Draft Consumer Rights Act 2015 (Enforcement) (Amendment) Order 2023

Kit Malthouse Excerpts

Wednesday 5th July 2023 General Committees

[Kit Malthouse (North West Hampshire) (Con)]

It is always a pleasure to see you in command, Ms McVey.

This is a seemingly innocuous and small slip of paper, but I want to raise a number of issues about which the Committee needs to be aware. First, anybody who is familiar with schedule 5 of the Consumer Rights Act 2015 will know that the implications of entering trading standards into the schedule can and will be profound. The schedule contains some draconian powers—powers that are now to be bestowed on trading standards—which have caused alarm pretty much ever since Gordon Brown amalgamated Customs and Excise with the Inland Revenue.

As a scholar of Daphne du Maurier, Ms McVey, you will know that the excise men, as they used to be known, have historically, since 300 or 400 years ago, had significant powers to deal with smuggling. With that came a culture in the then Customs and Excise of a slightly brutal approach towards their customer base. They were well used to smashing their way into warehouses without a warrant and could demand all sorts of documentation without any cause for suspicion. I am afraid that the amalgamation of Customs and Excise with the Revenue meant that that culture, which was a little bit like Japanese knotweed, infected the whole of what is now HMRC, to the extent that we do not now see a professional organisation that sits down with other professionals in the accountancy or legal profession and decides what is due. Instead, we see more of a brutal, demanding and aggressive organisation.

Unfortunately, through the schedule, the powers have been spread to other organisations, such as district councils and the Competition and Markets Authority, and we are now giving those powers to trading standards. For example, schedule 5 includes the power for an enforcement or investigation organisation to enter premises without a warrant. There is no requirement to go to a judge and offer any evidence as to why the organisation needs to enter those premises; it can just enter. The only restriction is that those premises, as I try to remind myself from the Act, cannot be wholly or largely residential, but I am not sure who makes that decision.

As my right hon. Friend the Member for East Yorkshire said, an awful lot of corner shop owners will be affected by this legislation, many of whom live above the shop, as my great-grandparents did in Harrogate. The question of who decides whether that premise—that corner shop—is largely or wholly residential will be an interesting one for the enforcement authorities to consider. I can see situations where they may well smash their way into a corner shop and there is a perfectly innocent family sleeping upstairs who will be traumatised by their entry. This is a draconian set of powers.

Similarly, there is the ability to demand documentation without any suspicion or recourse to law whatsoever. Much of it can be suspicionless, as far as I can tell from the Act. I ask colleagues to be under no illusion: this seemingly innocuous bit of paper is actually conferring significant powers on trading standards and we should not underestimate that.

[Sir Greg Knight]

Could not the concerns that my right hon. Friend raises be addressed by the Government in the guidance they will issue in due course?

[Kit Malthouse]

They certainly could be. This bit of legislation will go through today and I hope the Government will take those things into account. The explanatory memorandum states that respondents to the consultation were in favour, but I am not sure about the wider group. For example, I would be interested to know the view of the Association of Convenience Stores on the wider acquisition of the powers and the fact that they are being given to trading standards. My right hon. Friend is quite right; that could be addressed in the guidance. As I say, I want nobody to be under any illusions about what we are doing here.

Secondly, while this is an attack on the sale of illicit tobacco at the front end, I would be interested to know what the Minister is doing at the most vulnerable point for the smuggling of illicit tobacco: the border. We are seeing large amounts of illicit tobacco coming through the post, for example. It is mailed in packages from overseas through fast parcel delivery, often through the Royal Mail warehouse at Langley, near Heathrow.

I do not know whether colleagues know this, but that warehouse takes in 100% of overseas mail coming by Royal Mail route, and the ability to scan parcels quickly there is very restricted. We have never invested in proper parcel scanning at that facility, and those who would smuggle these goods—which, of course, can now be bought online and shipped from overseas—recognise the weakness in that route. I would love to see some of the £10 billion we are raising from tobacco every year invested in enforcement at the border, rather than it all being hived off to subsidise other activity. If we were really serious about stopping this trade, we would concentrate on the most vulnerable point, which is this funnel at the border where we could detect a lot of it.

Thirdly, this is yet another step in the phoney war against smoking that is taking place in this country. We never take what strikes me as the brave step of doing something imaginative to phase out smoking. We nip, we tuck, we chisel away, and we try to scratch the surface. We make life difficult for often marginal businesses such as corner shops, which are almost regulated out of existence now—they all have to have sliding doors in front of cigarettes and cannot display them in certain places—and yet we are not brave enough to do what other countries have done, which is to progressively raise the age at which people can buy cigarettes.

If we did that year after year, in time, only the over-60s or over-70s would be able to buy cigarettes, and we would have effectively phased them out in a generation. I do not understand why successive Governments have not been brave enough to do that, given the appalling statistics that the Minister mentioned. I speak as somebody who lost two grandparents and my grandmother’s twin sister to smoking-related cancer; both twins died of smoking-related cancer. I have seen the effects for myself, and I wish we could be braver about it and do something sensible, rather than running this phoney skirmish war that drags in so many innocent, struggling businesses.

The final point I want to raise is about the impact on local government. As the hon. Member for Erith and Thamesmead said, trading standards is not what it was. It is hard enough for consumers to get the attention of trading standards on anything these days. All our postbags will have been filled with letters from people who are frustrated by the fact that trading standards is not addressing their issue.

The explanatory memorandum says that there will be no impact on local government, stating:

“There is no, or no significant, impact on the public sector.”

If this measure is going to be effective, and if we are going to have all these inspections and regulation, surely this must fall within the additional burdens doctrine. Greater capacity must be given to trading standards to deal with this issue. If not, what part of its work is going to give? Where will the activity come from that the Minister now expects to be expended on illegal tobacco? We cannot just expect trading standards to expend ever more activity for the same number of heads and bodies and hours worked. If the Government really want this to be effective—and I have to say, I have my doubts—where will the extra capacity come from?

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[Stella Creasy (Walthamstow) (Lab/Co-op)]

It is a pleasure belatedly to serve under your chairmanship for the first time, Ms McVey. I am possibly going to shock the Committee in many ways by saying that I agree with much of what the right hon. Member for North West Hampshire has said. He and I might come from different ends of the political spectrum, but we share an interest in local regulation and in doing that in a proportionate fashion, because we have seen at first hand what happens when it does not work.

I am possibly the only person here who served on the Committee that considered the Consumer Rights Act 2015, in that halcyon era in which we in this place were looking at good regulation, rather than having no regulation at all. I want to ask the Minister a set of questions that follow up what the right hon. Gentleman was talking about, and I agree with him that there was a good reason for not including trading standards on the list of bodies that were to have powers under that legislation.

At the time, we felt that the powers were quite strong, and we recognised that the comparator bodies—the others that had the powers, such as the Competition and Markets Authority and the Financial Conduct Authority—were about whole markets. This statutory instrument is very much about a local power and local trading standards. Indeed, it now looks as though trading standards will have stronger powers than local police forces to do searches.

There might be good reasons for that owing to the nature of the trade that trading standards is trying to tackle, and I want to come to that subject, but the Minister did not say anything about, for example, what has been done to monitor the use of the powers over the past eight years. Will he say what we know about when there have been raids, what happened and how the use of the powers is monitored? The difference between market-wide powers and locally applied powers could be very strong.

The next point I want to follow up is the capacity of trading standards to make good on this measure. It is one thing to confer powers, but quite another to have the people to implement them. We know that spending on trading standards fell by 52% between 2009 and 2019. In some areas of the country, there are no trading standards officers at all. Liverpool Council, for example, no longer has a trading standards department because something had to give considering how little money the Government have given the council to run services.

Most local authorities have just one qualified trading standards officer, but if we are to give people stronger powers than the police, we want them to be qualified people who understand the remit and understand why they are being given the powers. Again, I ask the Minister to say something about whether additional funding is going to be given. If this measure generates the impact that we want it to generate in tackling the illegal cigarette trade, revenue will be raised that could go into trading standards.

My colleagues in trading standards do a fantastic job trying to tackle the crimes that, after all, are the crimes that most of our constituents come to us about most of the time, and they would want to see more investment in trading standards. A £16 billion cut in the core revenues of trading standards means that there will not be the officers to use these powers, and certainly not officers trained to use the powers sensitively, unless there is investment.

There is a final point on which I would like to hear more from the Minister, which is the trade we are trying to tackle. We know that 21% of cigarettes sold in the UK are illicit. This is an international trade—gangs, funding and all sorts of criminal activities in our communities. Putting trading standards officers on the frontline of tackling that trade is a bold move owing to the nature of the people with whom they might be interacting. What conversations has the Minister had with the National Crime Agency?

[Kit Malthouse]

There is an unproven statement that much of the trade is organised crime, but I know from my time at the Home Office that this is a low-margin business. I am not convinced that the volume is coming through via organised crime; I think it is coming through in fast parcels—small packages from overseas. That is why I am so keen to see some kind of intervention at the border, and I worry slightly that the more we talk about organised crime and gangs, the more the effort gets put in that direction, whereas a huge volume is coming through orders on the internet.

[Stella Creasy]

We were so close to having unanimity in this place about the nature of the challenge. I think it is both. The right hon. Gentleman says that there are small packages—I was going to ask the Minister to say a bit more about what conversations he has had with Border Force—but the Lords Justice and Home Affairs Committee investigation into the matter set out that international gangs were involved. One German-Russian gang made £50 million over several years by importing cigarettes into the UK.

We are therefore potentially asking trading standards officers to interact with very serious and dangerous people, and it is important that this House does not ask trading standards to be the blue line in our local communities. If we are to ask trading standards officers to take on this serious trade—packages might be one piece of investigation work—to enter properties and to take on organised crime, they need support. Will the Minister say more about the conversations that he has had with the National Crime Agency or Border Force about how to keep trading standards officers safe? Everybody agrees that we want to tackle this trade and everybody wants more investment in trading standards. We will all support the draft order, but I hope that the Minister understands that those of us who wrote the original legislation have some concerns about what we are asking of a service that has been stripped bare over the last 13 years.

[Gareth Davies]

Many excellent points have been raised, and I will do my best to address as many of them as possible.

First, the Labour party spokesperson, the hon. Member for Erith and Thamesmead, asked about the timing of the measure. One of the reasons for the timing of the measure is that the track and trace system that was implemented in 2019 needed time to bed in. We wanted it to get working. It was only in 2020 that we started the consultation on sanctions, and, now that the track and trace system is in place, we are in a position to execute on that.

The hon. Lady asked about the £1 million grant, which was to launch Operation CeCe. The money was provided in the 2020 Budget, and it has resulted in £7 million of illicit tobacco products coming off the streets of the UK. It has been a tremendous success, and we have now committed to extending the operation to 2025 with additional funding of £800,000.

The hon. Lady asked about resourcing, which was a common theme in the contributions of my right hon. Friend the Member for North West Hampshire and the hon. Member for Walthamstow. I will come to the powers of trading standards in a minute, but the key aim of the draft order is to change how trading standards operates with HMRC. Trading standards will gather information and refer cases to HMRC for sanctions to be administered, and HMRC will administer all the penalties. We are not giving trading standards additional powers. It is not required even to execute on the track and trace regulations. It is up to trading standards, but we are asking it to gather information that could then be provided to HMRC. That is why we feel that there is no additional burden on trading standards; if anything, much of the burden of administering the penalties is on HMRC.

The hon. Member for Erith and Thamesmead asked about the review of the policies. All policies remain under review, but HMRC and Border Force will be producing a new strategy on tackling illicit tobacco later this year, and I expect this policy and the success of Operation CeCe to form part of it.

As usual, my right hon. Friend the Member for North West Hampshire makes some incredibly insightful points that are based on his extensive experience. As I pointed out, trading standards is already covered by schedule 5 to the Consumer Rights Act. The draft order is about changing the approach to enforcement so that it is focused on track and trace. To date, it has been focused on the amount of illicit tobacco that has been found, and we have found that organisations and individuals have been holding a small amount of illicit tobacco to avoid significant penalties. The measure will change the approach so that new measures and regulations are tied to the 2019 track and trace regulations, and it will provide additional penalties and enforcement mechanisms for HMRC.

[Kit Malthouse]

I am no lawyer, and maybe I am reading this wrong. I acknowledge that schedule 5 already includes local weights and measures authorities. That is not necessarily the full extent of the powers of trading standards. I accept that, in legislation, it has the powers to smash its way into premises in pursuit of weights and measures issues, but it do not have those powers in anything else. My reading of the legislation is that it expands that power beyond weights and measures and into the regulation of tobacco. Its current ability to demand documents and enter without a warrant is being expanded so as to include enforcement of tobacco regulations. I do not think that that part of its work is currently included. If it were, why is the measure necessary?

[Gareth Davies]

This measure is necessary, first, to increase the penalty up to £10,000 for HMRC; secondly, to give trading standards the ability to share data with HMRC, which was not previously the case; and, thirdly, to shift the focus on to track and trace and away from the amount of illicit tobacco that is found. Trading standards is empowered to gather information and refer cases to HMRC for further investigation. I can write to my right hon. Friend on his specific point on weights and measures—he will forgive me for not having the same mastery of detail as him on that point. I hope the three points I mentioned clarify what we are seeking to do with this specific measure.

My right hon. Friend quite rightly asked about the border, where typically a lot of illicit tobacco enters our country. HMRC and Border Force work very closely together. As I mentioned in response to the hon. Member for Erith and Thamesmead, a new strategy will be published this year to outline how HMRC and Border Force interact and what more they can do to tackle illicit tobacco coming into our country. I can tell my right hon. Friend that 8 million cigarettes were seized between 2015 and 2021, and so there is a reasonably effective operation in place, but they can always do more.

[Kit Malthouse]

I recall that Border Force ran a competition looking for fast scanning technology. It awarded some money to a series of companies and there was some prize—I have in mind £1.5 million—for whoever could come up with this ability to whizz parcels through and scan them at speed. When I visited Langley, there were just two standard airport scanners, one of which was on the blink, for something like 1 million parcels a day, which is nuts. When he writes to us, will the Minister also update us on where that competition has got to?

[Gareth Davies]

I am very happy to do that. I am not familiar with that particular case.

The principle is right, in terms of ensuring that tobacco is tracked. We have a similar system for alcohol. The whole point of track and trace is to ensure that, from the point of manufacture to the point of sale, we are tracking and monitoring where illicit tobacco is going. We believe that will be an important way of bringing down the illicit trade that riddles our country and many countries in the world.

My right hon. Friend also asked about tackling smoking. That is an issue that unites the whole House. We all want to see smoking rates come down. He may describe the measures we have taken to date as piecemeal—I do not want to put words in his mouth—but they have had success. We have a prevalence rate of 13%, which means that 13% of our country smoke. That is lower than many countries and has come down quite significantly in recent years.

Some of the measures we are taking are based on the Khan review, which recommended the use of vaping to bring people off tobacco smoking. We are providing 1 million vaping kits for those who wish to come off smoking. Duty, as I said in my opening remarks, is a key way in which we can disincentivise the smoking of tobacco. We can always go further and I welcome the challenge.

[Kit Malthouse]

I mean, sliding doors are bonkers, right?

[Gareth Davies]

I very much welcome the challenge, and I can imagine that my right hon. Friend will be right there with us as we announce further measures in the Department of Health and Social Care.

Finally, the hon. Member for Walthamstow asked about the powers. I hope that I have addressed many of those points already, in terms of trading standards not gathering additional powers but seeking to work more closely on data sharing with HMRC, which will have the burden of executing and administering the additional penalties that we are able to operate today.

The hon. Lady quite rightly asked how we are keeping trading standards officers safe. We are in constant discussions with Border Force. We have not had discussions with the National Crime Agency, but I will write to her on what discussions have taken place across Government. The safety of trading standards officers is not directly related or relevant to this order, but the hon. Lady is right to raise it at any opportunity, because we want those who are gathering information with a view to prosecution and penalty execution to be as safe as possible. I expect them to work closely with local police officers wherever they deem a danger to exist.

The sale of illicit tobacco undermines public health policy by offering a cheaper option to those who might otherwise see price as a reason to stop smoking. It damages legitimate businesses and makes tobacco more accessible to children. The evasion of tobacco duty also has a significant impact on our economy and a negative impact on public health, legitimate businesses and overall public safety. It cheats the Exchequer of revenues of billions of pounds each year, and it blunts the effectiveness of tobacco duty as a tool to reduce smoking. This amendment to the Consumer Rights Act is important in tackling the trade in illicit tobacco. These changes will facilitate the UK Government in their objectives to protect public health, raise revenue and combat organised crime.

I hope that the Committee has found today’s sitting informative. I am certainly grateful for the interventions made and speeches contributed. I commend the order to the Committee.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Consumer Rights Act 2015 (Enforcement) (Amendment) Order 2023.

Finance (No. 2) Bill

Kit Malthouse Excerpts

Report stage
Tuesday 20th June 2023 Commons Chamber

[James Murray]

I thank the hon. Lady, I think, for that intervention. I am trying to work out exactly what point was being made there, but I think the overall point is clear. There is concern from all sides at £1 billion a year of public money being spent on a blanket change, rather than something targeted at NHS doctors.

That failure to spend public money wisely is evident again in the Bill’s proposal to reduce air passenger duty for domestic flights, the impact of which our new clause 10 seeks to uncover. Again, at a time when public finances are under severe pressure, household budgets are being stretched in all directions and the cost of inaction on climate change grows by the day, it is baffling that a tax cut for frequent flyers is the Government’s priority for spending public money.

[Kit Malthouse (North West Hampshire) (Con)]

I just want to take the hon. Gentleman back, if I may, to the point he made on pensions. Can he not see the difficulty of having a specific regime for NHS doctors? For example, if he were to bring in a specific regime, would it apply to doctors who also work in the private sector? What would happen if an NHS doctor changed career and became an accountant? There are other areas where we have difficulty securing the services of public servants beyond a certain point, for example judges, prison governors or senior police officers. Is he proposing that each of those areas should have their own specific scheme and that therefore we should build a sort of rats’ nest of complexity around pensions?

[James Murray]

I thank the right hon. Gentleman for his comments, but I feel he is misguided in claiming that it is somehow only Labour calling for a doctors-only pension scheme to be investigated. I referred to the Chair of the Treasury Committee, but I could also refer to the current Chancellor—the current Chancellor—who less than a year ago suggested that we should go for a doctors-only scheme. All we are asking is for the current Chancellor to do what he told himself to do less than a year ago and investigate the possibilities. That is important, because that is how we spend public money wisely.

To return to air passenger duty, Ministers may try to point out, when we discuss it later in the debate, that the lower rate of domestic air passenger duty has been accompanied by the introduction of an ultra long-haul rate. But when taken together, the air passenger duty changes in the Bill are set to cost the taxpayer an additional £35 million a year. That cannot be the right priority for spending public money. In Committee, we tried to get to the bottom of why this tax cut is being prioritised.

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[Harriett Baldwin]

I rise to speak to new clause 2 and amendment 7, which were tabled in my name and those of all the other members of the cross-party Treasury Committee.

“Taxes are far too complex.”

Those are not my words but the words of the Chancellor of the Exchequer when he gave evidence to our Committee. The amendments to which I am speaking would give legislative effect to the recommendations of the report we published last week on the work of the Office of Tax Simplification. The report is on the Table, and I encourage all hon. and right hon. Members to read it.

Across the House, I think we can all agree that, regardless of the level of tax, the tax system itself has become far too complex. To give an example, as a result of the Committee’s current inquiry on tax reliefs, we have finally found out how many tax reliefs there are in the tax code—1,180. The unnecessary complexity in our tax code makes the tax system expensive and difficult for HMRC to administer, makes the tax system confusing and makes it difficult for taxpayers to understand the choices on offer and the consequences of those choices for their after-tax income.

A complex tax system can be hugely costly for taxpayers and for those responsible for compliance with the tax code. The Financial Secretary to the Treasury was kind enough to give evidence to our Committee on the VAT system last week, and she described it as the “most complex” part of the tax system. VAT creates a crippling compliance burden for small businesses and, as a result, there is a massive pile-up of companies just underneath that £85,000 turnover threshold. This shows that small, potentially dynamic, growing businesses—the engines of our economy—would rather stay under the threshold than deal with the VAT system.

Unfortunately, the VAT threshold is far from the only cliff edge in our tax and benefits systems. At worst, these cliff edges result in people being worse off for earning more money. In recent evidence to a joint session of the Treasury Committee and the Work and Pensions Committee, we heard how people can suddenly find themselves much worse off, after losing entitlements such as free school meals and council tax support, when they earn only a little more money. Indeed, next winter a person who earns an extra £1 will take home £900 less because they lose the cost of living support entitlement, which we reflected in a recent report. People would actually be better off by working less, or perhaps not working at all, and surely that is something we do not want to see in our tax and benefits systems.

[Kit Malthouse]

My hon. Friend is making a powerful point, but does she accept that complexity can lead to gaming of the system? It often feels as if the accountancy profession and tax planners are streets ahead of the Revenue, to the extent that we now have to have a general anti-avoidance measure so that, if they find something we do not like, they are not allowed to do it, even though it may be within the rules. That is a direct product of this complexity, which is creating a whole other industry around finding loopholes.

[Harriett Baldwin]

I agree with my right hon. Friend’s excellent point. Not only do the wealthiest get the best tax advice, but general financial advice has now become so expensive in this country that only 8% of our constituents can afford to pay for it.

Finance (No. 2) Bill

Kit Malthouse Excerpts

Committee of the whole House
Tuesday 18th April 2023 Commons Chamber

[The Financial Secretary to the Treasury (Victoria Atkins)]

It is a pleasure to serve under your chairmanship, Dame Rosie.

Before I start, I would like to pay tribute to a previous Financial Secretary to Treasury, namely the right hon. Lord Lawson of Blaby, who sadly passed away while the House was in recess. After the Conservative party’s historic election win in 1979, he took office as the FST, calling inflation “a disease of money”. To this day, we on the Government Benches recognise that, which is why the Prime Minister is determined to halve inflation as one of his five promises to the public.

Margaret Thatcher recognised Lord Lawson’s talents, his incisive intellect and his single-minded determination to reshape the UK economy, and in due course she appointed him as her Chancellor. He went on to deliver six Budgets, drinking, I am told, a spritzer as he did so, and he set the framework for today’s tax system. He was an intellectual and political giant, and we pay tribute to him in this place.

The measures before the Committee today relate to the Bill’s clauses on corporation tax, investment incentives and the global minimum tax on large multinational businesses. The changes that they make will support business investment and innovation in the UK, while contributing to fiscal sustainability and protecting our tax base against harmful tax planning.

Clause 5 legislates for the right to charge corporation tax and maintain the rate at 25% for the 2024 financial year, in line with the 2021 spring Budget announcement. As hon. Members will know, we legislated in the Finance Act 2021 to increase the main rate of corporation tax to 25% from this month, April 2023. We typically legislate a year in advance to provide certainty to large companies that pay corporation tax in advance on the basis of their estimated tax liabilities. The rate increase, which took effect from this year and which the Bill will maintain for the 2024 financial year, is forecast to raise more than £85 billion in the next five years. It will make a vital contribution to ensuring that our debt continues to fall, as part of the Prime Minister’s five pledges, while allowing us to continue to invest in our much-cherished public services.

[Kit Malthouse (North West Hampshire) (Con)]

I draw attention to my entry in the Register of Members’ Financial Interests. As the Minister says, the Government are legislating in advance of next year. Can she reassure the Committee that as we approach next year, the Government will review not just the headline rate—a juicy and necessary source of income for the Treasury—but the thresholds? The media are full of the fact that at over £250,000 profit, people will be paying the higher rate, but there is also a transitional zone between £50,000 and £250,000 profits, which is exactly the ellipse of small company growth where companies need that money to invest for more growth. If there is a detrimental impact within that transitional zone, will the Minister undertake to review it in advance of next year? Will she perhaps think about shifting the thresholds upwards so that we do not constrain the growth that we so need in the economy?

[Victoria Atkins]

I acknowledge my right hon. Friend’s experience, not only at the Dispatch Box but, importantly, in the world of accountancy and business. I reassure him that the Treasury keeps all taxes under review. He is right to draw attention to clause 6, which maintains the small profits rate because, precisely as he says, we want to encourage small businesses that are in the first flourishes of profit and help them to build.

There are two measures that I hope will reassure my right hon. Friend. First, the small profits rate means that 70% of businesses will see no increase at all in their corporation tax charges. Because of the threshold that he describes, a further 20% will fall into that spectrum, so only 10% of businesses will face the full 25% rate. If they invest in their businesses and in plant and productivity, as we very much want and encourage them to, they will—depending on their returns—be eligible either for the full expensing capital allowance that the Chancellor announced alongside this measure at the spring Budget or for the annual investment allowance. This Budget was very much about encouraging growth and encouraging the small businesses on which my right hon. Friend the Member for North West Hampshire (Kit Malthouse) so rightly focuses, but we are doing so as part of a responsible fiscal approach and making sure that those with the broadest shoulders bear the greatest burden of tax.

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[Victoria Atkins]

Very much so. I am conscious that the hon. Gentleman’s constituency and his corner of the United Kingdom are marking the very important anniversary of the Good Friday agreement; we wish everyone who is marking that occasion the very best for the future. I know that there are points of contention with his party, but one reason why we are so very committed to the Windsor framework is that we want to ensure that issues that have arisen through the Northern Ireland protocol are resolved with the EU to enable the economic flourishing that he rightly describes.

I can reassure the hon. Gentleman and my right hon. Friend the Member for North West Hampshire that even with the increase to 25%, we will still have the lowest rate of corporation tax in the G7. What is more, it will be lower than at any point before 2010. I very much hope that the Committee understands why we are taking this approach: because we have to take a fiscally responsible approach to our public finances, but we want to do so while encouraging growth and international competitiveness.

Clause 6 will maintain the small profits rate, as I hope I explained in answer to my right hon. Friend’s intervention. Clause 11 will update the patent box legislation to reflect the introduction of the small profits rate. The patent box incentivises the retention and commercialisation of intellectual property, allowing UK companies to elect to pay a lower rate based on their earnings from patents or similarly robust IP. This is part of our drive to encourage innovation and growth in our economy.

We are not stopping there. A competitive corporate tax system that supports growth, investment and innovation is about so much more than just the headline corporation tax rate; the availability and generosity of reliefs also matter. Clause 7 will therefore introduce new first year capital allowances, including a 100% first year allowance for qualifying new main rate plant and machinery investments, known as full expensing. It will also introduce a 50% first year allowance for new special rate expenditure such as long-life assets. Full expensing offers a substantial financial incentive for companies to increase their investment, improving their cash flow by lowering their corporation tax bill in the year of investment.

These changes will provide a £27 billion tax cut for companies over three years. They will help to boost business investment by ensuring that the UK’s capital allowances regime is among the world’s most competitive: joint first by OECD net present value. The independent Office for Budget Responsibility estimates that full expensing will increase business investment by 3% for each year that it is in place. What is more, the Chancellor has set out his intention to make the measure permanent when fiscal conditions allow.

Clause 8 will set the maximum amount of the annual investment allowance at £1,000,000 indefinitely, providing certainty to the more than 99% of businesses that invest up to that amount.

Clause 9 will make changes to extend the generous 100% first year allowance for electric vehicle charging equipment. This will continue to encourage businesses to invest in the roll-out of charging equipment, which will be a key enabler of the transition to zero-emission vehicles.

Clause 10 and schedule 1 set out changes that will modernise research and development tax reliefs in order to better incentivise R&D methods that rely on vast quantities of data which are analysed and processed via the cloud. These changes will also help reduce error and fraud, requiring claims to include more information—including the name of any agent involved—and to be provided digitally. The Government have tabled amendment 14, which is a technical fix to ensure that companies claiming small and medium-sized enterprise credits will be able to benefit from the change in the going concern rules.

Clause 12 will introduce a new rate of investment allowance in the energy profits levy, set at 80%, for qualifying expenditure on decarbonising upstream oil and gas production. This builds on the existing 29% investment allowance which is designed to encourage the sector to reinvest its profits to support the economy, jobs, and the UK’s energy security. It supports key commitments in the North sea transition deal and the Government’s aims for net zero by 2050. Clauses 13 and 14 will extend the duration of the reliefs available to our important cultural sectors, including orchestras, theatres, museums and galleries, to meet ongoing pressures and to boost investment in those wonderful and important cultural bodies.

The final clause relating to investment incentives is clause 15. As well as making other improvements, it increases the amount of seed enterprise investment scheme funding that companies can raise over their lifetimes from £150,000 to £250,000. This will boost start-ups and young companies by widening access to the SEIS and increasing the funding limits, and we estimate that it will help more than 2,000 very early-stage companies a year to gain access to finance.

[Kit Malthouse]

Let me again draw attention to my entry in the Register of Members’ Financial Interests.

The SEIS changes are welcome, but, as I am sure the Minister knows, the amount of initial finance raised under the SEIS and, indeed, the enterprise investment scheme has been declining in recent years. That may be a reflection of the wider economic environment, but it nevertheless means that fewer businesses are being started under that scheme. Will the Minister and her Treasury colleagues give some consideration over the next few years to the sheer complexity that is involved in making what is a relatively small investment through the SEIS? The scheme deals with quite small amounts of capital—£25,000 or so—but an accountant and a lawyer are needed, as is pre-authorisation from His Majesty’s Revenue and Customs. An enormous amount of compliance is required even before a company makes its first investment, and a fair amount of the investment that is being made can be absorbed in compliance costs. Complexity is therefore as much of a deterrent as the limits on the scheme, which may be why it is not being taken up with the enthusiasm that I am sure the Minister would like to see.

[Victoria Atkins]

I genuinely thank my right hon. Friend for that intervention. I am trying to ensure that, not just in the context of this fiscal event but in our work across the Treasury, we focus on the pressure points involved in developing a business—setting it up, employing the first member of staff, and all the other major milestones that constitute a critical part of the journey towards growing a business. Obviously there has to be paperwork, but we want to ensure that it does not get in the way.

I will take away some of the ideas that my right hon. Friend has advanced, but let me also say that I very much understand his concerns. One of the main challenges that I issue to the Treasury during every one of our policy discussions is “Does this proposal make tax fairer, does it make it simpler, and does it support growth?” Those are the three objectives that I will be endeavouring to meet in all my work as Financial Secretary to the Treasury.

Let me now turn to the measures in clauses 121 to 277 and schedules 14 to 18, which constitute a large proportion of the Bill. I know that, rightly, they are meeting the sort of scrutiny that we expect of parliamentary colleagues, because they relate to a very significant international agreement. In 2021, my right hon. Friend the Prime Minister brokered an international deal as part of our G7 presidency to tackle profit shifting by large multinational groups and to level the playing field between countries for tax competition. That will ensure that countries are better able to tax the profits that multinational groups generate from trading in their jurisdictions. More than 135 countries have now signed up to the deal, including all members of the G7.

These changes mean that, regardless of where a multinational group operates, it pays tax of at least 15% on its revenues, or profits. This will protect the UK from multinational tax planning by removing the incentives to shift profits out of the UK for tax purposes, and will help to ensure that profits generated in the UK are taxed in the UK. It will also strengthen the UK’s international competitiveness by raising the floor on the low—or no—tax rates that have been available in some countries, while ensuring that groups are not exposed to top-up taxation in the UK as a result of the UK’s world-leading R&D credit and full expensing regimes. Finally, it will ensure that the top-up tax due from UK groups under pillar two is collected in the UK rather than being collected by other countries, which could be the case if we did not implement these arrangements by 31 December.

--- Later in debate ---

[Victoria Atkins]

I repeat that the date for implementation is 31 December. The EU has issued a directive and, as I outlined, the major economies within the EU are already bringing together the legislation to enact this. Japan has already legislated, and others are following.

I would argue that our plan B is in the very rules of this international agreement. The rules work because they ensure that every low-taxed multinational company pays the top-up tax that is due, whether or not it is headquartered in a country that has introduced pillar two. Those economies that rely on low tax rates understand that, because of how business is now conducted in some regards, we are raising the floor of international taxation so that those with the broadest shoulders continue to pay.

[Kit Malthouse]

Will my hon. Friend give way?

[Victoria Atkins]

I will give way once more, and then I will make some progress.

[Kit Malthouse]

The Minister is being generous with her time, although we are in Committee, so detailed scrutiny and questions are appropriate.

I have a couple of questions. The Minister says that one of her missions is simplicity, and I know she understands that this measure will necessarily add several thousand pages to “Tolley’s Tax Guide”, which is now in two volumes—it was only one volume when I trained as an accountant. That is unfortunate, and we can debate the desirability or otherwise of this measure, but what protections are there against the creation of just another game?

Although this Bill seeks to set a minimum floor on the headline corporation tax rate, it is perfectly possible for countries to compete on effective corporation tax rates. Are we likely to see Governments around the world play a game of competitive subsidies and competitive allowances? We will have full expensing, but some of our competitors will not—full expensing will reduce the effective rate for quite a lot of capital-intensive businesses, although not necessarily for services businesses—but there will now be a menu of allowances, derogations and tax breaks that can effectively be used to play a slight game of subterfuge as we all compete for these large, and now very mobile, businesses to locate in our territories.

[Victoria Atkins]

My right hon. Friend raises an interesting point. We have been leading the negotiations on this precisely so that we are able to bring in some of these allowances, which we fundamentally believe will help to support investment and growth in the UK economy. On multinational companies, we are trying to raise the floor in those jurisdictions that currently charge below 15%.

[Kit Malthouse]

Perhaps I was not entirely clear. For example, it is perfectly possible for us to say that our headline corporation tax rate is 25%, but we previously had—we are now getting rid of it—a super deduction that allowed me to offset more than 100% of any cost or investment against my tax and, therefore, reduce my effective rate of corporation tax to much less than 25%.

It is possible, away from the headline rate at which we are imposing this minimum rate around the world, for Governments to play the game of subsidy. “We will give you £150 million to come to our country, and you then pay 25% corporation tax. It is like for like. I am paying you, but I am getting my money back.” It is also possible to create a raft of allowances against that income, which will reduce the effective rate. The headline rate then becomes less important than the effective rate. We may well be kicking off that game with this measure. I am not entirely sure what protections there are against that, and against the complexity that comes with it, in this Bill.

[Victoria Atkins]

On the complexity point, having set my three objectives, of course I acknowledge that there will be times of tension between fairness and simplicity. Indeed, I said that in the Budget debate and on Second Reading. We believe it is fair to have a spectrum of corporation tax thresholds between 19% and 25% as businesses grow and accrue profits, but I fully admit that does not make it simple. The balance the Government have to strike is where there might be tension between fairness and simplicity. Of course, we always want to ensure that fairness prevails.

I take my right hon. Friend’s point about complexity, but I gently remind him that these enormous multinational groups have armies of lawyers and accountants looking after their affairs. One might say that many of them have been able to shift their profits in this way because they are able to conduct that analysis. I should say that they are doing it completely lawfully, and there is no allegation of misfeasance, but we wish to bring forward this international agreement.

In the 21st century, we should not be frivolous or dismissive about encouraging businesses to invest in plant, machinery and people. I know my right hon. Friend is not being frivolous or dismissive, but this is not a game. If we can encourage multinational groups to come and do more business here, to invest in our workforce and in other businesses, that would be a great thing for the UK economy. This international agreement is about trying to introduce a level playing field in 135 countries to ensure multinationals are taxed fairly in each jurisdiction.

Finally, if we do not implement this measure, the top-up tax that these groups would have paid to the UK will be collected by other countries. This important agreement was reached by the Prime Minister when he was Chancellor, during our G7 presidency, and we want to enact it in this Finance Bill to enable it to take effect.

--- Later in debate ---

[James Murray (Ealing North) (Lab/Co-op)]

Thank you, Dame Rosie, for the opportunity to respond on behalf of the Opposition. I would like to speak to the amendments and new clauses in my name and that of my hon. Friend the Member for Erith and Thamesmead (Abena Oppong-Asare).

When we debated this Bill’s Second Reading at end of last month, we made it clear that what we needed was a plan to get us out of what the previous Chancellor rightly called a “vicious cycle of stagnation”. We need a plan for growth—a plan to raise the living standards of everyone in every part of the country—but this Government have failed to offer us one. That much was clear from the data published alongside the Budget, which showed that ours is the only G7 economy forecast to shrink this year and that our long-term growth forecasts were downgraded in the Office for Budget Responsibility report.

Since we last debated this Bill, further data has been published confirming our fears. Earlier this month, a report from the International Monetary Fund put the UK’s growth prospects this year at the bottom of those of the G20 biggest economies—a group that includes sanctions-hit Russia. After 13 years of economic failure, people and businesses across the UK deserve so much better than that. They deserve a plan for the economy that offers more than managed decline. So today, we begin by looking at some of the measures the Government are seeking to introduce in this Bill and explaining why their approach is letting Britain down.

First, let me speak to clauses 5 to 15, which address the rate of corporation tax, capital allowances and other reliefs relating to businesses. On those, one thing prized above all else is the need for certainty and stability. Businesses across the country want stability, certainty and a long-term plan, yet under the Conservatives corporation tax has changed almost every year since 2010. Furthermore, as the Resolution Foundation has pointed out, the introduction of the latest temporary regime for corporation tax represents the fifth major change in just two years. It seems that the Conservatives are simply incapable of offering stability.

Let us start by looking at the main rate of corporation tax, which clause 5 sets at 25% for the financial year beginning in April 2024. The clause will mean that corporation tax will continue to be charged at the rate to which it rose at the start of this month. That rate, 25%, was first announced by the Prime Minister, when he was Chancellor, in his spring Budget 2021. One might think that sounds like a rare example of certainty, but, sadly, that is not the case. As we know, last September, the then Chancellor, the one who said our economy was trapped in a “vicious cycle of stagnation”, announced that the rise to 25% would be cancelled, leaving the rate at 19%. That was of course reversed just a month later, when the current Chancellor moved into No. 11, and confirmed that the rise to 25% was back on. So much for stability! But we are where we are, and if we are to assume that the current Chancellor’s plans will indeed go ahead—a bold assumption, I admit—the rise to 25% will now continue from April 2024.

With the rate of corporation tax being increased, it is particularly important to get capital allowances right. The Government should be focused on giving businesses certainty that will help them to plan and increase their investment in the UK economy. We need that certainty and greater investment—the UK currently has the lowest investment as a percentage of GDP in the G7—yet the approach in clause 7 is to introduce temporary full expensing for expenditure on plant and machinery for three years only. By making that change temporary, it only brings forward investment, rather than increasing its level overall. The Government’s own policy paper on this measure, published on the day of the Budget, makes that clear. It says:

“This measure will incentivise businesses to bring forward investment to benefit from the tax relief.”

As the Office for Budget Responsibility has made clear, the Government’s approach will mean that business investment between 2022 and 2028 is essentially unchanged as a result of these measures. If anything, there is a very slight fall. Britain deserves better than this. As Paul Johnson of the Institute for Fiscal Studies said in response to this temporary tweak to the tax regime for businesses:

“There’s no stability, no certainty, and no sense of a wider plan.”

That is why we have tabled new clause 3, which would require the Chancellor to follow Labour’s lead by developing a wider plan for business taxes, which we believe is needed. As my right hon. Friend the Member for Leeds West (Rachel Reeves), the shadow Chancellor has set out—

[Kit Malthouse]

I wish to challenge the hon. Gentleman’s assertion about the notion of a window. We know that where taxation is concerned the creation of a window can often create an incentive to move quickly. For example, when there was a stamp duty window, we saw a significant number of transactions brought forward and take place. The Government are saying that they want to see very significant investment taking place. We know that British industry has accumulated a large amount of cash on its balance sheets. Why would the Government not create a particular incentive by saying, “Look, there is a deadline. If you get in now, we will give you this very generous tax break and then who knows what may happen in the future”? We must not forget that although the investment may absorb all of the profit for small businesses, it will, in effect, create a tax loss that is able to be carried forward beyond the window. So I do not understand his criticism of our having a window if, as the Government say, they want action now rather than in three years’ time.

[James Murray]

I thank the right hon. Gentleman for his intervention but I feel he rather misses the point. Surely having a temporary change merely moves investment around, rather than increasing its overall level, as the OBR has set out. We have the lowest investment as a percentage of GDP in the G7, so the importance of increasing investment should be agreed by Members in all parts of this House. We need a wider plan that will give that stability and certainty, which is exactly what my right hon. Friend the shadow Chancellor has set out. She has set out Labour’s mission to secure the highest sustained growth in the G7, which means that in government we would review the business tax system and set out a clear road map to provide that certainty and boost investment.

New clause 3 speaks to that, and perhaps the right hon. Gentleman would like to join us by voting for it later this evening. It would require the Government to follow our lead by initiating that review of business taxes that we want to see now. Such a review would make recommendations on how to give businesses more certainty about the taxes they need to pay, and how to make sure that the system of capital allowances operates effectively to incentivise investment. The new clause would require the review to be conducted, and recommendations on how to increase certainty and investment to be published, within six months of the current Finance Bill becoming law. I urge Ministers and, indeed, Back Benchers to accept and support new clause 3. If they do not, I at least encourage Ministers to give as much certainty as possible by making it clear what their plans for capital allowances are beyond the three-year period covered by clause 7.

Finance (No. 2) Bill

Kit Malthouse Excerpts

2nd reading
Wednesday 29th March 2023 Commons Chamber

[Craig Mackinlay]

I do not think that was a criticism from my hon. Friend, but I was trying to be kind and find some good news in what is a fairly miserable story on corporation tax. He makes a good point: the world potentially has an almost limitless amount of global capital looking for a home, and I want that home to be here, and having a lower headline rate of corporation tax would be a very good way of achieving that. I want to develop the argument about the complication we have now added to the system.

[Kit Malthouse (North West Hampshire) (Con)]

I draw attention to my entry in the register. My hon. Friend is making a powerful point and is right about the impact of thresholds on behaviour. There are a number of thresholds, including the VAT threshold and income tax rates, and these marginal rates have a massive impact. Does he think that during the passage of this Bill the Government should consider whether the threshold of £50,000 to £250,000 ought to be higher, not least because catching a company just as it makes £50,000, on an ellipse of growth, and taxing it more is effectively to punish it for success?

What is his view on the notion that not just the rate but also consistency has an impact on the national and international sentiment about investment? The fact that we do not muck about with our rates all the time and they do not vary very significantly from year to year has a big impact on businesses’ ability to plan for the future. The Americans have a higher corporation tax rate than we do, but they have not touched it for years—it has been the same for many years—which allows businesses to trade a higher rate for a longer planning horizon. We might benefit from such a perspective.

[Craig Mackinlay]

My right hon. Friend makes a powerful point on the lower threshold for where 19% goes into the higher rate, and I am going to expand on what that rate actually is. He is right that £50,000 is not a king’s ransom these days; this should be in the phase of growth of a company as it goes on to higher levels.

I have some sympathy with my Front-Bench colleagues on the stability point. We need only think of the journey we have been on in just the last year. The former Chancellor, now the Prime Minister, declared that the rate would be going up to 25%. Then in autumn statement No. 1, it was going to stay where it was at 19%, but then we had autumn statement No.2, which confirmed that it would be going up to 25%. I was hopeful—I am sure my right hon. Friend and others were in a similar camp. I thought, “I will have a yo-yo this time; I am happy with a yo-yo. Let’s keep it at 19%.” However, my right hon. Friend makes the powerful point that stability is good. The rate might not be the one we prefer, but we can at least see to the horizon of where rates are likely to be quite a few years hence.

I want to expand on the point made by my hon. Friend the Member for South Dorset (Richard Drax) that the rise from 19% to 25% represents a 31% increase. I am afraid it is far worse than that on the marginal pound—say, if a company earns £50,001. To start at a 19% rate for up to £50,000 and get to a 25% rate at £250,000, the rate has to be more than 25% in between. The real rate on that marginal pound above £50,000 is 26.5%, so it is actually far worse. As I have said, we are going back to the bad old days where we have to divide those levels by the number of associated companies involved.

The full expensing is, of course, very welcome. I am sure that the Treasury has offered that as a quid pro quo in trying to encourage behaviour, so that companies can invest or are encouraged to invest in new plant, machinery, equipment and all the other stuff that will perhaps help our productivity gap, which we all know has been fairly poor for some time.

My hon. Friend the Financial Secretary mentioned the seed enterprise investment scheme under clause 15. There is also the old EIS, which is even more attractive to the small investor and is a means by which growth companies in early phases can get some capital from investors who may be looking for a home. The new higher levels are welcome, but I hope HMRC has the administration to cope with the applications. As my hon. Friend will know, we have had some problems with HMRC recently.

What does the message on higher corporation tax say to international investors? Big international investors will probably have a global accountancy firm that will analyse the tax rates, the deductions, the super deductions and the weave of things that go on in different countries, but the headline rate of 25% is not appealing. If a company is doing a first sort through Europe deciding where to go, Britain will not be appealing with one of the higher rates.

I worry that we are going for a sugar rush today that will lead to a deferred tax loss in the future because of the lack of domestic and international investment that otherwise might have come our way. That is a game of sliding doors—the title of a film I rather like—and one will never quite know what the future might have held, but this cannot be attractive to international investors. We raise taxes on things that are bad, such as cigarettes, to try to stop their use; why are we raising tax on something we want a lot more of?

I made a fairly lengthy speech on Budget day about the dividend tax—the dividend-free amount—and there is nothing on that in any of the clauses. I explained on the day that it has been through a story very much like the corporation tax story—up and down, with rates all over the place. We settled on the £5,000 amount of dividend-free allowance in about 2016. That did not last very long and went down to £2,000, and it is due to go down to £1,000 from next week. I stated on Budget day how I could live with £1,000 because it accords with other small amounts of income that HMRC is quite happy to disregard.

We have a disregard on trading allowance. Where someone has an eBay business that has advanced from selling the contents of the loft to doing a bit of trading, HMRC is not interested if it is under £1,000—it does not want to know and they do not have to do a tax return. A similar £1,000 allowance is in place for rent. Where someone rents their driveway out to a commuter or someone rents out their holiday home, if they are lucky enough to have one, for a couple of weeks a year, as long as the income is less than £1,000 they do not have to do a return, as no one is interested. A similar thing applies in respect of interest for basic rate taxpayers; £1,000 of interest may be earned and it does not need a tax return, as we are just not terribly interested.

The £1,000 level for dividends therefore has some common sense behind it. Obviously, as a low-tax Conservative, I would rather it were more, because this has already been taxed through the corporation tax system—it is not a deduction against corporate profits, so it is already a double tax. Reducing it further to £500 in 2024-25 breaks that £1,000 rate that we have established as reasonable. Not only that, but do we really want to drag in people who have been PAYE—pay-as-you-earn—all their lives?

We are talking about people with fairly simple affairs, who are perhaps retired and, for all the right reasons, have been in the Sharesave scheme. Let us suppose someone has accumulated a mere £10,000 over years of Sharesave in Lloyds Bank plc. The dividend from Lloyds, now that it is back paying dividends, is generally 5%. So for a mere £10,000 of Sharesave, which may have been accumulated over 20 years of work—hardly high amounts—these taxpayers, who have been PAYE all their lives, will now need to do a tax return in order to recover 8.75% on that marginal pound over £500. This seems to be unduly parsimonious, and I sincerely beg those on the Front Bench to look at it again. It will cost more for HMRC to administer these small amounts of tax receipts; there is no sensible intention here at all.

Clause 18 deals with the lifetime allowance for pensions. We are having a debate this afternoon, and Labour Members obviously think that this should be carved out just for those in the NHS and nobody else. We already have a carve-out for senior judges, and there is even a special one for the Leader of the Opposition. Why have this just for doctors? There is a saying in tax, which is that we should never allow the tax tail to wag the commercial dog, and that is exactly what has been happening with pensions: people have been retiring early and not taking up extra work because of this tax trap. I am delighted that we are getting rid of that trap. Surely a senior teacher who has been in employment for a number of years, a senior civil servant, or someone senior in the police or the armed services will be accumulating in excess of the old threshold of £1,073,000. Those very senior people are now likely to stay in post for longer, offering their services to the nation.

I could have lived with the £40,000 annual threshold, so I am delighted that it has gone up to £60,000. Why should a taxpayer—not a civil servant paid for by the public purse in any way—be penalised for good management of their pension fund? I have always found that bizarre. If they have been clever, they have had a great independent financial adviser or they have managed their own self-invested personal pension and they have exceeded that limit because of their own research and endeavours—and perhaps a bit of good luck—I say, “Good luck to them.” Why should there be a tax hit on that? Clause 20 and the annual allowance increase from £40,000 to £60,000 are therefore very welcome. The £40,000 threshold has been in place from 2014-15 and I calculated that, with inflation, it would be at £52,000 today. We have therefore done something outside the fiscal drag here, so that must be very good news. I would have thought that the Labour party, which has mentioned fiscal drag, would be grateful for that.

May I pay a particular tribute to the Financial Secretary to the Treasury, because I believe that I have had a success in this Finance Bill, and I do not get too many of those? I spotted it! It comes in clause 29, which deals with estates in administration, and in parts 1 and 2 of schedule 2, under the heading “Low income trusts and estates”. I am ignoring the complication of multiple settlements, so let us put that aside. There has been a concession by HMRC for many years that if someone had an estate in administration and the tax payable was £100 or less, HMRC did not want to know. What a lovely simplifying measure that is. However, it did not apply to small trusts, for example, where granny had left the Lloyds shares. I am being very nice to Lloyds this afternoon, so let us use a different share—

[Kit Malthouse]

Standard Life.

[Craig Mackinlay]

I thank my right hon. Friend for the prompt.

Let us suppose the Standard Life shares had been left for the grandchildren to get the capital when they are 18—I am talking about the usual little family trust. Under the changes that were made some years ago, any small amount of dividends required a full tax return, because 7.5% of dividend tax had to be found and the stopping of withholding tax on bank interest received required that to be returned. We therefore had the mad situation where people with the smallest trusts, created perhaps many moons ago for austere reasons and with parsimonious amounts, were having to do a full trust return.

I have been pushing on this since 2017, when my right hon. Friend the Member for Central Devon (Mel Stride) was the Financial Secretary, and I saw in the Bill that we are not going to have the £100 disregard on tax and that there will be a £500 income in total disregard. Thankfully, these small trusts will be able to save their accountant’s fees, if they had even thought they needed one thus far. I hope that this measure will have a degree of retrospection and HMRC will not be raising £100 fines and more all over the place for the granny trusts with a few Standard Life shares in them. This could have been achieved just by HMRC practice or an old-fashioned extra statutory concession, but it is being done legislatively and I am delighted about that.

So we are up to clause 29 of the 352 in the Bill. Members will be grateful to hear that I will leave it to others to comment on the alcohol duty changes, which range from clauses 44 to 120. So we have cut out a good amount there, Mr Deputy Speaker. What I am going to say now will perhaps be aired by others this afternoon. There was nothing on Budget day—not even the barest word—about these OECD pillar two proposals. To the Financial Secretary’s credit, she did mention them, but perhaps rather more briefly than required, given that half the Bill relates to them. In easy terms, as the Bill mentions, this is about the “multinational top-up tax”. It sounds cosy, does it not? Additionally, between clauses 265 and 312, there are measures on the “domestic top-up tax”. The House might be pleased to know that I am now up to clause 312 of 352. I have, constitutionally, an extreme disquiet, not about the proposal itself, but about what such a major international treaty commitment is doing within a Finance Bill. This has far-reaching consequences for UK corporation tax rules, yet it has been barely mentioned before today, and it is in a Finance Bill when it should be standing alone as an international treaty.

What worries me further, and it has been raised in interventions, is that most of the rest of the world is saying, “Thanks, but no thanks.” It seems that only the UK and South Korea are making substantial progress on this. I know that Switzerland, Holland, Germany and Japan have begun drafting, but 100 other countries are doing absolutely nothing at all at the moment and the EU has allowed a six-year run-on for the directive to take full effect. Four countries—Hong Kong, Thailand, Singapore and the USA—are saying that it is not for them at all.

Why, having had multiple years of Brexit battles, which were, at their core, over the sovereignty and independence of this nation, would we wish to outsource our own international corporation tax affairs to a supranational body? We are already having battles in the House with the Illegal Migration Bill about how the 1951 convention and the ECHR obligations are coming home to roost. Those conventions and treaties were signed with the best of intentions at the time, when the world was a rather different place, but they are now coming home to roost in ways that we perhaps did not expect.

The manifesto commitment on which I and every Conservative MP stood in 2019 was to take back control of our money and our laws. To see us almost unilaterally adopting this international accord on corporation tax seems rather strange. I am afraid that we are seeing rather a lot of this, including in terms of climate change commitments. We seem to be promoting a Betamax when the rest of the world is waiting for the VHS to come down the line. Being first in the field is not always the best place to be.

Perhaps it is thought that this will be a new tax-raising measure—I have seen it written that £2 billion could be raised by it. I stand to be corrected, but over many years Finance Bills have had substantial anti-avoidance legislation to stop transfer pricing. That has been the feature of much tax legislation over many years, which I would have thought would catch and overcome any mischief on low-tax profit shifting. But will this actually raise anything? I wonder what the OECD is trying to achieve. Will low-tax jurisdictions, particularly those involved in the insurance industry, just sit back and say, “Oh well, profits will be taxed up the line in the UK or elsewhere”—a very limited number of companies are taking this onboard—or will they raise tax themselves? That seems the obvious place they will go, but there is a conundrum. Much of the legislation is to do with how we calculate that profit. We have our means of calculating profit according to our corporation tax law, and other countries do the same. This is trying to overlay a determination of OECD profit out of the books and records of large, multinational corporations in the UK. That is what this is all about. It is about trying to create a new form of profit.

We have seen that—I have commented on it in the past—in something that is quite simple: whether one qualifies for support for childcare. We have three forms of calculation of profit in our tax code relating to the simple sole trader. That is the normal taxable profit in accordance with our tax law. We have a different assessment—it is marginally different—for calculation of profit to qualify for universal credits. Then there is something completely different, if someone wants to calculate their due profit for qualification of child help and support. Therefore, we are overlaying more complication on that OECD framework.

[Kit Malthouse]

Again, I draw attention to my entry in the Register of Members’ Financial Interests. Does my hon. Friend think that there is a risk that countries may seek to manipulate their tax code in such a way that, while their headline rate might comply with the international minimum, the effective rate could be manipulated by the creation of all sorts of bonkers and crazy allowances, as we have seen in the past? We have full expensing of capital. That is fine for a capital-intensive company, but we have lots of items that are disqualified for corporation tax, which could be allowed if we wanted to make the effective rate lower than the minimum 15% in future. In many ways, that encourages even more gaming of the system by countries, rather than the system that we have at the moment, where it is a bit more transparent, if indeed complex.

[Craig Mackinlay]

My right hon. Friend highlights the problem that different countries could indeed game the system. The peculiarity here is the domestic top-up tax. Even if, under the UK calculation of profit, a business had a profit rate of more than 15%, it could be under 15% using the OECD way of calculating profit and therefore there would be a top-up tax. That is truly perverse. In accordance with UK tax law, perfect rates of corporation tax are being paid, but because it does not comply with these new strictures, of which there are hundreds of pages in this legislation, someone could find themselves paying a domestic top-up.

My concern is whether we will see a rash of new statutory instruments, as we have new external nation-UK tax treaties needing to be looked at and unwound. I wonder, too, whether any thought has been given to potential trade deals; I am given to understand that the US is looking quite negatively at countries that are looking to implement the OECD pillar 2 proposals.

I am just about to conclude, which I am sure will be a great relief to many. What would I like those on the Treasury Front Bench to look at carefully before we get to Committee stage, Report and beyond? I recommend that we strip out the multinational top-up tax clauses, or implement what other hon. Friends have suggested, a start date more in accordance with when the rest of the world thinks this is a great idea as well. Otherwise, as I have said before, we could be buying the Betamax when we should be waiting for VHS.

These measures occupy half of the Bill. I would like to hear assurances that for 2024-25 we can have the £1,000 as a general disregard threshold applied to dividend taxes under a simplification measure. However, given that the Bill runs to such a huge volume, I would like to hear more about how we are going to replace the Office of Tax Simplification. I think it would be fair to say that I know many of the characters in there—there were a number of ex-presidents of the Chartered Institute of Taxation. I do not know quite how wide a remit they had, but one has to assume they did not really get very far with tax simplification.

When I qualified as a chartered accountant in 1991, there was big talk about the tax law rewrite to change seven pages explaining first in, first out with perhaps one word, FIFO. We have a lot of verbiage in our tax system, and to address and simplify the 23,000 pages would aid everybody. Those are my brief observations on the Finance Bill.

--- Later in debate ---

[Nigel Mills]

I agree with my hon. Friend. I remember the anger when I was first elected about people working in the private sector getting a very small pension and seeing the large generosity of the public sector ones that they could never dream of aspiring to. To have a more generous tax arrangement on top of a more generous pension that they were effectively paying for would be hard to sell to people. I think the Government have found a sensible fix on that.

Where has this situation left pension tax policy? We now have a regime where when someone earns the money and pays it into their pension, they do not pay income tax and national insurance on it, and when they draw the pension, they pay income tax, but not national insurance. We are not quite sure we like that. If someone is earning too much—more than £260,000 now—we start reducing the amount they can put in every year from the £60,000 cap down to a £10,000 cap. Then, if someone wants to draw their pension, they can have a quarter of it completely tax-free, even if they do that 10 years before they retire, but now we do not like that either, because that might be too much, so we have capped it at the level of the lifetime allowance that we have just scrapped. What are we trying to do? Added to that is the fact that if I have a defined-contribution pension that I do not draw and leave in my estate, there is no inheritance tax on it. I do not even pick up the tax at that point.

If we stood back and said, “What are we trying to incentivise and encourage people to do by the £50 billion or so of annual tax that we forgo”—or defer, strictly speaking—“on pension saving?”, I am not sure we would design this system. The Government would be well advised to create some kind of commission or review to look in the round at all the various ways we incentivise pension saving and all the ways we tax it and try to work out what a coherent system that people have some hope of understanding would be. I suspect we would get far better outcomes if we did that. I encourage the Government to do that. That would need to be on a long-term, cross-party basis. It cannot be done on a whim every few months.

The danger is that we get to a Finance Bill or Budget and we want a bit of money here, or we have found a little fire we want to put out there, or we want to make another tweak, and we end up building and building more and more strange bits on to this rather ugly looking house until it finally falls over. We should try to get it in some kind of shape before we get into that position.

Moving to the various corporation tax measures in the Bill, I am prepared to accept the rise in corporation tax. Given the fact we bailed out nearly every business in the economy three years ago in the covid pandemic, there is justification for saying that we need to pay those bills, and corporation tax, which businesses only pay when making a profit, is the right way to do that. It takes a little bit of believing to convince ourselves that we can raise the rate that businesses pay on all their future profits—all the fruits of their investment—and that that will not deter investment, but a short-term deferral of when they pay tax by having full expensing will somehow encourage loads of investment, even though they will end up paying the extra 6% on the profit they will earn from the use of new machinery at some point in the future. They will not pay it in the first year, but they will pay more in all of the subsequent years.

[Kit Malthouse]

My hon. Friend points to an argument that, I have to confess, has perplexed me. People say that raising corporation tax to 25% will not necessarily damage investment or, indeed, British business, but then why stop at 25%? Why is that the appropriate amount? If businesses are impervious to the tax rate and it does not affect their behaviour, why not have 30%, 35% or 40%? He understands my point. They are making a value judgment about where the line of damage is to be drawn, and I think he is quite right that it is hard to think that it will not have some kind of impact.

[Nigel Mills]

My right hon. Friend makes a fair point. I guess there is an attraction in that 25% is an easy calculation. We could go for 26%, which Labour had in its manifesto at the last election, and perhaps that could have been a submission. I think it also had a small companies rate rising to 21%, which it does not want to remember these days. I just think that we cannot really have it both ways—that deferring taxes encourages investment, even though businesses end up paying them, but raising them somehow does not. I think we should try to be a bit coherent about what we actually think in that situation.

Again, I have no idea what we are trying to do in giving people tax relief on their expenditure on capital assets. We now have a capital allowance regime that, for most assets, is generally 25% on a reducing balance, unless it is an asset for too long, for which the long-life regime is 4% a year, or it is a short-life asset, such as a computer, when they can choose a different regime over a shorter period of time. Then there is an up-front initial allowance, depending on whether we have one in place, and now we have a 100% initial allowance for a short period, but we do not give any tax relief at all for industrial buildings. If I want to build a new factory to bring some jobs back from China, I need to go through convoluted calculations—such as proving that the air-conditioning in my building is actually a piece of plant and equipment, not a part of the building—which makes huge amounts of work.

Could we just stand back at some point and think about what we are trying to incentivise business to do? I am not actually convinced that many businesses will really be able to use full expensing on large capital expenditure, because they just will not have the profit. It may give them some cash-flow advantage, but they will have the complexity of how much they can claim, and which company a loss gets trapped in to make sure they can use it all around the group. We are just creating difficulty. Most of the large businesses I ever worked with focused on the rate of tax they had to account for in their accounts—of course, having accelerated deduction does not change that—rather than the cash position, which was hugely complex if they were leasing an asset, finance leasing it, hire purchasing it or God knows what. So I would be a little suspicious or cynical about our actually getting the big change that the Government were hoping for here.

I would go back to an amendment I tabled a decade ago, when I said, “Why don’t we just try to move to giving people tax relief in line with their accounting treatment, so if they think this piece of kit has a five-year life and they account for it over five years, let’s just go for that? Why have all this hassle, and all the cost of all these different regimes? Let’s be more generous on the assets you get relief for, and let’s try to simplify it.” I have a feeling that, if we could somehow get to that, it would be more attractive to most businesses than the annual tinkering of saying, “You can now do this and get a bit more”, and no one knows where on earth they are in such a situation. I would recommend that.

On the multinational top-up tax, I actually support it, and I think I argued for it when it was being discussed. I have always been a little bit suspicious of the OECD—I once called it the organisation for excessively complex drivel, and if Members read the causes we have ended up with, they might think it was relatively complex. What I think we have started trying to do on base erosion is to stop people hiding profits in tax havens with very low rates of corporation tax. We generally know where they are and what their rates are. We could have gone back to what we used to have with our controlled foreign company regime, which was a list of naughty countries. If a business had a subsidiary in one of those, it had to go through some extra compliance to prove that real genuine trading profits were arising in that country, rather than that it was hiding passive income that should have been taxed somewhere else.

I think we could have found a way to have a regime that most countries accepted, where we just said, “If you’ve got a subsidiary in one of these naughty regimes then you have to pick up some tax on it,” rather than having dozens and dozens of hugely complex clauses to effectively create a whole new corporation tax range applying to companies in every country in the world, which have to try to work out whether they are paying too little tax or not based on whatever the local tax differentials are on timing and rules, which we then have to adjust for to try to work out whether someone is being naughty or not, when we know damn well a company in the Cayman Islands is paying zero on the £100 million-worth of profit it has salted there, which is what we were after in the first place.

I welcome where we have got to and I accept that if this is the way we have to do it, it is better than not doing it, but surely if anything highlights how complex our corporate income tax regime has become it is the fact that we need to have 150-odd clauses to try to tax income that is being hidden in territories that have a zero rate. It really is almost beyond belief that we have made it that difficult.

We have to remember that a lot of our own overseas territories and Crown dependencies have seen some of the worst behaviours in this area. As it was when we had to have more transparent disclosure regimes, we need to set a lead on this issue to get the rest of the world to follow. If we are not doing it and not encouraging parts of our UK family to do it, there is a fair chance that the rest of the world will think, “Well, if they’re not going to do it, we’re never going to do it.” So we end up moving at the speed of the herd, which will be standing still.

I welcome the fact that we are doing this. It is the right thing. We need to try to find a way of stopping profits being hidden in places where there is absolutely no justification for them being there. A 15% top-up rate is a good compromise. I would hope that most regimes would see the writing on the wall and up their rates to 15%, and not go for dubious reliefs, deemed deductions and so on to try to contrive their way of having a headline 15% but never applying it. Let us just say that this is the way that the world wants to go. This is what responsible ethical business looks like. This is what responsible ethical government looks like. We do not want money hidden where there is absolutely no justification for it being earnt there. We can try to end up not needing all these hugely complicated rules, which UK-headquartered companies might be having to apply to every territorial subsidiary they have, to try to catch some naughty things that they are not even doing in the first place.

Intriguingly, I do not see in the Bill the repeal of our controlled foreign companies rules. If we have a new regime that tops up the tax in every subsidiary owned by a UK group to 15%, do we need all the old compliance rules to stop UK companies hiding their profits offshore? It seems to me that we will end up with a collection of different regimes all trying to do the same thing. Maybe we could find at least a partial simplification to offset the 150-odd clauses here in the Bill.

My concluding remark on these key issues is that I welcome what the Government are trying to do, but at some point we need to stand back and think, “Have we got our tax code regime in a sensible place where we are realistically, and in as understandable a way as possible, trying to achieve these sensible aims; or have we, through quite understandable tinkering, ended up with some kind of hugely complex monstrosity that at some point will fall over and in the meantime is probably not incentivising the things we want people to do or disincentivising the things we really we do not want them to do?”

Silicon Valley Bank

Kit Malthouse Excerpts

Monday 13th March 2023 Commons Chamber

[Kit Malthouse (North West Hampshire) (Con)]

I draw attention to my entry in the Register of Members’ Financial Interests.

Bravo to the Minister and, in particular, the resolutions team at the Bank of England, who have been honing their skills for many years and finally got the chance to put them to use. Further to the question from my constituency neighbour, my hon. Friend the Member for Devizes (Danny Kruger), does the Minister understand the relief felt by many that the taxpayer, once again, has not been asked to step in and, in effect, nationalise private sector losses? Does he agree that for a capitalist economy to function, even in the most painful of circumstances, it has to be allowed to do what it does best—recycle distressed assets?

[Andrew Griffith]

My right hon. Friend is quite right to talk about risk and capital systems’ proficiency at recycling capital to productive uses. That is also an enormous focus of this Government and is why our No. 1 priority was to seek to make a private sector transfer of the bank if we could, to protect the taxpayer while also protecting customers and the solvency of the financial system. I am glad that we were able to achieve this outcome. We will continue to do so by having fit-for-purpose regulations in this space.

Oral Answers to Questions

Kit Malthouse Excerpts

Tuesday 7th February 2023 Commons Chamber

[John Glen]

The Chancellor is not doing that. There is a clear process in place, and we continue constructive dialogue with all professions in dispute with the Government and with their employers. This is obviously a challenging circumstance and we recognise how difficult it is.

[Kit Malthouse (North West Hampshire) (Con)]

When the Chancellor acceded to the Treasury throne, he appointed a panel of four advisers drawn from the City. Has the panel met, has he added anybody from small business or industry, and where can we find the minutes, please?

[Jeremy Hunt]

The economic advisory council has met, I believe, three times. I will write to my right hon. Friend with the details of what was discussed.

Charter for Budget Responsibility

Kit Malthouse Excerpts

Monday 6th February 2023 Commons Chamber

[Kit Malthouse (North West Hampshire) (Con)]

I have seen many displays of nerve in this Chamber over the last seven years, but I congratulate the Labour Front-Bench shadow, the right hon. Member for Wolverhampton South East (Mr McFadden), on his sheer chutzpah this evening. He was part of a Government who exploded the deficit under Gordon Brown, having been bequeathed a golden financial legacy, and then drove us off an economic cliff with a crash the like of which this country had not seen since the second world war. I draw attention to my entry in the register, because I still own the business that almost went to the wall during that crash, and I determined then, as I do now, to make sure that the right hon. Gentleman and his party never have stewardship of the economy of this country for fear of what they may repeat.

Before the Minister panics, I will say that I am here this evening to support the motion and the charter. While others have mentioned the renewal and the evolution of the charter over the years, it is a useful instrument that George Osborne introduced, albeit that I think he probably did so in contemplation of uncertain victory in 2015, wanting to jam an otherwise profligate and untrustworthy Labour party into a little more discipline for the future. But it is useful in giving guidelines to the wider world, and indeed the markets, about the Government’s intentions in the short and medium term. However, I have some questions for the Minister on this year’s mandate.

The first is about the independence and role of the OBR. As the Minister knows, there has been a lot of concern in the media and elsewhere about the role the OBR has played in the financial turbulence over the last few years, and in particular I want to talk about independence, accountability and its role in the formation of fiscal policy.

On independence, I must express to the Minister, an old friend and constituency neighbour, some concern about the evolution of the role of the OBR. The charter points out at paragraph 3.13:

“The government has adopted the OBR’s fiscal and economic forecasts as the official forecasts for the Budget Report.”

That means the Treasury is not now making its own forecasts; it is relying entirely on the OBR’s forecasts. In my view, that creates an element of conflict. I would hope that the Treasury would produce its own forecast driven by what the Chancellor wants to do, and the OBR would produce a parallel forecast, and then differences between the two could be highlighted and justified or argued about. Then those of us who rely on forecasts for policy making or investment decisions could decide where the fan chart of growth or of debt was likely to go. I am sure the Minister has the charter in front of him. It says in this paragraph that the Treasury still retains the analytical capability to produce those forecasts and reserves the right to disagree with the OBR, but in truth, because it is not producing a forecast, it does not and cannot.

At paragraph 4.11 the charter states that

“the OBR will provide independent scrutiny and certification of the government’s policy costings.”

Certification is an interesting word in this context, because it means that the OBR is basically approving the Government’s policy costings, which implies an element of negotiation and justification rather than assessment and opinion.

Paragraphs 4.20 and 4.21 on page 16 then say that there will basically be an iterative process between the OBR and the Treasury—and presumably the Chancellor—over the formation of the forecasts. That implies an element of negotiation—that the Chancellor will go to the OBR and say, “This is what we’re planning to do. What do you think?” and the OBR will say, “Well, we’re not sure this is going to produce quite the number you need.” So policy is formed in an iterative process.

I might have expected the Chancellor to ask his analysts in the Treasury what the impact of certain policies might be on forecasts. However, doing that directly with the OBR, which is supposedly independent, draws it into the policy formation process in a way that may not be helpful to its sense of independence or, indeed, to our sense of its assessment of the Treasury rules. Effectively, that imbues the OBR with an authority that should, in theory, bring with it an element of accountability.

Forecasts that should and could be produced by the Treasury would be produced under the name of the Chancellor, so if they are proven to be wildly wrong, there is direct accountability in this House through him or—hopefully in time—her. However, that is less the case with the OBR. It will appear periodically in front of the Treasury Committee, which is ably chaired by my hon. Friend the Member for West Worcestershire (Harriett Baldwin), who is here this evening and who has spoken. Other than that, however, the House will have no opportunity to properly scrutinise, test and understand why the OBR thinks the way it does.

[Richard Drax (South Dorset) (Con)]

If I might paraphrase, Treasury officials have Ministers by the short and curlies, which is perhaps not the best position for them to be in.

[Kit Malthouse]

My hon. Friend puts it in a pithy way, as he often does. It is not so much that there is some kind of trap or problem here; it is that a situation has evolved—probably more by accident than by design—whereby the OBR has been drawn into the machinery of the Treasury and therefore acquired an authority and an effective veto, in a way that is perhaps not helpful.

The reason that is a problem is that economics is an inexact science—if we put three economists in a room, we will have five opinions. Economics is not delineated in the way chemistry is; it is as much an art as it is a science, and much of it is actually psychology. So if the OBR is to be so involved in policy making, it is important that we understand the economic basis of its assessments. For example, do the people who produce these now Treasury —but actually OBR—forecasts appreciate, understand and believe in the Laffer curve? Do they think that if we reduce taxation, income will rise? That sits at the heart of the argument the Conservative party has had over the last few months about corporation tax. If we cut it, will we collect more money? Seemingly, the forecasts say not. Those are the kinds of judgment that anybody forming economic and fiscal policy must make.

There are also more fundamental issues—about, say, the operation of capital. If the head of the OBR is going to be so involved in policy formation—if there is to be a negotiation between the Chancellor and the OBR on an iterative basis—will that person be operating on the same ideological basis in terms of capital versus labour? Are they a Keynesian? Are they a monetarist? What is the impact of those kinds of belief system? Drawing the OBR into the Treasury machine therefore creates some difficulty for an organisation that, as I know the Minister will agree, has value because of its independence and its alternative view of what the Treasury is trying to do.

The second issue I want to raise is about the mandate. The previous charter contained a point about balancing the budget within three years; that is omitted from this charter. As the Minister said, things have changed, so that has been dropped. When we are effectively chasing a ratio as measured against GDP, we are chasing a moving number, which may make our lives more difficult. For example, if we are chasing a debt-to-GDP ratio, and our GDP is falling, we have to work ever harder to hit our target. The things we have to do to hit that target may also, paradoxically, reduce GDP even further, so we end up chasing ourselves down a spiral against a moving target. That is why, in last year’s charter, which has changed, the idea of balancing the budget within three years, and ensuring that our expenditure did not exceed our income, was quite helpful; it meant that there were two absolute numbers over which we had some control.

Fortunately, in its February forecast, the Bank of England says that if there is a recession, it will be shallower than we thought, which is good. That is not least because last year’s Budget represented a mild fiscal loosening in its initial stages, although not so much later on, with the energy price cap and all the rest of it. That may have helped with aggregate demand, making the recession less severe. However, if GDP does fall, the ratio that the Treasury is chasing will worsen, unless there are significant spending cuts or yet more tax rises, both of which may exacerbate the fall in GDP. That is why I am nervous about the mandate. The objective of reducing debt against GDP is absolutely right, but I ask the Minister to guard against the issue that I have raised.

Finally, I want to say something about the longer term. As politicians, we often focus naturally on a three to five-year horizon. We do that because, guess what, there are elections in a three to five-year horizon, and it is a horizon that is understandable and controllable. However, as the Minister will know, there are significant long-term issues for this country, which are driven by demographics and the nature of our economy. He will know that there are alarming reports that look way into the future, and if he has looked at the significant work done by my hon. Friend the Member for Wycombe (Mr Baker) before he was a Minister, he will know what I am talking about.

To take an example, the Government Actuary’s quinquennial review of the national insurance fund basically says that it will run out of money in about 20 years’ time. Indeed, the rise in the pension age that we have just put through may mean that that period will be shorter, unless there is significant Government intervention in the form of more money going into the fund, which will basically mean tax rises. In addition, the OBR’s financial stability report from last year—it now does a long-term financial stability report—forecasts that, on the current trajectory, although our debts will start to fall in the short term, by the time we get to the middle of the century, they will be well above 200% of GDP and heading towards 270%, and we will be running at a deficit of 10% of GDP.

These long-term trends are driven fundamentally by demographic issues. As a country, we are growing older. We have fewer workers per pensioner, and we are not replacing ourselves from a birth rate point of view, and that will cause an enormous problem. Other countries are in a worse situation. In Japan, on current rates, the population will have halved by the end of this century, which will be economically catastrophic for the country. Unless we start chasing our tail—raising taxes to pay more in welfare and Government spending—we will be in big trouble, which may exacerbate our GDP issues. When we put together the whole cocktail of forecasts—short, medium and long term—they scream out at us to think about the model we are operating.

The wealth of this country was built on three great leaps forward in growth. We had the industrial revolution. That was followed at the end of the 19th century and the start of the 20th century by mass industrialisation, and since the ’70s we have had the IT revolution. In some of those periods, particularly the last, growth was quite turbulent, but throughout them, there was a very high average level of growth; 3%, 4%, 5% or 6% a year was not uncommon. We stand on the verge of another technological revolution—a great leap forward with automation, artificial intelligence, the way we do things and the green economy. We are on an ellipse of scientific discovery. Life sciences are a particular passion of mine, because there are a number of companies on the verge of curing cancer.

If we are to capture this upswing in human ingenuity, we have to think about the model of our economy and the operation of capital within it, and whether we have the right fiscal measures to encourage the kind of buccaneering capitalism that took advantage of those three previous upswings. We did less of that in the third period, the IT revolution. We went through a period of what I suppose we could call centre left or socialist Governments, and it was not de rigueur until the ’80s to be an entrepreneur. We sat on the operation of capital and, as a result, we missed the swing. That is why we do not have an Apple, a Microsoft, a Facebook or a Google. We have some companies coming, and we had some nascent companies. Some Members will be old enough to remember Acorn. For a while it was going to be a great world-beating company, but it fell by the wayside.

The Minister thinks about these issues carefully, and is conscious of the need to energise capital in a way that will build the businesses, products and jobs of the future. I urge those on the Treasury Front Bench to reflect on the longer-term issues that I have raised, and to recognise the kind of straitjacket that we are putting ourselves in. That, and the debts we incurred during covid, may well mean that we miss the next upswing in the world economy, unless we are willing to take risks with the mandate. There has been much debate in this House, and certainly in the media, about going for growth, but if we miss this upswing in growth, we really will miss a huge opportunity for the next generation of our fellow countrymen.

--- Later in debate ---

[John Glen]

It is a privilege to close this debate on behalf of the Government. I thank those who contributed to the debate, including the distinguished Chair of the Select Committee, who highlighted some of the issues and presumptions of Government policy. I cannot comment on what will happen with fuel duty, as that will be the Chancellor’s decision. I thank the right hon. Member for Dundee East (Stewart Hosie) for his contribution, in which he seemed to suggest more targets and a poverty of ambition on behalf of the Government, and I can assure him that that is not the case.

I would like to respond to my right hon. Friend the Member for North West Hampshire (Kit Malthouse), who made a number of observations about the independence of the OBR; its certification and validation role; and the iterative process and whether that compromised the apparent independence of the Treasury. He described economics as not just an art or a science but even psychology. I can confirm that the OBR’s remit is unchanged: it is the Government’s official forecaster. But—as he notes and I am pleased to confirm—the Treasury maintains considerable analytical capability to support the policy advice to Ministers, and it does a very good job of it too. There is a clear separation between the OBR and policymaking, but it is a matter of securing credibility for those policies, and I think he would agree with me that that is a very important point.

[Kit Malthouse]

I guess the issue is: whose forecasts are they? If the OBR produces forecasts and Treasury officials say, “Well, Chancellor, we have looked over the forecasts and we think they are right,” that is qualitatively different, in the public’s mind, to the Treasury producing a forecast and the OBR saying to the public, “Well, we have looked over them and we think they are right.” While it does say that the Treasury reserves the right to disagree with the OBR, the nature of the iterative process presumably means that will never happen, because they agree before anything is published.

[John Glen]

What we can agree is that the budget responsibility committee has discretion over all judgments underpinning its forecasts. Of course, there is obviously a range of views—my right hon. Friend the Member for Wokingham (John Redwood) is always clear in his disagreements with what the OBR may or may not forecast—but what we are saying is that there is validity in and a need for an official forecast, and that is what we have.

With respect to the shadow Chief Secretary, the right hon. Member for Wolverhampton South East (Mr McFadden), before he gets a little too complacent he should be wary of the £90 billion of uncosted net spending commitments that his party has made since the turn of the year. I think the OBR would be very interested in what we would find there.

The charter represents our bedrock to prosperity. It will get debt falling but invest in the future. It will rebuild our fiscal buffers, bolster our economic fundamentals and deliver for the whole country. A vote for this charter is a vote for sustainable public finances, and that is why I commend the motion to the House.

Question put and agreed to.

Resolved,

That the Charter for Budget Responsibility: Autumn 2022 update, which was laid before this House on 26 January, be approved.

Business of the House (8 fEBRUARY)

Ordered,

That at the sitting on Wednesday 8 February, notwithstanding the provisions of Standing Order No. 16 (Proceedings under an Act or on European Union documents), the Speaker shall put the Questions necessary to dispose of proceedings on

(1) the Motion in the name of Secretary Suella Braverman relating to Police Grant Report not later than three hours after the commencement of proceedings on that Motion, and

(2) the Motions in the name of Secretary Michael Gove relating to Local Government Finance not later than three hours after the commencement of proceedings on the first such Motion or six hours after the commencement of proceedings relating to Police Grant Report, whichever is the later; proceedings on those Motions may continue, though opposed, after the moment of interruption; and Standing Order No. 41A (Deferred divisions) shall not apply.—(Penny Mordaunt.)

Financial Services and Markets Bill

Kit Malthouse Excerpts

Report stage
Wednesday 7th December 2022 Commons Chamber

[Andrew Griffith]

We talked about my right hon. Friend’s relative munificence of 53 free cash machines in his constituency—I think it was that at the last count. What he says is the case. The Bill gives the Government the ability at any point in time to give direction to the Financial Conduct Authority, the relevant regulator—this is the basis on which we regulate all our financial services in this country—through a policy statement that will set out the Government’s policy on such matters as cost and location. I am being clear that it is our expectation that the industry will deliver on this important issue for our constituents. If not, the Bill gives any future Government the ability to mandate that.

[Kit Malthouse (North West Hampshire) (Con)]

Notwithstanding the support that the Minister is giving to the notion of free cash, he will recognise that the Government cannot sit there like King Canute, and that between 2010 and 2020 the number of payments made in cash went from 50% to 17%. That has fallen yet further during the pandemic. There are significant advantages to cashless transactions, not least in the elimination of crime. Actually, it is a bit of a myth that there are sections of society that struggle, and we see that most apparently in the advent of cashless parking. There are hardly any councils left in the country now that use cash for their parking. They are all using apps on smartphones. When we introduced it when I was at Westminster City Council, we did not have a single complaint from an elderly person—quite the reverse. They often found it much easier than fumbling around for coins and notes to be able to park, as well as having the ability to extend the time using the phone. There are great advantages to the elimination of cash in society too.

[Andrew Griffith]

My right hon. Friend is right and illustrates well the Government’s desire to achieve the right balance in this debate, rather than operate at either extremity. He will know from his former role the significant move in relation to Oyster and the ability to be cashless.

--- Later in debate ---

[Andrew Griffith]

I agree with the hon. Lady’s point that it becomes a pressing issue. The justification, having successfully transacted in cash since the first Roman emperor decided to dispense pieces of metallurgic value with his head on them, is precisely that we see the transition and we want to get it right, in the interests of the vulnerable. The Bill also contains powers to regulate the wholesale distribution of cash—those people who trunk cash up and down cash centres across the United Kingdom.

[Kit Malthouse]

Will the Minister give way?

[Andrew Griffith]

We have spent a long time on cash, so I will take one final intervention on this. Then I will make progress, simply to allow other Members the chance to make the points that they are here to make.

[Kit Malthouse]

I am grateful to the Minister. He may not be old enough, but some of us will remember the moment the cheque started to go out of usage. There were lots of claims of damage to certain sections of society, and that lots of people would be outraged when the cheque disappeared. Now people operate without chequebooks on a daily basis, and no retailers, as far as I am aware, accept cheques. On the idea that we should mandate that cash be accepted, we cannot stand in the way of the fact that consumers are voting not to use cash. The market is telling us that cash is running out of use, and let us scotch the myth that there is such a thing as a free ATM. The network at the moment costs about £5 billion to operate. That is paid for by every user of the bank, whether they use the ATM or not.

[Andrew Griffith]

My right hon. Friend makes his points very well. As he said earlier, there are significant benefits in relation to fraud, traceability and the environment from dematerialising, but it is not the position of the Government to advocate for it.

Energy (oil and gas) profits levy

Kit Malthouse Excerpts

Tuesday 22nd November 2022 Commons Chamber

[Kit Malthouse (North West Hampshire) (Con)]

It is obviously foolish for the Opposition to pretend that a pandemic and a continental war, with its associated energy shock, would not be felt economically in this country. At the same time, it is clearly preposterous for them to try to talk down the UK economy as some kind of basket case, when we compare very favourably to some of our peers on debt to GDP, employment is still very high and we have an economy that exhibits so many underlying strengths. At the same time, it is fair to say that the autumn statement was greeted with some dismay on the Government Benches. The Chancellor of the Exchequer has obviously had to make some very difficult and challenging decisions, given the economic headwinds we face.

First of all, however, I should point to one of the bright moments in the statement, which was the Chancellor’s pledge on education funding. The £2.3 billion extra on top of what is already in the baseline over the next two years was very welcome. I am grateful to the 27 colleagues who, along with me, signed a letter urging the Chancellor not only to protect schools funding, but to invest further. Our view was that one of the groups most hard hit by the pandemic and that awful disease was children. The case for investing further in their education to deal with the backlog, helping them to catch up and ensuring they can have productive lives in the future, felt to us morally strong and it would have been indefensible to cut that spending. We are therefore extremely pleased that he responded in such a positive way.

I have only a few minutes, so I want to outline three lessons from the recent turmoil, two warnings and a hope for the future. The first lesson is predicated on a phrase that does not go down well in either marriages or politics—the four little words, “I told you so.” For those of us who have been tracking the path of the UK money supply over the last 10 years, the underlying inflation, which was baked into our system and has emerged over the last 12 months, has not, I am afraid, come as any great surprise. The fact that the Bank of England has been slow to recognise the importance of monetarism and money policy over the last couple of years is a cause of great dismay, not least because a number of us consistently raised this issue with the previous Governor when he was in front of the Treasury Committee and since. The denial of the kind of Bank of England orthodoxy that the money supply mattered has come back to haunt us in a big way. The enormous growth in the money supply has outstripped the growth in our economy—yes, coming out of the crash in 2007-08, but in particular coming out of the pandemic—and resulted in the inflation in this country that is now taxing every family. It is hard to see that the Bank has moved with alacrity to deal with it—if anything, I think the criticism is that it has been a bit slow—but I hope the lesson we learn for the future, and on which this House should concentrate and focus, is that the money supply matters. When we look around the world we see consensus around a loose monetary policy for far too long and we need to bear that in mind.

The second lesson is that the Bank’s handling of the bond market really matters as well. We had assumed that that was a benign market that we could take for granted, but it became clear that the Bank’s hangover from its quantitative tightening—its declaration of sales forward into the market—had a significant impact. That was then exacerbated by the so-called fiscal event. We also bear huge losses on that market from the Bank’s dealings. Admittedly, there have been profits in previous years, but the fact that we are bearing about £11 billion-worth of losses from the Bank’s trading in that market matters. Also, within that market, we discovered to our horror that pension funds were effectively gambling with borrowed money, shorting inflation through the so-called LDI— liability-driven investment—strategy, which became so systemically problematic for the economy that the Bank had to intervene again. That points to lax supervision and comprehension of the weaknesses in the bond market.

The third lesson is that we as a House have perhaps not concentrated enough on the operations of the Debt Management Office. I have yet to see anywhere an obviously declared policy decision to move our debt more towards index-linked or inflation-linked bonds. We have moved from 6% of our debt being index-linked 10 or so years ago to about 22%. That is a near-quadrupling of the figure. As I think the Chair of the Treasury Committee—my hon. Friend the Member for West Worcestershire (Harriett Baldwin)—said yesterday, that effectively means that the Government were shorting inflation. At a time when we had lost track of the money supply, or in fact, had decided that the money supply did not matter, that proved to be a foolish bet.

[Bim Afolami]

When I was on the Public Accounts Committee a couple of years ago, we looked at index-linked debt on the whole of Government accounts. If I recall this correctly, the answer we received was that there was no long-term risk of widespread inflation because there were global forces that were becoming deflationary, rather than inflationary. The points that my right hon. Friend is making illustrate well the poor analysis in that approach.

[Kit Malthouse]

I completely agree. I remember well debates with Mark Carney, when he was head of the Bank of England, about the combination of a rise in the money supply and the underlying inflationary effects in our economy being masked by deflationary effects, not least of global supply chains, and the fact that we now have so much stuff made and imported from China, as well as the effect of the internet. Once the curtain was pulled back and we had problems with our supply chains—and that curve of deflation bottomed out—lo and behold, the money supply suddenly became important again. Let us hope that we learn that lesson for the future.

Notwithstanding the difficult decisions that the Chancellor has made, another opportunity is coming for us to trim the sails: the Budget in the spring. As we move towards that moment, I hope that we can look towards some positive changes in the global economic environment. Hopefully, the war in Ukraine will start to recede. International container prices are already falling, as are energy costs. We can therefore think again in the spring and I hope that we will bear two things in mind.

First, we need to bear in mind that, in a tight labour market, tax rises can prolong inflation. If we, through tax rises, give people, in effect, a take-home pay cut at the same time as they face higher costs because of their mortgages and generally because of the cost of living, they are likely to start to demand more from their employers. I am afraid that that has a possibility of sparking a wage and price spiral, particularly as we know that the secondary effects of that inflation will take some time—possibly months, if not years—to work their way through the system. I would bear that in mind when we think about possible tax rises, particularly from fiscal drag.

My second concern—I give this warning to Ministers—is that chasing debt to GDP could become a hare that they are unable to catch. If the actions taken from a fiscal and monetary point of view damage our GDP number—if GDP falls—we have to work even harder to reduce costs, or debt, against that number. If the action taken to reduce the numerator in the equation paradoxically damages the denominator, the equation becomes harder and harder to reach. If we base our ability to reach that debt-to-GDP ratio on a lower figure—particularly with a 3% GDP debt limit—through tax rises, the only way to avoid a doom loop is to tax and tax, even if we know that we can never fill in the hole that we are digging.

Finally, let me turn to my hope for the future. When we get to the spring Budget, I hope not only that the global winds that are blowing against us will have receded somewhat, but that, frankly, we can restore our belief in capitalism. My strong view is that the only way that we will get out of this hole—a number of Members have said this in the past few days—is through growth. We will not tax our way to prosperity, nor will we tax our way out of this debt-to-GDP problem. We need to inject growth into the economy. The only way to do that is to let the wealth creators free by loosening the ties that bind them and by looking at the regulation and taxation on capital, in particular, so that people are willing to take risks. One of the most dismaying choices in the statement was the proposed increase in capital taxes, not least because that changes the risk-reward ratio, meaning that it is less likely that people will go out and start a business.

Although some of the decisions about research and development, including the vast amount of money that is being pumped into that across the whole UK, are extremely welcome, unless there is a strong, pullulating, dynamic private sector out there to pick up the ball and run with it, all the intellectual property that the money creates will just end up overseas, where plenty of venture capitalists and entrepreneurs will be willing to pick that up and run with it.

Believing again in capitalism, allowing people to keep more of their money and to invest it, and building businesses for the future will be critical to our overall success in the months, years and decades to come. As we move towards the spring Budget, I hope that Ministers will look again at the five-year OBR forecast, remembering that it is there not to be fulfilled, but to be beaten and bested. It is there to warn us of what might happen so that we can take action now to avoid it. I hope that come the spring Budget, that is exactly what the Government will do.

--- Later in debate ---

[Dr Liam Fox (North Somerset) (Con)]

It has been clear from this debate and the previous debate that the backdrop to our economic discussion is one of continuing post-pandemic global economic disruption and the rise of global inflation, caused not least by Putin’s invasion of Ukraine. If anyone still believes that we do not live in an interconnected and interdependent world, they are simply not looking at the evidence around us.

Part of the difficulty in assessing the data is the opacity of some of the figures on post-pandemic global trading and investment, but some patterns are now clearly beginning to emerge. According to the Office for Budget Responsibility, in the fourth quarter of 2021, UK imports from the European Union dropped by 18%, but global imports from the rest of the world were up by more than 10% and UK exports to the European Union in July this year reached an all-time high of £17.4 billion. In other words, despite the fact that there are greater barriers to trade on the European Union side than on the UK side, British exports to Europe are actually managing to be more robust than European exports to the United Kingdom. So let us be clear: we do not need a new relationship with the European Union, Swiss or otherwise. We do not require freedom of movement, integration into the European single market or integration of EU law into the UK.

[Kit Malthouse]

My right hon. Friend has outlined some impressive figures. Does he recall that one of the themes of the Brexit debate was that our trading patterns should change? We said that there was a big wide world out there to which we had to look, from a trade point of view, that we had become over-reliant on the EU and that there were more exciting markets elsewhere that were growing much more strongly and that we could participate in.

[Dr Fox]

I entirely agree. The concept of the bloc in trade terms is very second half of the 20th century. We need to look at the growing markets that give greater opportunities for the United Kingdom in goods and services. The fact that they are not immediately geographically adjacent to us should not be our primary concern. We need to move with the trends in the global economy, not focus on what is a largely ossified view of the world based on the post-second world war consensus.

When we look at the origins of the inflation that we are facing in the United Kingdom, we see that there are several of them. They have been referenced a lot during this debate. The post-pandemic supply issues are still ricocheting around the global economy and particularly harming developing countries at the present time. Also, the central banks—not just the Bank of England but the Federal Reserve in the United States and the European Central Bank—got into a group-think on what they laughingly call the modern monetarists, which means that they are not monetarists at all. They believed that they had found some sort of monetary alchemy through which they could continue to print money faster than the economies were growing without creating inflation. I believe that is why there is higher inflation in the United States, the United Kingdom and Europe than in other countries—notably Switzerland, which sits in the middle of the eurozone but did not follow the same expansionist monetary policies.

By far the greatest boost to inflation has come from Putin’s invasion of Ukraine, however. That has come about in a number of ways, which I will come to in just a moment, but we must remind ourselves that inflation is not just an economic evil; it is a moral and social evil as well. The poorest people in our society are hit the hardest by inflation because they spend more of their income on non-discretionary items. It also transfers money from the savers to the borrowers in society, which is not something that a Conservative Government should want to see. The Government have done much in this statement to protect those on low and fixed incomes, including an extra £26 billion in cost of living support, particularly on fuel, on top of what we have spent already, and an extra £11 billion on uprating benefits. The Government introduced those two items to protect those on low and fixed incomes and, taken together, they are the size of the United Kingdom’s defence budget. These are not small sums. Our increased spending on education and health is hugely welcome, especially as we catch up on the post-pandemic disruption, but to be frank, even the generous sums put forward by the Government will largely be eaten up by inflation until we get it under control.

And that is before we come to the most frightening item of all, the fact that this year we will be spending £120 billion on debt interest payments. For reference, we spend only £134 billion on NHS England each year, so we are spending almost the NHS budget on debt interest payments. We need to recognise that we cannot increase our debt further. As my right hon. Friend the Member for North West Hampshire (Kit Malthouse) said, around 20% of our debt is now index-linked and is therefore very vulnerable to rises in the retail price index. Duncan Simpson, the chief executive of the TaxPayers Alliance, said:

“The spiralling cost of servicing the national debt is deeply concerning. Taxpayers’ money that should be spent on frontline services or keeping rates down is instead going towards interest payments that outsize the costs of government departments.”

If we cannot raise debt any further, either we have to see spending come down or taxes go up, or we have to increase Britain’s wealth from the rest of the global economy. The latter is difficult in current global conditions and the Government have correctly, but rather disappointingly, from a political perspective, had to see taxes rise. That sets a clear way in which to see our future priorities. The first thing is to bear down on inflation. At the same time, we have to get control of the public finances and then we have to get our taxes back down.

I hope the Opposition will reflect on this point today. We have heard from the Opposition Front Bench on both days of this debate that we are facing a recession made in Downing Street. Currently, the greatest source of global inflation is Putin’s invasion of Ukraine and rising global commodity prices, particularly food and fuel, which is causing potential starvation in vulnerable states, with widespread social dislocation and increased international migration.

Oral Answers to Questions

Kit Malthouse Excerpts

Tuesday 15th November 2022 Commons Chamber

[Jeremy Hunt]

I did actually reverse most of those measures within three days of becoming Chancellor, so, among my many failings, the one thing I cannot be accused of doing is being slow to change things.

[Kit Malthouse (North West Hampshire) (Con)]

As I understand it, the Chancellor is basing his fiscal strategy on Office for Budget Responsibility forecasts, but does he agree that the only thing we know for certain about those forecasts is that they are wrong?

[Jeremy Hunt]

We know that all economic forecasts are inaccurate, but that does not mean that it is better not to have a forecast than to have one. In defence of the OBR, I would say that its forecasts are more accurate than the Government forecast that we used to use before it.