Wednesday 21st February 2024
(10 months ago)
Lords ChamberFinance Act 2024 View all Finance Act 2024 Debates Read Hansard Text Watch Debate Amendment Paper: Consideration of Bill Amendments as at 5 February 2024 - (5 Feb 2024)
Baroness Vere of Norbiton
That the Bill be now read a second time.
The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)
My Lords, it is a pleasure to open this debate on the Finance Bill. As I explained during a memorable debate in your Lordships’ House last year, the Autumn Statement was designed with three purposes in mind: “to drive growth” across the economy, to create jobs, and to ensure that hard-working people can keep more of what they earn.
As many noble Lords will know, since the beginning of 2023 we have been working on five priorities. Three of those priorities are economic: to halve inflation, grow the economy and reduce the national debt. I will outline our current economic picture in more detail shortly. A year on from when we set out these priorities, I am pleased to report that there has been some significant progress.
Inflation has fallen from 11.1% to 4%, and this has led to two positive outcomes: wages are rising faster than inflation, and mortgage rates are starting to come down. On growth, like some other similar economies, the UK faced challenges at the end of 2023, but overall the economy was larger at the end of the year than at the start. The Bank of England and the IMF forecast growth to increase over the next few years. Finally, our national debt is on track to fall as a share of the economy.
The Government proposed at the Autumn Statement to put money back in people’s pockets, cut taxes and “back British business”. That is why the National Insurance Contributions Act has reduced national insurance from 12% to 10%, delivered a tax cut for 29 million working people, and saved the average worker £450 a year. But I recognise that times are still far too tough for far too many. That is why we need to stick to our plan, so we can deliver the long-term change our country needs to deliver a brighter future for Britain, and improve economic security and opportunity for everyone.
As part of delivering our broader long-term plan, we need to deliver our Autumn Statement commitments. This Finance Bill does exactly that. First, it will support British businesses by allowing them to invest for less. Secondly, it will support employment, by ensuring that hard work pays, through reforms to our pensions system. Finally, its measures will improve and simplify our tax system, ensuring that it is fit for purpose. Indeed, the Finance Bill covers 36 different measures in total, some more technical than others.
Before I delve into the specifics of these measures, I will first outline some of the economic context behind this Finance Bill. As noble Lords will be aware, inflation—and the subsequent impact on the cost of living—has been the Government’s key challenge since Vladimir Putin’s illegal invasion of Ukraine in 2022. Therefore, it is significant that, as I noted previously, inflation has more than halved, from 11.1% in late 2022 to 4% in February. Our key priority remains getting inflation back to the 2% target, to drive sustainable growth. The recent GDP figures are a reminder that, while inflation has more than halved from 11% to 4%, wages are rising, mortgage rates are falling and taxes are being cut. But we are not out of the woods yet; there is more to do. The OBR has projected that the 2023 Autumn Statement policies will have “lasting supply-side effects”. Combined with policies from the Spring Budget in 2023, this approach will permanently boost output by 0.5% by 2028-29.
I will now outline the measures in the Bill which will back British business, reward work, and support a modern and simpler tax system. I turn to the suite of measures to back British business. First, we will make full expensing permanent, thus allowing businesses to invest for less. As a result, firms will save £10 billion a year—the most generous plant and machinery capital allowances of any major economy. This will drive 0.1% GDP growth over the next five years, and that number will increase to 0.2% every year over the longer term. It is forecast to unlock an additional £3 billion of investment per year.
The Government’s second measure recognises the importance of research and development. R&D is important because of its dual role: driving economic growth and bringing benefits to wider society through innovation. Therefore, we will merge two government programmes: the R&D expenditure credit scheme and the small to medium-size enterprises scheme. This will have two key impacts: it will simplify the system and provide greater support for UK firms to drive innovation. These changes will apply from 2024 onwards. I note that the Government have consulted widely on proposed changes to the R&D tax credit system over a considerable period. We have decided to proceed with an April 2024 implementation date to move the system to a more stable footing at the earliest opportunity.
In the Bill we have gone even further, by introducing greater support for loss-making R&D-intensive SMEs. In addition, we will also lower the R&D intensity threshold required to access this support to 30%. As a result, around 5,000 extra SMEs will now be covered by the support and will receive £27 per £100 of qualifying R&D invested.
I note that noble Lords on the Economic Affairs Finance Bill Sub-Committee want us to simplify this scheme further by bringing it within the merged scheme at a higher rate of relief. It is worth being aware that the intensive scheme will share many of the merged scheme’s rules, including on subcontracting, albeit with a different rate mechanism given that the merged scheme is above the line. While there is potentially an option to simplify in the future, further work is needed to establish how that would operate while still targeting the scheme effectively.
These measures will significantly increase support to firms’ R&D efforts by about £280 million per year by 2028-29. We will also extend the sunset clause for two more programmes: the enterprise investment scheme and the venture capital trust scheme. Both will be extended to 6 April 2035, providing support to young companies in their endeavours to raise capital.
The UK’s creative industries grew 1.5 times faster than the wider economy between 2010 and 2019. It is therefore right that the Government offer them their fullest support. That is why we will reform tax reliefs to refundable expenditure credits for the film, TV and video games industries. In addition, we have designed targeted measures to boost investment in three areas: animated film, animated TV and children’s TV programmes. These areas will now be eligible for a 5% uplift in tax relief to a 39% credit rate.
This Government believe that hard work must be appropriately rewarded. That is why we are using this Bill to legislate for the abolition of the lifetime allowance. The OBR estimates that this will retain 15,000 workers annually in the UK labour market. The British Medical Association described it as
“potentially transformative for the NHS”,
because many of the individuals will be highly skilled, including senior doctors. We will effect this transformation with the right incentives. The removal of pension tax limits will motivate individuals to work harder for longer so that they can reap the rewards in future years.
Finally, I turn to measures in support of the third objective of our Finance Bill, a simpler and modernised tax system. This Bill, as I previously mentioned, makes full expensing permanent, which is a huge simplification for larger firms, but we are also supporting more than 4 million smaller, growing traders by expanding the “cash basis”. This will simplify the process for them to calculate their profits and pay income tax. We have closely consulted industry and, as result, the Government will legislate to remove three of the main restrictions on using the cash basis, completely removing limits on the size of businesses able to use the basis, interest deductions and the loss relief available.
We must also make sure that HMRC delivers on its strategic objective to collect the right tax at the right time. The Bill will deliver this by enabling HMRC to reduce the off-payroll working PAYE liability of a deemed employer which is responsible for ensuring that PAYE is calculated and sent to HMRC correctly. This will apply where that engagement was incorrectly treated as self-employed for tax purposes.
Of course, we need to ensure that UK plc is following, adopting and influencing developments on taxation on the global stage. That is why in the spring we legislated to implement OECD pillar 2 in the UK. This built on a historic international agreement to a two-pillar solution to the tax challenges of a globalised digital economy. This Bill goes on to make technical amendments to the main pillar 2 rules, as identified from stakeholder consultation, and ensures that the UK remains consistent with the latest internationally agreed guidance.
We will also take forward other technical measures, such as improving the data HMRC collects from its customers. These will result in a trusted, modern tax administration system. However, a simple, modernised tax system must also be fundamentally fair. Therefore, this Bill will create a criminal offence for promoters of tax avoidance specifically where persons continue to promote a scheme after the receipt of a stop notice. The Bill will also ensure that HMRC is empowered to respond more quickly to tackle promoters of tax avoidance. It will do so by introducing a new power for HMRC to bring disqualification action against the directors of companies involved in promoting tax avoidance. The scope of that power will include being applicable against those who control or exercise influence over a company.
Further to that objective of fairness, our next measure under this objective will amend the construction industry scheme to reduce the scope for tax fraud in that industry. To do so, the amendment will add VAT to the gross payment status test. This means two things: VAT compliance will now be checked as part of this process and HMRC powers to remove gross payment status will be enhanced. We will also legislate to confirm that, in line with the retained EU law Act, where UK law is incompatible with EU law, UK VAT and excise law will prevail. This measure also ensures the stability of the VAT and excise regimes while providing legal certainty for business following the changes in the retained EU law Act taking effect. This protects billions of pounds for the Exchequer.
This Finance Bill delivers some of the Chancellor’s key announcements at Autumn Statement 2023. As I have set out, it backs British business, rewards hard work and supports a modern and simpler tax system. I beg to move.
Baroness Vere of Norbiton (Con)
My Lords, I had better intervene quickly, before that continues. I am grateful to my noble friend, but I am sure he is well aware that that was not the usual procedure.
I am very grateful to all noble Lords who have taken part in the debate this evening. It has been a spirited debate, as ever, and I can definitely say at the outset that I am unable to agree with everything that has been said—by some noble Lords more than others, and by one or two almost entirely. But let us leave it at that.
There have been many excellent contributions and points raised. I am very grateful to the noble Lord, Lord Davies, who kicked off the debate with some wonderful tax questions about pensions. Clearly, the issue around pensions catching up with the personal allowance is not something that I can comment on now, but it is something that people are aware of and it will be addressed over a period of time. It is the case, too, that many political parties are committed to the triple lock. Pensioners whose sole income is the new state pension and who do not have deferred or received protected payments currently do not pay any income tax, as noble Lords will know. This year we provided the biggest ever cash increase to payments—a 10.1% rise.
The Government have doubled the personal allowance since 2010, ensuring that those with the lowest incomes do not pay income tax at all. Many noble Lords are concerned about the level of the personal allowance. I believe that over the longer period of time, looking back to 2010, there have been significant increases, such that 30% of people do not pay tax at all. I accept that, given external headwinds, certain decisions had to be made—and were made quite rightly—to freeze the personal allowance over a period of time. However, it is one of the goals of this Government that, as we return to the sort of growth that I think all noble Lords would like to see, it would be a possibility in future that we would be able to address how those personal allowances are going to change over time.
If a person has to pay tax that cannot be collected through PAYE, whether because they have no employment or they have an occupational private pension, and they are not already a self-assessment taxpayer, HMRC may issue them with a simple assessment to explain what tax they owe and how to pay it. That would be well in advance of any payment being needed. But, of course, that assumes that personal allowances and the state pension collide in future. I would not want to say that that is the case, but it is an issue that people are aware of.
The issue around the tax threshold freezes comes up quite a lot in your Lordships’ House. I absolutely accept that we have had to make some incredibly difficult choices but, having done so, a UK employee can earn more before paying income tax and social security contributions than an employee in any other G7 country. We do not tax our employees as highly as other people do, and that is to our credit. We have taken a fair approach to repairing the public finances, so we have asked everybody to contribute a little through keeping tax thresholds fixed. However, that ensures that those with the broadest shoulders pay the most. As I say, now that inflation is falling and the economy has turned a corner, we must continue with our plan, and we can responsibly return some money to taxpayers to slightly change the shift and the amount of tax that people will now pay, versus what they were going to pay in the past. But it is important that we do that in a way that supports the work and grows a sustainable economy for the future. Prioritising those in work is the best way in which to get the economy growing and reducing national insurance contributions is the best way in which to target those individuals.
I will check through the comments made by the noble Lord—
Lord Sikka (Lab)
I am grateful to the Minister. Is she saying that we cut taxes for people? Earlier she mentioned 29 million people. Can she also confirm that 17.8 million UK adults with an income of less than £12,570 a year received a zero cut in national insurance or taxes in last year’s Budget?
Baroness Vere of Norbiton (Con)
Yes, but let us also remember that the national living wage has gone up by 25% in real terms since 2010. There are all sorts of different things that the Government have done to protect the most vulnerable; the noble Lord is picking on just one thing. We are always looking at the most vulnerable to ensure that, for them too, work pays. That includes lifting the national living wage.
Lord Sikka (Lab)
I am happy to respond to the Minister—this could get interesting. The £12,570 threshold —and, as I said, 17.8 million adults have less than that —is after taking account of the increases in minimum wage. Many people have zero-hours contracts, work part-time or are maybe on a pension. That is after taking account of all the increases that the Minister said have been handed out.
Baroness Vere of Norbiton (Con)
Does the noble Lord want me to give them a tax cut for taxes that they do not pay? I am not following here at all, but I am not willing to get into a long debate about this right now. The noble Lord may write, and I will respond, if he would like to get into that in detail, but I am not willing to get into the debate right now.
Moving on to other issues raised by the noble Lord, Lord Davies, I will write in more detail around the specific things; I was doing very well for 80% of his speech but I lost him towards the end, around the taxation of negative pension growth, or gains. I will write on that point.
The noble Lord, Lord Desai, noted that the Bill is too late. Obviously, this is beyond a humble Minister like me. The House authorities will have guided it through. I know that it took a while to get through the Commons, and we addressed it in your Lordships’ House as quickly as we could once it had finished in the Commons. I would like to push the blame down to the other place and leave it there. However, it is always our ambition to get our Finance Bills into and through Parliament as quickly as possible, because it is a really important thing that we do.
I suspect that, particularly as we go into the Spring Budget, there will be many more debates around growth. I say again that, since 2010, we have had the fastest growth of any European G7 nation. I also suspect that there will be counterarguments to that, and that those will continue. In many of these circumstances, particularly some of the points raised by the noble Lord, Lord Desai, it is just a case of economists not agreeing. Not all economists agree—it is an art, not a science. For those of us who studied economics at university, it is clear that there are sometimes fundamental differences, as noble Lords have said today. My noble friend Lord Leigh is also a very experienced person in these matters. As he pointed out, he does not agree with much of the analysis. Sometimes, that is the case.
I am incredibly grateful to my noble friend Lord Leigh, his committee and the officials for the report of their sub-committee. I reassure him that we take those reports very seriously. Officials read them to ensure that we take into account the considerations and the recommendations made. On research and development, I think he agrees with us that we want to keep things as stable as possible. We do not intend to make any further changes. However, there are a few small areas where we will continue to engage, and any changes will be done cautiously. We hear what he and his committee say, and we will consider it carefully.
My noble friend noted the issue around HMRC data and tax administration. The Government’s economic response to the coronavirus pandemic was made possible through the powerful use of all sorts of data. However, it highlighted that there are gaps in the data that HMRC holds. New or improved data collected by HMRC, such as detailed information on employee hours and start and end dates on self-employment, will help government to address some of the gaps, building a tax system which is more resilient. I reassure him that the Government are taking a proportionate response and collecting improved data in areas where taxpayers already hold it, to minimise administrative burdens. The existing safeguards are robust, well-established and well-understood. I reassure him that we expect all taxpayers to have this information already and be able to provide it to HMRC. HMRC will take a reasonable and proportionate approach to the application of any fees or penalties in this regard. These changes will not take effect before April 2025, to give the system some time to adjust.
My noble friend Lord Leigh also mentioned HMRC customer service. Noble Lords will have heard me say this before, and indeed I have had the discussion directly with HMRC: it acknowledges that its customer service levels are simply not as good as they should be. Levels on the phone and in the post are below service standards from last year. HMRC has been working very hard to improve services for those people who need to call, but encourages people to use the digital services as much as possible, as they can be very efficient and get very good ratings from customers.
My noble friend Lord Leigh once again brought up his minority sport—a very important sport—of EIS and VCT, and why these are being extended by regulation. He hinted about it being something to do with the Windsor Framework, the EU, Northern Ireland, and the trade and co-operation agreement, and he is right. These are important schemes, and the vast majority of UK subsidies will need to comply only with the UK’s domestic subsidy regime, as noble Lords would expect. The Windsor Framework also means that the EU-UK Trade and Cooperation Agreement will now serve as the primary framework governing subsidy control between the UK and the EU. For the EIS and the VCT scheme, we are engaging with the EU on approval for extension, due to Northern Ireland’s unique access to the EU single market. We are working to meet all relevant obligations. We believe that the systems are consistent with subsidy control principles and address evidence of market failure, and therefore we think those conversations will go well.
My noble friend mentioned the complexity of Pillar 2. I agree that it is complex and difficult to administer—it is necessarily complex, because of the wide variety of different corporate structures which exist. However, we are reassured that we have simplified processes as much as we possibly can, such that compliance from business will be at the sorts of levels that we want to see.
On stooge directors, as noble Lords would expect, these measures are targeted at the promoters of tax avoidance schemes. Stooges enable these promoters to hide their activities, and, frankly, that is not what we are after at all. The Government understand the need for strengthened HMRC powers to be proportionate and balanced. Those are the two words that are absolutely key. Nobody wants to put anybody in jail because they did something under the duress of somebody else.
The noble Lord, Lord Sikka, raised a number of points and many rhetorical questions, and, I suspect, lots of really good ideas for the Labour Party manifesto. I, unfortunately, cannot agree with much of what he said, particularly his insistence that the state needs to substantially increase investment which is traditionally private sector activity. The state does invest, but it invests in those areas where we feel it is right for the public sector to be investing. We believe that the private sector is much better at picking up that sort of investment.
The noble Lord seemed to imply that the Government have done nothing against tax avoidance and that it is all terrible out there, etcetera. I am afraid that is just not right. The amount of money lost to the Exchequer from tax avoidance has fallen from £3.6 billion in 2010—to pick a year—to £1.4 billion in 2021-22. That is a significant reduction in the amount of tax avoidance. Again, I do not expect the noble Lord to agree with me. He went on to ask me for specific examples. HMRC already prosecutes promoters. Since 2016, more than 20 individuals have been convicted of offences relating to arrangements which have been promoted and marketed as tax avoidance. Our interventions are working, and there are interventions in the Bill to make our levers stronger. This Government do not tolerate tax avoidance and we will do whatever we can to stop it.
The noble Baroness, Lady Kramer, raised a number of issues. I have already mentioned thresholds; from the Government’s perspective, we understand what had to happen over that time. She raised the issue of public spending, which I note is going up in real terms by 0.75% over the forecast period. What slightly concerns me now is the question of where it would stop. If it is going up in real terms every single year, after how many years would we say that that is enough? However, I also put it to her that, as important as productivity is in the public sector, in the private sector you would not get away with the lack of focus on productivity. That is why the Chief Secretary to the Treasury is looking at a productivity review across all areas of government, to ensure that public spending is the right amount. At the end of the day, the best way to increase the amount of money that we have available for public spending is to grow the economy, and that is exactly what this Government are doing.
The noble Baroness mentioned productivity. It has been estimated that supply-side measures from the Autumn Statement 2023 could close up to half of our productivity gap with France, Germany and the US. We feel that we are making good progress, investing in the right areas to improve productivity.
The noble Baroness mentioned climate change, which is incredibly important. It is also interesting that she mentioned Labour in her appeal to keep climate change front of mind, because Labour still has its very unachievable climate plans, with now literally no funding. It used to have £28 billion of funding, which shadow Front-Bench Members managed to commit to over 300 times. Unfortunately, that £28 billion has now disappeared, but all the policy seems to remain in the same place. That goes back to the point that the noble Lord, Lord Livermore, made. Apparently, in the stability, investment and something else he said—their plan to deliver, which I am still looking for the detail on—all Labour policies will be fully costed, apart from those on climate change. Is that right? I am looking forward to it. I do not know; the £28 billion has disappeared but the policies have not.
The noble Lord asked me to commit to certain things for the Conservative Party manifesto, which I will not do, but the Government have just introduced permanent full expensing. It would be a great surprise to me if, all of a sudden, it were to disappear again, because we believe that it is a very valuable thing to do.
The noble Lord mentioned non-domiciled individuals. I, too, am very interested in that and will keep an eye out for how much money will be raised from the changes to non-domiciled individuals’ tax arrangements. I suspect that it will not be anywhere close to the amount of money that Labour platitudes and unfunded promises will need as we head into the election. But we believe that non-UK domiciled individuals play an important role in funding our public services through their tax contributions. The Government want the UK to be a destination that will attract talented people to work and do business, and that includes people from overseas. It is only right that those who choose to live here for a long time pay their fair share of taxes—namely, that they cease to become non-domiciled.
I believe that I owe various noble Lords a letter, which I will ensure gets to them as soon as possible. In the meantime, I commend the Bill to the House.