Tuesday 4th July 2023
(9 months, 4 weeks ago)
Lords ChamberFinance (No. 2) Act 2023 View all Finance (No. 2) Act 2023 Debates Read Hansard Text Watch Debate Amendment Paper: Consideration of Bill Amendments as at 20 June 2023 - (20 Jun 2023)
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, we are here to debate the annual finance Bill, introduced in the House of Commons following the Budget on 15 March. At the Budget, my right honourable friend the Chancellor was clear-sighted about the global headwinds we are facing. We are all familiar with the challenge on inflation as we work through the impacts of the pandemic and of the energy crisis triggered by Putin’s invasion of Ukraine.
In the face of these challenges, the Prime Minister has set out his key economic priorities: to halve inflation, get our national debt falling and secure economic growth. The finance Bill we are debating today is an essential plank in our plan to deliver this. It takes forward measures to support enterprise and grow the economy by encouraging business investment and helping to increase the number of people in work. It legislates for announcements made at previous fiscal events which take advantage of our opportunities outside of the EU and which reinforce our commitment to financial stability and sound money, and it implements the tax measures needed to continue improving and simplifying our tax system to ensure it is fit for purpose.
I turn to the substance of the Bill in those areas, starting with measures to support growth. This Government recognise how important private sector investment is to growth. That is why the Chancellor has set out his long-term vision to make the UK an attractive location for innovators and entrepreneurs, with a particular focus on key growth sectors of digital technology, green industries, life sciences, advanced manufacturing and the creative industries.
That is also why this Bill lowers business taxes to incentivise investment and tackle the productivity gap. Following the end of the super-deduction, the Bill introduces full expensing for the next three years. This means that for every single pound a company invests in qualifying plant or machinery, its taxes are cut by up to 25p. This will result in a corporation tax cut worth £9 billion that the OBR has said will increase investment by 3% for every year it is in place. It will also make us the only major European country with full expensing and give us the joint most generous capital allowance regime of any advanced economy—securing the UK’s position as a global leader.
The Government are committed not only to supporting the growth of established businesses but to providing a boost to start-ups and young companies. The Bill therefore legislates for an increase in the amount of seed enterprise investment scheme funding that companies can raise over their lifetime from £150,000 to £250,000, an increase in the company gross asset limit from £200,000 to £350,000, an increase in the company age limit from two to three years and an increase in the annual investor limit from £100,000 to £200,000. It also introduces changes to the enterprise management incentives, or EMI, scheme to simplify the process to grant options and reduce the administrative burden on participating companies, as well as changes to the company share option plan, or CSOP, rules and limits. Since 6 April 2023, qualifying companies have been able to issue up to £60,000 of CSOP options to employees, which is double the current £30,000 limit. These changes provide a boost to young companies by widening access to the schemes and increasing the limits, encouraging additional investment and helping to attract talent.
To encourage research and development, the Bill legislates for previously announced reforms to R&D tax reliefs, such as changes to support modern research methods by expanding the scope of qualifying expenditure for R&D reliefs to include data and cloud computing costs, and a range of measures to reduce error and fraud to ensure that our tax reliefs are well targeted and offer value for money. By encouraging more businesses to invest in R&D, this Government are helping them to create the technologies, products and services which advance living standards.
The finance Bill will also extend for another two years the current 45% and 50% rates of tax relief for theatres, orchestras and museums. This builds on wider support for the sector through the cultural recovery fund and the public bodies infrastructure fund, and will continue to offset ongoing pressures and boost investment in our cultural sectors.
The Bill will also support the Government’s ambitions for employment. To achieve the dynamic economy we all want and to support action to halve inflation, we need to get more people back into work. This means removing the barriers that stop people who want to work from doing so.
The Government recognised that senior clinicians felt they had to leave the workforce just when the NHS needs them most because of unexpected tax charges on their pension. To make sure that they and those in other professions are not deterred from working, this Bill increases the pensions annual allowance to £60,000. The Bill also removes the lifetime allowance charge altogether. This will incentivise our most experienced and productive workers across our economy to stay in work for longer, easing pressures in the economy while increasing the knowledge and experience of the UK’s labour force.
It is vital that the growth this Bill will support is felt across all corners of the United Kingdom and not concentrated in London and the south-east. The Spring Budget set out the creation of 12 new investment zones, helping to spread the benefits of economic growth around the UK, with at least one zone in each of Scotland, Wales and Northern Ireland. The Government continue to work with stakeholders to establish how investment zones will be best delivered in these areas. This Bill will deliver important aspects of that ambition. It will ensure that investment zones have access to a single optional five-year tax offer in specific sites, matching that in freeports. This will consist of enhanced rates of capital allowances, a structures and buildings allowance, full relief from stamp duty land tax and business rates, and a reduced rate of employer national insurance contributions.
This finance Bill will also deliver on previous commitments, including delivering on the UK’s freedom to set its own course outside the EU. Among these opportunities was a major review of the alcohol duty system on which the Government have worked closely with industry over the past two years. The UK can now implement a system that aligns with public health goals and is fairer for hard-working producers. The Bill simplifies the alcohol duty regime and moves to a progressive tax structure in which products are taxed according to their strength. It also legislates for two reliefs, draught relief and a new small producer relief, which will support a wider range of small businesses to grow and provides a recognition of the vital role that pubs and other on-trade venues play in our communities.
We are also able to take action to better connect our country. As announced in the Autumn Budget 2021, this Bill delivers a package of air passenger duty reforms that will bolster air connectivity across the UK through a 50% cut in domestic APD. The new domestic rate applies to flights between airports in England, Scotland, Wales and Northern Ireland, benefiting more than 10 million passengers this year. These reforms will also further align with the UK’s environmental objectives by adding a new ultra-long-haul distance band, ensuring that those who fly the furthest and have the greatest impact on emissions incur the greatest duty.
This finance Bill takes forward measures that support sustainable public finances, helping to provide the stability and confidence that underpin the economy and supporting businesses and households across the country. The Bill legislates for a tax on the extraordinary electricity generator returns resulting from the spike in gas prices driven by Russia’s war. This will raise billions of pounds over the next five years to help fund public services and the interventions to support households and businesses with increased energy bills. We are also taking steps to decouple electricity and gas prices permanently by reforming the energy market and using technologies such as energy storage to balance the system and reduce our reliance on imported fossil fuels.
To further ensure that businesses pay their fair share of tax, the Bill contains significant measures to protect the UK tax base against aggressive tax planning and reinforce the UK’s competitiveness. This Bill implements the G20-OECD pillar 2 rules in the UK, building on the historic agreement reached with more than 135 countries and jurisdictions and brokered by the current Prime Minister during the UK’s 2021 G7 presidency. This is a two-pillar solution to the tax challenges of a globalised digital economy. Pillar 2 will ensure that multinational enterprises pay a minimum tax rate of 15% in each jurisdiction in which they operate, meaning that those companies operating in the UK will contribute their fair share. The UK is implementing the global minimum tax in unison with many of our international peers, such as Germany, France and Ireland—indeed, all EU member states—as well as Japan, Australia, South Korea and Canada. Acting alongside others is crucial in meeting the aims of this global reform while ensuring that the top-up taxation on UK operations is not imposed by other countries.
Finally, the Government want to deliver a tax system that is simple, fair and fit for purpose. As announced last year, this Bill legislates for the abolition of the Office of Tax Simplification. Rather than an arm’s-length body to oversee simplification, this Government set a clear mandate for officials in the Treasury and HMRC to put tax simplification at the heart of policy-making. A great example of this introduced by the Bill is the previously announced permanent £1 million limit on the annual investment allowance. This measure allows businesses to write off the cost of qualifying plant and machinery investment in the first year up to £1 million, simplifying the tax treatment of capital expenditure for 99% of businesses. As is usual for a finance Bill, this Bill also legislates for a range of administrative changes to deal with technical issues, improving and modernising the tax system and making it easier for businesses to interact with it.
To conclude, this finance Bill takes forward important measures that are needed to support enterprise and growth, including incentivising investment and supporting employment, including in the NHS. It seizes freedoms that are available now that we are outside the EU. It deals with threats to the sustainability of our public finances posed by the energy crisis and international tax avoidance. It supports our long-standing goals to modernise and simplify the tax system. This delivers on an important part of the Government’s commitments made in the Spring Budget to long-term economic growth. For these reasons, I beg to move.
Baroness Penn (Con)
My Lords, I thank all noble Lords for their contributions to the short debate that we have had on the finance Bill today. Noble Lords reflected on the economic circumstances in which we find ourselves. We recognise that high inflation increases costs for households and businesses and that, as my right honourable friend the Chancellor has said, low inflation is necessary for growth. The energy shock from Russia’s unlawful invasion has been felt more in the UK, partly due to our historic dependence on gas, and domestic factors such as record tightness in the labour market and high inactivity rates have put pressure on UK inflation, but that does not remove the fact that we are not alone in facing the global challenge of high inflation rates. Despite this, the IMF has said that the UK has taken decisive and responsible steps to tackle inflation, and all major forecasters expect inflation to fall this year.
Turning to noble Lords’ comments around the level of taxation in our economy and the suggestion—I am not sure whether it was from the Labour Front Bench—that we should change the decisions that we made on tax thresholds to consolidate our public finances and that this should be the route that we take to help people with the cost of living, as my right honourable friend the Chancellor has made clear, the Government’s number one priority is reducing inflation. Not only will this be the most effective tax cut for people and businesses across the UK, but we must not to do anything to prolong inflation, which unfunded tax cuts would only fuel.
It is important to reflect on the action taken since 2010. We have increased the personal allowance and the national insurance contribution threshold above inflation, taking millions of people out of paying tax altogether. Consequently, we have some of the most generous starting allowances for income tax and social security contributions in the OECD and the most generous in the G7.
Outside the tax system, to support household we have focused our help on those who are most vulnerable to the impact of rising prices. Our cost of living support includes the energy price guarantee, cost of living payments and the household support fund, as well as uprating benefits in line with inflation. I say to the noble Baroness, Lady Kramer, that the Government recognise the impact that rising inflation and increases in the cost of living are having on households across the country. That is why cost of living support for households totals £94 billion, or around £3,300 per household, on average, this year and next, which represents one of the most generous packages of support in all of Europe. I say to the noble Lord, Lord Sikka, that looking at the impact of the decisions made from the Autumn Statement 2022 onwards, government support for households in 2023-24 provides low-income households with the largest benefit in cash terms and as a percentage of income. On average, households in the bottom half of the income distribution will see twice as much benefit as households in the top half of the income distribution in cash terms.
My noble friend Lord Leigh welcomed the implementation of the G20/OECD pillar 2 rules. We take our international obligations very seriously. We were instrumental in negotiating this agreement and these rules and as such do not see them as at odds with our sovereignty. We retain sovereignty to set our corporation tax rate as one of the lowest in the G7 and to use important tax levers to boost investment in the UK, including our world-leading full expensing regime and our generous R&D tax reliefs. In fact, pillar 2 will boost the international competitiveness of the UK because it places a floor on low and no tax rates that have been available in some countries. It is designed to protect against the risks of harmful tax planning by multinational groups. As my noble friend said, it is important that the UK legislates for these rules now but, to repeat the assurance that the Financial Secretary to the Treasury gave in the Commons, we will provide an update on pillar 2 implementation as part of the forthcoming fiscal event in the autumn and, if necessary, in the spring, too. This will include the latest revenue forecast from the OBR and an update on the status of international implementation.
I turn to my noble friend’s comments on research and development relief. He asked whether I would have regard to the Chartered Institute of Taxation’s detailed comments, in particular in respect of the new powers HMRC has to remove a claim. While it is correct to assert that customers do not have a right of appeal, they do have a new statutory right of representation to provide HMRC with evidence within 90 days if they think the claim has been removed in error. They also retain the right to apply for judicial review if they do not think HMRC has applied the process correctly.
My noble friend also raised concerns about the R&D compliance check. The Government acknowledge that there is currently a high level of non-compliant claims in R&D tax reliefs and that it is right that HMRC takes action, as I think my noble friend also recognised. HMRC has increased the action it is taking, which means addressing more of the non-compliance. As part of this, it has been rapidly upscaling its numbers of people, and this can sometimes come with teething problems. HMRC ensures that less experienced caseworkers can call on technical support or specialist advice from more senior colleagues. HMRC will continue to work with stakeholders to ensure that the department is managing checks professionally and in line with the HMRC charter, and I would happily hear any further representations by my noble friend or others on how we can ensure that we are delivering in this area.
On company tax rates, the noble Lord, Lord Sikka, asked how many companies will pay the full 25% rate, which is an increase in the headline rate of corporation tax. The noble Lord is absolutely right that the small profits rate will keep the rate at 19% for companies with profits of £500,000 or under, and marginal relief is available for companies with profits from £50,000 to £250,000, meaning that companies will pay somewhere between 19% and 25%. That means that 70% of actively trading companies will not see an increase in the rate of corporation tax they pay, and only 10% will pay the full rate.
I am grateful to the noble Lord for giving me the opportunity to make those points. Sometimes, there is concern among those in business that our corporation tax rate is either uncompetitive or targeting smaller businesses. What we have done in changing the rate is to ensure that businesses pay their fair share of returning our public finances to a sustainable footing after the shocks of Covid and the invasion of Ukraine. We have reinstated some of those exemptions to ensure that the smallest businesses do not face those burdens. That is entirely how we have designed our approach.
Baroness Kramer (LD)
Can the Minister tell us—this is not to make a point but just for clarification and to understand the numbers better—is it 70% by number of companies or 70% by a value number of some sort, such as an asset value, a market value or a revenue generation value? How is that number calculated?
Baroness Penn (Con)
What I have before me is that 70% of actively trading companies will not see an increase, so I would take it as the former. If it is calculated in a different way, I will write to the noble Baroness to clarify that.
Baroness Kramer (LD)
To strengthen the Minister’s own point, it might be helpful if we had a calculation that gave us a better feel. One multinational could easily produce revenues many times those of dozens and dozens of small companies, so she might be getting a bigger tax take than the number that she is using implies.
Baroness Penn (Con)
The noble Baroness is exactly right. The increase in the headline rate of corporation tax makes a significant contribution to our public finances and to the consolidation of our public finances after Covid. All I meant to say is that, for some of the reasons set out by the noble Baroness, we have been able to exempt smaller businesses from that increase while also ensuring that bigger businesses—which often benefited a large amount from government support put in place during the pandemic—contributed their share to returning our public finances to a sustainable footing.
The noble Lord, Lord Sikka, also asked why HMRC’s budget had been cut. HMRC will receive a £0.9 billion cash increase over the Parliament, from £4.3 billion in 2019-20 to £5.2 billion in 2024-25, so I do not quite recognise the picture that the noble Lord has put forward. HMRC’s budget includes funding to tackle avoidance, evasion and other forms of non-compliance, to deliver a modern tax system and to support a resilient customs border.
I turn to another area of tax, the energy profits levy, which, I remind noble Lords, has helped to pay a significant proportion of households’ and businesses’ energy costs through the support that we have been able to provide. I want to be clear to noble Lords that the allowances in place are not a loophole. The OBR’s latest forecast is that the EPL will raise just under £26 billion between 2022-23 and 2027-28, inclusive of the EPL’s investment allowances. That is on top of £25 billion over the same period from the permanent regime for oil and gas taxations, totalling around £50 billion.
Abolishing the investment allowance would be counterproductive. The UK is still reliant on oil and gas for its energy supply and will be for several years; reducing incentives to invest would lead to investors pulling out of the UK, damaging the economy, causing job losses and leading to lower tax revenue in future.
My noble friend Lord Leigh asked about the impact of the price floor and the Government’s long-term plans for energy security. By introducing the energy security investment mechanism, the Government are providing certainty about the future of the energy profits levy. This allows companies to invest confidently in the UK and supports our economy, jobs and energy security.
On the long-term fiscal regime for oil and gas, the Government are also conducting a review to ensure that the regime delivers predictability and certainty, supporting investment, jobs and the country’s energy security. I wonder whether that predictability and certainty would be covered in Labour’s review of business taxes. I do not think the oil and gas sector sees predictability and certainty in its policy approach in recent weeks.
I turn to the electricity generator levy. Unlike the EPL, this not a tax on total profits that is calculated after the recognition of total revenues and costs. Instead, the EGL is payable only on the portion of revenues that exceeds the long-run average for electricity prices. The Government took into account the potential impact on investment when setting the benchmark price.
The Government are supporting renewables deployment through a range of policy levers, including the contracts for difference scheme, through which generators have received almost £6 billion net in price support to date. The electricity generator levy will not be payable on renewable generation produced under contracts for difference, which is the Government’s main form of support for green energy and will account for most new large renewable generation.
I turn to the point raised by the noble Lord, Lord Livermore, on non-doms. The Government recognise that issues of taxation come down to fairness. We need to have a fair but internationally competitive tax system which brings in talented individuals and investment that contribute to growth. Reforming the non-dom regime could potentially damage the UK’s international competitiveness, leading to a loss of international investment and talent. There is a great deal of uncertainty over the wider economic impacts of complete abolition.
Non-doms play an important role in funding our public services through their tax contributions. They pay tax on their UK income and gains in the same way as everyone else, and they pay tax on foreign income and gains when those amounts are brought into the UK. The latest information shows that that 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 2020-21 and have invested over £6 billion in the UK using the business investment relief scheme introduced in 2012.
Lord Leigh of Hurley (Con)
On another point of clarification, is my noble friend saying that HM Treasury’s calculations are that, if the reliefs that apparently exist for non-doms were withdrawn, as has been suggested elsewhere, there would be a net loss to Treasury revenue, given the mobile nature of such non-domiciled persons?
Baroness Penn (Con)
I am saying that that is most certainly a risk. There is a high amount of uncertainty about the impact of any changes in that area, and it would not necessarily lead to an increase in revenue, as is being relied upon by the Labour Party.
Lord Eatwell (Lab)
My Lords, surely there is not that degree of uncertainty, since the Government did raise a base levy on non-doms. Surely, then, we have evidence from the mobility of non-doms reacting to that base levy. What is the evidence? I suggest it is evidence of no mobility at all.
Baroness Penn (Con)
My Lords, I was speaking about the difference between changes to any scheme and abolition of the status altogether, but I would say that there is a high degree of uncertainty about the impact of changes made in this area.
Finally, I turn to the pension tax changes made through this Bill and the Budget, which many noble Lords have spoken about. To respond to the noble Lord, Lord Eatwell, I was not implying that only the most highly skilled and productive workers benefit from these changes, but many of them will. They have been designed in response to feedback from the NHS in particular that there was an impact on retention of the most skilled staff.
Regarding the suggestion that a doctors-only change could have been implemented instead, unlike more targeted policies, the Government have considered a range of options to address this issue over a number of years. One of the elements which means that a more targeted approach would not be appropriate in these circumstances is the time it would take to implement. These changes could be implemented quickly, from April 2023, minimising the risk of early retirements in the NHS before any changes take effect.
In the Statement taken before this debate, we heard about the pressures on our NHS workforce and the pressing need to address those immediately. If we were to take a targeted approach to one profession—NHS doctors—we may well come back to the same issue, as the same issues are faced by employees in other sectors, such as air traffic controllers, the police, the Armed Forces and senior teachers. To introduce targeted measures for each profession would not be an effective way to deal with challenges across those different workforces.
The Government are aware of the concern raised by the noble Lord, Lord Eatwell—
Lord Sikka (Lab)
I am grateful to the Minister for giving way. Will she take up my challenge and tell me which of the big four accounting firms, with strong court judgments against them in the cases brought by HMRC, has been investigated, fined, disciplined or denied government contracts because they are peddling tax abuses? If the Minister cannot name such a firm, can she tell me why the Government are soft on tax abuses by big accounting firms?
Baroness Penn (Con)
I think one of the reasons why I frustrate the noble Lord in this area is that the Government do not normally comment on individual taxpayers. On his more general point, the Government have taken action to tackle tax avoidance and evasion over many years and to reduce its incidence in our economy.
Finally, I turn to the impact of the change to the annual allowance and its potential inheritance tax impacts. Noble Lords are right that the annual allowance has meant that there has been a limit on how much individuals can put into their pensions and therefore pass on. The Government are aware of concerns that some may be using their pension pots to reduce future inheritance tax liabilities, rather than for their purpose: to fund their retirement. As with all taxes, the Government keep the rules under review.
Lord Eatwell (Lab)
My Lords, before the noble Baroness moves away from the lifetime allowance, I asked her if it was true that this £1 billion was funded by increased borrowing. In her summing up just now, she said very clearly that unfunded tax cuts increase inflation; those were her exact words. Is this not an unfunded tax cut?
Baroness Penn (Con)
The OBR has been clear about its forecast for the public finances, which has shown that they are more resilient than previously expected. Debt is lower in every year of the forecast compared with the November forecast. Borrowing falls year on year and the current Budget is in a surplus from 2026-27. All these decisions are taken in the round and assessed against the Government’s fiscal rules and the independent OBR’s forecasts for government borrowing and debt.
We have had a wide-ranging debate today, but if we return to the measures in the Bill, they form an essential part of our plan for the economy. They support enterprise, business investment and employment, including in the NHS. The Bill seizes the freedoms now available to the UK outside of the EU, addresses international tax avoidance and the problem it causes for the sustainability of our public finances, and will help simplify our tax system. For these reasons, I beg to move.