but it is on a concessionary rather than a legislative basis. The changes in clause 7 provide certainty that the employees of the RFA are eligible for the deduction by placing it on a statutory footing. The RFA plays a crucial role, and it is right that its employees are eligible for the deduction in the same way as other seafarers. This clause provides certainty for RFA employees. I believe the Committee should welcome it and I commend it to the Committee.
Anneliese Dodds
I am grateful to the Minister for his comments concerning this alteration, but I have a couple of questions. As I understand it, this change largely reflects existing practice in law, specifically the fact that RFA seafarers should be entitled to seafarers’ earning deduction. I understand that the seafarers falling into that category have asked the Government to make it clear in this Committee that there will be no detriment for them as a result of this change. They are asking for that because some of them fear retrospective penalties from HMRC or from the employer, given that previously the deduction was practically operated in an informal manner. I hope that the Treasury Minister can make it clear that this measure will not operate to the detriment of the seafarers.
I wanted to make the point that unfortunately this change will not alter the material circumstances of our RFA seafarers; it recognises in law a situation that already exists informally in many cases. We have substantial recruitment issues at the moment with RFA seafarers, and those issues could become more acute because we are going to have 12 vessels when the new ones come on-stream. They will need to be serviced by RFA seafarers, yet the level of pay provided for them has been squeezed because they are covered by the arrangements for public sector employees. Their situation is out of kilter with the situation for seafarers working in the private sector doing comparable jobs, and that is a major concern for them. While we may now see a reflection of the reality when it comes to the tax situation, my concern is that we are not reflecting reality when it comes to recruitment challenges and the need to consider whether current pay levels are appropriate. This should not be viewed as a proxy for the kind of pay lift that at least some of those seafarers are saying they think they need to deal with recruitment challenges. This is rather a cosmetic change.
Mel Stride
The hon. Member for Oxford East raised the issue of whether there will be any detriment, and she specifically mentioned retrospective issues in terms of this formalisation of the relief that has hitherto been available on an informal basis. I can assure her that there will not be any detriment, and I thank her for raising that important matter. As for seafarers’ pay, that is probably an issue that is out of scope for this Committee, but I am sure she will raise it in other quarters. Part of the reason for introducing this clause, and for formalising and putting into legislation these particular reliefs, is to make sure that we are as effective as we can be on the tax side when recruiting men and women who do such an important job, and that we remain internationally competitive in our tax treatment of their earnings. I hope that the Committee will accept clause 7.
Question put and agreed to.
Clause 7 accordingly ordered to stand part of the Bill.
Clause 9
Benefits in kind: diesel cars
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss new clause 5—Impact of benefit in kind tax supplement on the use of diesel cars—
‘(1) Chapter 6 of Part 3 of ITEPA 2003 is amended as follows.
(2) After section 141, insert—
“141A Impact of benefit in kind tax supplement on the use of diesel cars
(1) Within six months of the passing of the Finance Act 2018, the Chancellor of the Exchequer must review the effects of the changes to this Chapter made by section 9 of that Act.
(2) The review under this section must consider the effects of those changes on—
(a) the use of diesel cars, and
(b) the Government’s emission reduction targets.
(3) The Chancellor of the Exchequer must lay before the House of Commons the report of the review under this section as soon as practicable after its completion.””
This new clause requires the Treasury to carry out a review of the effect of the provisions of Clause 9 on the use of diesel cars and on emission reduction targets.
Mel Stride
Clause 9 provides for a 1 percentage point increase in the company car tax diesel supplement. This modest increase will help to fund the UK’s national air quality plan, and is designed to encourage manufacturers to bring forward next-generation clean diesels sooner. There have been significant improvements in air quality in recent years, with nitrogen oxide emissions falling 19% between 2010 and 2015. However, air pollution is still at harmful levels in many of our towns and cities, and road transport is responsible for 80% of nitrogen oxide emissions in roadside tests. Even new diesel vehicles are a significant source of emissions. A test on the 50 best-selling diesel cars in 2016 found that, on average, they emitted over six times more nitrogen dioxide in real-world driving than is permissible under current emissions standards.
Diesel company cars are already subject to an additional supplement, currently at 3%, in recognition of diesel engines producing harmful pollutants in addition to carbon dioxide, including nitrogen oxide, or NOx, gases. The measure increases the diesel supplement from 3% to 4% for all cars solely propelled by diesel for the tax year 2018-19, until a point at which they meet the real driving emissions step 2 standard, known as Euro 6d. RDE2 sets a standard for nitrogen oxide emissions in real-world driving situations, with an emission limit of 80mg of NOx per kilometre. The supplement will not affect diesel hybrids, petrol or ultra low emission vehicles, or drivers of heavy goods vehicles or vans. The measure also removes the diesel supplement altogether for cleaner diesel cars that are certified to the RDE2 standard.
A basic rate taxpayer with a VW Golf will pay an additional £54 in 2018-19 as a result of the change. Company car drivers typically travel more miles, and have therefore benefited greatly from successive fuel duty freezes since 2011; in the autumn Budget, the Chancellor announced the eighth successive fuel duty freeze, saving the average driver £160 a year compared with the pre-2010 escalator plans. The change will encourage manufacturers to bring forward next-generation clean diesel sooner, and will also strengthen the incentive to purchase cars with a lower number of harmful pollutants—for example, ultra low emission vehicles or zero-emissions vehicles.
The measure is designed to work over several years to encourage manufacturers to bring forward the development of cleaner vehicles, so we do not believe that a review after six months, as requested in new clause 5, which was tabled by Opposition Members, would be appropriate. Company car fleets are typically renewed every three years, so we will not see the full impact of any change that takes effect from April 2018 until three years later. We will of course continue to review the uptake of company diesel cars and developments with those vehicles as part of our wider strategy on improving air quality. On that basis, I do not believe that the new clause is necessary, and I ask hon. Members to consider withdrawing it.
Clause 9 makes a small change that will support the UK’s transition to less polluting cars, helping to make sure that our towns and cities are clean and healthy places in which to live. I commend it to the Committee.
Anneliese Dodds
I am grateful to the Minister for his comments. However, Labour Members will continue to be concerned about the measure and will continue to ask for a review of its effectiveness. There is obviously a clear rationale for this kind of measure: it follows widespread public and scientific concern about emissions from diesel cars that do not use emission capturing technology to the extent that they might.
There are many examples of this kind of technology-forcing regulation being effective. However, we believe that a review is required—first, because we need to be clear that new technologies will indeed be incentivised through this measure. We do not feel that we have effective evidence to prove that at the moment. The Institute of Chartered Accountants suggests that it is unlikely that any diesel cars will meet the standard required to avoid the supplement until at least 2020, so there is a question about whether distorting decisions could be made that would prioritise petrol vehicles over diesel vehicles in the meantime—especially if appropriate technologies are not introduced as quickly as they should be. I know from discussing this issue with motor manufacturers that they are confident about the roll-out of the new technology, but a review would none the less be appropriate, given the extent of use of diesel technology.
Secondly, it is important that we review the measure’s contribution to emissions reductions targets because of the lack of other environmental commitments in the Bill. Sadly, the Bill lacks measures to reduce carbon emissions in order to halt the climate crisis, despite many of us hoping that it would include, for example, more tax breaks for solar technologies, which have sadly been scaled back.
From what I can see, this is also the only measure to promote better air quality, when we know that there are many other sources of pollutants in the air that we breathe. Yes, of course NOx is important, but small particulates and other emissions are important as well. It is absolutely right to mention that NOx pollution from diesel emissions is significant at roadside sites, but petrol emissions are also significant away from direct roadside sites or at particular roadside sites, and industrial sites are also important, in terms of emissions.
Mel Stride
I thank the hon. Lady for her further comments on this matter. I reiterate that we believe that a six-month time horizon is too soon. I have already said that company car fleets, for example, generally turn over every three years, which is well beyond the six-month period that we are considering. She questioned the fact that some of these measures will not fully kick in until as late as 2020. By that time, no fewer than about one million potential drivers of company cars will have taken a decision on what kind of company car they wish to take on—so a million drivers will be directly affected by this measure and will be encouraged to move to less polluting vehicles as a consequence of it. We will keep these measures under review in the light of the progress of the industry in improving the cleanliness of diesel engines and of the new technologies that are developing all the time. I commend the clause to the Committee.
Question put and agreed to.
Clause 9 accordingly ordered to stand part of the Bill.
Clause 10
Termination payments: foreign service
Question proposed, That the clause stand part of the Bill.
Mel Stride
Clause 10 ensures that all employees who are UK-resident in the tax year in which their employment is terminated will be liable to income tax on their termination payment in the same way, regardless of whether they have worked abroad. Foreign service relief allows termination payments for certain qualifying individuals to be completely exempt from income tax. Employees who receive termination payments while working in the UK may be eligible for a 100% reduction in income tax on this payment if they have worked abroad for a qualifying period. An employee has to meet certain qualifying criteria; these include the foreign service covering three quarters or more of the employee’s period of employment with an employer. Employees may also be able to receive a smaller relief proportionate to their time worked outside the UK for that employer.
Around 1,000 individuals claim foreign service relief each year. However, this relief has become outdated and it is unfair that some UK residents may receive tax relief simply because they have worked abroad. Today there is a global workforce, and this exceptional treatment is no longer justifiable.
The changes made by clause 10 will ensure that those who are resident in the UK in the year their employment is terminated will be taxed in the same way, whether or not they have worked outside the UK. The statutory residence test will be used to determine which employees are UK-resident in the tax year in which they receive their termination award. These changes will apply to those individuals who have their contract terminated on or after 6 April 2018.
However, the Government will not tax termination payments if an individual receives the award outside the UK and it has already been taxed in another country. Individuals will still benefit from the £30,000 income tax exemption and the unlimited employee national insurance contributions exemption for termination payments. This is a fair and proportionate change. Our tax treatment of termination payments is one of the most generous in the world; that is something of which we can be proud. I commend the clause to the Committee.
Question put and agreed to.
Clause 10 accordingly ordered to stand part of the Bill.
Clause 11
Employment income provided through third parties
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Amendment 34, in schedule 1, page 57, line 33, at end insert
“or such higher amount as may be determined in accordance with sub-paragraphs (1A) to (1D).
(1A) This sub-paragraph applies where the loan is between £100,000 and £199,999.
(1B) This sub-paragraph applies where the loan is a multiple of £100,000.
(1C) Where sub-paragraph (1A) applies, the penalty is £600.
(1D) Where sub-paragraph (1B) applies, the penalty is the equivalent multiple of £300.”
This amendment provides for higher penalties for failure to comply with paragraph 35C where the amount of the loan is greater.
Amendment 35, in schedule 1, page 57, line 38, after “£60”, insert
“or such higher amount as may be determined in accordance with sub-paragraphs (4) to (7)”.
This amendment paves the way for Amendment 36.
Amendment 36, in schedule 1, page 57, line 39, at end insert—
‘(4) This sub-paragraph applies where the loan is between £100,000 and £199,999.
(5) This sub-paragraph applies where the loan is a multiple of £100,000.
(6) Where sub-paragraph (4) applies, the penalty is £120.
(7) Where sub-paragraph (5) applies, the penalty is the equivalent multiple of £60.”
This amendment provides for higher penalties for continued failure to comply with paragraph 35C where the amount of the loan is greater.
Amendment 37, in schedule 1, page 58, line 10, at end insert
“or such higher amount as may be determined in accordance with sub-paragraphs (6A) to (6D).
(6A) This sub-paragraph applies where the loan is between £100,000 and £199,999.
(6B) This sub-paragraph applies where the loan is a multiple of £100,000.
(6C) Where sub-paragraph (6A) applies, the penalty is £6,000.
(6D) Where sub-paragraph (6B) applies, the penalty is the equivalent multiple of £3,000.”
This amendment provides for higher penalties for inaccurate information or documents relating to compliance with paragraph 35C where the amount of the loan is greater.
Amendment 38, in schedule 1, page 60, line 20, at end insert—
“17 (1) The amendments made by paragraphs 9 to 12 have effect in accordance with the provisions of this paragraph.
(2) No later than two months after the passing of this Act, the Chancellor of the Exchequer and the Commissioners shall undertake an assessment of the profile of those holding loans to which the amendments made by those paragraphs apply.
(3) A review under this paragraph shall consider what discretionary arrangements it is appropriate for the Commissioners to take in relation those holding such loans who are not higher rate taxpayers.
(4) The amendments made by paragraphs 9 to 12 shall have effect when the Chancellor of the Exchequer has laid before the House of Commons a report of the review under this paragraph.”
This amendment provides for commencement of the provisions of Part 4 of the Schedule to take place after the publication of a review of the profile of those affected, and in particular on lower paid taxpayers.
That schedule 1 be the First schedule to the Bill.
That clause 12 stand part of the Bill.
That schedule 2 be the Second schedule to the Bill.
Is that clear?
Mel Stride
I am very clear on my instructions. Thank you, Mr Owen.
Clauses 11 and 12 make changes to ensure that businesses and individuals who have used or continue to use disguised remuneration tax avoidance schemes pay their fair share of income tax and national insurance contributions. Disguised remuneration schemes are used to avoid tax and national insurance contributions by paying individuals and taking profits through third parties in ways that are claimed not to be taxable, such as loans. Such schemes are highly artificial. In the Government’s and HMRC’s view, they do not produce the declared tax advantage, but that has not stopped their use entirely. The coalition Government first introduced legislation to stop such schemes in 2011. The legislation was successful, and since 2011 HMRC has collected more than £1.8 billion in settlements from scheme users.
Of course, more always needs to be done. The Government continue to tackle disguised remuneration avoidance schemes. The changes announced at Budget 2016 included the 2019 loan charge, which treats all outstanding disguised remuneration loans as taxable income on 5 April 2019. The 2016 package followed the tax avoidance industry’s aggressive response to the 2011 changes: it has created and sold more than 70 new schemes. It is claimed that those schemes achieve the same outcome through the addition of even more contrived steps. The Budget 2016 package will bring in more than £3 billion by 2020-21, and will ensure that scheme users pay their fair share of tax.
The changes made by clause 11 will make clear how the disguised remuneration anti-avoidance rules apply to schemes used by the owners of close companies. The clause also introduces a requirement for scheme users to provide information on disguised remuneration loans outstanding on 5 April 2019 to HMRC, which will help HMRC to enforce the 2019 loan charge. The new information requirement includes an additional penalty regime, which is consistent with existing HMRC information powers.
The clause also includes a clarification to the disguised remuneration rules. It puts beyond doubt the fact that anti-avoidance rules apply even if an earlier income tax charge arises. It will prevent any attempts to avoid paying the tax by claiming that HMRC is out of time to collect payment. The disguised remuneration rules prevent any double tax charge on the same income.
Finally, the clause will make a change to ensure that any employee who has benefited from a disguised remuneration avoidance scheme is liable for the tax arising on the 2019 loan charge where the avoidance scheme used an offshore employer. Clause 12 will also introduce a new requirement for self-employed individuals, and partners who have used disguised remuneration schemes, to provide information about loans that are outstanding on 5 April 2019 to HMRC. That will help to ensure that HMRC is able to enforce the loan charge.
Let me turn to the Opposition’s amendments. Amendments 34 to 37 seek to include penalties linked to the loan amount for those who fail to comply with the reporting requirement. Amendment 38 seeks to introduce a review to consider the impact of the measure on taxpayers—particularly basic rate taxpayers. It would be inappropriate to introduce a penalty based on the loan amount, as it would be inconsistent with HMRC’s other information powers, and a separate penalty regime already does that where a taxpayer does not correctly report the tax due from outstanding loans.
On the proposed review, the Government do not think it is appropriate that avoiders should get a discount, compared with the vast majority of taxpayers, who pay the right tax at the right time. However, the clause may have a significant impact on the users of disguised remuneration schemes. HMRC aims to contact those who are affected and encourages those who are concerned about their ability to make timely and full tax payments to contact HMRC. The Department has an excellent track record of supporting people with financial difficulties who may be finding it hard to pay immediately. The Government believe that the proposed review would not provide any additional benefit, so I urge the Opposition not to press the amendments.
It is right that everyone should pay their fair share of tax and make their contribution towards public services, and the changes will ensure that users of disguised remuneration schemes pay their fair share. I therefore commend clauses 11 and 12 to the Committee.
Anneliese Dodds
May I pose one brief question about clause 12 before speaking to amendments 34 to 38 to schedule 1? I am grateful to the Minister for his clarifications and comments about clause 12 and schedule 2, but a pertinent question has been asked by one of the different interlocutors—one of the taxation organisations —which suggested it might be easier for self-employed people who have used the schemes to report their use in accordance with the self-assessment deadline. Has that been considered, because there could be a helpful reduction in bureaucracy and in the amount of fees paid to accountants and so on were there an alignment with the self-assessment return deadline? Will the Minister respond to that?
Moving on to our amendments, we would obviously welcome tightening in the area of disguised remuneration schemes following widespread concern about practice. There have been some high-profile cases, not least those revealed recently in the Paradise papers or the Rangers football club case, which have shown the lengths to which some people are prepared to go to avoid paying the tax that others view as a normal part of doing business.
We are concerned that the measures in the Bill do not go far enough. Loans, for example, have been taxable since the disguised remuneration rules came into force in 2011. There should be no excuse for people not to be aware of the situation; there should be widespread understanding of the need for employers and employees to comply in the area and not to enter into such schemes. We therefore need to ensure that future penalties are sufficiently dissuasive of other forms of aggressive tax avoidance as well as this one.
The Minister rightly described some of what has gone on as involving excessively contrived steps to avoid tax. He suggested that our additional penalties might somehow be inconsistent with others delivered by HMRC but, for the reasons I have just mentioned, it is important for us to have a strong line on such issues. The consistent policy has been that there should be no disguised remuneration, in particular through loans or connections with third parties in effect—not third parties, but those presented as third parties—and we need to ensure that we dissuade people with appropriate penalties.
I further note that the projected IT cost to HMRC of delivering the measure is about £3.5 million, so it is important to ensure that such costs are covered and that HMRC does not lose out due to the creation of the new penalties, especially when it is already subject to new demands because of the possible shift to a new customs regime, as we were discussing until very late last night. For those reasons we are keen to press ahead with our amendments, despite the Minister’s suggestion that we do not press them.
Mel Stride
The hon. Lady asked a specific question about clause 12 and schedule 2, on the timing of the requirement for payment of the loan charge and how that interacts with the self-assessment deadline. I will come back to her on that inquiry with a specific and detailed answer.
The hon. Lady is absolutely right, however, that since 2011 we have been clamping down on avoidance schemes, as I said in my opening remarks, and we have had considerable success, although we feel that the job is not yet done. We made it clear with the Finance Act 2017 and with further tightening in this Finance Bill that we will push even further in that direction, so that those schemes that are not paid off or sorted out with the Revenue before April 2019 will incur a penalty charge. We believe that is certainly the right direction of travel.
Anneliese Dodds
At the risk of producing a horrible sense of déjà vu in the Committee, following consideration by the whole House, I will say that assessments of the tax gap do not include the loss of revenue caused by profit shifting internationally. I wanted to clarify that before we get too optimistic about the success of HMRC in that regard.
Mel Stride
I will make two points in response to the hon. Lady: first, she mentioned profit shifting, and we have been in the vanguard of the OECD base erosion and profit shifting project—right at the forefront, driving it forward and, indeed, implementing it in many areas earlier than other countries decided to. Secondly, I believe that our overall record is exemplary and world-class; but of course there is always more to be done. It is absolutely right and proper that those who owe tax pay it, and where HMRC or the Treasury come across schemes that use various artificial devices to avoid and evade tax we will clamp down on those measures with vigour. We have demonstrated our success in doing so in the past, and will continue to do so in the future. The clause is yet another step in pursuing that endeavour.
Question put and agreed to.
Clause 11 accordingly ordered to stand part of the Bill.
Amendment proposed: 34, in schedule 1, page 57, line 33, at end insert
“or such higher amount as may be determined in accordance with sub-paragraphs (1A) to (1D).
(1A) This sub-paragraph applies where the loan is between £100,000 and £199,999.
(1B) This sub-paragraph applies where the loan is a multiple of £100,000.
(1C) Where sub-paragraph (1A) applies, the penalty is £600.
(1D) Where sub-paragraph (1B) applies, the penalty is the equivalent multiple of £300.”—(Anneliese Dodds.)
This amendment provides for higher penalties for failure to comply with paragraph 35C where the amount of the loan is greater.
Question put, That the amendment be made.
Finance (No. 2) Bill (Second sitting)
(6 years, 10 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Chair
With this it will be convenient to discuss the following:
Amendment 39, in schedule 3, page 65, line 28, at end insert
“or
(j) the pension scheme is a Master Trust scheme which has not complied with the relevant requirements of section 159E(2).”
This amendment paves the way for Amendment 41.
Amendment 40, in schedule 3, page 65, line 37, at end insert
“or
(i) the pension scheme is a Master Trust scheme which has not complied with the relevant requirements of section 159E(3).”
This amendment paves the way for Amendment 41.
Amendment 41, in schedule 3, page 65, line 37, at end insert—
‘(4A) After section 159D, insert—
Additional registration requirements for Master Trust schemes
159E Additional registration requirements for Master Trust schemes
(1) This section establishes additional registration requirements for Master Trust schemes.
(2) In respect of any such scheme, an investment strategy must be presented to the Commissioners prior to registration.
(3) In respect of any such scheme, and in respect of each year of registration, an annual report must be published on administration, fund management costs and transaction costs for each asset class and for active and passive asset management strategies.’
This amendment requires additional information to be provided on investment strategies and costs for Master Trust schemes prior to and in each year of registration with HMRC.
Amendment 42, in schedule 3, page 67, line 14, after “153(5)(i)”, insert “and (j)”.
This amendment is consequential on Amendment 41.
Amendment 43, in schedule 3, page 67, line 16, after “158(1)(h)”, insert “and (i)”
This amendment is consequential on Amendment 41.
Amendment 44, in schedule 3, page 67, line 17, at end insert—
‘(ba) sub-paragraph (4A);’.
This amendment is consequential on Amendment 41.
That schedule 3 be the Third schedule to the Bill.
The Financial Secretary to the Treasury (Mel Stride)
May I start by saying what a pleasure it is once again to serve under your chairmanship, Sir Roger? Clause 13 makes changes to extend Her Majesty’s Revenue and Customs’ powers to refuse to register and deregister pension schemes. The changes will enable HMRC to restrict tax registration to those pension schemes providing legitimate pension benefits and support the Pensions Regulator in its new authorisation and supervision regime for master trust schemes. The measure supports the Government’s objective of fairness in the tax system by maintaining the integrity of pensions tax relief.
Over the past few years, there have been growing threats to individuals’ pension savings, and they come in many forms. Many start with the setting up of a scheme, into which individuals are persuaded to pay their hard-earned savings, with a promise of various benefits. Sometimes these apparent pension schemes are no more than a scam, designed to extract money from unsuspecting individuals who end up with little or no retirement savings as a consequence. The Government are committed to tackling that threat, to ensure that individuals who save in a pension scheme have those funds available to them when they retire.
A master trust scheme is an occupational pension scheme for multiple employers, and clause 13 will extend HMRC’s powers to refuse to register and to deregister master trust pension schemes that are not authorised under the Pensions Regulator’s new authorisation and supervision regime. Aligning HMRC’s registration and the Pensions Regulator’s authorisation processes for master trust schemes will provide more effective protection for individuals.
The proposed amendments to schedule 3 would require pension schemes to provide additional information about the investment strategy of the scheme before HMRC decides to register the scheme and require the scheme to publish an annual report of costs in connection with the investments of the scheme to maintain its registration. The Government agree that transparency is integral to good governance and delivering improved member outcomes. However, the amendments would add little and largely duplicate existing requirements. The additional information required would not help HMRC to perform its role in collecting tax and ensuring that pension schemes are adhering to the tax rules. It would duplicate existing requirements by other regulatory bodies and add burdens and costs to pension schemes.
The amendments also propose that an annual report of costs in connection with the investments of the scheme be published. The Government consulted last year on legislation requiring transaction costs and other charges to be published for every investment option offered by defined contribution schemes, not just master trust schemes, and given to members. We plan to bring regulations for that into force in April this year.
The clause will ensure that HMRC can prevent scam pension schemes from being established and that it has the powers to take action where an existing scheme is discovered. That enables HMRC to protect people who have saved money for their retirement from the threat of pension scams. It supports the Government’s efforts to tackle abuse across the tax system, and I therefore commend the clause to the Committee.
Peter Dowd (Bootle) (Lab)
It is a pleasure to see you in the Chair, Sir Roger. The Minister referred to scams. To some extent, I am glad that he used the word “scam”, because I suspect that if I had used it, people would have said it was Labour again attacking companies, pension companies and investments. It is not the word I would have used, but I understand the point he makes, and it goes to the heart of what we want to discuss today, which is transparency.
Amendment 41 seeks to improve the transparency of master trust pension schemes, to ensure that they are at the forefront of changes taking place across the defined contribution sector. There is an argument to say that one cannot be transparent enough in these sorts of situations. We have had all sorts of institutional dodginess—let us put it no stronger than that—in the past, and whether through endowment schemes, personal protection plans, or the stuff now going on with leaseholds and property, people’s faith in some institutions is, I suspect, being challenged a little. That is why we want to push the envelope, so to speak.
The changes proposed in the amendment are twofold: first, it would ensure that a clear and coherent investment strategy is presented to HMRC before registration, which would go beyond the Government’s proposal; secondly, a clear annual report on the costs and charges being applied to saver pots must be presented to the trustees and, we hope, be made available to savers. We think that that will modernise the approach towards the fiduciary management of savers’ assets, updating the statement of investment principles approach that is currently required by master trusts. It will also bring master trusts in line with wider Government policy on reporting costs and charges—we are finally beginning to see some progress on that, following many years of campaigning by various bodies and organisations, as well as by many Members on both sides of the Committee and by other organisations.
Subsection (2) of amendment 41 requires a master trust to include an investment strategy in its application for registration to HMRC. Until now, every occupational pension scheme has been legally required to prepare and maintain a statement of investment principles, and that is expected to cover the trustees’ plans for securing compliance with their statutory duties, and their policies on investments, risks, returns and how they will exercise their voting rights. The amendment would ensure that such practice is embedded in the master trust sector, and enhanced to encourage trustees to strategically consider—a split infinitive there—factors that they believe will influence the financial performance of their investments, as well as, importantly, looking more closely at socially responsible investment.
We know that companies with strong environmental and social governance credentials have better long-term performance—that goes without saying. A company that is committed to environmental sustainability, and which cares about its staff and is well run and managed should, in the long term, always profit over a company that does none of those things. We have only to look at the Sports Direct share price over the past two years, or at Volkswagen following the 2015 emissions scandal. People react to what they perceive as non-environmentally friendly, or non-socially friendly approaches to their staff or product. Of course, Her Majesty’s Revenue and Customs has an interest in ensuring that the schemes that register with it for taxation purposes have a clear and transparent strategy for guaranteeing pension scheme members a secure retirement. That is a big responsibility for HMRC, and we should support it with the appropriate resources.
As long as pension funds can show that any investment or policy decision was made on a fiduciary basis and consulted on with members, they can avoid the charge that they have not considered their members’ best interests. The amendment will help HMRC to feel confident that the scheme being registered is legitimate, and it will also have secondary effects. Public opinion tends to position the average citizen as a helpless bystander in this drama, when in fact public money underpins the entire system. Anyone with a pension is indirectly an owner of Britain’s biggest companies, and the amendment envisions a world in which people feel that their savings give them a positive stake in the economy, and a voice in how the companies that they invest in are run.
The rise of private pension savings has led to a democratisation of company ownership, but when it comes to control of ownership rights the reverse is true. Power has become increasingly concentrated in the hands of a relatively small number of opaque and unaccountable financial institutions. As the Kay report showed, these institutions often face systematic pressures to act in ways that may not serve savers’ best interests. Direct accountability to savers is therefore a vital component of a healthy economic and financial system. As millions of savers have entered the capital markets through pension auto-enrolment, now is the right time, in our opinion, to build a more accountable system. We are talking 10, 20, 30 or 40 years ahead—let us start now.
In June 2011 the Government invited Professor John Kay to conduct a review into equity markets and long-term decision making. As I recall, the final report was published in July 2012. His review considered how well equity markets were achieving their core purposes: to enhance the performance of UK companies and to enable savers to benefit from the activity of these businesses through returns to direct and indirect ownership of shares in UK companies. The review identified the fact that short-termism is a problem in UK equity markets. Professor Kay also recommended that company directors, asset managers and asset holders adopt measures to promote both stewardship and long-term decision making. In particular, he stressed:
“Asset managers can contribute more to the performance of British business (and in consequence to overall returns to their savers) through greater involvement with the companies in which they invest.”
He concluded that adopting such responsible investment practices would prove beneficial for investors and markets alike. When it is put in those simple terms, who could argue? It seems to me axiomatic.
In practice, responsible investment could involve making investment decisions based on the long term, as well as playing an active role in corporate governance by exercising shareholder voting rights. Master trusts will want to consider the Kay review’s findings when developing their proposals, including what governance procedures and mechanisms would be needed to facilitate long-term responsible investing and stewardship through the funds they choose for members to save in.
The UK stewardship code, published by the Financial Reporting Council, has seven principles and also provides master trusts with guidance on good practice when monitoring and engaging with the companies in which they invest. Amendment 41 seeks to make sure that the trustees are cognisant of these issues, and we hope that where possible they will engage with their scheme members during the decision-making process.
In recent decades, efforts to improve the way in which companies are run have focused heavily on making directors more accountable to their shareholders—for example, the recent introduction of a binding say on pay—but this job is only half done. Ownership rights are exercised largely by institutions that are themselves intermediaries and accountability to the underlying savers who provide the capital remains weak. The logical next step must be for institutional investors to extend the same accountability that they expect from companies to the savers whom they represent. Indeed, such accountability is essential to the success of recent measures to encourage more engaged and responsible shareowners.
The UK stewardship code was introduced in the aftermath of the financial crisis to address concerns that shareholders were behaving as—I think this was the quote—“absentee landlords”. Rather than being enforced by regulators, it is a voluntary code that relies on scrutiny from below to promote compliance, mirroring the corporate governance code for companies. Yet while shareholders are given extensive rights to hold companies to account for their governance practices, savers are not equipped to play the same role in relation to institutional investors. The investment regulations currently require master trusts to set up, within the statement of investment principles, the extent to which social, environmental or corporate governance considerations are taken into account in the selection, retention and realisation of investments, and these policies should be developed in the context of consultation with the scheme members and should enhance the engagement with them over these crucial issues.
Ruth George (High Peak) (Lab)
Does my hon. Friend agree that this helps to encourage workers to engage with pension investment, in particular those on low pay for whom auto-enrolment and pension contributions can require a substantial portion of the earnings that they have left over after essential bills? Before coming here, I was engaged in setting up a pension scheme for low-paid nursery workers. It was important to them that they could see how their money was being invested, because they did not have very much of it. The more transparency we have, the more it will encourage such low-paid workers to feel secure that their money is safe and to make the investments that they need to make for their retirement.
Peter Dowd
My hon. Friend makes an important point. We want to move away from the passivity and disempowerment that people in that situation feel and towards their having the confidence to engage, if they so choose. We have to ensure that the mechanisms are there for them to choose. It is a little bit like democracy at the end of the day: we have elections, and if someone does not want to participate in them, that is a matter for them, but at least we have them. People are given the capacity to participate, which is no different, in principle, from the point my hon. Friend was making.
As well as better protecting savers’ long-term financial interests, this will be good news for those who believe that part of the current system of capitalism has lost a little bit of its moral compass in certain situations; I alluded to that a little earlier with some of the scams that the Minister referred to. It is a bit like this House, where we have to feel accountable to the people who send us here. Whatever the system is—politics, business or pensions—we have to feel accountable, and more importantly, we have to be accountable.
In addition, savers who feel connected to their money are more likely to see it as a medium for the expression of their values. That goes to the heart of what my hon. Friend touched on, and indeed to the point I made earlier about how transparency and accountability should matter to those whose only concern is making markets work more efficiently. It has to go beyond that. Efficient market theory presumes that consumers act in their own interests. However, in the capital markets, decisions are being made not by consumers but by intermediaries acting on their behalf, so there is a disconnect to some degree there as well.
Moreover, consumers themselves are deeply disconnected from their money, and the opt-out mechanism of pensions auto-enrolment is predicated on that fact. That means that intermediaries themselves are subject to limited market discipline. The pensions market may never be dominated by active and engaged consumers, which comes back to the point I made before, but the more consumers are active and engaged, the better the market will work. I do not think there is any question about that.
In addition, accountability should build trust in the system, even among those who choose not to engage, thus encouraging people to keep saving in effect. This is an important consideration in a market in which just 70% of retail investors trust investment firms to “do the right thing” and consumers cite lack of trust as the No. 1 reason for opting out of private pension saving, which is a real shame.
Ruth George
My hon. Friend makes excellent points that are absolutely true while auto-enrolment contributions are 1%, and will be even more true when they rise to 3% and then 5%. We are looking to individuals, often on low pay and often at quite an early stage in their working life, to contribute a substantial sum towards their pension, which is for a time they cannot see, so it is vital that these are transparent decisions for them.
Peter Dowd
My hon. Friend again makes an important point, and that arrow goes to the heart of things.
There are practical objections on the grounds that savers are not interested in, or capable of, engaging with their money, which simply perpetuates a vicious circle of disengagement. That is the passivity I talked about earlier—almost an institutional passivity on the part of savers. Savers may be put off by the language of investment, but that does not mean that they are not interested in where their money goes; they are.
Likewise, savers may lack understanding of the technicalities of investment, but there are many matters on which they are qualified to comment, including the way the scheme behaves as an owner of major companies, or its policies on social, environmental and governance issues. We see that to an extent, in an institutional way, in the Church of England, among other organisations; it puts those things at the heart of its approach. Savers should be allowed to do that as well. Indeed, emphasising the positive contribution that schemes are making to a better economy, through their exercise of ownership rights, could be a way to engage people with saving money more widely.
The onus must be on the master trusts and the wider investment sector to take the lead in developing a clear and engaging investment strategy. Making such a strategy a requirement of registration with HMRC will ensure that no master trust will slip through the net. The recent local government pension scheme regulations follow a similar path and require the administration authorities to create investment statement strategies. There is no reason why that good practice cannot be extended to defined contribution schemes.
I turn to the reporting of costs and charges—a subject that my hon. Friend the Member for High Peak touched on, and which is addressed in proposed new subsection (3) in amendment 41. For far too long, the pensions market has had a single glaring dysfunction: no one knows how much a pension pot costs. Members of this House would not go into a marketplace to buy anything without understanding the basic information relating to a product: its price, its essential properties, and the promises made about it. Strangely, this information, which is so fundamental to consumer choice and the operation of any market, remains largely absent in the pension market. Master trusts must establish what each investment choice costs and what their drawn-down product costs. Anything short of that is not helpful for millions of citizens.
We have a duty to ensure that a reporting line is open between a master trust, HMRC regarding a trust’s tax affairs, and the trust’s members on the costs they incur while saving for retirement. Again, Labour Members have campaigned for many years on this issue and it seems that the Government are beginning to catch up, not simply because of what we have been doing but also because of what Government Members and other organisations have been doing. We are not trying to claim all the credit; to some extent, this has been a team effort, right across the piece.
In the consultation on defined contribution pension schemes, under which master trusts operate, the Government requested evidence on how they might improve transparency in reporting information on the transaction costs and charges for members of workplace pension schemes. Amendment 41 would be a clear step forward, in line with the calls that we have been making alongside the industry, trustees, savers and Government Members, for transparency of costs and charges when it comes to pension savings. This issue affects us all.
I am afraid to say that the Government have seen fit to replace action with rhetoric here—a pattern that we see a little bit too often. However, I do not want to push that argument too much. We have to encourage and prod. The architecture to get the data, analyse it and present it is being discussed, with a view to its being built. It can be a platform from which other projects, including the value-for-money analysis needed for all workplace pensions, can be developed—and it can be delivered.
Amendment 41 helps to embed a process that is already under way, thanks in no small way to years of campaigning by many organisations and political parties. There is no reason why the Government should not take this opportunity to do something that is in line with their stated objectives. We must ensure that every person auto-enrolled into a master trust is given the opportunity to understand what pension system they are going into, how much it will cost and how much they will get. To do otherwise would be a clear breach of the fiduciary duty owed to scheme members.
The Financial Conduct Authority’s asset management market review said that evidence suggests that
“there is weak price competition in a number of areas of the asset management industry”,
which has a material impact on investors’ returns through their payment for asset management services. One of the FCA’s conclusions was that there should be a requirement for increased transparency, and standardisation of costs and charges information for institutional investors. That word “transparency” crops up time after time, for good reason.
The Government have agreed to implement the FCA’s recommendations in full. We can enshrine that guarantee in the Bill. Quite frankly, it is a fundamental market failure that no pension fund can understand its cost basis. If one does not understand costs, the investment strategy set out in proposed subsection (2) of amendment 41 cannot be evaluated.
It is also a sensible proposition that a scheme’s outgoings on costs and charges be evaluated during the process of tax registration by HMRC. The risk and responsibility will continue to rest with the pension saver; charges for ongoing administration and investment management will be deducted from their account—another reason why transparency and low charges are important.
If a scheme member loses money in retirement, it is extremely difficult—if not impossible—to get it back again, as their sources of income may be limited and a return to work might not be an option. Ultimately, members could run out of money. That has happened before with some of these schemes. The member is responsible for their decisions and the outcome the scheme generates. It is therefore essential that the member can see the cost of their pension pot. The efficient management of pension funds is critical to ensuring that we stave off a pensions crisis.
Dan Carden (Liverpool, Walton) (Lab)
My hon. Friend is making an excellent contribution. Pensions are incredibly complex; I am sure that most of us would be happy to admit that we do not have any great understanding of their workings. When we speak to our constituents, we hear that this is about confidence. Many people choosing between taking money home and investing money for the future—we look at this money as deferred wages—do not have confidence in the system because it is not transparent. Anything that we can do, through the amendment, to make the Government act sooner and not engage in more consultations on what is a rather obvious solution, which is to open up the industry to scrutiny and to give greater understanding to our constituents of how their pensions are invested, is a good thing. We ask the Government to agree to this amendment, so that we can get there quicker.
Peter Dowd
My hon. Friend makes a very important point.
To draw to a conclusion, I reiterate the point that I was making when my hon. Friend intervened. The efficient management of funds is critical to ensuring that we stave off a pensions crisis that citizens will be forced to endure in their retirement if we are not careful. The Government will fail in their duty of care if we do not get cost reporting on to the statute book. Transparency —there is that word again—is now an objective of all parties across the House. In our view, the Government must back this amendment and replace a little bit of rhetoric with action to protect pension savers.
Mel Stride
The hon. Gentleman has set out a comprehensive set of reasons for supporting his amendment. He will be pleased to know that I whole- heartedly agree with many elements of what he shared with us. Both sides of the Committee agree on our enduring belief that we should ensure that sufficient transparency is available and that we should do all we can to protect the life savings—in many cases—of those who invest in any form of pension, let alone master trust schemes, some of which have fallen foul of the kind of issues that we have been debating.
Unfortunately, I cannot agree with all the hon. Gentleman’s assertions. He spoke about the importance of transparency—I have said that I agree with that—but he also said that we cannot be transparent enough. That is an important maxim to operate by, but that cannot allow us to be led into a situation where we have overly burdensome additional costs as a consequence. That is the nub of our objection to his amendment.
The amendment would bring in a duplication of the regulatory body’s function of reviewing investment plans at the time that schemes are set up. The kinds of issues that the hon. Gentleman wants to be addressed are being addressed; I would be happy to share that information with him at a future date. The Financial Conduct Authority is consulting at the moment; the consultation closes on the 12th of this month—a few short days away. We have regulations planned for April that will ensure that we look into these issues and move into the area of the publication of costs and the way these schemes are run.
Returning to the clause, I hope we are united in believing that HMRC should be given additional powers to refuse the registration of schemes where it feels that they are deficient, and to withdraw registration where that is appropriate. I ask the hon. Gentleman to consider not pressing his amendments, and commend clause 13 to the Committee.
Peter Dowd
We have taken considerable time in outlining our proposal, which the Minister was gracious enough to say was comprehensive. The onus is on us to push the matter to the vote. We want to put down a marker. I am sure the Minister and his colleagues will appreciate that there are no traps here, or attempts to force the Government down paths that they do not want to go down; I suspect that they would in due course like to go down these paths. Like John the Baptist, we are laying out that path before them. [Interruption.] Yes, and look what happened to the guy who followed him. I will push the matter to a vote in due course, Sir Roger. I hope that the information I have provided will resonate with hon. Members.
Question put and agreed to.
Clause 13 accordingly ordered to stand part of the Bill.
Amendment proposed: 39, in schedule 3, page 65, line 28, at end insert
“or
(j) the pension scheme is a Master Trust scheme which has not complied with the relevant requirements of section 159E(2).”
This amendment paves the way for Amendment 41.—(Peter Dowd.)
Question put, That the amendment be made.
The Chair
With this it will be convenient to discuss the following:
Clause 15 stand part.
Clause 16 stand part.
That schedule 4 be the Fourth schedule to the Bill.
Clause 17 stand part.
Government amendment 1.
That schedule 5 be the Fifth schedule to the Bill.
New clause 6—Review of risk to capital changes—
‘(1) Within fifteen months after the first exercise of the power to make regulations under section 14(4), the Chancellor of the Exchequer must review the effects of the changes made by section 14.
(2) The review under this section must consider—
(a) the revenue effects of the changes, and
(b) the effects on the long-term growth and development of companies.
(3) The Chancellor of the Exchequer must lay before the House of Commons the report of the review under this section as soon as practicable after its completion.’
This new clause provides for a post-implementation review of the changes in Clause 14.
New clause 7—Review of changes to EIS and VCT reliefs for knowledge-intensive companies—
‘(1) Within fifteen months after the first exercise of the power to make regulations under paragraph 10 of Schedule 4, the Chancellor of the Exchequer must review the effects of the changes made by that Schedule.
(2) The review under this section must consider—
(a) the revenue effects of the changes, and
(b) the effects on the policy objective to facilitate and encourage additional investment in innovative companies developing and exploiting new technologies.
(3) The Chancellor of the Exchequer must lay before the House of Commons the report of the review under this section as soon as practicable after its completion.’
This new clause provides for a post-implementation review of the changes in Schedule 4.
New clause 8—EIS, SEIS, SI and VCT reliefs: review of operation—
‘(1) Within twelve months after the passing of this Act, the Chancellor of the Exchequer must review the operation of the reliefs established under Parts 5, 5A, 5B and 6 of ITA 2007.
(2) The review under this section must consider—
(a) the revenue effects of the reliefs and changes made to those reliefs since the passing of the Finance Act 2012,
(b) the employment effects of the reliefs and those changes,
(c) other economic effects of the reliefs and those changes, and
(d) the extent to which trusts or other entities have been created to secure benefits from the reliefs and those changes without providing wider employment or economic benefits.
(3) The Chancellor of the Exchequer must lay before the House of Commons the report of the review under this section as soon as practicable after its completion.’
This new clause provides for a review of the operation of the enterprise investment scheme, the seed enterprise investment scheme, income tax relief for social investments and venture capital trusts income tax relief.
Mel Stride
Clauses 14 to 17 and schedules 4 and 5 make changes to the tax-advantaged venture capital schemes as part of the Government’s response to the patient capital review. They also correct minor technical flaws in the legislation, to ensure that the legislation works as intended. The changes aim to drive more than £7 billion in new and redirected investment into high-growth companies over the next 10 years.
Responses to the patient capital review consultation pointed to the continuing importance of these schemes in incentivising investment in early-stage companies that would otherwise struggle to receive investment to help them grow and develop. However, evidence provided during the consultation, backed up by Sir Damon Buffini’s industry panel, suggested that knowledge-intensive companies, which are particularly research and development-intensive, still struggle with some of the most acute funding gaps, despite their growth potential. This is because they often require a large amount of capital up front to fund their growth, and it can be many years before their products can be brought to market. Evidence provided through the consultation also highlighted a large subset of low-risk capital preservation investments structured around the tax reliefs. One response showed that £467 million of funds raised by enterprise investment scheme funds in 2016-17 were aimed at schemes that could be described as capital preservation.
Clause 14 introduces a new “risk to capital” condition for the enterprise investment scheme, the seed enterprise investment scheme and venture capital trusts, in response to evidence of continuing capital preservation investments using the venture capital schemes. The condition takes a principles-based approach to deny tax relief to these investments. Investments will be excluded where it is reasonable to conclude that the company does not have the objective of growing and developing its trade in the long term and there is no significant risk that any loss of capital will be greater than the net return on the investment. The measure would take effect from Royal Assent.
Clause 15 makes technical changes to ensure that the rules on determining the amount of funding a company may receive in its lifetime, under the EIS, VCTs or social investment tax relief, work as intended. The clause ends certain transitional provisions introduced in 2007 and 2012, which excluded certain investments from counting towards the lifetime limit, and ensures all risk finance investments are counted towards the lifetime funding limits for the EIS, VCT and SITR schemes. This will apply to new investments on or after 1 December 2017.
Clause 16 and schedule 4 make three changes in response to the patient capital review. The changes will significantly expand the support offered to knowledge-intensive companies through the EIS and VCTs. The annual limit on how much an investor can invest through the enterprise investment scheme will be raised from £1 million to £2 million. Any investment over £1 million must be invested in knowledge-intensive companies.
Knowledge-intensive companies often need large funding rounds as they are highly capital-intensive. With this in mind, we are doubling the annual investment limit for knowledge-intensive companies using the EIS and VCT schemes to £10 million. Under the current EIS and VCT rules, knowledge-intensive companies must be broadly under 10 years of age when receiving their first qualifying investment. The clock starts when the company makes its first commercial sale. Knowledge-intensive companies sometimes find this point difficult to identify. Clause 16 introduces flexibility to this rule by allowing knowledge-intensive companies to choose to start the clock at the point they reach an annual turnover of £200,000.
Before I turn to Government amendment 1 to schedule 5, I will give some background, if I may, to introduce clause 17 and the schedule. Clause 17 and schedule 5 make changes to the VCT rules. Schedule 5 corrects a technical flaw and changes some of the rules to encourage VCTs to invest more of their funds in qualifying growth companies and to invest those funds more quickly. Government amendment 1 introduces new rules on qualifying loans to encourage VCTs to make longer-term investments in higher-risk companies. Some VCTs have used loan structures as a method of capital preservation, charging prohibitively high interest rates and including other conditions in the terms of the loan. The effect is to secure a return of capital well before the end of the five-year minimum period. Amendment 1 is intended to prevent the use of low-risk loans to minimise risk to the VCT and to its investors, including where the terms involve very high interest rates, redemption premiums and other charges. I commend Government amendment 1 to the Committee.
I turn to the rest of the provisions in schedule 5. The schedule corrects a flaw in an anti-abuse rule introduced in 2014 to prevent investors from being punished for mergers they did not know were about to occur. The changes will apply retrospectively, from the introduction of the anti-abuse rules in April 2014. The proportion of VCT funds that must be invested in qualifying companies will be raised from 70% to 80%. This will ensure that a greater proportion of VCT funds reaches the target companies. Once a VCT realises a gain by disposing of an investment, it must reinvest that gain within six months. Many VCTs currently pay out the proceeds as a dividend instead. To encourage more reinvestment by VCTs, schedule 5 raises the reinvestment period to 12 months. These last two changes take effect from April 2019 to allow VCTs time to adjust their investment portfolio.
VCTs currently have up to three years to invest funds after those funds are raised. A new rule will require them to invest at least 30% of funds in qualifying companies within one year of the end of the accounting period in which they were raised. This will accelerate investment of money raised from investors and will apply to funds raised from 6 April 2018.
Many previous changes to the VCT rules have been grandfathered. This means new investments can still be made under the old rules that applied when the money was originally raised. These transitional provisions enable some VCTs and their investors to access a range of generous tax reliefs on low-risk investments. The schedule will ensure that all VCT investments meet the current rules, regardless of when the original money was secured. These changes will take effect for investments from 6 April 2018.
New clauses 6 to 8 call for reviews into some of the changes made in this legislation, as well as a review of the efficacy of the venture capital schemes as a whole, but the changes made in the legislation are the result of a thorough review of all the venture capital schemes as part of the patient capital review. The review concluded that the schemes did vital work in providing capital for high-growth companies but that certain changes would make the schemes more effective and fairer for the taxpayer. Because we are committed to making the schemes work better, the Government have already committed to a report on the changes. An initial report to the Chancellor of the Exchequer for Budget 2018 will set out how the different measures in the Government response are being implemented. Then, in autumn 2020, a report will assess the impact of the policies set out in the Government response, including the clauses in this Finance Bill.
A review of this condition any earlier than 2020 would not be able to make any reasonable assessment of the effect of the changes on the scheme. It would be working from a single year’s data on the impact on Government revenue and would be unable to assess the impact on the long-term growth and development of businesses. In the meantime, HMRC publishes statistics on the use of venture capital schemes every year. The information includes details of amounts invested and company activities. The first figures reflecting the effect of the new changes for the tax year 2018-19 will be available in April 2020. These will be closely monitored. I therefore urge the Committee to reject the new clauses.
Sir Roger, these changes significantly expand the venture capital scheme’s innovative, knowledge-intensive companies while reducing the scope for low-risk investment within them. They will drive more than £7 billion of investment towards high-growth companies over the next 10 years and ensure the smooth operation of these important schemes. I therefore commend clauses 14 to 17 and schedules 4 and 5 to the Committee.
Peter Dowd
I will speak to our amendments to schedule 4, which also affect clauses 14, 15, 16 and 17.
May I start by telling the hon. Member for Middlesbrough South and East Cleveland, who was slightly confused as to which way he should vote, I am not sure whether if I had a spoken a little less he might have come our way, or perhaps he would have done so if I had spoken a little longer. We will never know, alas.
Clause 14 seeks to amend the requirements for investment to qualify for relief under the enterprise investment scheme, seed enterprise investment scheme or the venture capital trust scheme. As indicated, it also introduces an overarching risk-to-capital condition to deter investment companies whose activities are mostly geared towards protecting capital through minimising risk rather than supporting long-term growth and development of UK enterprise. It is important to start with that proposition.
Clause 14 also introduces a new principle-based risk-to-capital test that would change the current regime in which HMRC provides assurances for investments in advance. In the not too distant future, I am also going to introduce the T word—the transparency factor— I am giving notice of that.
Under this measure, HMRC would no longer provide advance assurance for investments that would appear not to meet the terms of the new rule. The Treasury has stated that if the new test proves effective in simplifying the conditions, this approach may be used to simplify further aspects of venture capital schemes legislation. It is clear that the current legislation is a maze of complexity that makes it difficult for businesses and advisers to establish that qualifying conditions are met with certainty, and also for HMRC to ensure that the reliefs are being used correctly and are not subject to abuse.
Mel Stride
Briefly, the hon. Gentleman raised a few points, including one being about HMRC and its effectiveness, particularly in advance assurances. As we know, advance assurances are a service provided on a non-statutory basis by HMRC, where a company can be given assurance on proposed investments that qualify for relief, unless the circumstances of the investment or, indeed, the law were to change. Here, assurance is being provided for investments that have not yet occurred. Clearly, HMRC cannot provide assurances for investments which, by the time they are made, may not meet a new condition that is going through Parliament. That has been a situation recently. HMRC has published a response to its advance assurance consultation, which sets out the steps it is taking with the aim of dealing with the vast majority of cases in 15 working days by this spring. That includes taking the action that we have been discussing on capital preservation.
In terms of reviews, assessments and the new clauses that are proposed, I come back to my earlier points that this whole set of changes that we are looking at around VCTs, EIS and so on, have come out of an extensive period of consultation led by Sir Damon as part of the patient capital review, in which the very questions that the hon. Member for Bootle was rightly asking in his speech were asked and consulted on in great detail. As I said earlier, there will be a report to the Chancellor on the implementation of these measures. That will happen in the Budget this year, in 2018. By autumn 2020, we will have the assessment report on the policies, including the measures that are covered in the Bill. For those reasons, I urge the Committee to reject the new clauses, and I commend clauses 14 to 17 and Government amendment 1.
Question put and agreed to.
Clause 14 accordingly ordered to stand part of the Bill.
Clauses 15 and 16 ordered to stand part of the Bill.
Schedule 4 agreed to.
Clause 17 ordered to stand part of the Bill.
Schedule 5
Venture capital trusts: further amendments
Amendment made: 1, in schedule 5, page 75, line 36, at end insert—
“Non-qualifying loans
6A (1) Section 285 of ITA 2007 (interpretation of Chapter 3 etc of Part 6) is amended as follows.
(2) In subsection (2)—
(a) omit “(whether secured or not)”;
(b) at the end of paragraph (b) insert “, or
(c) any liability of the company in respect of a loan to which subsection (2A) applies that has been made to the company.”
(3) After that subsection insert—
“(2A) This subsection applies to a loan if—
(a) the return on the loan represents more than a commercial rate of return, or
(b) the loan is made on terms which grant to a person or allow a person to acquire—
(i) any security or preferential rights in relation to assets of the company, or
(ii) the ability to control the company.
In sub-paragraph (ii) “control” has the meaning given by sections 450 and 451 of CTA 2010.
(2B) The return on a loan is not to be treated as representing more than a commercial rate for the purposes of subsection (2A)(a) if—
(a) the return on the loan during the period of 5 years from the making of the loan does not exceed 50% of the amount lent, and
(b) the total return on the loan does not exceed—
where—
N is the number of years (including any fraction) in the term of the loan;
A is the amount lent or, in a case where some of the loan is repaid during the term of the loan, the average amount outstanding during that term.
(2C) The Treasury may by regulations substitute a different figure for a figure that is at any time specified in subsection (2B)(a) or (b).
(2D) In subsections (2A)(a) and (2B) “return” means interest, fees, charges and other amounts payable in respect of the loan.
(2E) Where it is to any extent not known, before the end of the term of a loan, what amounts will be payable in respect of the loan—
(a) subsections (2A)(a) and (2B) apply, until the relevant matters are ascertained, on the basis of what amounts can reasonably be expected to be payable;
(b) when those matters are ascertained, any necessary adjustments must be made by making or amending assessments or by repayment or discharge of tax (regardless of any limitation on the time within which assessments or amendments may be made).””—(Mel Stride.)
Schedule 5, as amended, agreed to.
Ordered, That further consideration be now adjourned. —(Graham Stuart.)