Tuesday 16th May 2023
(1 year, 5 months ago)
Public Bill CommitteesFinance (No. 2) Act 2023 View all Finance (No. 2) Act 2023 Debates Read Hansard Text Amendment Paper: Public Bill Committee Amendments as at 16 May 2023 - (16 May 2023)
The Chair
With this it will be convenient to discuss the following:
Clause 37 stand part.
That schedule 5 be the Fifth schedule to the Bill.
Clause 38 stand part.
The Financial Secretary to the Treasury (Victoria Atkins)
Clause 36 makes changes to ensure that tax is paid on value built up in UK shares or securities even if the shares or securities are exchanged for an equivalent holding in a non-UK company. The measure is already legally in application since the point of its announcement in the autumn statement on 17 November last year. It will ensure that tax cannot be avoided where a UK resident non-domiciled individual with a degree of control in a UK company exchanges shares or securities in a UK close company for shares or securities in a non-UK holding company.
Before the measure was introduced, individuals could claim the remittance basis on disposal of the non-UK company shares and any income received in respect of the non-UK company shares. That means that tax will be paid only on the chargeable gain or the income if it is brought into the UK. The measure prevents the remittance basis from applying to the chargeable gain on disposal where the individual holds more than 5% of shares or securities in a UK close company and exchanges the shares for an equivalent holding in a non-UK company. Instead, the individual will pay tax as if the share exchange had not taken place. The clause will prevent tax avoidance by a small number of individuals, and protects £830 million of revenue across the scorecard period, ensuring that tax is paid on value built up in the UK on UK company securities even when securities are exchanged for securities in a non-UK company.
Clause 37 and schedule 5 make changes to require large multinational businesses operating in the UK to prepare transfer pricing documentation in accordance with the OECD’s transfer pricing guidelines. Transfer pricing is a means of ensuring that the pricing of transactions between connected parties is at arm’s length for tax purposes. From the financial year 2016-17 to 2021-22, HMRC brought in £10 billion in additional tax from transfer pricing compliance activities. HMRC does not currently prescribe specific transfer pricing records that UK businesses must prepare to demonstrate that their tax returns are complete and accurate, or the format of those records.
The proposed changes would require UK businesses to prepare OECD standardised documentation, which is described as a master file providing high-level information of the global business operations and a local file providing more detailed information about material cross-border transactions of UK group members with other members of the multinational group. The changes made by clause 37 and schedule 5 provide greater certainty for UK businesses, provide HMRC with better quality data to enable more efficient and targeted compliance interventions, and align the UK’s practice more closely with the transfer pricing documentation requirements of comparable tax administrations.
Clause 38 makes changes to ensure that access to double taxation relief is limited in respect of dividends received by UK companies in periods prior to the introduction of a broad distribution exemption regime in 2009. Specifically, it will prevent new claims for double tax relief credit calculated at the foreign nominal rate of tax on such dividends being made on or after 20 July 2022, the date on which the Government announced in a written ministerial statement that legislation would be introduced for that purpose. Unlike normal double tax relief, which is given on tax actually paid, foreign nominal rate credit is a notional amount calculated by reference to the rate of tax applicable to the profits out of which the overseas dividends were paid.
A first-tier tribunal decision in 2021 concerning the nature of this credit raised the prospect that certain claims could still be made by companies in receipt of foreign dividends prior to the introduction of distribution exemption in 2009, possibly as far back as 1973, so we needed to act. The measure will protect Exchequer revenue by preventing new claims from being made for long-settled years where no actual additional tax has been paid by the claimant. It does not seek to prevent such claims in relation to periods that are open or remain subject to ongoing litigation. The measure is intended to preserve the balance between taxpayers’ rights to make double-taxation relief claims and the need to impose reasonable time limits in respect of such claims. I recommend that all of these clauses stand part of the Bill.
James Murray (Ealing North) (Lab/Co-op)
I begin by addressing clause 36, which inserts new sections into the Taxation of Chargeable Gains Act 1992. As we heard from the Minister, the new sections will help to make sure that UK tax cannot be avoided on chargeable gains made on the disposal of a UK business, or on income received in respect of shares or securities held in a UK business, by exchanging securities in a UK company for securities in a non-UK holding company. Under the current legislation, where such an exchange takes place and the individual is a UK-resident non-domicile, they will be able to claim the remittance basis on any chargeable gain made on the disposal of the non-UK company’s securities or on any income received in respect of the offshore company’s securities.
I would be grateful if the Minister could set out the Government’s response to some of the queries about the detail of the Bill that have been raised by the Chartered Institute of Taxation, which has expressed concern that by applying only to individuals in their other guises—for example, when they are acting as trustees—the measure leaves gaps that could be exploited. The Chartered Institute of Taxation believes that there is potentially a straightforward avoidance opportunity here, whereby having shares held by trustees just before the share-for-share exchange could be resolved by extending the measure to cover trustees, rather than just individuals on their own. To tackle this issue, the Chartered Institute of Taxation suggests that individuals acting as trustees, or as partners or members of partnerships or LLPs, be included within the definition of those affected by the change, to ensure that artificial intermediaries are not put in place prior to any exchange.
The second point raised by the Chartered Institute of Taxation, which I would like the Minister to address, relates to the wording of the Bill with respect to the ownership of shares, which it believes may also create an avoidance opportunity. New section 138ZA(1)(d) of the Taxation of Chargeable Gains Act 1992, which clause 36 introduces, refers to the person to whom the shares are issued—the legal owner, as opposed to the beneficial owner. It is well recognised in tax law that the beneficial owner is the real owner for tax purposes, so the Bill should logically refer to beneficial ownership. The Chartered Institute of Taxation is therefore concerned that failure to clarify the beneficial, rather than legal, ownership could leave a possible avoidance opportunity open, and I would be grateful if the Minister could address that point.
More widely, looking beyond the specific detail of the Bill, we believe it is important to consider the context in which the clause operates. It seems clear that the situation that the measure in the clause seeks to address arises only because of the existence of the non-dom tax status and the associated remittance basis. Indeed, the Government’s own policy paper on this matter makes it clear that the measure is expected to affect a very small number of wealthy, UK-resident non-domiciled individuals a year. In practice, the measures we are considering need to be addressed only because the Government refuse to get rid of the £3.2 billion-a-year tax loophole that the Prime Minister has referred to as “that non-dom thing”.
The Minister may recall how she told the House in January that the measures we are debating today would mean that the Chancellor would close the loophole in non-dom legislation, but when we inspect the detail that is before us today, it is clear that this is just a smaller loophole within the much larger and more profound loophole: the continued existence of the non-dom tax status. The policy paper underscores this point and confirms that the measure will raise, on average over the next five years, just one 20th of the £3.2 billion lost through the non-dom tax status every year. I urge the Minister to go beyond the small step today and commit to abolishing the non-dom tax loophole altogether.
Moving on to clause 37 and schedule 5, we understand that this measure is intended to make sure that businesses maintain and provide upon request transfer pricing documentation prepared in accordance with the OECD transfer pricing guidelines. We recognise that accessing high-quality data in a standardised format would enable HMRC to carry out more informed risk assessments, target resources more efficiently and reduce the time taken to establish the facts in compliance interventions. Moreover, having to clearly report transfer pricing information in specific documentation will result in businesses having clearer and more robust transfer pricing positions to inform the filing of their return. This may encourage and incentivise businesses that adopt higher risk transfer pricing positions to change their behaviour.
In recent years there have been significant developments in the field of international taxation. More than six years ago, the OECD presented a package of measures in response to the G20-OECD base erosion and profit shifting action plan, including a requirement to develop rules regarding transfer pricing documentation. The action 13 final report recognised the importance of having the right information at the right time to identify and resolve transfer pricing risks. This led to the introduction of guidance on a standardised approach to transfer pricing documentation.
The standardised approach consists of three things: a master file containing standardised information relevant for all multinational enterprise group members; a local file referring specifically to material transactions of the local taxpayer; and a country-by-country report for the largest multinational enterprise groups containing aggregate data on the global allocation of income, profit, taxes paid, economic activity and so on among the tax jurisdictions in which it operates.
We understand from the policy paper on this measure that the UK did not originally introduce specific requirements regarding the master file and local file because the Government felt that the UK already had broad record-keeping requirements. They seem to have changed their mind on this, which has led to this Bill. It seems that the status quo had created uncertainty for UK businesses regarding the appropriate transfer pricing documentation that they needed to keep. That led to an inconsistency of approach. Although this measure relates to the standardised approach for transfer pricing documentation, I would like to ask the Minister to update the Committee on the status of country-by-country reporting.
The policy paper refers to the fact that the UK implemented the country-by-country minimum standard. However, as we know, the Government have long been hesitant to go beyond that minimum and provide public country-by-country reporting. Indeed, nearly three years ago my hon. Friend the Member for Houghton and Sunderland South (Bridget Phillipson) made it clear to one of the Minister’s predecessors that for years the Opposition has been urging the Government to commit to country-by-country reporting on a public basis. Will the Minister give us her view on public country-by-country reporting and explain what is preventing the Government from implementing it?
Finally, clause 38 introduces a measure to limit access to double taxation relief in certain circumstances. Specifically, we understand that it will prevent new claims for double taxation relief credit, calculated by the foreign nominal rate of tax, which could arise in relation to overseas dividends received by UK companies in periods prior to the introduction of the distribution exemption in 2009. We recognise that this measure is intended to preserve the balance between double taxation relief claims and the need to impose reasonable time limits in respect of such claims, so we will not be opposing this clause.
Victoria Atkins
I am delighted to answer the Opposition’s queries on non-domiciled taxpayers. Their stance is an interesting contrast to the Conservative party’s inclusive nature when it comes to wealth creation, and opening ourselves up to the rest of the world to encourage the best and brightest to come here and do business. I am interested to hear that the hon. Gentleman has something against film stars, singers and—dare I say it—movie stars who perhaps cross into the world of football. I will not name any taxpayers. But my goodness, I am sure he is proud of the fact that we have a leading film and creative industry in the United Kingdom, particularly on the outskirts of London. I have the great pleasure of meeting representatives of some of those industries from time to time; the excitement and the welcome they feel from the United Kingdom, partly because of the reliefs and support given by the Government, is really interesting to see.
Turning to the scheme itself, we want to have a fair but internationally competitive tax system, designed to bring in talented individuals and investment that will contribute to the growth of the economy. Non-domiciled individuals pay tax on their UK income and gains in the same way as everybody else, and they pay tax on foreign income and gains when those amounts are brought into the UK. They play an important role in funding our public services through their tax contributions. According to the latest information, non-UK domiciled taxpayers are estimated to have been liable to pay almost £7.9 billion in UK income tax, capital gains tax and national insurance contributions in 2021, and they have invested more than £6 billion in the UK using the business investment relief scheme introduced in 2012.
To put those numbers into context, £7.9 billion is just under half of what we spend on policing in England and Wales. They are extremely big numbers. When the Opposition put their plans forward, they do not address a significant risk, which we have looked into carefully. What happens if, by changing the rules and making ourselves less competitive, we start to turn away those very successful people?
The hon. Member for Ilford South talked about capital flight. I think he was referring to the research published by the London School of Economics and the University of Warwick, which suggested that abolishing the non-domiciled regime would lead to very little immigration—around 0.2%. That study looked at the particular response to the 2017 reforms. As colleagues will know, several policy mitigations that were put in place in 2017 reduced the migration impact of reform: protections for non-resident trusts, the option to revalue non-UK assets at their 5 April 2017 valuation for CGT purposes and the ability to rearrange offshore investments to make it easier to bring money to the UK. Abolishing the remittance basis outright would be expected to have a much more significant behavioural impact in the absence of any policy mitigations, so the headline result of the external research may underestimate the migration response.
Samantha Dixon (City of Chester) (Lab)
This morning we discussed the Office for Budget Responsibility’s statement that the Bill will drag an extra 1.2 million people into the higher rate of tax, so will the Minister explain, in plain English, her reluctance to include non-domiciled taxpayers?
Victoria Atkins
They are taxed, as UK taxpayers are taxed, on their UK income—that is the point. The hon. Lady will know that the threshold for the additional rate was lowered from £150,000 to just over £125,000 at the autumn statement. That will apply to the UK income tax of those who are earning here in the UK. That is precisely the point; the difference relates to their foreign income. We want to help these very mobile and very successful people who work for banks or in the movie and sporting worlds, and we want to help those who work for the various businesses to which the hon. Member for Ilford South referred to help us to build the best tech industry that we can possibly have. We want them to help us to build incredible life sciences solutions.
If the hon. Member for City of Chester took a bit of time to talk to some of the individuals involved in the life sciences industry—that golden triangle between Cambridge, Oxford and London—she would know that what they do is genuinely inspiring. Why on earth would we not welcome people from overseas to help us in that? That little golden triangle has more tech companies in it than any place on the planet other than New York and Silicon Valley. If those places are our competitors in the tech industry, we are doing very well indeed. We want to encourage more of them to come to our country to help us to build that.
Aaron Bell (Newcastle-under-Lyme) (Con)
It is a pleasure to serve under your chairmanship, Ms McVey. The Opposition already seem to have spent the money from this claimed non-dom bonus a dozen times over, by my count. The Minister referred to the University of Warwick research, which I have referred to during various debates in the main Chamber. If the Treasury analysis is that that research—that 0.3% figure—is misguided, is it not the case that the magic pot of money that the Opposition keep spending does not actually exist?
Victoria Atkins
My hon. Friend brings a particular fervour to his intervention, if I may say so. I absolutely want very high-earning people to pay their proper taxes here in the United Kingdom, but we need to stay competitive, which is why we look at other countries around the world. Our competitors have regimes that give tax advantages, or they are more careful with the tax that they apply, to people who are so highly mobile. I want to bring those people to the UK and get them to pay UK taxes on their UK earnings.
Rob Butler (Aylesbury) (Con)
It is a pleasure to serve under your chairship, Ms McVey. Is it not also the case that attracting those very mobile people to this country means that they then spend money in this country? Some of that is on VAT—a further tax—and much of it is on employing other people, who then pay tax themselves, so the very presence of such very mobile people has a multiplier effect on tax.
Victoria Atkins
I completely agree: there is a ripple effect from those individuals. Conservative Members understand the concern that such people should pay their taxes fairly and contribute to our economy, which is precisely why it is a Conservative Government who act on loopholes when they emerge and are drawn to our attention, as we have done in the Bill but also in 2017. There is a delicate balancing act to ensure that we remain internationally competitive.
Sam Tarry
It is important that we are clear that non-dom status is mostly used by British citizens who were born in this country but have decided to not pay their taxes in this country, even though they live here for the majority of the year—[Interruption.] It is true. It is a hangover from the colonial era, when people used to have sugar plantations. Look at the history of non-dom status; it is hundreds of years old. It has not just been cooked up by the Treasury in the last five minutes, has it? It was a way of allowing people to own different things around the world—sugar plantations in the Caribbean are one example—and have that money come back to the UK without paying the taxes. It was a perk, essentially, for those people.
If Conservative Members do not believe me, they should go and look at the history. They are in government. They should know these sorts of things. The fact is that non-dom status is used as a tax dodge. The point is about fairness. Of course we want to encourage the brightest, most talented people to come to this country, make a life here and contribute, be that in life sciences, tech companies, the NHS or whatever, but I strongly suggest to the Minister that she should have a firm conversation with the Home Secretary about putting in place a progressive migration policy, because that is the problem here.
This is about taxation and people paying their fair share. Some 77,000 people—British residents, living most of the time in this country—use the non-dom scheme to not pay taxes—
Victoria Atkins
The hon. Gentleman is trying to tempt me away from the scope of the Bill, and I will resist that temptation. I gently ask him to help me—perhaps afterwards—to understand the evidence he has to support his claim that the overwhelming number of non-dom claimants are British residents. We just need to be a little bit careful about definitions.
Let me move on to the questions from the hon. Member for Ealing North. The share exchange legislation provides a relatively simple way for shareholders to avoid tax. It applies only to individuals. If individuals use artificial arrangements to prevent the legislation from applying, they will need to consider whether other anti-avoidance provisions apply.
The hon. Member asked about the difference between the legal owner and the beneficial owner. Again, the legislation applies to shares held on behalf of the individual in a nominee, or bare trust arrangement. Section 60 of the TCGA treats shares as being issued to the beneficial owner where there is a bare trust or nominee arrangement in place.
On public country-by-country reporting, we remain firmly committed to a multilateral approach, but it is important that such a requirement applies consistently across domestic and foreign headquartered multinationals to avoid distorting decisions on where companies decide to locate.
James Murray
The Minister quoted some figures that we have heard before, and I think it is worth the Committee having the context for them. The Minister tried to defend non-dom tax status by claiming that non-doms paid £7.9 billion in UK taxes last year. As always, that argument entirely misses the point, because we are talking about the £3.2 billion of tax that non-doms avoid paying in this country every year.
The Minister also repeated her line about non-doms having invested £6 billion in investment schemes since 2012, but I am sure the Committee would want to know that that ignores the fact that only 1% of non-doms invest their overseas income in the UK in any given year. In fact, non-dom status discourages people from bringing money into the UK to invest. We have set out the Labour party’s position very clearly, explaining how we would have a modern, short-term scheme for temporary residents.
Finally, the Minister referred to the potential behavioural impact if non-dom status were abolished. She was quick to dismiss some of the independent findings of the LSE and Warwick, made on the basis of HMRC data. If she is so confident that the behavioural difference will be that different, will she publish the Treasury research, so we have it in the public domain?
Victoria Atkins
We have to make judgments on how we ensure that the UK economy is not only internationally competitive but attractive to other countries. We are happy to make the point that non-domiciled taxpayers can make a valuable contribution to the United Kingdom, but of course we want them to pay—we require them to pay—UK income tax, and so on, on their UK income and remittances. We want to ensure that that system is in place.
On the behavioural aspects, we looked very carefully at the University of Warwick report, but what worries us is that there does not seem to be a recognition of the mobility of such people. They are able to live and work anywhere in the world. We do not want to put their living here at risk. Let us not forget that the hon. Gentleman is prepared to put at risk £7.9 billion. That is a risk we are not prepared to take.
James Murray
I will focus on the question in my previous intervention. The Minister was keen to rubbish the LSE and Warwick analysis based on HMRC data. Will she—
The Chair
We cannot say “misrepresentation”, but I would like the Minister to give a full response to what was said.
Victoria Atkins
We have been through this on many occasions. We are perfectly entitled to receive advice. We have come to the conclusion that non-domiciled status is right for ensuring that we remain internationally competitive. I am not rubbishing anyone, or anything of that nature, and it is improper to say that I am, but we do have reasonable concerns. We have to look at the evidence base. The one thing that we are not prepared to do is to put at risk that £7.9 billion going into the UK economy.
Question put and agreed to.
Clause 36 accordingly ordered to stand part of the Bill.
Clause 37 ordered to stand part of the Bill.
Schedule 5 agreed to.
Clause 38 ordered to stand part of the Bill.
Clause 39
Payments to farmers under the lump sum exit scheme etc
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clause 40 stand part.
Government amendments 6 and 7.
Clause 41 stand part.
Government amendment 8.
Clauses 42 and 43 stand part.
Victoria Atkins
Clause 39 makes changes to clarify that payments from the lump sum exit scheme are treated as capital receipts. It aims to set clear and fair rules regarding the taxation of the scheme. Clause 40 creates a fairer system for assessing capital gains when an asset is disposed of under an unconditional contract. Clause 41 makes the capital gains tax rules fairer for spouses and civil partners in the process of separating or divorcing. Clause 42 makes changes to ensure that individuals who pay tax on carried interest are able to better align the time a tax liability arises in the UK with that of other relevant jurisdictions, and therefore claim double taxation relief where it is due. Clause 43 makes changes to ensure that roll-over relief and private residence relief work as originally intended for members of limited liability partnerships and partners of Scottish partnerships.
I will go through the changes in detail. Clause 39 clarifies the tax treatment for around 2,700 sole trader farmers, farming partnerships and farming companies who have received, or will receive, payments from the lump sum exit scheme. That will give certainty to those receiving such payments and remove the need to consider individual cases.
Clause 40 modifies HMRC’s four-year assessment powers so that, in certain circumstances, they will operate by reference to the tax year or accounting period in which the asset is conveyed or transferred. For capital gains tax, those circumstances are where the conveyance or transfer takes place six months after the end of the tax year in which the contract is entered into. For corporation tax, the date is one year after the end of the accounting period for the contract.
Capital gains tax rules provide that the transfer of assets between spouses and civil partners is made on a “no gain/no loss” basis. When spouses or civil partners separate, no gain/no loss transfers can be made only in the remainder of the tax year in which the separation occurs. Clause 41 extends no gain/no loss treatment until the end of the third tax year after the year the parties ceased to live together, the date on which the parties’ marriage or civil partnership ended, or the date when the parties entered into a divorce or separation agreement. No time limit applies to transfers of assets that form part of a formal divorce or separation agreement. The clause also makes changes to the rules that apply to the sale of the former family home. The other change applies to individuals who have transferred their share in the former family home to their ex-spouse or civil partner and who are entitled to receive a percentage of the proceeds when it is eventually sold.
Amendment 6 corrects an issue with time limits. Where a divorce agreement has not been entered into, spouses and civil partners should have up to three full tax years in which to transfer assets between themselves on a no gain/no loss basis. As it is worded currently, clause 41 provides a day short of that, so we want to correct that. Amendment 7 clarifies that the new rules also apply to divorce agreements entered into after spouses and civil partners have ceased to be married or have ended their civil partnership.
The changes made by clause 42 will introduce a new elective basis of taxation for carried interest, a type of reward for asset managers. For those who opt to use the elective basis, it will tax carried interest in the UK at an earlier time than under the current rules. That will mean that individuals receiving carried interest may be able to claim double tax relief in other jurisdictions more easily, avoiding disproportionate tax outcomes. That will help to remove barriers to international trade and support the health of the asset management sector while accelerating, but not reducing, UK tax.
Amendment 8 seeks to refine the calculation of carried interest for the purposes of clause 42. It modifies the calculation methodology so that it works in circumstances where managers are entitled to more carried interest if investors receive fund profits earlier. That means that the measure will better deliver in practice the opportunity to claim relief from double taxation on carried interest, as intended.
Clause 43 will ensure that roll-over relief and private residence relief work as originally intended for members of limited liability partnerships and partners of Scottish partnerships, by clarifying that the reliefs are available to them when an exchange of interest in land or private residences takes place, in the same way as they are when the land is held by the individual members or partners.
This group of clauses will provide greater certainty, consistency and fairness in the taxation of chargeable gains. I therefore commend them to the Committee.
James Murray
Clause 39 clarifies the tax treatment of payments received under the lump sum exit scheme, saying they will be treated as capital receipts rather than income, provided that the eligibility criteria are met. As we know, the lump sum exit scheme was designed to make it easier for farmers who wish to retire or to leave the industry. The basis for the scheme was considered in 2021 by a consultation that we understand received 654 responses.
We will not oppose the clause, which is specifically designed to provide clarity on the tax treatment of payments made under the scheme, but I wish to use this opportunity to ask the Minister for more context around the clause and, in particular, for details on the operation of the scheme and what comes next.
I understand that a total of 2,706 farmers made an initial application to the lump sum exit scheme by the deadline of 30 September 2022. Of those claims, 511 were withdrawn or rejected. Will the Minister tell us what analysis there has been of why those 511 claims were withdrawn or rejected?
I am conscious that when the draft Agriculture (Lump Sum Payment) (England) Regulations 2022, which relate to this matter, were debated in March last year, concerns were raised, on behalf of organisations including Sustain, that the scheme could be open to instances of fraud. Will the Minister confirm whether any of the 511 claims that were withdrawn or rejected were in fact rejected on the basis of fraud? If she does not have that information, perhaps she can at least provide us with the detail about what anti-fraud efforts have been made in relation to the scheme and how successful they have been.
I understand that the Department for Environment, Food and Rural Affairs is conducting five pilots aimed at supporting new entrants into farming, and I would be grateful if the Minister updated us on how those pilots are going and any early lessons that she may be able to share with us.
Clause 40 modifies the operation of the period in which a person must notify HMRC that they are chargeable to capital gains tax or corporation tax, and the time limits for assessing chargeable gains and claiming allowable losses, when an asset is disposed of under an unconditional contract.
When an asset is disposed of in that way, its date of disposal for capital gains purposes is treated as being the date on which the contract is made and not the date on which the asset is conveyed or transferred, if this is different. HMRC subsequently has four years from the end of the tax year or accounting period in which the disposal is treated as taking place in which to assess any tax that is due. Similarly, there is a four-year time limit for making loss claims. If there is a long gap between the disposal contract being entered into and it being performed, that can result in HMRC and taxpayers having little or no time in which to make a tax assessment or a claim.
We recognise that the measure removes potential avoidance opportunities by ensuring that HMRC can assess tax due in circumstances in which more than four years pass between an unconditional contract being entered into and an asset being conveyed or transferred. It also provides the taxpayer with a safeguard by allowing a corresponding period to claim allowable losses. We will therefore not oppose the clause.
As we heard, clause 41 makes changes to the rules that apply to transfers of assets between spouses and civil partners who are in the process of separating. It provides that they be given up to three years in which to make a no gain, no loss transfer of assets between themselves when they cease to live together, and unlimited time if the assets are the subject of a formal divorce agreement. It also introduces special rules that apply to individuals who have maintained a financial interest in their former family home following separation and that apply when that home is eventually sold.
Essentially, the clause seeks to make fairer the capital gains tax rules that apply to spouses and civil partners who are in the process of separating. It gives them more time to transfer assets between themselves without incurring a potential charge to capital gains tax. No gain, no loss treatment is currently available only in relation to disposals made in the remainder of the tax year in which the spouses or civil partners cease to live together. After that, transfers are treated as normal disposals for capital gains tax purposes. The measure extends the time available to give separating couples at least three years to make no gain, no loss transfers between themselves for capital gains tax purposes.
It is worth noting that the “Background to the measure” section of the Government’s policy paper on this matter refers to the Office of Tax Simplification and its consideration of how the capital gains tax rules apply to individuals who separate and divorce. The Government responded to the Office of Tax Simplification recommendations by agreeing that the no gain, no loss window on separation and divorce should be extended, and that is what the clause implements.
There is at the very least something ironic about a Government who use one clause of a Finance Bill to implement a recommendation of the Office of Tax Simplification and another clause of the same Bill to abolish that institution. As the Chartered Institute of Taxation has pointed out, the changes to be made by the clause are a result of an Office of Tax Simplification report. In fact, they are the third recommendation from that report to be implemented: it also recommended an increase in the notification period for the disposal of residential properties from 30 days to 60, and the incorporation of capital gains tax into a single customer account.
Will the Minister offer her views on that when she responds, and set out how the Government reconcile the apparent worth they seem to attribute to the Office of Tax Simplification, as evidenced by their decision to implement its recommendation in clause 41, with their decision to scrap it later in the Bill?
Victoria Atkins
On amendment 8, I had read out that it seeks to refine the calculations of carried interest for the purposes of clause 42. It modifies the calculation methodology so that it also works in circumstances where managers are entitled to more carried interest if investors receive fund profits earlier. That will mean that the measure will better deliver in practice the opportunity to claim relief from double taxation on carried interest, as intended.
James Murray
I apologise to the Minister for missing her comments about Government amendment 8 and remind her that I would like to know whether the amendment, if it is passed, will have any effect on the overall Exchequer impact of the measure.
Victoria Atkins
I will come to that later.
The hon. Gentleman should send his questions about the farmer scheme to DEFRA, which is responsible for the Rural Payments Agency, which operates the scheme. He will know that we are confining ourselves to the tax implications of the scheme, so he ought to direct his questions there.
The hon. Gentleman asked about the Office of Tax Simplification, and that debate awaits us in our next day of consideration in Committee. I will not trespass on those deliberations, but we are in fact going further than the OTS’s recommendation, as we consider that that will give a fairer outcome to the parties involved in complex separation and divorce proceedings. We received representations that the OTS’s recommendations did not go far enough and we wanted to address the issues about the former family home that, for many divorcing and separating couples, is their main asset. We want to try to relieve the pressure during what can be a very upsetting and emotional time for the people involved and to try to ensure that they have time to resolve important family disputes.
In relation to carried interest being taxed as income, depending on the circumstances carried interest can be subject either to income tax rates or to the higher capital gains tax rate of 28% for higher and additional rate taxpayers. This is a balanced approach and one that is followed by comparable jurisdictions. We are supportive of the wider role and importance of the asset management sector. Amendment 8 has no impact on clause 42; it is designed to make the measure work as intended.
Question put and agreed to.
Clause 39 accordingly ordered to stand part of the Bill.
Clause 40 ordered to stand part of the Bill.
Clause 41
Separated spouses and civil partners
Amendments made: 6, in clause 41, page 32, line 36, at beginning insert “on or ”.
This amendment ensures that the inserted subsection (1C) applies to disposals made on the days mentioned in paragraphs (a) and (b) of that subsection as well as before those days.
Amendment 7, in clause 41, page 33, line 8, after “etc)” insert—
“, but as if, in subsection (2)(a), after ‘partner’ there were inserted ‘, or former spouse or civil partner,’”. —(Victoria Atkins.)
This amendment clarifies that the inserted subsection (1D) applies in relation to disposals made after A and B have ceased to be married or civil partners.
Clause 41, as amended, ordered to stand part of the Bill.
Clause 42
Carried interest: election to pay tax as scheme profits arise
Amendment made: 8, in clause 42, page 34, line 40, at end insert—
“(5A) Where—
(a) distributions were made by the scheme to external investors before the relevant tax year, and
(b) the timing of those distributions affects the amount of carried interest that actually arises to A,
the amount of carried interest to be presumed to arise in the circumstances mentioned in subsection (5) is to reflect the fact those distributions were made before the relevant tax year.
(5B) But if reflecting that fact would lead to a presumption that an amount of carried interest had arisen before the relevant tax year, any such amount is to be presumed to arise in the relevant tax year.” —(Victoria Atkins.)
This amendment secures that the amount of carried interest that is presumed to arise in the hypothetical situation that determines the amount of the charge properly reflects prior distributions to investors.
Clause 42, as amended, ordered to stand part of the Bill.
Clause 43 ordered to stand part of the Bill.
Clause 44
Meaning of “alcoholic product”
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
That schedule 6 be the Sixth schedule to the Bill.
Clauses 45 and 46 stand part.
Clause 49 stand part.
The Exchequer Secretary to the Treasury (Gareth Davies)
It is a great pleasure to serve under your chairmanship, Ms McVey. Clauses 44 to 46 and 49 introduce part 2 of the Bill, which delivers on the Government’s commitment to reform alcohol duty. Clauses 47 and 48 were debated in the Committee of the Whole House, which accepted that they should stand part of the Bill. The clauses change the structure of alcohol duty by creating a standardised series of tax bands based on alcohol strength.
At Budget 2020, the Government announced that they would take forward a review of alcohol. This legislation is the result of that review and makes changes to the duty structure for alcohol, moving from individual product-specific duties and bands to a single duty on all alcohol products and a standardised series of tax bands based on alcohol strength. In making these changes, the Government aim to support public health, encourage innovation and ensure that the duty system reflects modern drinking practices.
Clause 44 sets out what is meant by “alcoholic product” and points to definitions in schedule 6. Clause 45 explains the meaning of alcohol strength and gives HMRC the power to make regulations about how strength is to be determined for duty purposes. Clause 46 gives His Majesty’s Treasury the power to amend the categories of alcohol product and treat products as falling within a certain category, even though they may otherwise have fallen in another. Clause 49 explains when excise duty on alcohol is payable, how the amount is determined and how it is paid.
The changes made by the alcohol duty clauses are expected to impact up to 10,000 businesses that produce alcohol, import alcohol or supply it wholesale. This impact will be down to changes in how they calculate the amount of duty that is due on their products. The entire alcohol reform package will cost £155 million in 2022-23 and £880 million across the scorecard period.
To conclude, the clauses and accompanying schedule form an essential part of the Government’s ambitious reform of alcohol duty and will modernise the tax treatment of alcohol. I commend the clauses and schedule to the Committee.
Gareth Davies
That was an extensive display of preparation and reading, and quite right too, because that is exactly what we are here to do—scrutinise the Bill. Let me try to answer some of the many points that were raised in the three speeches. First, let me thank Opposition Members for their very generous and kind words. It is a great pleasure to serve in this position in the Treasury.
First out of the gate, let me say that the reforms were extensively consulted on; a lot of the comments related to that. As was pointed out, the reforms were first mentioned in 2020. The hon. Member for Wallasey is quite right: one of my first meetings was on this subject. Engagement with industry is paramount, and that is an ongoing process. Many in the various industries affected by the reforms very much welcome the public health focus that is driving this significant change. Many also welcome the simplification that we are bringing in across the board, and the fact that we are correcting several inconsistencies. I was asked by Opposition Members to give several examples. I can do that. One that springs to mind is the fact that sparkling wine pays 28% more duty than still wine, yet has significantly less or the same alcohol content. The driving principle behind the reforms is that the more alcohol in a product, the more tax that the producer pays. That is very clear for businesses to understand.
We were asked at the beginning about our support for businesses, and were told that businesses require certainty. I completely accept that, and we are providing it with the reforms. This is a massive simplification of our tax system for alcohol, and it builds on all the support that the Government have provided through covid and the energy crisis, as hon. Members will be well aware.
Let me try to rattle off a couple of quick responses to the hon. Member for Wallasey. I was asked about the differences in banding and how certain categories of alcohol can fall into different bands. That is true of spirits; Scotch whisky is required to be over a certain level of alcohol, but cocktails in a can and other items that I am aware of are lower in alcohol content, and so will have a lower tax requirement. That is very pertinent to businesses that have a portfolio of different products in their range.
The question about HMRC readiness is absolutely fair, and we are very confident that the processes have been put in place and businesses are ready to adapt to the new system. As I say, it is based on an extensive programme of consultation and engagement. The hon. Lady asked about exports. They are not subject to alcohol duties, although we are aware of the importance of exports to our alcohol industry. That is a live discussion that we have with the Scotch whisky industry all the time.
Let me address the point about the wine easement, which also relates to the question that the hon. Member for Aberdeen North asked about engagement with industry and others. There is a unique circumstance involving wine that comes from fresh grapes: the alcohol content changes by season, according to seasonal factors. That is different from fortified wine, which involves a more artificial process in which spirits are put into the wine to achieve a specific alcohol content. As part of the consultation that I mentioned, we listened to the wine industry, and for 18 months we have put in place a transitional arrangement for still wine of between 11.5% and 14.5% derived from fresh grapes to enable the industry to transition accordingly.
The hon. Member for Wallasey asked about draft relief. If she will forgive me, that was fully covered in Committee of the whole House, but she is right that it will benefit drinkers of pints in a pub over supermarkets. Draft relief applies to all alcohol below 8.5%. It is something that we are doing in support of beer drinkers and to support our community pubs, which are a vital part of all our communities.
Finally, I will just say that cider is also subject to the general principle that we seek to adhere to—namely, that the higher content of alcohol, the more cider producers will pay. Producers of super-strength ciders above 8.5% will pay more duty, but those of fruit ciders will pay significantly less. At the moment, on certain fruit ciders that are not apple or pear cider, producers pay two to three times the amount of duty. The outcome of these reforms will be a range of differential impacts for the cider industry. I will always support the cider industry, because it is incredibly important to the south of our country, but also to those across the country who enjoy drinking cider in the pub or at home.
Dame Angela Eagle
The Minister talked about simplification, and changing the system to make it easier for people to understand often brings important benefits. However, the reliefs that are coming in complicate it again. Is he satisfied that he has the right balance in extending the reliefs to the new simplified system, particularly the draft relief and the transitional relief?
As the person who brought in the small brewers relief, I have a certain attachment to it, although we will not be talking about that. What revenue does the Treasury believe these reliefs will rob it of, and does he think he has the right balance in imposing a more complicated relief-based system on his simpler system?
Gareth Davies
It is a fair question. We are seeking to simplify the entire system of alcohol taxation, and in the round that is broadly what we are doing. However, we are conscious that certain sectors are under acute pressure—smaller cider makers may have particular vulnerabilities to some of these reforms, for example, and we are mindful of that.
However, we are still applying the principle that I have discussed: the higher the alcohol content, the more tax will be paid. As I mentioned, the wine easement is a reflection of the particular and unique circumstances that I heard about from the wine industry. That is a transitional arrangement, not a permanent reform; overall, we are seeking to simplify the system.
Abena Oppong-Asare
I thank the Minister for his explanations so far. I want to get clarification on a few points. As I mentioned, clause 46 and schedule 6 have been drafted to allow the reclassification of categories. Is any guidance being drafted at the moment? Can the Minister give us more information about how the operation will be carried out to make sure that no issues are identified later? The legislation is not very clear.
To follow on from the points made by my hon. Friend the Member for Wallasey, extra work will be given to HMRC as a result of this. I know that the Government have done work on the issue for some time, but I would like reassurance that adequate processes are in place. How much resource has been allocated to ensure that this is carried out? There will be extra work for HMRC to make sure that the alcoholic strength regulations are determined. It is important that we know whether there have been issues for HMRC in delivering because it has been under a lot of pressure. More information about that would be very helpful.
Gareth Davies
Let me answer the point about guidance. I assure the hon. Lady as well as the hon. Member for Aberdeen North that guidance will be issued very shortly. The hon. Member for Erith and Thamesmead will be able to review that and it should answer a lot of the questions that she has just asked.
Let me repeat what I said about HMRC. The organisation has some incredibly hard-working staff who I have had the pleasure of meeting just in my first two weeks. As a Treasury, we have been preparing for this for quite some time. I have every confidence that our colleagues at HMRC are ready and waiting to implement the system. I have nothing further to add on this, so I urge that the clauses stand part of the Bill.
Kirsty Blackman
I have a brief comment about the guidance. I appreciate that a proportion of the stuff coming out is guidance so will not need to go through any parliamentary processes. However, some of the issues are to do with statutory instruments. Is the Minister satisfied that enough parliamentary time would be given for those, whether under the negative or affirmative procedure? Will they happen as quickly as possible? Clause 119 is about procedure and regulations. Will there be enough time for all that as well as for the less formal guidance coming through from HMRC?
Gareth Davies
We all take parliamentary scrutiny incredibly seriously and of course we will allow appropriate time for scrutiny of the Bill and all the guidance in the appropriate way.
Dame Angela Eagle
Given the newness and thoroughness of the changes that the Minister has outlined, and obviously extensively consulted on, I am presuming that the Treasury will also have a review process once the introduction has happened, so that it can look at how the changes have gone and whether further tweaks are necessary. Certainly, but not surprisingly, some aspects of the industry at the higher ABV end wish the transitional arrangements for wine to be extended beyond 18 months, as the Minister would expect. Is there going to be a review process? Could the Minister briefly outline the kind of time scales that are on his mind?
Gareth Davies
All taxes are always under review, as the hon. Lady knows. The Treasury Committee, of which we were both members, plays a vital part in the scrutiny process—of course it does. That process started when the Chancellor appeared before it, and carries on through the parliamentary procedures we are going through right now. The Treasury is unusual in that it has two fiscal events per year—
Gareth Davies
I was waiting for that.
The Treasury has two fiscal events in which the full House has the opportunity to scrutinise our decisions. That also gives the Treasury the opportunity to review existing rates and systems, which is what we are doing as part of the spring Budget.
Question put and agreed to.
Clause 44 accordingly ordered to stand part of the Bill.
Schedule 6 agreed to.
Clauses 45 and 46 ordered to stand part of the Bill.
Clause 49 ordered to stand part of the Bill.
Clause 61
Mergers: general provisions
Question proposed, That the clause stand part of the Bill.
Gareth Davies
Clauses 61 to 71 provide for transitional arrangements for small businesses that merge under the new small producer relief and provide definitions for terms used in the chapter.
The Government are committed to modernising and reforming alcohol duty. Part of the reform package is a new small producer relief for businesses that make alcoholic drinks of a strength less than 8.5% alcohol by volume. That will extend the benefit of progressive duty rates enjoyed by small brewers to the producers of other alcohol products. The provisions on mergers and acquisitions mean that small businesses that merge will not face a cliff-edge duty increase in the first year of the merger; instead, their duty rates will increase gradually over a three-year period. The clauses also include some general provisions around definitions for the purposes of the relief.
Clause 61 introduces the concept of a post-merger group, which is a company formed from the merging of two or more companies, and explains how each of the three years in the transitional period will be referred to. Clause 62 sets out the conditions which must be met for a newly merged business to qualify for the relief. Clause 63 explains what is meant by the “relevant production amount” during the transition period. Clause 64 explains what is meant by “post-merger amount”, which determines the level of relief available to newly merged businesses.
Clause 65 provides for termination of a transition period where the amount of alcohol produced by a post-merger group decreases. Clause 66 explains the treatment when another merger takes place during an ongoing transition period. Clause 67 explains the treatment of mergers involving more than two small producers at the same time. Clause 68 provides that that the transition period ends when businesses demerge. Clause 69 gives definitions of “production premises”, “production groups” and “connected premises” for the purposes of small producer relief. Clause 70 explains that the definition of “connected persons” for the purposes of the relief mirrors that in the Corporation Tax Act 2010. Clause 71 provides a table of expressions used throughout the small producer relief chapter.
Around 10,000 businesses in the UK produce alcohol, import alcohol or supply it wholesale. The clauses will help small businesses compete with larger businesses, such as multinationals, and support them as they grow. The entire alcohol reform package will cost £155 million in 2022-23 and £880 million across the scorecard period. These clauses and accompanying schedule form a key part of the Government’s ambitious alcohol duty reform and will support small alcohol producers to grow and thrive.
Abena Oppong-Asare
The clauses under discussion in this group form part of chapter 3 on small producer relief, as the Minister mentioned. I thought it would be helpful to remind the Committee that Labour introduced the small brewers relief in 2002, and we are proud of the effect it has had in supporting small brewers, creating the vibrant UK beer scene, and supporting British business. We therefore support its extension to other producers.
In the context of small producer relief, clauses 61 to 68 specifically deal with the regulations and provisions for when mergers take place. Clause 61 sets out general provisions, determining that a merger of two small producers is to be called a post-merger production group, and is deemed to be in a transition phase for the three years following the merger. Clause 62 introduces modified conditions to determine whether the premises of two small producers that newly merge are small production premises for the purposes of small producer relief. A merged small producer will be eligible for small producer relief if the adjusted post-merger account does not exceed the small producer threshold of 4,500 hectolitres and if, for each set of premises in the group, fewer than half of the alcoholic products produced on those premises in the previous year were produced under licence.
Clause 63 sets out that, in calculating small producer relief for a post-merger group, the adjusted post-merger amount is used for the “relevant production amount” as set out in section 59. Subsection (3) sets out that the exclusion in clause 58(c) does not apply to the premises in a merger transition year. The Minister will not be surprised that I want to ask why that is the case. I cannot find anything about the purpose of the subsection in the explanatory notes, and it would be helpful to get the background as to why it exists.
Clause 64 provides a definition of the adjusted post-merger amount, which is used to determine eligibility and calculate the rate of small producer relief for companies transitioning post merger. Clause 65 sets out that a merger transition period will end early if the total amount of alcohol produced on all premises by a post-merger group in the preceding production year is less than the adjusted post-merger amount for the current year.
Clause 66 lays out provisions for subsequent mergers of alcohol producers. If a second merger takes place, the producer is no longer considered to be in its merger transition period for the first merger. The second merger could be considered a new merger transition period if the eligibility conditions are met. On the other hand, clause 67 lays out provisions for simultaneous mergers, setting out which producers will be considered the “larger producer” and the “smaller producer” for the purposes of determining the small producer relief. Clause 68 sets out what happens when a production group demerges and the regime to be applied for demerged businesses looking to receive small producer relief.
As we know, clauses 69 to 71 provide some guidance on the interpretation of chapter 3. Clause 69 lays out definitions of the terms producer, production premises, group premises and connected premises. Production premises are premises where alcoholic products are produced, including premises outside the UK. Group premises are all the premises on which the same person produces alcoholic products. A production group includes the group premises and all connected premises. A producer is a person who produces alcoholic products.
Clause 70 states that two people will be considered to be connected persons if they meet the test contained in section 1122 of the Corporation Tax Act 2010, although HMRC’s commissioners can overrule that if they think it necessary. Finally, clause 71 provides a table of expressions used in the small producer relief chapter. These clauses are all administrative in purpose, and we will not oppose them.
Gareth Davies
I am very grateful to the hon. Lady for her comments. Let me start by acknowledging the success of small brewers relief. We have seen the number of breweries increase six times since its introduction, and I think we should applaud a good policy, wherever it originates. In fact, we are seeking to build on it by expanding its principles to the new small producer relief and extending it to all alcohol products under the parameters that she has outlined. There was a very specific point of clarification, which I am afraid I do not have to hand at the moment, but I am happy to set out in writing the detailed answers that she seeks.
Question put and agreed to.
Clause 61 accordingly ordered to stand part of the Bill.
Clauses 62 to 71 ordered to stand part of the Bill.
Clause 72
Exemption: production for personal consumption
Question proposed, That the clause stand part of the Bill.
Gareth Davies
Clauses 72 to 81 reproduce existing exemptions and reliefs from excise duty on alcohol products. These reliefs and exemptions will continue to operate in the same way as they do now. To reform the alcohol duty system, we are legislating for a restructured duty system and two new reliefs. To ensure that all primary legislation relating to the production and use of alcoholic products is contained in one place, existing exemptions and reliefs from alcohol duty unaffected by the reforms but still needed in the new duty system have been re-enacted in the Bill. The relevant legislation in the Alcoholic Liquor Duties Act 1979 and Finance Act 1995 will be repealed.
Kirsty Blackman
Alcohol hand sanitiser is obviously not for human consumption, but is it considered to be a medical item and so exempt under clause 76(2), or to be not fit for human consumption and so exempt under clause 79? However it is considered, will the Minister clarify that it is exempt from alcohol duty? Many of us had not often used it prior to 2020, but these days it is a significant part of our lives. It would be a concern if it received an alcohol duty charge, because it is part and parcel of keeping us safe and ensuring that we stop any further spread of covid or anything else.
Gareth Davies
As I set out at the beginning, the changes are largely administrative. To answer the question directly, there is no change whatsoever in terms of how the provisions are operationalised; they are carried over. The whole point is to consolidate the legislation in one place. I think our alcohol taxation system dates back to 1643, and the last change was in the 1990s. A lot of the changes are administrative, and the hon. Member for Erith and Thamesmead should take assurance from that.
Abena Oppong-Asare
I appreciate that a lot of these clauses are administrative. In that case, is the Minister able to tell me whether there has been any work done on unauthorised exemptions? Has that issue come up, does he have data on it and is he confident that unauthorised exemptions are being prevented? Could he give more information about what schemes or measures may be put in place? I appreciate that the clauses are administrative, but there is nothing in them about how to ensure that the system is not being abused.
Gareth Davies
There are penalties already in place if a person uses products or carries out activities that are not approved. The hon. Lady should take my assurance that these are carry-over provisions that come with the protections that we already have in place. I really do not have anything more to add, other than the fact that what was in existence prior to this legislation is being carried over. To answer the specific question on hand sanitizer, it is exempt.
Question put and agreed to.
Clause 72 accordingly ordered to stand part of the Bill.
Clauses 73 to 81 ordered to stand part of the Bill.
Clause 82
Approval requirement: producers
Question proposed, That the clause stand part of the Bill.
Gareth Davies
Clauses 82 to 89 make changes to the approval and registration requirements for alcohol producers, ensuring that they are harmonised across all products. The new alcohol duty rates and reliefs will take effect from 2023, but the commencement of changes to approvals will come into force at a later date. The Government are committed to simplifying the current alcohol duty system, which is complicated and outdated. The clauses repeal and replace the Alcohol Liquor Duties Act 1979, as well as sections 4 and 5 of the Finance Act 1995.
The changes made by the clauses will standardise the approval processes for all alcohol producers, regardless of which alcoholic product they produce. Clause 82 sets out the requirement for a person to be approved by HMRC in order to produce alcoholic products. Clause 83 stipulates that an approval may cover multiple premises and product types, and that HMRC may vary or revoke an approval at any time. Clause 84 provides an exemption from the requirement to be approved for those who make alcoholic products for their own consumption, although that does not apply to spirits.
Clause 85 provides an exemption from the requirement to be approved for those who produce alcohol only for research and experiments. Clause 86 restricts the mixing of multiple alcoholic products except in certain circumstances. Clause 87 reproduces a section of the Alcoholic Liquor Duties Act 1979 with minor changes to update terminology. Clause 88 gives HMRC the power to make regulations regarding the administration and collection of alcohol duty. Clause 89 details the penalties and forfeiture that may apply if a person does not comply with the approval requirements. Overall, the clauses simplify and standardise approval requirements for alcohol producers.
Abena Oppong-Asare
We come to chapter 5 of the Bill and a group of clauses concerning regulated activities and approvals. Clauses 82 and 83 would require any person producing alcohol products to be approved by HMRC as a fit and proper person to do so, as determined by the HMRC commissioners. Clauses 84 and 85 provide exemptions from the approval process, so that a person may produce alcoholic products for their own consumption or for research into, and experiments in, the production of alcoholic products without needing approval from HMRC.
Clause 86 restricts the mixing of multiple alcoholic products, except in certain circumstances, such as if it is done in an excise warehouse and the mixing occurs before the duty point; the alcoholic products being mixed are all of the same type and strength; or the alcohol duty on each product has been paid and the resulting mixed product is to be consumed at the place where the mixing took place, such as a pub or bar. Clause 87 sets out that a person cannot mix water or any other substance with alcoholic products if the mixing is after the duty point, the mixed product is to be sold, and the resultant product would have attracted a higher amount of alcohol duty if the mixing were done prior to the duty point.
Clause 88 provides for HMRC to make regulations concerning the production, packaging, keeping and storing of alcoholic products; charging alcohol duty in reference to a strength that might reasonably be reached; relieving alcohol products from alcohol duty in certain circumstances; and regulating prohibition of the addition of substances and mixing. Before the Minister says that these are all largely administrative clauses, which I do not dispute, these seem like quite wide powers. I am interested to see that they will be subject to the negative procedure. Perhaps he can explain why that is the case?
Clause 89 sets out the penalties or forfeiture that can occur if a person fails to comply with clauses 82, 86 and 87, and any regulations made under clause 88, as we have just discussed. As we know, this is an administrative set of clauses laying out a reasonable approval and exemptions process, so we will not oppose it.
Dame Angela Eagle
It is obviously important, when we get on to enforcement, that we are confident that HMRC is on top of this. The Minister was a bit coy about when these clauses will come into being, so perhaps he can explain that, given that they are quite important. They are about the fitness, rightness and properness of the characters out there producing alcohol, who must be properly registered by HMRC.
The Minister gave the impression that this is just a technical thing—that it is a hold-over from older laws dealt with in a more simplified and perhaps modernised way—but he was not very explicit about how it will be simpler or modernised. Can he give us some idea? Will it all be done online? Is there some modernisation such as that? If he can give us a handle on how the administration of the scheme will change, that might give us an idea of HMRC’s intention.
The Minister is about to introduce a new scheme, whereby the taxation of alcohol is based on the alcohol by volume level. That creates a completely different incentive for adulteration along the production process. HMRC’s decisions about which category of duty a product is in become important in terms of what tax is due. That creates new forms of incentives for fiddling. I am not saying that everyone in the alcohol industry, by definition, wants to fiddle and avoid tax, but there will be temptations along that line, given the new focus on alcohol by volume as a way of calculating what tax is due. That makes adulteration and fiddling potentially much more valuable for avoiding tax. It also means that HMRC has to be vigilant in protecting revenue from those taxes.
Will the Minister therefore say a little about enforcement? Given the new dangers around alcohol by volume and the approach to what duties are due, will HMRC beef up its enforcement regarding not only approved producers but checking along the production line when decisions are made on what tax will be due on the particular product being manufactured?
Gareth Davies
Let me respond to those questions in turn, but I will come to the post-duty point dilution last, if that is okay. I was asked about scrutiny in the first instance by the Labour spokesperson, the hon. Member for Erith and Thamesmead. The powers mirror those that we have already, and we are putting exactly the same procedures in place in the Bill, but I will outline, and give an example of, how the Government could use the powers.
The powers allow HMRC to make adjustments to the new reforms by regulation, if needed. It will have that flexibility, given the scale and novelty of the reforms. That is a sensible precaution to allow HMRC to make changes quickly if the reforms are not working as intended. Today, reviewing and tweaking as necessary have come up consistently. We are carrying over a lot of the legislation, and this is one power, in particular, that we are able to use.
The overarching policy is one of simplification and putting in place a simpler, streamlined process, where we have one single approval process for all alcohol products, to answer the hon. Member for Wallasey. She also asked about HMRC’s readiness and, as I have already said, I have full confidence in our colleagues at HMRC to be able to process the changes and—she also asked about this—to enforce the rules, regulations and laws we are putting in place. Furthermore, we are looking to deliver a digitised application process, which will happen at a later date, once robust systems are put in place. As she would rightly expect, we want to get that absolutely right for producers first.
Let me directly answer the question of post-duty point dilution. The hon. Member for Aberdeen North raised that with my predecessor in 2018, and she is a great champion of her constituent, who raised the issue with her. Following the question to my predecessor, we introduced post-duty point dilution specifically to address wine, I think. We now go further by extending the provisions to all alcohol products and not just wine. That goes back to the overarching principle that we are trying to impose a consistent, simplified approach to all alcohol categories. That is why we are doing it, and we believe that it is impactful. I have no anecdotes, but if I obtain any, I will certainly write to her.
Kirsty Blackman
I appreciate the logic behind the original measure and behind the change. Had I been the Minister, I would have been talking positively about the change and about the fact that we are moving from made-wine and wine to everything. He is right that this is a simplification and a good thing, and it will ensure that everyone ends up paying the right tax. He is playing it down a bit by saying that it was just about terminology changes. That is another of the issues I had with the explanatory notes, which could also have sung the praises of the changes that are being made, rather than simply describing them as minor terminology changes to tidy things up. This is a change in the application, and I am glad the Minister has confirmed and clarified that from the virtual Dispatch Box. That will make this change easier for people to understand when they read about it in concert with the Minister’s statements in Committee.
Gareth Davies
I always take constructive feedback on presentation and talking up the policies we are implementing, so I completely accept that. For the record, we believe this is a really important anti-avoidance measure, which will protect the integrity of the duty system we are implementing, and I want to be really clear about that.
Question put and agreed to.
Clause 82 accordingly ordered to stand part of the Bill.
Clauses 83 to 89 ordered to stand part of the Bill.
Clause 90
Denatured alcohol
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss clauses 91 to 97 stand part of the Bill.
Gareth Davies
Clauses 90 to 97 reproduce the existing exemption from excise duty on denatured alcohol. The exemption will continue to operate in the same way as it does now. As mentioned during the debate on clauses 72 to 81, we are legislating to ensure that all primary legislation relating to the production and use of alcoholic products is contained in one place.
No policy changes are made by these clauses. They reproduce an existing exemption from the charge of alcohol duty for denatured alcohol. In some clauses, changes to the structure and language have been made to modernise and simplify the legislation, but the operation of the exemption remains the same. The clauses reproduce the exemption for denatured alcohol, which is used for the manufacture of products that are not for human consumption, such as paint fillers, cosmetics and toiletries.
The clauses are an administrative measure to ensure that the current exemption for denatured alcohol will continue as now in the newly reformed alcohol duty system. I therefore urge that the clauses stand part of the Bill.
Abena Oppong-Asare
We now come to chapter 6 of the Bill, which concerns denatured alcohol. Clause 90 states that the definition of “denatured alcohol” will be provided by the HMRC commissioners. Perhaps the Minister could give us an idea of what that definition might look like. The clause also sets out that alcohol duty will not be charged on denatured alcohol.
Clause 91 specifies that a person must be licensed as a denaturer to legally denature alcoholic products or be a wholesaler of denatured alcohol. Clause 92 provides the HMRC commissioners with a sweeping set of powers, such as allowing them to regulate the denaturing of alcoholic products and the supply, storage and sale of denatured products. Perhaps the Minister could outline the purpose of this wide set of delegated powers or give an example of where he would expect them to be used.
Clause 93 sets out that failure to comply with the regulatory regime for denatured alcohol, as set out in chapter 6, will attract a penalty under section 9 of the Finance Act 1994. Clauses 94 and 95 lay out the circumstances in which denatured alcohol is liable for forfeiture or penalty—for example, when a person produces or possesses more denatured alcohol than they are licensed to.
Clause 96 gives HMRC officers a power to inspect, at any reasonable time, premises being used to produce denatured alcohol, and to take samples. Finally, clause 97 lays out the circumstances in which it is an offence for a person to use denatured alcohol—for example, preparing denatured alcohol as a beverage or purifying denatured alcohol. Most of these clauses simply update and integrate into the Bill provisions already laid out in the Alcoholic Liquor Duties Act 1979, so we will not oppose them.
Gareth Davies
Let me again provide reassurance that we are not changing the definition of denatured alcohol, and we have no need to do so—this is a legislative update. However, the hon. Lady should know, for interest and further exploration, that the definition is found in the Denatured Alcohol Regulations 2005. In this measure, we are simply re-enacting existing powers. She should take reassurance from that.
Question put and agreed to.
Clause 90 accordingly ordered to stand part of the Bill.
Clauses 91 to 97 ordered to stand part of the Bill.
Clause 98
Definitions
The Chair
With this it will be convenient to discuss the following:
Clauses 99 to 105 stand part.
That schedule 10 be the Tenth schedule to the Bill.
Clauses 106 and 107 stand part.
Gareth Davies
Clauses 98 to 107 and schedule 10 simply reproduce existing provisions for excise controls on anyone making wholesale transactions in duty-paid alcoholic products.
As mentioned during the debate on clauses 72 to 81, and clauses 90 to 97, we are legislating to ensure that all primary legislation relating to the production and use of alcoholic products is located in one place. Clauses 98 to 107 and schedule 10 reproduce the requirements for the wholesaling of controlled alcoholic products. Those controls and requirements will continue to operate in the same way as they do now.
To conclude, these clauses and schedule 10 are an administrative measure to ensure that all primary legislation relating to the production and use of alcoholic products for duty purposes are contained in one place.
Abena Oppong-Asare
We now come to chapter 7 of the Bill, which concerns the wholesaling of controlled alcoholic products. Clause 98 provides several definitions relevant to the chapter, and clause 99 allows HMRC commissioners to make specific definitions concerning whether goods are to be considered wholesale or retail sale. Clause 100 lays out an approval process to allow a person to carry out wholesale activity. Again, that simply reproduces, with updated terminology, sections of the Alcoholic Liquor Duties Act 1979.
Clause 101 requires HMRC to keep a publicly available register of all approved wholesalers, and clause 102 provides HMRC with powers to regulate the wholesale system. I would be grateful if the Minister could humour me and give me more information on how the register will be made publicly available, what timescales have been given to HMRC and what publication dates will be required for that information.
Clause 103 turns the focus to purchasers of alcoholic products, specifying that a person may not buy controlled alcoholic products unless they are buying from an approved wholesaler. Clauses 104 and 105 and schedule 10 make it clear that a penalty could be incurred if a person knows, or reasonably suspects, that they have bought alcoholic products from someone who is not suitably approved.
Clause 106 defines a group for the purposes of the alcoholic product wholesaler provisions, and clause 107 provides definitions for some of the terms used in the chapter. We do not take issue with this set of clauses concerning wholesale transactions, and we will not oppose them.
Gareth Davies
I appreciate the points that the hon. Lady has raised. I reassure her that these are technical updates to consolidate the legislation, so that, for simplification purposes, we have in one place all the legislation for alcohol duty and measures—isn’t that a wonderful thing that we are doing?
The hon. Lady made a good point on communication. We will ensure that all communication is as good as it can be, and we will come up with further details on that in due course.
Question put and agreed to.
Clause 98 accordingly ordered to stand part of the Bill.
Clauses 99 to 105 ordered to stand part of the Bill.
Schedule 10 agreed to.
Clauses 106 and 107 ordered to stand part of the Bill.
Clause 108
Reviews and appeals
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
That schedule 11 be the Eleventh schedule to the Bill.
Clauses 109 to 112 stand part.
That schedule 12 be the Twelfth schedule to the Bill.
Clauses 113 and 114 stand part.
That schedule 13 be the Thirteenth schedule to the Bill.
Clauses 115 to 120 stand part.
Gareth Davies
Clauses 108 to 111 and schedule 11 make supplementary changes for the reformed alcohol duty system. The provisions are necessary consequential amendments as a result of changes made elsewhere in the Bill. Clause 112 and schedule 12 reproduce the requirements for duty stamps on alcoholic products. Those controls and requirements continue to operate in exactly the same way as they do now. Clauses 113 to 116 make changes to repeal outdated legislation and provide transitional arrangements for wine businesses and small cider makers as they move to the new duty system. Clauses 117 to 120 allow for regulations to be made to supplement the provisions in primary law.
The Government are committed to simplifying the current system for alcohol duty, which is complicated and outdated. As mentioned in debate on previous alcohol duty clauses, we are legislating to ensure that all primary legislation relating to the production and use of alcoholic products is contained in one place. Clauses 113 to 116 and schedule 13 repeal some parts of the Alcoholic Liquor Duties Act 1979 that are no longer needed, and they ensure that all primary legislation relating to alcohol duty is now contained in one place. They also include specific transitional provisions for cider and wine products, which face the biggest challenges as we move to the new strength-based system. Clauses 117 to 120 allow the Government to commence different parts of the primary legislation at different times by appointed day order.
Clause 108 and schedule 11 provide a right to reviews and appeals for decisions that HMRC makes. Clause 109 ensures that the forfeiture provisions across the reformed alcohol duty system are consistent. Clause 110 updates legislation relating to certain movements of alcohol products from a warehouse so that it applies equally to alcohol products removed from premises that have the new alcohol approval. Clause 111 extends brewers’ existing ability to offset a claim for refunds of excise duty against liability on their monthly return. Clause 112 and schedule 12 reproduce the requirements for duty stamps on alcoholic products. Those controls and requirements will continue to operate in the same way as they do now.
Clause 113 provides a list of repealed legislation. Clause 114 makes consequential amendments to other legislation, which is required as a result of the policy changes. Clause 115 is a temporary provision for producers and importers of certain wine products, to help them to manage the transition to a strength-based system. That will be in place for 18 months, and it will ease the administrative burdens of moving to calculating the duty on wine based on strength. Clause 116 is a temporary provision for small cider producers to maintain the effect of the exemption from registration and paying alcohol duty that they currently hold until the approvals provisions are given effect next year.
Clause 117 provides an index of terms used in this part of the Bill and references to where further detail can be found regarding each. Clause 118 provides a power to make regulations in relation to this part of the Bill and how the power may be used. Clause 119 explains the parliamentary procedure that must be used to make regulations using the various powers included in this part. Clause 120 concerns commencement and states that, other than these clauses and other regulation-making powers, none of the provisions in the Bill concerning alcohol duty takes effect until an appointed day order is laid.
These clauses and accompanying schedules are administrative measures that ensure that the Government’s ambitious alcohol reform is underpinned by modern legislation, and that the transition to the new system is smooth. The clauses conclude the part covering alcohol duty reform, and I commend them to the Committee.
Abena Oppong-Asare
With this group of clauses, we turn to chapters 8, 9 and 10 of the Bill concerning supplementary items, repeals, further amendments, transitional provisions and final provisions. Clause 108 and schedule 11 make relevant amendments to the Finance Act 1994. They appear to be purely administrative, but perhaps the Minister could clarify that? Clause 109 specifies that HMRC may destroy, break up, or spill anything seized as liable to forfeiture. Clause 110 inserts new subsections into the Customs and Excise Management Act 1979. As this is quite technical, perhaps the Minister could explain precisely what the clause achieves, because I found that the explanatory notes did not cover it in depth. [Interruption.]
Gareth Davies
Let me first address the request from the hon. Member for Erith and Thamesmead for me to further explain certain clauses. Clause 108 ensures that the legislation works, basically, and detail is provided in the explanatory notes. If she requires more detail, I am happy for her to write to me. Clause 110 ensures that this measure works with amended legislation, because it is about the movement of alcohol from excise warehouses to authorised people. Clause 115 basically sets out the period of 18 months that I am about to address. Clause 116 relates to when the period ends and approvals come into force.
The hon. Member for Aberdeen North makes some good points, and she asked a good question about the 18-month period for the wine easement. It has been determined, through consultation and engagement with the wine industry, that 18 months is sufficient time for it to put in place the operational requirements, such as labelling, for it to be able to meet the alcohol reforms that we are making. As I set out at the beginning, some types of wine will see a reduction in duty. Simplification is driving these reforms, and we are moving to the principle that the more alcohol a product contains, the more tax it attracts, so there will be increases and decreases as part of all this.
Question put and agreed to.
Clause 108 accordingly ordered to stand part of the Bill.
Schedule 11 agreed to.
Clauses 109 to 112 ordered to stand part of the Bill.
Schedule 12 agreed to.
Clauses 113 and 114 ordered to stand part of the Bill.
Schedule 13 agreed to.
Clauses 115 to 120 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Andrew Stephenson.)