Finance Bill

Debate between Lord Mackinlay of Richborough and Greg Knight

Tuesday 12th September 2017 Commons Chamber

[Craig Mackinlay]

We will be having a debate about that tomorrow, I believe. The fact is that we had a £150 billion per year deficit when we came into power with our then Lib Dem partners in 2010, and we have got that down to just a little over £50 billion a year. A GDP borrowing requirement of 10% in 2010 is now down to 3%. I certainly hope that as we grow this economy we will be able to look at public sector pay in a more reasonable and appropriate way in future, but that is a debate for tomorrow and for years ahead.

I was very taken by the maiden speech made by my hon. Friend the Member for Moray (Douglas Ross) and especially by his story about the previous Chancellor, my right hon. and learned Friend the Member for Rushcliffe (Mr Clarke), putting a seal on that barrel of cask whisky. Let us hope that he put a seal on it meaning that it may be opened tax free, for the benefit of all, in due course.

The statistics on what we have achieved speak for themselves. The one that bears the most fruit is that on the lowering of corporation tax. We generally tax things that are bad. We put high rates of tax on things such as cigarettes or alcohol because we want to stop their use to some extent because of their perilous health effects—particularly those of cigarettes. Why would we want to follow Labour’s proposal to raise the tax on corporates? It seems to me that unless we want to supress profit and jobs and to do entirely the opposite of what we actually want to achieve, raising tax on corporates is the worst thing we can do—and it has been shown to be the worst thing. Members should not take my word for it. The Institute for Fiscal Studies took the Labour party’s spending plan to pieces before the election.

That is the good news. I am not always in favour of Finance Bills, and I am particularly not always in favour of one of this size. As I have said before, I am a chartered accountant and chartered tax adviser, and I still work as that from time to time. I am afraid that it does no good for UK competitiveness that we now have one of the most complex tax systems in the world. It now runs to 22,000 pages and 10 million words. Compare that with the entire tax system of Hong Kong, which runs to 350 pages in its entirety. In the early days of my training, in the late ’80s, the tax law rewrite was being discussed. We then had the Office of Tax Simplification, run for a time by John Whiting CBE, a man I know well and a fellow member of the Chartered Institute of Taxation. It is time to do what we can to slim down legislation and make it fit for purpose.

Much of what we have been doing of late is going in the right direction. Let me canter through various parts of the tax system and give my comments thereon. On inheritance tax, the proposals to give an increasing exemption for the family home must be the right way forward. For many people, the reason their property has become of such high value is often not to do with their circumstances. It might have been caused by quantitative easing resulting from the 2008 failure and the inflation of prices. Of course, the north-south divide and the sheer desirability of London and the south-east, as well as restrictions on planning, have caused a huge asset bubble.

One area that has much to say for itself and has been discussed a lot this afternoon is the extension of inheritance tax to non-domiciles. The situation has been daft for a long time as non-doms have benefited from tax exemptions across vast parts of our tax code, but we should strike a note of caution this afternoon. Clause 33, expanded in schedule 10, deals with non-doms who use a company or trust to hold UK residential property. There is perhaps a flaw in the Bill as drafted that needs clearing up, and that could be done in Committee.

The situation as it is designed deals with non-doms who own a residential property through a foreign company. Let us say that that non-dom is a New Zealander, who owns a property portfolio through a New Zealand company. If that were the case, he could now be subject to inheritance tax on that UK property.

That in itself is not an issue, but my worry is that if an alternative non-dom had provided the financing to the non-resident company for that UK property purchase—this could involve a vehicle that had never had anything to do with the UK—there is potential under the Bill as drafted for that loan to be caught under UK inheritance tax rules. I am not entirely sure that that was the intention. For example, a Swiss investment company owner—or even a foreign discretionary trust—providing finance for a non-dom company to buy UK residential property could find itself within the inheritance tax net even though it had never set foot in the UK. A foreign discretionary trust could even find itself facing 10-year principal charges. Again, I am not sure that that was the intention. We have done much—starting some years back with the annual tax on enveloped dwellings and the extension to stamp duty for properties purchased that way—to try to unwind corporate structures that own property in the UK. No other party has tried to make the playing field level for UK citizens in this country who are doing the right thing, but we are now rightly extending those measures to include non-doms.

I know that we have had the election, and circumstances have brought us to where we are today. There are no surprises in the Bill, and it is not retrospective, but I believe that we should avoid the practice of proposals coming into force, many of them on 1 April this year, before the legislation has been agreed in this House. For instance, if the proposals on non-doms owning a residential property through a foreign company become law, a situation could arise in which a person who had died sometime after 1 April was subject to a law that had not yet been enacted because it had not received Royal Assent. We should avoid situations such as that.

My concern about some parts of the inheritance tax extension to non-doms—I am not saying that it is not right at all—is that we need to get the balance right. My right hon. Friend the Member for Wokingham (John Redwood) highlighted the fact that there is a balance to be struck between making Britain an appealing place for business and deterring non-doms from coming here at all. Many of those who come will be spending out on improvements and jobs as well as contributing to the VAT take. There is a balance to be struck and, unlike Labour, we know where that balance is. My hon. Friend the Member for Newark (Robert Jenrick) put it rather well when he said that we would rather see more people becoming wealthy than see the poor suffering as long as the rich did too.

Pensions have gone through what can rightly be called a revolution over the past few years, starting with the pension freedoms that came into play in 2015. The way in which we took our pensions was very restrictive. We accumulated our funds, but we had no choice but to put them into annuities that could, depending on the interest rate at the time, have provided a rather poor outcome. It is therefore absolutely right that we now have pension freedoms. We can do what we like with the pot that we have accumulated. We can have draw-down income, and we can use it far more flexibly.

It is recognised that massive amounts of tax relief are available in the area of pensions. There is nothing wrong with the current annual allowance of £40,000; that is the right level. However, I do have some problem with the lifetime allowance of £1 million, because I do not think a senior nurse aged 45 to 50 in the NHS pension scheme was ever intended to be knocking on the door of lifetime allowances. If somebody with their own self-invested personal pension or defined contribution scheme has a good fund manager and has done well during their working life, is it fair for them to be penalised by comparison with somebody who has not had such a good fund manager and whose returns have not been quite so good? I am not in favour of the lifetime allowance, but I am certainly in favour of the annual allowance.

Auto-enrolment has been one of the great successes, because I do not think that anybody is saving enough towards their pension.

[Sir Greg Knight (East Yorkshire) (Con)]

I am reflecting on what my hon. Friend said about allowances. Is he arguing for allowances to be automatically uprated to take account of inflation?

[Craig Mackinlay]

There is an uprating coming into place to allow the floor to increase from £1 million in due course. There used not to be a lifetime allowance, but it started at £1.8 million some years ago and has come down to £1 million.

The flexibility of SIPPs and the success of auto-enrolment are essential if we are to rebalance our savings rates, which have been fairly poor by comparison with those of other G20 countries. I am looking forward to seeing how lifetime ISAs will plug any holes in the pension market. We have had a lot of change, and even though much of it has been to the good, we are in danger of losing stability. People become rather unsure about what will happen in the pension market and whether the changes will affect them. The last thing we want to do is to deter people from saving for their pensions.

On IR35, much has changed in the last year, particularly in terms of personal service companies that provide services to public sector bodies. It has long been known that personal service companies and the IR35 rules have been abused—that was recognised in the House of Lords’ report—and so I welcomed the change that came in from April this year. It is not right that personal service companies, which are, by any other measure, a disguised form of employment, are not being taxed in the right way. I fully support what is happening, but I do think that we need greater clarity over employment status.

The rather complex process of recognition of whether a person is properly self-employed or properly employed is quite confusing for a small employer. That is still somewhat vague, and there is some gold-plating in the public sector because of worry about people’s status. I regularly see people who work through a proper personal service company and who are clearly self-employed, not in an employment situation. Out of fear, the public sector is tending to move everybody who works in such a way to an IR35 status, which adds to costs in the sector. It is a very difficult balance.

Termination payments have been discussed this afternoon. My worry about them is that the £30,000 level has been in place since the early 1990s. If it were more realistically upgraded in accordance with inflation to today’s values, it would be in the region of £70,000. Other changes are likely to bring more termination payments—most likely correctly—into tax.

I turn to the dividend tax changes. Dividend tax has been subject to huge change over the last few years. Just two years ago, it was announced that the first £5,000 would be completely free of tax, after which an individual enters the regime of 7.5% while they are within the basic rate band. I am concerned that we have moved so quickly to cut the allowance from £5,000 to £2,000. In doing so, we have not provided a stable playing field for people to get used to. I can certainly understand, from the Treasury’s point of view, that this has been an area of tax loss. It has long been known that owner-managers probably give themselves the lowest level of salary, but then pay themselves through a dividend route. People recognise that the situation has perhaps been too good for too long and that things now have to change, but I am concerned that it did not take very long for the allowance to be reduced from £5,000 to £2,000.

I realise that much of the Finance Bill—the provisions amount to some 300 pages— concerns the corporation tax loss regime and the restriction of interest. I will canter through this as fast as I possibly can. Brought-forward losses may now be used very flexibly, which is very good for the smaller company. The one complexity that the Bill will bring in is that there will be two lots of losses: old losses, which have to be used in the old way; and new losses, arising after 1 April 2017, which will be used in the new way. For the smaller company, that will add a level of complexity that we perhaps do not need. I therefore seek from the Treasury Bench some change, if possible, to allow smaller companies some degree of exemption.

All in all, we are in a very good place with our tax system. There could be more simplification, and I have previously raised with Treasury Ministers my concerns about various aspects of the system. I hope that we can look again at one concern that turns up regularly in my inbox, which is the restriction on landlord’s interest. That has been ill thought out and could be looked at again.

My hon. Friend the Member for North West Hampshire (Kit Malthouse) and I often discuss enterprise investment schemes and seed EISs. The sad fact is that the number of seed EISs, which should be a very flexible way of getting small amounts of capital into small start-ups, have not really been used as widely as they should have been. From my perspective of having tried to put them in place professionally, it is very unlikely that a smaller business can afford even the modest professional fees necessary for raising such a small amount of capital. Some flexibility is needed if we are to encourage seed EISs.

We need to continue to debate tax policy. Much was said by my hon. Friend about how we have a tax system that was designed with the 19th and 20th centuries in mind—trying to tax things or recognisable services—but the new digital economy means that the playing field is rather different. We need to think rather carefully, perhaps on a cross-party basis, about how we can tax the digital economy properly. We also need to discuss what our tax policy is trying to achieve. For too long, whenever we have tried to make a small change, it has either been howled down or the media have got involved, and I am afraid that we have become somewhat fearful of change. It is now time for cross-party working on what we are trying to achieve in raising the appropriate amounts of tax in the modern age.

Much has been said about productivity, but it is very difficult to measure—I am sorry to be so technical—especially in services, which are rather more prevalent in our economy than in those of other OECD countries. I know, however, that I would rather have lower levels of productivity and higher levels of employment than the massively high youth unemployment seen in other countries in the EU, which—by whatever measure—have managed to have higher productivity among those actually in work. I put that down to the more laissez-faire system under which we operate in the UK, where the employment rules are slightly more liberal. In France and Germany, employers dare not get it wrong, because they have very little flexibility in getting it right when they need to shed staff.

I will leave my thoughts on the tax system there, and I look forward to supporting the Second Reading this evening.