Finance (No. 2) Bill (First sitting)
(1 day, 10 hours ago)
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The Committee divided: - Ayes: 2 / Noes: 10 - Question accordingly negatived.
The Chair
Good morning, everyone. We are now sitting in public and the proceedings are being broadcast. Before we begin, I remind Members to please switch electronic devices to silent. Tea and coffee are not allowed in the room. Members may remove their jackets if they wish to do so.
We will now consider the programme motion and the motion to enable reporting of written evidence for publication. In view of the time available, we will take these matters formally, without debate.
Ordered,
That—
1. the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 27 January) meet—
(a) at 2.00 pm on Tuesday 27 January;
(b) at 11:30 am and 2.00 pm on Thursday 29 January;
(c) at 9.25 am and 2.00 pm on Tuesday 3 February;
(d) at 11:30 am and 2.00 pm on Thursday 5 February;
(e) at 9.25 am and 2.00 pm on Tuesday 10 February;
(f) at 9.25 am and 2.00 pm on Tuesday 24 February;
(g) at 11:30 am and 2.00 pm on Thursday 26 February;
2. the proceedings shall be taken in the following order: Clauses 11 to 43; Schedule 3; Clauses 44 to 45; Schedule 4; Clause 46; Schedule 5; Clause 47; Schedule 6; Clauses 48 and 49; Schedule 7; Clause 50; Schedule 8; Clauses 51 to 54; Schedule 9; Clause 55; Schedule 10; Clause 56; Schedule 11; Clauses 57 to 61; Clauses 70 to 82; Clauses 87 to 100; Schedule 23; Clauses 101 to 136; Schedule 14; Clauses 137 to 140; Schedule 15; Clauses 141 to 148; Schedule 16; Clause 149; Schedule 17; Clause 150; Schedule 18; Clauses 151 to 220; Schedule 19; Clauses 221 to 241; Schedule 20; Clauses 242 to 247; Schedule 21; Clauses 248 to 252; Schedule 22; Clauses 253 to 279; any new Clauses or new Schedules relating to the subject matter of those Clauses or those Schedules; remaining proceedings on the Bill.
3. the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 26 February. —(Lucy Rigby.)
Resolved,
That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Lucy Rigby.)
The Chair
Copies of written evidence that the Committee has received will be made available in the Committee Room.
We will now begin the line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and on the parliamentary website. It shows how the clauses and schedules have been selected, and amendments have been grouped together for debate. Let us be clear about this, because I suspect that there may be Members present who have not been on a Public Bill Committee before, or any Committee before. The lead amendment is the first amendment in the group. That is the only one that, at the start of that debate, will be moved. All the others will be debated but moved later, if necessary. In clause stand part debates, the Minister will be called first. Other Members are then free to indicate if they wish to speak in the debate by bobbing. It would help if Members bobbed when they want to speak; we are all quite good at this but we do not have second sight.
The decision on clause stand part is usually taken at the end of the debate on each clause. You can either have a stand part debate at the end or during the debate on the amendments, but you cannot have both. I am fairly relaxed about this; other Chairs may take a different view. Sometimes it is more convenient to have a fairly wide debate on the clause at the start of the debate about amendments to the clause. That is perfectly in order as far as I am concerned, but you cannot do it twice. The Chair—in this case, me—will judge whether or not the clause then warrants a stand part debate. That is my decision, not yours, and it is final. Basically, that ball is in your court.
At the end of the debate on amendments and new clauses, I shall call the Member who moved the lead amendment—the one at the start of the group—or new clause. Before they sit down, it would be helpful if they could indicate whether they wish to move the amendment or withdraw it. It would also be helpful to whoever is in the Chair for there to be an indication if anybody wishes to force a Division on other amendments in the group.
The amendments are grouped by the Clerks, who are very expert in this, but in some cases they may relate to matters that come much further on in the Bill. People may say, “Hang on a minute! Why haven’t we voted on that?”—the answer is, we will when we get to it, if you want to. If any Member—the Minister, shadow Minister or anybody else—is speaking to an amendment that they want to move, it would be very helpful for the Chair to have an indication early on, so that when we get to that point we have a marker down that you want to force a Division. Within reason, we shall allow that.
If there are any queries at any time during the process—which is fairly arcane—do not be shy. None of us has a monopoly of wisdom, so just ask. I probably won’t know the answer either, but the Clerks will.
Clause 11
Charge and main rate for financial year 2027
Question proposed, That the clause stand part of the Bill.
The Economic Secretary to the Treasury (Lucy Rigby)
I am very pleased to be opening the first debate in this Finance Bill Committee. Clause 11 sets the charge for corporation tax for the financial year commencing in April 2027 and sets the main rate at 25%. Clause 12 sets the small profits rate at 19% for the same period.
The Government are committed to a stable and predictable tax system for businesses, and we are supporting businesses by creating the economic stability and fiscal sustainability needed for future growth. That is why we are delivering on our commitment, set out in the 2024 corporate tax road map, to cap corporation tax at 25% for the duration of this Parliament. The changes made by clauses 11 and 12 will establish the right of the Government to charge corporation tax for the financial year beginning in April 2027.
Mark Garnier (Wyre Forest) (Con)
Thank you for your guidance, Sir Roger. I am very grateful that you are in the Chair, because although I have been doing this for 15 years, as you know, and this is about my fifth Finance Bill, I do not have a clue how any of it works.
Mark Garnier
It is of course standard practice—as with income tax—for the Government to legislate the charge for corporation tax every year. These rate levels have remained unchanged since Labour came into office. As my hon. Friend the Member for Grantham and Bourne (Gareth Davies) pointed out last year, Labour promised to cap the corporation tax rate at 25% for the whole of this Parliament. That has not been done in legislation, although we have had an indication from the Minister that that is still the Government’s intention.
I will make just one small political point. The Government did promise that they would not increase taxes on working people, but we have seen national insurance contributions increase—that was obviously in a different Bill. None the less, the more the Minister can say about capping corporation tax at 25%, the more confident businesses and our economy will be that something will not be slipped in during the next three and a half years before the general election. We have no other objection to this measure.
Lucy Rigby
I am grateful to the hon. Member for Wyre Forest for his comments and for highlighting the fact that we have kept our manifesto commitment on tax. This is part of that: we are capping corporation tax at 25% in line with our corporate tax road map.
Question put and agreed to.
Clause 11 accordingly ordered to stand part of the Bill.
Clause 12 ordered to stand part of the Bill.
Clause 13
Enterprise management incentives: thresholds and period for exercise
Lucy Rigby
I beg to move amendment 37, in clause 13, page 7, line 37, at end insert—
“( ) In section 169I(7D)(b) of TCGA 1992 (material disposal of business assets)—
(a) for ‘tenth ’ substitute ‘specified’;
(b) at the end insert ‘(with “specified anniversary” having the meaning given in section 529(2A) of that Act)’.”
This amendment to TCGA 1992 would reflect the changes made to section 529 of ITEPA 2003 by clause 13 of the Bill.
The Chair
With this it will be convenient to discuss the following:
Government amendment 38.
Clause stand part.
New clause 24—Report on impact of section 13 (Enterprise management incentives: thresholds and period for exercise)—
“(1) The Chancellor of the Exchequer must, within two years of the coming into force of section 13, lay before the House of Commons a report on the impact of that section.
(2) The report under subsection (1) must, in particular, assess the impact on—
(a) the recruitment and retention of skilled employees in qualifying companies,
(b) high-growth and innovative companies, and
(c) the Exchequer finances.”
This new clause would require the Chancellor of the Exchequer to report to the House of Commons on the impact of section 13 on recruitment and retention in qualifying companies, on high-growth and innovative businesses, and on the Exchequer finances.
Lucy Rigby
Clause 13 significantly expands the enterprise management incentives scheme eligibility to allow greater access for scaling companies. Specifically, the changes made by the clause will expand the EMI company eligibility limits to maintain the world-leading nature of the scheme.
Government amendments 37 and 38 are consequential to the business asset disposal relief legislation, updating it to align with the EMI maximum holding period expansion provided by the clause. The change will significantly expand the EMI limits and expand access for scale-up companies.
New clause 24 would require reports to the House of Commons on the impact of the clause on recruitment and retention in qualifying companies, on high-growth and innovative businesses and on the Exchequer finances. The Government have published a tax information and impact note setting out the impact of the EMI expansion. That showed that the measure will cost £585 million in 2029-30. The expansion is expected to support an extra 1,800 of the highest growth scale-up companies over the next five years, allowing them to reward an estimated 70,000 more employees.
The Government keep all taxes under review, and monitor and evaluate tax policy changes on an ongoing basis. We have also launched a call for evidence to gather views from founders, entrepreneurs, scaling companies and investors on tax policy support for investment in high-growth UK companies.
James Wild (North West Norfolk) (Con)
It is a pleasure to serve under your chairship, Sir Roger, and on the Committee considering this 536-page doorstop of a Bill. We are grateful for the written contributions and evidence provided to the Committee, but I think the usual channels should consider having oral evidence sessions for future Finance Bills, so that people can make important representations on significant pieces of legislation.
I will turn to clause 13 and new clause 24 tabled in my name. We need to have an enterprise economy that incentivises investment. The tax regime clearly has an important role to play in helping to achieve that, and in doing so, backing much needed growth in the economy. Clause 13 amends the Income Tax (Earnings and Pensions) Act 2003 to expand the enterprise management incentives scheme. That scheme helps attract, keep and motivate staff by allowing employees to buy shares in the company with tax advantages. That includes no income tax or national insurance contributions at the time of grant and exercise, with gains eventually being taxed under the more favourable capital gains regime, rather than as income tax.
The changes in the clause should make it easier for start-ups and growing companies to use the enterprise management incentives scheme, helping them reward staff and link employees’ success to the company’s growth. That is something that we support and the British Private Equity and Venture Capital Association has also welcomed the change. The clause increases the company options limit from £3 million to £6 million, raises the gross asset limit from £30 million to £120 million, and doubles the employee limit from 250 to 500. It also extends the exercise period to 15 years. These are all welcome changes.
However, one important element that is not due to change under these provisions is that the scheme allows qualifying companies to grant employee share options up to a maximum value of £250,000 per individual. Has the Minister considered going further and raising the cap beyond £250,000 to attract the brightest and best to grow businesses?
In its report on competitiveness, published yesterday, TheCityUK states that,
“the UK’s tax schemes such as…Enterprise Management Incentives (EMI) offer lower relief thresholds and tighter eligibility than international equivalents such as the Qualified Small Business Stock regime in the US, weakening incentives to scale and retain activity domestically.”
I have tabled new clause 24, which would require the Government to assess and report to Parliament on the impact that the changes have on the recruitment and retention of skilled employees in qualifying companies, on high-growth and innovative companies and on the Exchequer.
The Minister referred to the tax information and impact note, but clearly that is a forecast of what the Government hope will happen, not a review of what has actually happened. I think that will be a debate that we have many times as we consider the Bill: a TIIN is not a review of what has actually happened. The numbers that the Minister gave may be higher or lower, but we need to have a post-implementation review.
According to the Budget 2025 policy costings, the objective is to increase eligibility to allow scale-ups, as well as start-ups, to access the scheme. That is, of course, something we support. Will the Minister commit to keeping the scheme under review to ensure it is delivering on its aims to support high-growth firms and to consider whether further action, such as on the individual threshold, is needed?
Given the substantial investment, can the Minister clarify what behavioural assumptions underpin these projections? How many companies just above the existing threshold are expected to utilise these expanded limits? The BVCA has said that the enterprise management incentives scheme is
“long overdue for reform: high growth companies are often unable to grant EMI options due to the constraints of the £30m gross assets and 250 employee limits.”
Does the Minister have figures showing how much these limits have actually restricted growth?
Mr Joshua Reynolds (Maidenhead) (LD)
It is a pleasure to serve under your chairmanship, Sir Roger, on what is not only my first Finance Bill Committee, but my first Bill Committee—a nice, simple one to start me off. The Liberal Democrats welcome the changes made by clause 13. We need to support our British start-ups and British start-up culture to grow and develop.
We would of course like the Government to go further than clause 13 in what they promise. We need to ensure that we have a British start-up culture where start-ups do not, after five or 10 years, head off to the United States, taking that capital and leaving the UK with a brain drain. I have only one question to the Minister: how can we go further to ensure that once we have implemented the Bill, we will be in a position to say that fantastic UK companies will not head overseas, taking that capital and culture with them?
Lucy Rigby
The hon. Member for North West Norfolk made a series of important points. I come back to the fact that the Government have opened a call for evidence on tax in this area. The Committee will come to the enterprise investment scheme and venture capital trusts scheme, which the call for evidence also covers. Importantly, the call for evidence covers the changes we have made to the enterprise management incentives scheme. All of those changes, as well as the clauses we are about to discuss, are important to the Government’s objective of making sure that the UK is the best place in the world to start and grow a business, and I encourage any views to be fed into that call for evidence.
The hon. Member referred to an important report from TheCityUK and PwC; I attended its launch yesterday. I am pleased to tell him that the Government’s objectives on the growth of financial services very much align with that report. Our objectives and the report have much in common, but most importantly, we share the sense of urgency and ambition that it outlines.
The hon. Member for Maidenhead referred to his desire to see more companies remain in the UK. That is imperative, and it is behind the Government’s reforms to a series of tax incentives in this area. We believe that the UK is already the best place in the world to start a company, and we have to make sure that it continues to be, but it must also be the best place to scale and to list a company. That is why the reforms are so important—so that companies stay.
Amendment 37 agreed to.
Amendment made: 38, in clause 13, page 7, line 38, for “(7)” substitute “(8)”.—(Lucy Rigby.)
This amendment is consequential on the addition of a new subsection by Amendment 37.
Clause 13, as amended, ordered to stand part of the Bill.
Clause 14
Enterprise investment scheme: increase in amounts and asset requirements
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Amendment 29, in clause 15, page 10, line 23, leave out subsection (2).
This amendment would maintain the rate of income tax relief for investments into venture capital trusts at 30 per cent.
Government amendments 3 and 4.
Clause 15 stand part.
New clause 1—Report on the impact of section 15—
“(1) The Chancellor of the Exchequer must, within six months of this Act being passed, lay before the House of Commons a report on the impact of implementation of the provisions of section 15 on—
(a) early-stage investment volume,
(b) investor participation, and
(c) international competitiveness.”
This new clause would require the Chancellor of the Exchequer to report to the House on the impact of section 15 on early-stage investment volumes, investor participation and the UK’s international competitiveness.
Lucy Rigby
Clauses 14 and 15 double the maximum amount that a company can raise through the enterprise investment scheme and venture capital trusts scheme, as well as the gross assets limit for companies using the scheme. The VCT income tax relief will also be reduced from 30% to 20%.
The changes made by clause 14 will mean that, from April 2026, the EIS annual company investment limits will increase to £10 million, or £20 million for knowledge-intensive companies. The lifetime company investment limits will increase to £24 million, or £40 million for knowledge-intensive companies. The gross assets test will increase to £30 million before share issue, and £35 million after. Likewise, clause 15 will mean that from April 2026, the VCT company investment limits and gross assets test will increase to the same levels. Alongside that, as I said, the VCT up front income tax relief will decrease from 30% to 20% from April 2026.
Government amendments 3 and 4 fix wording in clause 15 so that the annual and lifetime investment limits consistently apply to “the relevant company”, removing any ambiguity in how the VCT limits should be interpreted.
James Wild
Clauses 14 and 15 are a story of two halves. As the Chartered Institute of Taxation rather adeptly put it—we are grateful for its support in scrutinising the Bill—these changes give with one hand and take with the other. We support clause 14, but we have doubts about clause 15.
Both clauses deal with our risk capital schemes—the enterprise investment scheme and venture capital trusts. EIS was introduced in the UK in 1994 to stimulate economic growth and, along with VCTs, these Government-backed schemes encourage individuals to invest in smaller high-risk trading companies by offering tax reliefs on their investment. As a former adviser in the Department for Business, Innovation and Skills, I helped to develop these schemes, as well as the seed enterprise investment scheme. I recognise their importance.
As the venture capital industry has noted, these are essential tools in unlocking private capital for early-stage, high-growth UK businesses, which we all support, particularly in the knowledge-intensive sectors such as life sciences, clean energy and deep tech; however, companies now routinely require £20 million to £30 million in funding before they start to sell their products. The previous limits had prevented UK investors from following their initial investment with more capital, forcing businesses to turn to overseas capital too early. That is a problem I think we all want to fix.
The main difference between the schemes is that with EIS an investor buys shares directly in an eligible company, whereas with VCTs the investor buys shares in a listed fund-like vehicle, which then spreads their money across a portfolio of qualifying companies. These clauses increase the annual and lifetime investment limits for the EIS and VCTs in Great Britain and raise the gross asset thresholds for qualifying companies.
Clause 14 increases the annual and lifetime investment limits for the EIS and VCTs, and raises gross asset thresholds. These limits have not been uprated since 2018 for knowledge-intensive companies and 2015 for other companies. Now, all limits are being doubled, which is welcome. As we have heard, for both schemes, the limit will rise from £10 million to £20 million. The total amount that can be raised over time will increase to £40 million for those knowledge-intensive firms. The gross assets yield for qualifying companies will go up to £30 million before a share issue and £35 million thereafter. TheCityUK has said that schemes such as EIS remain vital for crowding in early-stage finance and these changes are welcomed by the industry.
Clause 15 heads somewhat in the opposite direction. This clause reduces the rate of income tax relief for investment in VCTs from 30% to 20%. This is where our doubts begin to grow. The 2025 Budget policy costings reveal a calculated trade-off. The increased limits in clause 14 will cost the Exchequer £60 million in 2027-28. Meanwhile, the reduction in VCT income tax relief will raise £125 million in the same year, delivering a net yield of approximately £65 million. The policy costings state that this rate reduction is intended to
“better balance the amount of upfront tax relief…and ensure funds are targeting the highest growth companies”,
but the costings’ own assumption that
“investors alter or reduce the way they invest into VCT”
is an acknowledgment that the relief cut will dampen investor appetite.
I am concerned by how much that tax increase will reduce investment in these high-growth companies that we all support. The British Private Equity & Venture Capital Association has been explicit about its concerns, warning that this reduction
“could lead to a decline in fundraising that would impact the high growth and high-risk investments that the Government is looking to encourage”.
VCTs are a key part of the UK’s capital mix, providing one of the few consistent sources of long-term equity for early-stage and scaling companies. Any reduction in their ability to raise funds would directly affect the pipeline of innovative businesses that the UK needs to grow.
The reduction in VCT relief to 20% creates a fundamental risk to venture capital funding, precisely when scale-ups face capital constraints. For early-stage companies dependent on VCT funding, the reduced relief translates directly into a higher cost of capital and reduced funding availability. The Budget relies heavily on revenue raising from less visible and more complex parts of the tax system. This VCT change exemplifies that approach, shifting costs to venture investors rather than implementing transparent broad-based taxation.
New clause 1 would require the Chancellor to report on the impact of the cuts to VCT allowance on early-stage investment volume, investor participation and international competitiveness. Given the Government’s own admission that this will alter investment behaviour, such reporting is essential, and I reiterate that a TIIN does not review what actually happens in practice. Amendment 29 would simply remove the provision in clause 15(2) that reduces the rate relief from 30% to 20%, keeping the relief at its current level to support investment in high-growth firms. I believe both amendments would be supported by industry and, subject to what the Minister says, I intend to press amendment 29 to a vote.
The Government are expanding VCT investment limits while simultaneously cutting the relief to 20%. How would the Minister address the concerns of the investment sector that the combined changes will dampen investor appetite for venture capital trusts at the very moment we need to encourage them?
Lucy Rigby
I welcome the shadow Minister’s welcoming of the majority of the changes that we are making. To address his criticism of what we are doing in relation to the venture capital trust income tax relief, I come back to the impetus behind this package of reforms as a whole on EMI, EIS and VCT, which is to make sure that the UK is the best to start, scale, list a company and to ensure that companies stay.
The specific change to VCT to reduce the income tax relief from 30% to 20% is to help rebalance the up-front tax reliefs offered across the schemes, where the VCT scheme offers tax relief on dividend income, which the EIS scheme investors do not get. VCTs tend to invest in larger, less risky, scaling companies compared with EIS scheme investors. The reduction in income tax relief therefore reflects the overall reduction in investment risk that comes with investing in later-stage companies.
It is important to bear in mind that the VCT scheme remains very generous with, as I said, 100% tax relief on dividend payments and 100% capital gains tax relief on the sale of shares, alongside that 20% income tax relief. I know that the shadow Minister does not like TIINs in general—he has made that point in the Chamber—but they do contain the full details of the assumptions and impacts, and indeed the policy rationale. I therefore commend clauses 14 and 15 and Government amendments 3 and 4 to the Committee, and ask that amendment 29 and new clause 1 be rejected.
Question put and agreed to.
Clause 14 accordingly ordered to stand part of the Bill.
Clause 15
Venture capital trusts: rate of relief and amounts and asset requirements
Amendment proposed: 29, in clause 15, page 10, line 23, leave out subsection (2).—(James Wild.)
This amendment would maintain the rate of income tax relief for investments into venture capital trusts at 30 per cent.
Question put, That the amendment be made.
Lucy Rigby
Clause 16 will enable the existing enterprise management incentives scheme and company share option plan contracts agreed before 6 April 2028 to be amended to include a sale on the private intermittent securities and capital exchange system—known by its much more catchy acronym of PISCES—as an exercisable event, without losing the tax advantages. The legislation will have retrospective effect from 15 May 2025. In the interim, His Majesty’s Revenue and Customs will be able to use its collection and management powers to not collect tax on exercise.
That means that this change will benefit PISCES trading events that happen before the Finance Bill receives Royal Assent. The change will therefore support more employees of growing UK companies to access the tax advantages of EMIs, and ensures that the tax system keeps pace with innovation in the wider economy. It also, of course, supports the launch of PISCES, which will provide a key stepping stone for public markets, supporting our world-leading capital markets. I commend clause 16 to the Committee.
James Wild
As the Minister says, clause 16 addresses a specific but important matter by permitting employers to amend existing company share option plan and enterprise management incentives option agreements, to allow PISCES trading events to serve as exercisable events without sacrificing the valuable tax advantages. Employers frequently offer share options to employees in recognition of their service and commitment, and to grow their businesses, and when employees exercise such options, they naturally face income tax and national insurance consequences. To encourage this form of employee ownership, successive Governments have introduced tax-advantaged schemes, including CSOP and EMIs, that provide relief from those taxes when certain conditions are satisfied.
Lucy Rigby
The Government delivered the regulatory framework for PISCES in May 2025, and the shadow Minister has, fairly, asked for an update. I am pleased to tell him that the Financial Conduct Authority has since approved, as he may know, two PISCES market operators: JP Jenkins and the London Stock Exchange. We are hopeful that the first trading events on PISCES will take place soon.
I understand the impetus behind the shadow Minister’s other points. PISCES can, of course, be written into new contracts when they are agreed, meaning that those contracts should not need to be amended to include PISCES, because it can be there ab initio. However, it is fair to say that companies might not yet be aware of PISCES, as it was only recently introduced. That is exactly why we have the April 2028 extension, to allow PISCES to become more embedded and therefore more standard in EMI and company share option plan contracts. As I said, I understand the impetus behind the suggested change; I just do not think it is necessary.
Question put and agreed to.
Clause 16 accordingly ordered to stand part of the Bill.
Clause 17
Employee car and van ownership schemes
Question proposed, That the clause stand part of the Bill.
Lucy Rigby
Clauses 17 and 18 will bring employee car ownership schemes into the benefit-in-kind regime from 2030, with transitional arrangements until 2032. Clause 19 will ensure that the introduction of new emissions standards does not lead to a sharp increase in benefit-in-kind tax for plug-in hybrid electric vehicles.
On clauses 17 and 18, the costing, published alongside the Budget, accounts for a behavioural response whereby a significant number of taxpayers switch towards alternative vehicles or move away from using company cars altogether. That has been updated since the 2024 autumn Budget, taking into account further evidence on the impacts of the measure provided by the sector.
Private use of a company car is a valuable benefit, and it is right that the appropriate tax be paid on it. This measure will ensure fairness to other taxpayers, reduce distortions in the tax system and reinforce the emissions-based company car tax regime, which incentivises the take-up of zero emission vehicles. To support the automotive industry and provide employers with more time to adjust to the changes, the Government have delayed implementation of the measure to 6 April 2030 and have introduced transitional rules.
On clause 19, new emissions standards being introduced in the UK reflect the higher real-world emissions of PHEVs. It is important that a car’s official emissions figures reflect real-world emissions, but that can lead to tax increases where tax is linked to emissions levels. The Government recognise that although it is right that higher-emitting vehicles pay more tax, lower-emission company cars such as plug-in hybrid vehicles continue to play an important role in supporting our transition towards zero emission vehicles and the decarbonisation of transport. The changes made by the clause will introduce a temporary benefit-in-kind tax easement for employers providing, and employees being provided with, PHEVs as company cars. I commend clauses 17 to 19 to the Committee.
Mark Garnier
I thank the Minister for her comments, but we are concerned about the unintended consequences of the three clauses.
We are concerned about how clause 17 will affect automotive industry jobs and vehicle sales. Approximately 76,000 workers use ECOS, across 1,900 medium-sized and large businesses. Those workers have utilised ECOS for essential, affordable and reliable personal transport. We believe that the clause risks making ECOS vehicles unaffordable for the workers who currently use them. In fact, using the scheme arrangements and paying tax from 2030 to 2032 onwards means that such workers face, in effect, a pay cut. That is especially unfair because those people who most use the schemes rely on a vehicle for their job much more than those in most other industries. There is a risk of further knock-on effects on the automotive industry if workers abandon ECOS completely.
The chief executive of the Society of Motor Manufacturers and Traders, Mike Hawes, who is one of the leading voices in the automotive industry, has expressed strong disapproval of the Government proposal to change ECOS. That is because 100,000 cars are provided through the schemes each and every year, which alone amounts to 5% of the new-car market in the UK. The SMMT predicts that changing the schemes will endanger 5,000 manufacturing jobs in the UK; it claims that that will bring about a loss of half a billion pounds a year due to fewer sales, lost VAT and lost vehicle excise duty receipts. That more than outweighs the £275 million in revenue that the Treasury predicts it will take within the first year of the tax changes taking effect.
We do not feel that clause 18 adequately protects the automotive industry and its workers. Under current ECOS arrangements, employers can sell a vehicle to an employee below market value, at a discounted price. For many employers, that has acted as an additional benefit to form a competitive employee recruitment package and has helped to improve staff retention. These criteria effectively stipulate that vehicles must be sold on the same terms as in the open market. Although exempt employers will not pay benefit-in-kind tax, they will inevitably have to pay a higher price for the vehicle itself. The SMMT estimates that that could become unaffordable for its members’ staff and automotive workers. The knock-on effects outlined in the discussion of clause 17 will remain. Fewer employees will be attracted to purchasing a vehicle. That will lead to fewer employers purchasing vehicles from car manufacturers, and the risk to manufacturing jobs and lost revenue will therefore still apply.
Clause 19 aims temporarily to ease the benefit-in-kind tax treatment for plug-in hybrid electric vehicles. We understand the intention behind this legislative change. We want people to take up low-emission electric vehicles, and the taxation system is an effective tool to encourage that. We are also conscious that stricter emission tests will be implemented over time. That could push plug-in hybrid emission vehicles into higher emission bands, and more tax will therefore be paid on them in the future. The knock-on effects on electric car manufacturers and the environment could be stark.
Clause 19 is part of the same package that endangers jobs in the automotive manufacturing industry, which will lead to a loss of about £500 million in VAT and vehicle excise duty receipts. Automotive News has reported on the progress of electrified vehicle registrations: it says that in October 2025 PHEV registrations rose by 27.2%, and that electrified vehicles represented the majority of new car registrations, at 50.8%. The SMMT says that in 2025 the new car market reached 2 million units for the first time since 2019. It predicts that the removal of ECOS could undo the progress that electrified vehicles, including PHEVs, have achieved by denying workers affordable access to new and increasingly zero emission vehicles.
CBVC Vehicle Management has said that these measures continue to make PHEVs look attractive in the short term, but the chief executive, Mike Manners, has advised people considering a PHEV to look at the benefit-in-kind tax implications and avoid their lease running into the tax year 2028-29. The benefit-in-kind easement is temporary until 6 April 2028.
Anthony Cox of RSM UK says that manufacturers do not expect that the reforms will push people into using electric cars. He states that employees of manufacturers and retailers could instead seek out older or less clean cars to purchase, outside any employer or employee management arrangements.
The point is that there are unintended consequences to the clauses. Although we will not oppose them, we want the Minister to take into account the fact that the Government may not get what they want out of them.
Mr Reynolds
The Liberal Democrats share the concerns of the SMMT. Given that the sector is struggling with severe uncompetitiveness across the country, anything that undoes the progress that the Government are seeking to make would not be welcome. Nissan tells us that its plant in Sunderland is the most expensive for electricity of any of its plants worldwide. That is not good for British business or for British car manufacturers. The SMMT worries that these proposals will not be good for British car manufacturers either.
On clause 18, we would like some draft guidance on proposed new section 116A to be published this year and consulted on. A number of the definitions could be clarified to give the industry some certainty about what will and will not be included.
Lucy Rigby
On the points made by the shadow Minister, the hon. Member for Wyre Forest, we have listened very carefully indeed to the sector’s concerns and have responded. That is exactly why we are delaying the proposed changes to employee car ownership schemes until 2030. That is the reasoning behind the delay.
The Government are firmly committed to our modern industrial strategy, and specifically to the automotive sector. That is why in the past year we have committed £2.5 billion to automotive investment and research and development, increased flexibilities in the ZEV mandate, funded the roll-out of more charge points and announced plans to cut electricity costs for energy-intensive manufacturers. Various points have been made about the tax incentives, but underpinning all of them is our commitment to support the automotive industry in a challenging fiscal environment.
We will publish in due course the guidance that the hon. Member for Maidenhead requests.
Question put and agreed to.
Clause 17 accordingly ordered to stand part of the Bill.
Clauses 18 and 19 ordered to stand part of the Bill.
Clause 20
Employment income: miscellaneous exemptions
Question proposed, That the clause stand part of the Bill.
Lucy Rigby
Clauses 20 to 23 relate to other employment income. Clause 20 will simplify the rules on common workplace health and equipment costs, reducing administrative burdens for employers and giving greater clarity to the tax treatment of these costs. It will exempt reimbursements for accommodations, supplies or services used in performing employment duties, such as homeworking equipment; it will extend the existing exemptions for eye tests and corrective appliances to cover reimbursements; and it will introduce a new exemption for both the direct provision and the reimbursement of flu vaccinations. Uptake will depend on employer practice, but these changes will make the rules simpler and fairer for those affected. The Exchequer impact is negligible, but this change will allow employers to support staff without having to handle the sourcing and provision of minor items themselves. This will reduce time and resource costs.
Clause 21 relates to homeworking expenses. It will remove the process by which employees can claim an income tax deduction from HMRC if they have incurred additional household costs when required to work from home. The changes introduced by the clause aim to address concerns around non-compliance and to ensure fairness across the tax system.
Clause 22 will introduce changes that confirm the income tax treatment of payments made by zero-hour or similar limited-hour workers for a cancelled, moved or curtailed shift. This measure will put the tax treatment of such a shift beyond doubt. These tax changes will have an impact only on a small subset of workers, as the vast majority of such payments are taxable under existing legislation. The measure confirms that payments received in the event that a shift is altered at short notice are taxable in all scenarios, including in relation to agency workers and workers employed under umbrella companies.
Clause 23 puts beyond doubt the answer to whether earnings for duties not performed should be treated as UK earnings or overseas earnings for non-UK residents. The clause will establish a general principle to determine the tax treatment of earnings that relate to duties that have not been performed. It will also make a consequential amendment to foreign employment relief, commonly known as overseas workday relief, to ensure that this clarification also applies to UK residents who claim it. I commend clauses 20 to 23 to the Committee.
Mark Garnier
Clause 20 will introduce specific exemptions for minor expenses incurred by an employee on behalf of their employer. The Opposition particularly welcome subsections (3) to (6). As the Institute of Chartered Accountants in England and Wales says, it is a positive step that focuses on prevention rather than cures. It is also about the trade-off between tax relief and reduced future healthcare spending.
As the Association of Taxation Technicians has asked, will the Minister consider whether the covid-19 vaccination could be included in this provision? The Government’s explanatory notes state that corresponding changes to NICs for influenza vaccines and homeworking equipment will be made through separate regulations. Will the Minister provide more detail on when we can expect those regulations to be introduced?
On clause 21, the Government’s policy paper suggests that there will be no direct impact on business. However, there may be an indirect impact, as employers feel pressured to change their policies on reimbursement. As the Chartered Institute of Taxation points out:
“This creates an uneven situation in which two employees with identical working arrangements and costs are treated differently for tax purposes solely on the basis of their employer’s reimbursement policy.”
It also seems to follow our party’s scepticism about solely remote working. During the passage of the Employment Rights Act 2025, the Government said repeatedly that the right to work from home boosts productivity. Clause 21 seems to go against that by making it more difficult to work from home. It also seems to be a further attack on private sector employees, despite the fact that in 2024 HMRC spent £82 million on remote working devices for its workers, while the Home Office spent £53 million. Is this another example of the Government hitting the private sector while protecting the public sector?
Clauses 22 and 23 confirm that payments received in Great Britain for cancelled, moved or curtailed shifts are subject to income tax. In the explanatory notes, the Government state that this would also allow for
“the introduction of regulations to ensure that payments are also subject to National Insurance contributions”.
We think it would help to provide fairness in the tax system to support the clarity that the clause provides, so can the Minister confirm when the Government will seek to introduce those specific changes?
More generally, I want to make a point that my hon. Friend the Member for Mid Buckinghamshire (Greg Smith) made on the Employment Rights Bill Committee. While the clause provides fairness in the system between employees, the Government are still providing little support for businesses if they have to cancel, move or curtail shifts in circumstances that are unexpected or out of their control. Will the Minister commit to working with her colleagues in the Department for Business and Trade to assess how they can better support businesses when such situations arise?
Oliver Ryan (Burnley) (Lab/Co-op)
As ever, Sir Roger, it is a pleasure to make a short contribution while you are in the Chair. On clause 20, I will not echo the point that has just been made, but the Minister will have seen the written evidence submitted by the Association of Taxation Technicians, which discussed potentially widening the new initiative of including flu vaccinations in expenditure deductible from employment income, so that it also includes covid vaccinations. Has the Minister given that any thought?
On clause 22, it is a pleasure to see the Employment Rights Act being enacted and to address shifts being missed by people on zero-hours contracts, such as those in my constituency. It probably takes us into a wider debate that the Opposition have raised about having oral evidence sessions. It is clear from the evidence pack that the Chartered Institute of Taxation, the Association of Taxation Technicians and other taxation professionals have quite a lot of comments to make. If submissions on the clause were opened to my constituents, I am sure that there would be mass evidence from the public saying how much of a good thing it is. Does the Minister have any comments on that?
Mr Reynolds
Clause 21 will increase unfairness. Those required to work from home are currently divided into two groups: one group who receive reimbursement for costs without incurring income tax but are not reimbursed by their employer, and another group who take that via a taxation route. This measure will exacerbate that split and create a greater divide between the two. Where two employees hold exactly the same position or role, but in different companies, one may receive the payment and the other may not. The figures suggest that about 300,000 people will be affected by this measure. Can the Minister comment on how we can be in a position whereby two employees in the same job, but with different employers, are treated differently for tax purposes?
Lucy Rigby
The shadow Minister, the hon. Member for Wyre Forest, and my hon. Friend the Member for Burnley referred to vaccinations and asked about the extent to which covid vaccinations might be part of the scheme. We are limiting relief to flu vaccinations because employers have consistently highlighted them as a common relief in relation to which reimbursement would be helpful. Flu vaccinations are low in cost, seasonal and widely offered by employers as part of routine health support to employees. By contrast, other vaccinations vary significantly in cost and frequency. Importantly, however, many of them can be accessed free through the NHS.
As you might expect, Sir Roger, I completely reject the shadow Minister’s assertion that any of these measures is an attack on private sector workers. Not at all—far from it.
It is important to be clear that clause 21 will not impact employers’ existing ability to reimburse employees for costs relating to home working, where eligible, without deducting income tax and national insurance contributions.
The question of national insurance was raised in relation to clause 22 on payments for cancelled shifts. These payments will be subject to national insurance. My hon. Friend the Member for Burnley was entirely right to refer to the Employment Rights Act and its significance. I think I am right in saying that a question was also raised about the taxable nature of payments for cancelled shifts. I can confirm that payments received for short-notice shift cancellations or changes are regarded as earnings. They are paid in lieu of the payment that workers would have received had they completed the shift, and as such they are taxable in all relevant scenarios, irrespective of the arrangement or the employment structure.
Question put and agreed to.
Clause 20 accordingly ordered to stand part of the Bill.
Clauses 21 to 23 ordered to stand part of the Bill.
Clause 24
Umbrella companies
Lucy Rigby
I beg to move amendment 5, in clause 24, page 28, line 25, at end insert—
“61Z2 Disclosures to liable persons
(1) Subsection (2) applies where an officer of Revenue and Customs considers that a person is, or may be, jointly and severally liable to pay an amount as a result of this Chapter.
(2) The officer may at any time disclose to the person such information as the officer considers appropriate (whether or not such a disclosure would otherwise be permitted under section 18(2)(a) of CRCA 2005 or any other enactment) for the purposes of informing the person about that liability (‘the joint liability’) including—
(a) the identity of any person who is an umbrella company, a purported umbrella company or the worker in relation to the arrangements to which the joint liability relates, and
(b) information about the nature and extent of the liability of an umbrella company or a purported umbrella company that (by virtue of this Chapter) results, or may result, in the joint liability.
(3) Information disclosed in reliance on subsection (2) may not be further disclosed without the consent of the Commissioners for His Majesty’s Revenue and Customs (which may be general or specific).
(4) Where a person contravenes subsection (3) by disclosing information relating to a person whose identity—
(a) is specified in the disclosure, or
(b) can be deduced from it,
section 19 of CRCA 2005 (offence of wrongful disclosure) applies in relation to the disclosure as it applies in relation to a disclosure in contravention of section 20(9) of that Act.
(5) In this section ‘CRCA 2005’ means the Commissioners for Revenue and Customs Act 2005.”
This amendment permits disclosures (whether or not permitted as a result of provision elsewhere) to persons who may be jointly and severally liable as a result of new Chapter 11 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003.
The Chair
With this it will be convenient to discuss the following:
Government amendments 6 to 8.
Clause stand part.
Lucy Rigby
Clause 24 will make changes to ensure that recruitment agencies are responsible for accounting for pay-as-you-earn on payments made to workers that are supplied via umbrella companies. Many umbrella companies operate diligently and support their employees, but a significant number are used to facilitate non-compliance, including tax avoidance and fraud. Clause 24 is intended to encourage increased due diligence among businesses that choose to use umbrella companies to engage workers. It will do so by introducing joint and several liability for the PAYE taxes that umbrella companies are required to remit to HMRC.
Government amendments 5 to 8 will ensure that the legislation works as intended by making a small technical change. This will ensure that HMRC is able to recover underpayments of tax from businesses that are within scope of the new rules because they purport to be umbrella companies, in the same manner that underpayments will be recovered from the other businesses that are within scope of the new rules. Amendment 5 will ensure that HMRC is able to keep taxpayers informed about its investigations concerning sums to which they are jointly and severally liable. That will help taxpayers to take action to mitigate their exposure to unpaid liabilities.
I commend clause 24, together with Government amendments 5 to 8, to the Committee.
Mark Garnier
Back in 2023, the Conservative Government opened a consultation on how to tackle non-compliance in the umbrella company market, because there was evidence of widespread non-compliance that deprived workers of their employment rights, distorted competition in the labour market and led to a significant tax loss to the Exchequer. In the 2024 autumn Budget, the Chancellor announced that she would follow up the consultation, hence this clause.
The Government state in their explanatory notes that the clause seeks
“to drive behavioural change among businesses that use umbrella companies in the supply of workers by giving them a financial stake in the compliance of the umbrella companies that they use.”
I think there is broad agreement about the need for this measure in tackling tax non-compliance in the umbrella company market. However, the Chartered Institute of Taxation has raised two particular issues, and I would be grateful for the Minister’s comments on them.
First, there seems to be an absence of safeguards. Currently, HMRC can transfer liability to the agency regardless of its circumstances. When an agency has done all it can to ensure the integrity of the supply chain, but has been the victim of fraud by the umbrella company, we think there should be safeguards in place to prevent the transfer of debts.
Secondly, there is some concern that the definition of “purported umbrella company” is too wide. The clause defines such a company so as to include any entity supplying an individual with services where that individual has a material interest in the entity. That means that, for instance, personal service company arrangements could fall within the definition. Is it the Government’s intention to include personal service company arrangements within the definition of a purported umbrella company? I should declare an interest: I have a personal service company. Can the Minister expand on what discussions on the clause have taken place with industry organisations such as the Freelancer and Contractor Services Association, which provides accreditation for many umbrella companies?
Lucy Rigby
On the shadow Minister’s final question, I am afraid that I do not know what discussions have taken place with the organisation he referred to, but I can write to him and let him know. Ultimately, whether to use an umbrella company when supplying a worker to a client is a commercial decision for agencies. That commercial decision has been incentivised not just by the ability to outsource administration to umbrella companies, but by the shielding from exposure to tax risk that that model provides. It is good to hear the shadow Minister welcome the impetus behind the changes in that regard.
The current legal framework provides few incentives for agencies to ensure that the umbrella companies they use are compliant. We think it—and it sounds like the shadow Minister agrees—that that has contributed to the proliferation of non-compliance in the umbrella company market. It is important that agencies take steps to ensure that their labour supply chains are compliant, and some agencies already do. HMRC has published guidance on how to undertake checks.
The shadow Minister asked about which agencies may be treated as umbrella companies, given the breadth, or otherwise, of the definition. We are, of course, aware that some agencies engage workers as employees, and where that is the case, and they meet the other conditions of the legislation, they will be treated in the same way as umbrella companies and this measure will apply. Employment is a fundamental characteristic of how most umbrella company workers are engaged and is the key aspect in determining when this legislation will apply. I think that will be the key legal test.
Amendment 5 agreed to.
Amendments made: 6, in clause 24, page 29, line 31, leave out
“a ‘relevant party’ for the purposes”
and insert
“jointly and severally liable to pay an amount as a result”.
This amendment makes sure that HMRC can use their power to make determinations about PAYE income in relation to persons who are jointly and severally liable to amounts of PAYE income under new section 61Z1 of the Income Tax (Earnings and Pensions) Act 2003.
Amendment 7, in clause 24, page 29, line 32, leave out from “ITEPA” to end of line 33 and insert “(umbrella companies)—”.
This amendment is consequential on Amendment 6.
Amendment 8, in clause 24, page 29, line 34, leave out from first “to” to “as” in line 35 and insert “that amount”.—(Lucy Rigby.)
This amendment is consequential on Amendment 6.
Clause 24, as amended, ordered to stand part of the Bill.
Clause 25
Loan charge settlement scheme
Lucy Rigby
I beg to move amendment 9, in clause 25, page 30, line 21, at end insert “, or
(ii) a director or shadow director of such a person.”
This amendment expands the persons to whom the Commissioners are not required to make a loan charge settlement offer so as to include directors and shadow directors of a promoter or introducer.
The Chair
With this it will be convenient to discuss the following:
Government amendment 10.
Clause stand part.
Clause 26 stand part.
Government amendment 11.
Clause 27 stand part.
New clause 25—Report on fairness and scope of the loan charge settlement opportunity—
“(1) HM Revenue and Customs must, within 12 months of the passing of this Act, lay before the House of Commons a report on the operation and impact of any loan charge settlement opportunity established under section 25 of this Act.
(2) The report under subsection (1) must in particular consider—
(a) whether the terms of the settlement opportunity are available to individuals who have previously settled or fully paid liabilities arising from disguised remuneration loan arrangements,
(b) whether the terms of the settlement opportunity are available to individuals with disguised remuneration loan arrangements falling outside the loan charge years specified in Part 7A of the Income Tax (Earnings and Pensions) Act 2003,
(c) the extent to which any differences in treatment between these groups and those eligible for the settlement opportunity affect perceptions of fairness, and
(d) the potential impact of such perceptions on future tax compliance and trust in the tax system.
(3) The report must include—
(a) an assessment of whether extending more favourable settlement terms to the groups described in subsection (2)(a) and (b) would improve fairness and consistency, and
(b) any recommendations HMRC consider appropriate in light of that assessment.”
This new clause would require HMRC to report on the operation and fairness of the new loan charge settlement opportunity. It would consider whether more favourable terms are, or should be, available to those who have already settled or fully paid liabilities, and to those with arrangements outside the loan charge years.
New clause 26—Report on the treatment of disguised remuneration arrangements outside the loan charge years—
“(1) HM Revenue and Customs must lay before the House of Commons a report on the treatment, under any loan charge settlement opportunity established under section 25 of this Act, of disguised remuneration arrangements falling outside the 2010/11 to 2018/19 tax years.
(2) The report under subsection (1) must in particular consider—
(a) the extent to which disguised remuneration income from tax years outside the loan charge period is excluded from the settlement terms,
(b) the number of taxpayers with disguised remuneration arrangements which HMRC consider to fall outside the loan charge but within Part 7A of the Income Tax (Earnings and Pensions) Act 2003,
(c) the interaction between settlements pursued in respect of such arrangements and those relating to the loan charge, and
(d) whether excluding factually linked arrangements from the settlement opportunity may prevent taxpayers achieving a full and final resolution of their tax affairs.
(3) The report must include—
(a) an assessment of whether including disguised remuneration arrangements that are factually linked to the loan charge period (whether arising before, during or after that period) would improve the effectiveness, fairness and finality of the settlement process, and
(b) any recommendations HMRC considers appropriate.”
This new clause would require HMRC to report on the exclusion from the new loan charge settlement opportunity of disguised remuneration arrangements outside the loan charge years, including arrangements which HMRC considers to fall outside the loan charge but within the disguised remuneration rules.
Lucy Rigby
Clauses 25 to 27 provide for the Government to create a settlement opportunity in line with their response to the independent review of the loan charge, and to encourage those who have not yet settled with HMRC to come forward and do so.
Clause 25 sets out some of the main features of the scheme, including how the new settlement amount will be calculated. Clause 26 will ensure that inheritance tax is not charged as part of any settlement where it relates to disguised remuneration arrangements in scope of the loan charge. Clause 27 makes supplementary provision for the settlement scheme to ensure that it can operate as intended.
In some places, the Government have gone further than the review recommended. In addition to removing late payment interest and inheritance tax, and allowing for generous tax deductions to represent amounts assumed to have been paid to promoters, the Government will also write off the first £5,000 of each individual’s liability. Because of these changes, around 30% of people within scope of the review could see their liabilities removed entirely, while most other individuals will see their liabilities reduced by at least half.
Turning to Government amendments 9 to 11, HMRC is aware of a number of promoters who have made use of their own disguised remuneration schemes and would be within scope of the settlement opportunity. I am very clear that it would be wrong for those individuals to be able to access the generous settlement terms on offer rather than paying every penny that they owe. Clause 25 makes provision for the exclusion of tax avoidance promoters from the settlement opportunity. Amendments 9 and 10 tighten those provisions to ensure that HMRC is able to prevent the controlling minds behind promoter companies from inappropriately accessing the settlement opportunity, in line with the Government’s announcements at the Budget. Amendments 9 to 11 also clarify that where an employer still exists, it can enter into a settlement on behalf of its employees who used disguised remuneration schemes.
New clauses 25 and 26, which would require HMRC to publish a report on the operation and scope of the loan charge settlement opportunity and a report on the treatment of disguised remuneration arrangements falling outside the scope of the loan charge, are unnecessary. The Government published a comprehensive response to the review, setting out our position, at the Budget. That outlined the decisions the Government made to help draw this matter to a close for those impacted, and explained why the scope of the review had been set as it had. It explained that the settlement opportunity will apply to disguised remuneration use between December 2010 and April 2019, because that is the period to which the loan charge applies. While people who used tax avoidance schemes outside that period will not be able to access the scheme, HMRC will work sensitively and pragmatically to help people to resolve their cases, including by taking account of people’s means and offering generous payment terms where appropriate.
I am sure that everyone will be aware that the loan charge is already subject to significant parliamentary scrutiny. HMRC officials and Treasury Ministers routinely provide updates on their work to the Treasury Committee and the Public Accounts Committee, and the Treasury Committee asked the HMRC permanent secretary about this topic just last month. I therefore urge the hon. Member for Maidenhead not to move his new clauses, and commend clauses 25 to 27, and Government amendments 9 to 11, to the Committee.
Mark Garnier
The Conservatives welcome the independent review and the thrust of clause 25. If we were to have a criticism, it would be to do with fairness, on which we had concerns shared with us by the Low Incomes Tax Reform Group. A key objective of the McCann review, which the Minister referred to and which was set up by the Government, was to ensure fairness for all taxpayers. However, by not extending the more generous settlement opportunity to those who have already fully settled and/or paid the loan charge, the provision arguably does not achieve fairness for all taxpayers. It will effectively put those who chose not to comply with their tax obligations in a better position than those who did. That could create perverse incentives, harm future tax compliance and damage trust in the tax system. Could the Minister provide a little more detail as to why the Government have excluded those who have already settled their claims?
Mr Reynolds
New clause 25, which I hope to press to a Division, would require the Government to undertake a report to consider a number of issues pertinent to the loan charge settlement scheme outlined in the Bill. The Liberal Democrats are clear that the settlement opportunity should be fair to everybody affected, including those who have already paid or settled, so as to ensure that people outside the loan charge years are not treated differently without clear reason. Unequal treatment can create the perception of unfairness, even if the policy is technically and soundly legal. It seems to us that if perceived unfairness in the system could be reduced, we should strive to do so, in order to protect the public’s trust in HMRC and the wider tax system. Is it right that someone who has already settled should be ineligible for the loan charge settlement? Surely, that tells people that in future they should just hold off and not settle or come to agreement, because that will leave them in a better position.
James Wild
We will look sympathetically on the hon. Gentleman’s new clauses if he chooses to press them to a vote. I have constituents who were heavily pressured by HMRC and ended up settling, which left them at a considerable financial loss, so I share his concern that those people, who were effectively bullied by HMRC, will now not get the same support as people who held out.
Mr Reynolds
The hon. Gentleman is completely correct. The place we are in now is that someone who settled and came to an agreement with HMRC is excluded from the opportunity laid out in the Bill. That means that when something like this happens again—and we all know that it will—those individuals will not want to come to an agreement with HMRC. They will know that if they hold off, a better solution and a better agreement will come through.
The report required by new clause 25 would outline a range of things, including whether the loan charge settlement opportunity is available to individuals who have settled, which is really important and something that we need to ensure; whether the settlement opportunity applies to individuals with disguised remuneration outside the loan charge years; and the extent of the impact of differential treatment between those two groups and those who are eligible. The extent of the impact is the most important thing, because for those individuals it will be severe. The report would also include an assessment of whether extending more favourable settlement terms to excluded groups would improve fairness and consistency with HMRC overall.
Lucy Rigby
The purpose of the review, as I think is well known, was to bring the matter to a close for those who had not yet settled and paid their loan charge liability to HMRC. That by its very nature meant focusing on open cases and outstanding liabilities. The Liberal Democrat spokesman, the hon. Member for Maidenhead, referred to something like this happening again. I think we would all agree that we hope it does not. However, we would probably also agree that it is crucial that any resolution to this issue is fair to the wider tax-paying population that has never avoided tax.
The Government believe that this settlement opportunity is the most pragmatic solution to draw a line under the issue for as many individuals with outstanding liabilities as possible. The settlement opportunity being provided is substantially more generous than any opportunity HMRC has previously offered and will substantially reduce the outstanding liabilities of people who have yet to settle with HMRC, particularly those with the lowest liabilities. Most individuals, as I said, could see reductions of at least 50% in their outstanding loan charge liabilities. We estimate that 30% of individuals could have their liabilities written off entirely.
James Wild
In her opening remarks, the Minister referred to promoters of disguised remuneration schemes not being eligible for this settlement scheme, which I welcome. Perhaps she could update the Committee on whether HMRC is proactively pursuing such individuals, who caused such distress to my constituents and, of course, to people across the country who were sold schemes, advised that they were legitimate and had been agreed with HMRC, and then discovered they were not and have lost their homes and their life savings as a result.
Lucy Rigby
I managed to give way just before the end of my speech. The shadow Minister raises a good question and a fair point. Through the new measures and existing rules, HMRC will have powers that can result in criminal prosecution of promoters of tax avoidance, including the new universal stop regulation proposal, which will ban the promotion of the most fanciful schemes outright and allow the HMRC commissioners to ban by regulation the promotion of other arrangements that HMRC thinks will not work. We will consult on further measures to target promoters in early 2026—indeed, it is 2026 already, so the shadow Minister may assume that that will happen soon.
Amendment 9 agreed to.
Amendment made: 10, in clause 25, page 32, line 12, at end insert—
“‘shadow director’ has the meaning given by section 251 of the Companies Act 2006.”—(Lucy Rigby.)
This amendment inserts a definition for the purpose of Amendment 9.
Clause 25, as amended, ordered to stand part of the Bill.
Clause 26 ordered to stand part of the Bill.
Clause 27
Loan charge settlement scheme: supplementary
Amendment made: 11, in clause 27, page 33, line 15, at end insert—
“(da) adapting provision made under section 25(6), in cases where a settlement offer is made to a person who is not an individual, about the calculation of settlement amounts (including provision for the calculation to be different to what is required by section 25(6));”.—(Lucy Rigby.)
This amendment clarifies that the loan charge settlement scheme can provide for the calculation of the settlement amount to be adapted where a settlement offer is made to a person who is not an individual.
Clause 27, as amended, ordered to stand part of the Bill.
The Chair
Mr Reynolds, I heard you say you wanted to press your new clauses to a vote. New clauses, for general consumption, are always taken at the end of the Bill, so many weeks from now you will get your chance to have your vote.
Clause 28
Main rate of writing-down allowances for expenditure on plant or machinery
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clause 29 stand part.
New clause 2—Report on the impact of section 28—
“(1) The Chancellor of the Exchequer must, within six months of this Act being passed, lay before the House of Commons a report on the impact of implementation of the provisions of section 28 on—
(a) business investment levels,
(b) capital-intensive sector employment,
(c) the manufacturing sector,
(d) small and medium-sized enterprises, and
(e) the public finances.”
This new clause would require the Chancellor of the Exchequer to report to the House on the impact of section 28 on business investment, employment in capital-intensive sectors, the manufacturing sector, small and medium-sized enterprises and the public finances.
Lucy Rigby
Clause 28 will reduce the main rate writing-down allowance for corporation tax and income tax, and clause 29 introduces a new first-year allowance available for expenditure on plant and machinery. As I am sure all hon. Members are aware, capital allowances allow businesses to write off the costs of capital assets, such as plant or machinery, against their taxable income. The UK continues to offer one of the most generous capital allowances systems globally and ranks top among OECD countries for plant and machinery capital allowances.
Clause 28 will reduce the main rate writing-down allowance from 18% to 14%, starting on 1 April 2026 for corporation tax and 6 April 2026 for income tax. That allows the Government to fund a new first-year allowance while also fairly raising revenue to protect the public finances. Clause 29 will introduce the new 40% first-year allowance, which will support future investment. The new allowance is available for expenditure on plant and machinery, including assets bought for leasing and assets bought by unincorporated businesses, from 1 January 2026.
The changes made by clauses 28 and 29 will raise approximately £1.5 billion per year by the end of the scorecard. The changes are UK-wide and will impact businesses with pools of historic main rate expenditure, which predate the introduction of the super-deduction or full expensing regimes for companies, as well as historic expenditure or future main rate expenditure that does not qualify for first-year allowances, or where first-year allowances were not claimed. We have heard the calls to expand full expensing to more assets and businesses. Although the fiscal climate limits what we can do now, the new first-year allowance moves us closer to that goal in a responsible way.
New clause 2 seeks to mandate reporting the impacts of clause 28 to the House. The Government have published documents much loved by the shadow Minister, the hon. Member for North West Norfolk—tax information and impact notes—setting out the impact of the reduction to main rate writing-down allowances, alongside the introduction of the new 40% first-year allowance. I therefore reject new clause 2 and commend clauses 28 and 29 to the Committee.
James Wild
I want to get on the record that I do not have a problem with TIINs, but they serve a different purpose from reviewing legislation after the event. I would not want any Treasury officials to feel that the Opposition do not value TIINs.
I will speak to clauses 28 and 29 as well as new clause 2, which is tabled in my name. Capital allowances are one of the primary mechanisms through which our tax system supports business investment. They enable firms to deduct the cost of purchasing plant and machinery from taxable profits, thereby reducing their tax liability and helping them to invest and grow, which we all support. The annual investment allowance is perhaps the most straightforward example. It allows businesses to deduct the full cost of most plant and machinery up to £1 million annually, in the same the year that the expenditure occurs.
Beyond that, there are the first-year allowances with no annual cap. The most generous of those is full expensing, which the Minister referred to, which provides a 100% deduction for qualifying main rate assets and a 50% allowance for certain special rate assets. Those measures were introduced by the previous Conservative Government in order to stimulate faster investment and drive up what have been, I think it is fair to say, historically low levels of business investment throughout all parties’ periods in government. I think that we are all committed to try and address that.
Where businesses cannot or choose not to utilise those more generous allowances, they rely on writing-down allowances. They spread tax relief over several years by permitting a set percentage of the remaining pool balance to be written off annually, with assets allocated to either a main rate or special rate pool, depending on their classification.
Clause 28 reduces the main rate from 18% to 14% a year, while the special rate remains at 6%. The relevant date is 1 April 2026 for corporation tax purposes, and 6 April 2026 for income tax. For periods straddling that change, a hybrid rate will apply. New clause 2 would require the Chancellor to produce a report that examines the impact of those reductions on business investment levels, capital investment sector employment, the manufacturing sector, small and medium-sized enterprises and public finances.
The 2025 Budget policy costing document presents that as a part of capital allowance reform, but the reduction in the main writing-down rate will alter the cash flow position of capital-intensive businesses, slowing the rate at which they can recover investment costs through tax relief. Businesses with substantial brought-forward main pool balances will see their tax relief decelerate, with corresponding impacts on cash flow and the overall tax benefit. For companies planning significant investment, timing has now become more important. This is yet another structural tax increase on businesses with large asset bases, which will now recover their investments more slowly.
Make UK has described this Budget as
“a case of two steps forward one step back for manufacturers.”
The 4% in reduction in the writing-down allowance is undeniably bad news for business. It is little wonder that polling by the Institute of Directors reveals that four in five business leaders view this Budget negatively, and I think that those findings were replicated across the Federation of Small Businesses, the CBI and many other business organisations. The delayed recovery of capital costs will constrain reinvestment in modernisation and automation, precisely when UK manufacturers are already facing strong headwinds, not least from the very high energy costs that they face in this country. The reduction from 18% to 14% will diminish the speed at which businesses can recover these costs. Has the Treasury assessed the impact on business investment intentions, particularly for small and medium-sized enterprises in manufacturing and logistics? If not, I am sure that the Minister looks forward to supporting new clause 2.
Clause 29 is an attempt to balance the changes made in clause 28. It introduces a new 40% first-year allowance from 1 January 2026 for new, unused main rate plant and machinery. The new allowance expands relief to unincorporated businesses and firms that buy assets to lease out, which do not qualify for full expensing or the 50% special rate allowance once they go over the £1 million annual investment allowance. The explanatory notes highlight that this new allowance represents an expansion to include leasing, which we welcome—those activities that have traditionally been excluded from such reliefs. The allowance is not available for special rate expenditure, second-hand or used machinery, expenditure under disqualifying regimes or general exclusions.
We support the expansion set out in this clause. While these measures may have good aims, introducing an additional rate adds some complexity to the system. There is also the length of the Finance Bill that we are considering—536 pages of dense text—and that we expect businesses and individuals across the country to comply with, else HMRC will come after them. I urge the Government to monitor closely the impact on business investment and to look at options for a more streamlined or neutral capital allowances structure in future. What steps are being taken to tell businesses about these new allowances and freedoms they have to invest in leased assets—for example, by working with business organisations to get the word out? Opposition Members will certainly do that with businesses in our constituencies.
The new allowance will provide some up-front support for qualifying new investment, partly offsetting the impact of reducing the main writing-down rate to 14%. Once again, the Government are giving with one hand and taking with the other. The uplift will be of use for unincorporated and leasing businesses, but for most other businesses with historical or non-qualifying assets, there is no uplift at all. They simply face a slower rate of relief, going down to 14%, stretching allowances over a longer period and affecting their cash flow.
The Minister referred to Office for Budget Responsibility forecasts that suggest these combined measures will cost businesses more than £1 billion in 2026–27, rising to around £1.5 billion a year thereafter. That is a significant burden at a time when companies are grappling with weak investment and, to put it bluntly, the higher costs imposed in the first Budget. The £20 billion jobs tax has had a big impact, as we saw in the data earlier this week and as we see in the number of graduates who are struggling to find jobs.
As I say, the inclusion of leasing is welcome, but we do think there is benefit in reviewing those measures after the event and coming back to Parliament to explain what has happened.
Lucy Rigby
The shadow Minister referred to the new 40% first-year allowance, which is bringing forward relief for the leasing sector and unincorporated businesses, which have historically been carved out of the first-year allowance. In doing so, it allows for immediate relief on a significant amount of their investment from their corporation tax or income tax bill in the year in which they make that investment.
As the Chancellor has repeatedly made clear, the fiscal environment is challenging. We cannot make unfunded commitments on tax. The shadow Minister referred earlier to being an adviser to the previous Government, which is not, I suspect, to suggest that he had a role in creating the fiscal environment that we unfortunately inherited from the previous Government. We have heard the calls to expand full expensing to more assets and businesses. When the fiscal climate allows us to do so, we will look into that.
Oliver Ryan
The Minister makes a very good point about the expansion of exemptions and the fact that the Government are minded to look at this in future Budgets. I welcome clause 29, which talks about the leasing of plants and machinery and affects many businesses in my constituency. I think it will have a genuine impact and, much as the Opposition might say, “This is a very good thing,” and welcome it, I hope they will vote with us today. However, the question has to be asked why, after 14 years in government, they did not bring this in. For various businesses in my constituency that lease large equipment, this would have made a massive difference. Unfortunately, it is being brought in by us later in the day because it was not done by the Conservatives.
Lucy Rigby
My hon. Friend makes a very good point.
The shadow Minister asked about working with businesses to get the word out. We have been working closely with industry on the expansion to leasing and we are consulting businesses on guidance to ensure that understanding of the new rules is as full as possible. The TIINs beloved of the shadow Minister, we now hear, make it clear that the OBR’s “Economic and fiscal outlook” sets out that the measure is not expected to have significant macroeconomic impacts, and for future investment the present value and cost of capital for businesses that claim the new first-year allowance remains broadly the same following these changes. For all those reasons, I maintain the view that new clause 2 should be rejected.
Question put and agreed to.
Clause 28 accordingly ordered to stand part of the Bill.
Clause 29 ordered to stand part of the Bill.
The Chair
As an old hand, Mr Wild will know that a decision on new clause 2 will come at the end, if he wishes to press it to a Division.
Clause 30
Expenditure on zero-emission cars and electric vehicle charging points
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss new clause 3—Review of the impact of section 30—
“(1) The Chancellor of the Exchequer must, within six months of this Act being passed, lay before the House of Commons a report on the impact of the expiry in 2027 of the 100% allowance made under section 30.
(2) The report under subsection (1) must assess the case for long-term capital allowance support for zero-emission cars and electric vehicle charging points to maintain UK competitiveness in green technology.”
This new clause would require the Chancellor of the Exchequer to review and report on the impact of the expiry in 2027 of the 100% allowance made under section 30, including the case for ongoing capital allowance support for zero-emission cars and electric vehicle charging points.
Lucy Rigby
Clause 30 will extend the 100% first-year allowance for qualifying expenditure on zero emission cars and plant or machinery for electric vehicle charge points by a further year to April 2027. More specifically, it will extend the availability of these capital allowances to 31 March 2027 for CT purposes and 5 April 2027 for income tax purposes, ensuring that investments in zero emission cars and charge point infrastructure continue to receive the most generous capital allowance treatment.
New clause 3 would require the Chancellor to review and report on the impact of the expiry in 2027 of the 100% first-year allowances made under clause 30, including the case for ongoing capital allowance support for zero emission cars and electric vehicle charging points. Alongside the 2025 Budget, in which the extension was announced, a policy costings document and a TIIN were published that set out the expected economic, business and other impacts of the changes, including impacts on incentivising businesses to purchase zero emission vehicles. Those documents are of course available online.
The Government annually review the rates and thresholds of taxes and reliefs to ensure that they are appropriate and reflect the current state of the economy. For that reason, new clause 3 is unnecessary. I commend clause 30 to the Committee, and ask that new clause 3 be rejected.
James Wild
As we have heard, clause 30 will extend the 100% first-year allowance for expenditure on zero emission cars, including EVs, and EV charging points. As the Minister said, the extension runs for a year to March 2027 for corporation tax and April 2027 for income tax purposes. Our new clause, consistent with other amendments that we have tabled, would simply ask the Chancellor to come back and report to Parliament, and to the public, on the impact of her measures. I do not really understand this reluctance to understand the actual impact of the measures. As part of the Government’s broader regulatory reform approach, they seem keen on post-implementation reviews, but the Treasury holds out alone against its homework being scored, it would seem. We want to consider whether long-term support should continue to be provided to maintain UK competitiveness in green technology. It is, in essence, a call for evidence that could make a difference to business confidence and investment.
The allowance was first introduced in 2002 for low emission cars, and the threshold was tightened over time, reaching zero emissions from April 2021. The extension continues that policy, but only for a year, and the Government’s own costings suggest that the extension will cost £145 million. Businesses planning multi-year fleet transitions and charging infrastructure investments face repeated cliff edges. Each year, a one-year window does not help a company planning to electrify its fleet in two years’ time; it simply rewards those who are able to accelerate the investment within the next 12 months.
Does the Minister recognise that it creates a stop-start approach that could discourage investment, undermine industry confidence and, ultimately, slow the UK’s transition to clean, green technology? That is odd when, in many ways, the Government are accelerating full throttle towards 2030 electrification across the grid. Members may have pylons and other pieces of grid infrastructure being dumped in their constituencies, with no public recourse, in the name of the Energy Secretary’s net zero goals. It is worth asking whether their policy is joined up if it includes these incremental extensions.
In that spirit, I have tabled new clause 3 so that hon. Members can judge whether the Government have a coherent approach. It would require the Chancellor to assess, transparently and on the record, whether a long-term support system is justified to keep Britain competitive in the global race for green manufacturing. A formal assessment would give Parliament and businesses the information they need to plan ahead.
In the debate on clause 11, the Minister referred to the long-term certainty provided by committing to a 25% corporation tax rate for this Parliament. Of course, that is not actually in the legislation, but we welcome that commitment and the greater certainty, and similar certainty could be given in this area. A formal assessment could also ensure that public money is being used wisely and that policy provides the certainty to unlock the investment we all want to see.
Given their 2030 obsession, why have the Government again chosen a one-year extension that provides limited certainty for fleet operators or for the charging infrastructure sector? I see that the hon. Member for Banbury is getting ready to dive into the debate. Will the Minister support new clause 3 and commit to a proper assessment of the lasting framework that is needed to secure Britain’s place in the green technology economy of the future?
Sean Woodcock (Banbury) (Lab)
The shadow Minister talks about a stop-start approach from this Government. I find that a bit brass neck, to be frank, considering the record of the previous Government, who shifted the dates and forced all sorts of investment with regard to EVs.
I welcome the measure. As part of the just transition, it is important to encourage the roll-out of EV infrastructure and charging points, particularly in rural constituencies such as mine where that is a significant challenge. Members will not be surprised to hear that I do not support the official Opposition’s new clause, but there is an important debate about how we ensure that investment is rolled out more equitably into constituencies such as mine. I ask the Minister to comment on how the Government see the roll-out of EV infrastructure in areas where there are issues with the electricity grid and network, so that the just transition can happen in those areas as well.
Mr Reynolds
The Liberal Democrats wholeheartedly support electrifying our vehicle fleet. It is a shame that some other political parties and politicians have stopped at a red traffic light when it comes to electrification. [Hon. Members: “More!”] I will not make any more traffic jokes—apologies.
That is why it is quite concerning to see the 2027 expiry date for the capital allowance. When potential EV owners are surveyed, their biggest concern is charging their vehicles, and it is the same for big employers. We all know that businesses need long-term security and a long-term commitment. That is why businesses were not doing well under the last Government, and why they retreated when the 2024 Budget brought in so many changes for businesses.
Long-term security is clearly what businesses need to invest. One-year extensions on top of one-year extensions do not give the certainty that businesses need to invest in the electrification of fleets—they need to do it this year or not at all. Once we take away that capital bid, it is very difficult to get back, so I would like to see that changed.
James Wild
The hon. Member and I agree about the importance of long-term certainty. People who are watching the proceedings may wonder why we did not just table an amendment to extend the scope to 2030, but due to the narrowness of the measures passed by the House, we are unable to do so. As I weigh up whether to push my new clause to a vote in a few weeks’ time, will the hon. Member consider supporting it?
Mr Reynolds
We can look into whether to support new clause 3 in a few weeks’ time. There seems to be very little in the new clause that we as Liberal Democrats would not support. Let us face it: we need to review the impact of the 2027 expiry date. We do not believe that the allowance should expire in 2027; it needs to be extended significantly further, so we would certainly consider supporting a review of whether 2027 is the right place.
That is my question for the Minister, really: why are we saying that the expiry date will be in 2027? Will we all be sitting here excitedly after the next Budget, looking at a 2028 expiry date, and so on for 2029 and 2030?
Lucy Rigby
On new clause 3, I think I have been as full as I can. The Government annually review the rates and thresholds of taxes and reliefs to ensure that they are appropriate and reflect the current state of the economy. We therefore do not need the review that is suggested in new clause 3.
On the broader points made by the shadow Minister, the hon. Member for North West Norfolk, we are, as I say, fully committed to supporting our automotive sector. On the suggestion that we might look further ahead, the Chancellor makes decisions on tax policy at fiscal events in the context of the public finances. My hon. Friend the Member for Banbury is right that support for infrastructure in this area is critical; indeed, that is the wider policy of the Government. On the suggestion from the hon. Member for Maidenhead that we might go beyond one year, we need to balance support for the industry with the impact on the public finances.
In our debate on clause 30, we have had “stop-start”, “accelerate”, “full throttle” and “red light”. I now encourage the Committee to greenlight the clause.
Question put and agreed to.
Clause 30 accordingly ordered to stand part of the Bill.
The Chair
As we are nearing the end of the sitting, let me make three brief housekeeping announcements.
First, for operational reasons, the central door has been locked during the sitting. It will be opened very shortly before we adjourn so that Members may leave through it if they so wish.
Secondly, it has been drawn to my attention that, since the start of the sitting, the temperature has dropped dramatically, presumably because of the weather. Whether we can do anything about it during the lunch hour I do not know, but we will try.
Thirdly, the doors will be locked between now and the afternoon sitting. Given the weight of papers that everybody has been given, those Members who wish to leave them in the room may do so.
Clause 31
Payments for surrender of expenditure credits
Question proposed, That the clause stand part of the Bill.
Lucy Rigby
Clause 31 will make changes to clarify the tax treatment of payments made by companies in return for receiving expenditure credits. The changes made by the clause will set out a treatment for companies to follow. Payments made in return for credit must be ignored for corporation tax purposes, both by the surrendering company and by the recipient company.
Clauses 32 and 33 will introduce technical amendments to the legislation on video games expenditure credit and audiovisual expenditure credit. The changes made by clause 32 will add a new transitional rule to modify the video games expenditure credit calculation so that it accounts for both European and UK expenditure. The changes made by clause 33 will prevent incorrect amounts from having an impact on the intended generosity of special credit. They will do so by preventing some incorrect amounts from occurring and by setting out how to resolve others when they arise. Noting that clause 32 will close a loophole, I commend clauses 31 to 33 to the Committee.
James Wild
As the Minister said, these clauses are mainly technical, tidying-up measures, but they are worthy of debate none the less.
Clause 31 clarifies the corporation tax treatment of payments made in return for the surrender of research and development expenditure credit, audiovisual expenditure credit or video games expenditure credit for payments made on or after November 2025. This technical clarification ensures that, when companies sell or surrender tax credits, the accounting treatment is consistent and correct.
R&D expenditure credit has been in place since 2013 to support companies carrying out R&D, and these creative industry expenditure credits will fully replace the old film, high-end TV, animation, children’s TV and video games tax reliefs from April 2027. At the moment, there is no agreed approach between tax authorities and companies on how to treat payments received when these credits are surrendered for corporation tax purposes, which has created uncertainty.
Clause 31 will hopefully put that beyond doubt by setting out a clear tax treatment in law, and HMRC will update its guidance manuals to reflect the new rules. Does the Minister have any figures—I do not have the TIINs to hand on this one—on whether that uncertainty has cost companies, or cost the Government, in lost revenue?
Clause 32 corrects transitional rules between the video games tax relief and the video games expenditure credit to ensure that the new expenditure credit works fairly for games that are moving over from the old relief. It corrects how the expenditure credit is calculated for transitional games—those that already have tax relief claims and then opt into the new scheme—so that companies do not get too much or too little relief, simply because the old regime used European expenditure while the new one uses UK expenditure.
In effect, clause 32 ensures that companies switching schemes do not get double relief or under-relief. Can the Minister provide an estimate of how many video games development companies will be affected by this transitional correction, and whether any have suffered financial detriment under the previous rules?
Clause 33 makes changes to the special credit for visual effects, which is part of the audiovisual expenditure credit, as the Committee will be aware. It prevents the calculation for additional credit from producing incorrect results, correcting anomalies in the visual effects credit calculation. The explanatory notes explain that, without this fix, certain combinations of expenditure could generate incorrect credit amounts or negative values, so clause 33 ensures that the scheme operates as intended and that the special credit scheme is neither more nor less generous than intended. Does the Minister have any figures on how many production companies have experienced calculation errors as a result of the previous rules?
Matt Turmaine (Watford) (Lab)
It is a pleasure to serve under your chairmanship, Sir Roger. I will speak briefly on clause 32, as a member of the all-party parliamentary group for video games and esports, to say to the Minister that I welcome the closing of this loophole. Does she agree that the change will support the British video games industry, which is industry-leading across the world, and deliver the best for our economy?
Lucy Rigby
I wholeheartedly agree with my hon. Friend the Member for Watford about the impact of these measures.
In relation to clause 31, if only the shadow Minister, the hon. Member for North West Norfolk, had the TIIN to hand; if he did, he might have been aware that we estimate that the payments for the surrender of expenditure credits will have an impact on roughly 12,000 claimants of R&D expenditure credit, audiovisual expenditure credit and video games expenditure credit.
The shadow Minister asked about the impact on video games companies: I think it is fair to say that if a company has a game that switches from the video games tax relief to the video games expenditure credit, it simply needs to make sure that it uses the modified version of step 2 when calculating how much credit it is entitled to. This will affect only games that are already in development and need to switch reliefs. There are no figures available to show the impact on companies; it is normally in the tax line, so it is not treated as taxable by most companies. I think that answers all of his questions.
Question put and agreed to.
Clause 31 accordingly ordered to stand part of the Bill.
Clauses 32 and 33 ordered to stand part of the Bill.
Clause 34
R&D undertaken abroad: Chapter 2 relief only
Question proposed, That the clause stand part of the Bill.
Lucy Rigby
Clause 34 makes a minor legislative amendment to the R&D tax relief rules to put beyond doubt that the overseas restrictions apply to R&D expenditure credit claimants with a registered office in Northern Ireland. The Government are making this amendment to provide clarity to businesses and ensure that the legislation aligns with the original policy intent of the Finance Act 2025. I commend clause 34 to the Committee.
James Wild
Clause 34 will amend the Corporation Tax Act 2009 to clarify restrictions on relief for overseas R&D applied to companies across the entire United Kingdom, including Northern Ireland and Great Britain. It applies retrospectively on claims made on or after October 2024. It puts beyond doubt that the geographical restriction on R&D expenditure credit relief applies uniformly across all jurisdictions. Can the Minister confirm that, notwithstanding this clarification, exemptions under the enhanced R&D intensive support scheme still apply to firms based in Northern Ireland?
Lucy Rigby
I thank the shadow Minister for his question. The Government are committed to supporting R&D investment across the UK through R&D tax reliefs; they of course play a vital role in supporting the mission to boost economic growth, which he will know is this Government’s No. 1 priority.
The legislation clarifies that the rules are the same for all R&D expenditure credit companies across the UK. The overseas restriction was introduced in regulations in 2024 before being included in the Finance Act 2025. It was always intended to apply to R&D expenditure credit claimants across the UK, so the change is purely to clarify the Finance Act 2025 to put that position beyond all doubt.
Question put and agreed to.
Clause 34 accordingly ordered to stand part of the Bill.
Clause 35
Restriction of relief on disposals to employee-ownership trusts
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
New clause 28—Implementation of section 35 (Restriction of relief on disposals to employee-ownership trusts—
“(1) HM Revenue and Customs must, as part of the implementation of the provisions of section 35, make an assessment of the potential benefits of establishing a digital application process for taxpayers seeking to pay capital gains tax by instalments under section 280 of TCGA 1992 in respect of disposals to employee ownership trusts.
(2) The assessment made under subsection (1) must consider potential guidance on eligibility criteria and processing timescales.”
This new clause would require HMRC to assess the potential benefits of establishing a digital application process for taxpayers to pay capital gains tax by instalments in respect of disposal to employee ownership trusts as part of the implementation of section 35.
New clause 29—Report on the impact of section 35—
“The Chancellor of the Exchequer must, within 12 months of this section coming into force, lay before the House of Commons a report assessing the impact of the changes made under section 35 on small and medium-sized enterprises, including—
(a) the number of EOT transactions completed compared to the previous three-year average,
(b) any administrative costs and burdens reported by businesses and tax advisers,
(c) the incidence and value of dry tax charges arising, and
(d) recommendations for any modifications to the instalment payment regime under Section 280 of TCGA 1992.”
This new clause would require the Chancellor of the Exchequer to lay a report before the House of Commons on the impact of section 35 on small and medium-sized enterprises.
Lucy Rigby
Clause 35 reduces the amount of capital gains tax relief available on disposal of company shares to the trustees of an employee ownership trust. The Government are committed to building on the success of the existing scheme so that the UK remains a leader in the field of employee ownership. However, the Government have to consider the public finances and the important issue of fairness in our tax system.
The current regime allows business owners to dispose of valuable shareholdings for significant capital gains without paying any tax at all. The cost of the CGT relief alone reached £600 million in 2021-2022, and forecasts suggest that it could rise to more than 20 times the original costing to £2 billion by 2028-29, if action is not taken. The changes made by clause 35 will restrict the amount of CGT relief available to company owners who dispose of shares to the trustees of an EOT. For disposals on or after 26 November 2025, half of the gain on disposal to the trustees of an EOT will be treated as the disposer’s chargeable gain for CGT purposes, and charged to tax according to the usual applicable rules. The remaining half of the gain will be not charged to tax at the time of disposal.
Overall, this means that disposals to an EOT will benefit from a rate of tax that is broadly equivalent to half of the usual rate, which will still constitute an effective incentive to encourage company owners towards employee ownership.