Corporate Profits: Inflation
Lord Palmer of Childs Hill Excerpts(12 months ago)
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Baroness Penn (Con)
My noble friend is right that, when we think about tackling inflation, the number one area is remaining steadfast in our support of the independent Bank of England as it takes action to return inflation to the target of 2% through monetary policy. However, government does have a role to play. We must make difficult but responsible decisions on tax and spending so that we are not adding fuel to the fire. We also need to take longer-term action to bring down prices, whether that is investing in our future energy security or looking at the tightness of our labour market and taking action to get people back to work—for example, through our ground-breaking reforms to childcare.
Lord Palmer of Childs Hill (LD)
My Lords, I hear what the Minister says, but a new word has appeared: “greedflation”. Everyone knows that the idea of a business is to make a profit; no one is saying that they should not make a profit. However, there is now greedflation, which is the padding of profits. We see people struggling while companies are making surplus profits above what is reasonable. Have the Government any real answer to this?
Baroness Penn (Con)
My Lords, the answer is twofold. We are looking closely at the data and will continue to do so, but we do not see the pattern that the noble Lord refers to so far. We will also work with the regulators in the main areas—the FCA when it comes to the banking sector and the passing on of higher interest rates to savers, as well as mortgage holders—and look at the work of the supermarkets to ensure that their profits are fair and reasonable and driven by fair competition in the sector. We will keep all of that under review. We have agreed a series of steps with the regulators to make sure that action is taken if competition is not working as it should.
Inheritance Tax: Cohabiting Siblings
Lord Palmer of Childs Hill Excerpts(1 year ago)
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Baroness Penn (Con)
My Lords, the Government have attempted to draw up a system that is fair but recognises the unique status of marriage and civil partnerships. As I pointed out to your Lordships’ House, very few estates fall subject to inheritance tax, and we have put in place processes to ensure that those who live in the same house, for example, are able to meet their obligations over time, to lessen the impact of inheritance tax.
Lord Palmer of Childs Hill (LD)
My Lords, one can leave all above £325,000 to your spouse, your civil partner, a charity or a community amateur sports club. Can the Minister explain how siblings are less important than a community amateur sports club?
Baroness Penn (Con)
My Lords, I do not think that is the rationale behind the approach. The rationale in distinguishing between marriage and civil partnership and other relationships is the unique legal status and the unique legal and financial obligations that people enter into in that regard. As the noble Lord, Lord Pannick, referred to, this question was also referred to the courts, which found in the Government’s favour.
Farmers and Landowners: Tax Consequences
Lord Palmer of Childs Hill Excerpts(1 year, 7 months ago)
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Baroness Penn (Con)
I am afraid that I cannot give the noble Lord the Answer he desires. I can confirm that HMRC is discussing the issues he has raised with Defra both to clarify how existing law applies, for example, to the production, sale and use of carbon units in different environmental schemes, and to look at the inheritance tax question he raised. The Government have shown that we will act to clarify the tax rules where appropriate for the farming programme. For example, legislation is being introduced to clarify that payments under the lump sum exit scheme for farmers are treated as capital receipts and, therefore, charged to capital gains tax or, for companies, to corporation tax as chargeable gains.
Lord Palmer of Childs Hill (LD)
My Lords, I hear what the Minister says but the government paper of October 2021 said that the Government would
“review guidance on the tax treatment of trees and woodlands, to provide greater clarity to landowners on how new and existing trees on their land affect tax liabilities.”
Nothing has been forthcoming. Can the Minister update the House on the progress of the review? She mentioned HMRC but most people do not know what the guidance is.
Baroness Penn (Con)
My Lords, we are iterating our approach as we develop these schemes. Quite a lot of them are new, and many different aspects are being piloted or developed. It is important that, as development happens, we take into account the tax considerations and implications of the new schemes. I can reassure noble Lords that we are aware of some of these questions and issues. We are looking at them very closely and, as the policies are developed, we are taking that into account in the Treasury’s input into Defra schemes.
Finance Bill
Lord Palmer of Childs Hill Excerpts(8 years, 7 months ago)
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Lord Palmer of Childs Hill (LD)
My Lords, much has been said and debated in the past few days as to whether your Lordships’ House can amend a statutory instrument that relates to money. As the instrument was not a money Bill, such amendments, fatal or otherwise, were allowable. However there is no doubt that the Finance Bill before us today both is a Bill and relates to money. Therefore, as other noble Lords have said, we cannot amend it.
I would like to take this opportunity to raise what happens when the other place gets it wrong on a money Bill. That can be because too little time is spent in the other place, or because of hasty government amendments. The noble Lord, Lord Flight, took us back a couple of hundred years, but I only want to take us back to March this year. The March 2015 Finance Bill—not the Bill before us today—had a clause added to it without consultation, and was enacted two days after that addition was made. The Government did not notify the umbrella company sector that it would be making those changes at that late stage. In speaking today, I am seeking that the Government should think again with the current Bill and repeal the section in question.
The section will prevent contractors and freelancers claiming their legitimate tax relief at source as they have always been able to do. Instead, because of the hastily added section in the March Finance Act 2015, they will now only be able to claim via self-assessment, which at best will result in a significant delay during which time the individual will be out of pocket. I refer of course to Section 289A of the March 2015 Act relating to exemption for paid or reimbursed expenses. The addition of subsection (5)(b), which contains an innocuous, convoluted phrase, will affect about 400,000 contractors by delaying receipt of their properly incurred tax relief. Whereas at present the tax relief is given at source, it will now have to be claimed after the end of the tax year. Many contractors will fail to do so; many will need to employ an accountant to sort it out; and—just imagine—the overworked and understaffed HMRC will need to process an additional 400,000 tax returns.
I have had recent experience of trying to phone my inspector of taxes. On three occasions, I was told I was in the queue and should be answered in 35 minutes. On the first two occasions I gave up; on the third occasion I hung on for 45 minutes, when a charming, helpful but overworked inspector dealt with my query. My noble friend Lady Kramer and the noble Lord, Lord Haskel, referred to the pressures on HMRC, and the effect of this section in the March 2015 Act will exacerbate that no end.
I have knowledge of this sector of the industry through having served in this House on the Select Committee on Personal Service Companies and as a now retired chartered accountant. Many companies do not employ contractors directly as employees: many use an umbrella company. This is not a brolly manufacturer but a company that acts as an employer to agency contractors who work under a fixed-term contract assignment, usually through a recruitment employment agency in the United Kingdom. The umbrella company receives the fee and pays it to the agency contractor after deducting full PAYE. However, the umbrella company can deduct at source relevant and valid expenses before calculating the PAYE. The expenses will be valid in calculating the tax but by this mysterious section, which suddenly appeared in the March Finance Act 2015 with two days’ notice, the tax relief on expenses would have to wait until the end of the tax year and beyond and use up the valuable HMRC staff time—to which other noble Lords have referred—to achieve no material tax gain to the Exchequer.
This is not only a technical point. Umbrella companies are a critical element in supporting the UK’s flexible workforce. They offer workers the platform to work without the worry of running their own companies while offering employers, directly or through an agency, the flexible workforce they require. Umbrella employees will see significant drops in their monthly income because of the delays they will face when claiming for tax relief that they are legitimately entitled to. Many of those affected will also have the added administrative burden of filing a self-assessment tax return which they had previously not needed to complete.
However, the significant number of umbrella employees in the UK—estimated to be at least 300,000 and probably 400,000—means that this will have a significant impact on the economy, particularly in restricting the flexibility of the workforce. The opportunity to provide contractors with their entitled tax relief at source is a key benefit for individuals choosing an umbrella firm—a perfectly acceptable tax use—and the new law would effectively remove this key commercial advantage, putting the whole industry at risk. The Freelancer and Contractor Services Association calculates the impact of the section is financially greater for many families than the loss of tax credits. That demonstrates how important this is.
I ask the Government to consider in the current Finance Bill repealing Section 289A(5)(b) of the March 2015 Finance Act—I am sure the Minister has it close to his chest and remembers every word of it—or, at the very least, to insert a new clause to delay the implementation of Section 289A(5)(b) for 12 months to enable a full consultation to take place so that an impact assessment can be made. I hope that the Minister will take this suggestion—that is all we can do in a Finance Bill debate—back to the Government so as to remedy in this Bill what may have been the unintended consequences of a section added to the previous Finance Bill and enacted two days later.
Turning back briefly to today’s debate, given that the noble Lord, Lord Lennie, referred to the fact that the reduction in tax credits was a dreadful thing, I ought to put on record that the Liberal Democrat amendment failed. I then went home and on the television I heard the Chancellor of the Exchequer saying that the Labour Party was fully against any reduction in tax credits, which was not what happened in the vote. What we voted for in the end was a deferment of tax credits.
The noble Lord, Lord Cavendish, talked about the tribute to the mayor for Crossrail. I pay tribute to him for giving the credit to the Labour mayor who introduced Crossrail, and for bringing this to this House in that manner.
I hope that the noble Lord will take into account the difficulties of this House giving advice on a Finance Bill—a money Bill—which will be listened to by the other place.
Defence: Budget
Lord Palmer of Childs Hill Excerpts(9 years, 7 months ago)
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The Lord Privy Seal (Baroness Stowell of Beeston) (Con)
My Lords, I am sorry for taking up time in the Chamber, but it is actually the turn of the noble Lord opposite.
Lord Newby
My Lords, I did read the Financial Times article. It is fair to say that all the parties going into the next election will have different views about how to bear down on the deficit. The Conservatives have one view and the Liberal Democrats have a different view as to where the balance between expenditure cuts and tax rises should fall. I have no idea what the Labour view is.
Lord Palmer of Childs Hill
My Lords, I want to be more specific. The Government’s original plan was to purchase 138 F-35B joint strike fighter aircraft. This was reduced to 48 and it has been further reduced to 19. How will this commitment be affected by budget requirements and how will budget requirements and the needs of the defence of the realm be balanced?
Lord Newby
My Lords, at this stage of the Joint Strike Fighter programme, aircraft are being procured via a rolling programme of annual contracts which confirm customer requirements two years ahead of purchase. We will make further announcements on new contractual commitments in due course. The overall number of F-35 joint strike fighter aircraft to be purchased will not be determined before the next strategic defence and security review.
Personal Service Companies (Select Committee Report)
Lord Palmer of Childs Hill Excerpts(10 years ago)
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Lord Palmer of Childs Hill (LD)
My Lords, I, too, was a member of the committee and I thank my noble friend Lady Noakes for her incredibly able chairmanship of it. We received a very complex set of reports, which were often conflicting and incomplete. I shall not repeat her comments on the Government’s response, which did not really address many of the problems that were raised.
My noble friend Lady Noakes dealt in great detail with the report and the response from the Treasury. Perhaps I may take a more generalised look at this issue. I came to the Select Committee with the experience of 28 years as a local government councillor. With some relief, I stepped down this May. I also have a lifetime behind me as a practising chartered accountant, so IR35s and the whole concept of tax reduction were not new to me. My view before the hearings was that personal service companies were essentially a means of reducing income tax and national insurance. That was my view when I went into the committee. People who were self-employed were able to claim greater expenses against their income and thus reduce their tax. There was a difference in tax law for those who were employed. Any expenses claimed had to be wholly, exclusively and necessarily in the course of one’s employment. If you were self-employed, any expenses claimed had to be only wholly and exclusively; the “necessarily” did not come in and you could claim more expenses, thus reducing your tax.
Being a personal service company is cost effective for what I will for simplicity call the employer—although it is not the employer—paying via such a company. The so-called employer does not have to pay holiday pay, redundancy pay, sick pay or employer’s national insurance, as well as a number of other things. So you might say that it is pretty useful. The employee is able to reduce his tax and national insurance liabilities by using a personal service company. It is good for the employee and employer, if I may call them that, but not so good for tax-gathering, because it essentially reduces the taxes that the state receives.
I was particularly worried by the move to use personal service companies in local government, the BBC, health authorities and the like. There is an acceptable use, as mentioned by my noble friend Lady Noakes, such as in employing IT contractors for a specific task—a contractor who may well have many other clients, be on a short-term contract, and so on. But a test of being self-employed in the old days, when I practised as a chartered accountant, was that you had recurring fees, not necessarily from one but from at least two clients. You could very well be treated as being an employee by the Inland Revenue if you had only one payer of your fees. But is it really acceptable to have people in designated positions of chief executive, director, assistant director or head of a department who are not employees under PAYE? To my mind, this is the big fault of what we have ended up with through personal service companies. However, in the private sector, it has always been sound business practice to trade through a company to take advantage of limited liability. This could apply whether you were the local grocer, running an IT company or whatever. After six months of hearing very complex and often conflicting evidence, I saw the problem as being that a whole industry has been built up on how to trade as a personal service company and avoid the pitfalls of IR35.
It appears that very few personal service companies are investigated by HMRC for non-completion of the IR35. It was shattering to hear what a small number it is. If there is any benefit it is purely that of deterrence. This was addressed by my noble friend Lady Noakes’s comment about the larger sum which the Inland Revenue theoretically maintains has been saved. I reckon that personal service companies simply chance their arm that they will not be caught by the IR35 legislation and do not actually bother too much with it. I will not repeat the comments made by the noble Lord, Lord Myners, and my noble friend Lady Noakes about the Treasury Minister or civil servants not coming to give evidence. I agree entirely with what they said.
After six months on the committee, having gone into the committee with a completely different preconceived view, I came to the conclusion that the report and government response should be noted, which is what we are asked to do, but I am not happy with it. To my mind, having thought about it even after the end of the committee proceedings, I believe that one of the fault-lines is that public bodies should not pay senior employees through personal service companies, or, indeed, umbrella companies. By some form of government directive, enforced by the payment of grant allocation, these bodies should be forced to employ people as proper employees under PAYE. If these are government-style bodies, however one looks at them, then the Government have control in terms of the money that those government bodies receive, and one of the requirements should be that they do not try to circumvent the PAYE system, which most people in this country are caught by.
Other than that—this is my final, rather bold statement—we should abolish IR35s and let all the accountants, lawyers, contractors, organisations and politicians go and get a life, without IR35s. There will be, in my view, no real, noticeable loss to the Exchequer and if there is no noticeable loss to the Exchequer, can other noble Lords and the Minister please tell me why we have entered in this farrago of IR35s? It is a deterrent to do something which is not really deterring. If there were no IR35s, the Exchequer would not lose more than the very modest sums that my noble friend Lady Noakes mentioned. The idea of IR35s is almost a jealousy that some part of our community—our business community—is getting a better deal than anybody else. That may well be the case, but it is not a case to my mind, having come at this from completely the other angle as a practising chartered accountant. There is no benefit in the IR35 and when HMRC and Treasury Ministers deign to come back to your Lordships’ House on this matter, I hope that they will take that point into account.
Lord Newby
Well, it is a transfer of money from one part of the Government to another, but this is hardly surprising since it is one part of the Government that has transgressed a rule set by another part of the Government. As for firing senior civil servants for not having kept this properly under review, I am rather tempted by the suggestion—but if it were a principle, we would rapidly find that there was a depletion of civil servants, not specifically in this area but from a whole raft of other areas where there may have been the odd transgression that was not stamped down on quickly enough.
The noble Lord, Lord Davidson, asked an extremely interesting question about the Scottish situation and the relationship between the UK and Scotland, and asked whether there had been discussions with the Scottish Administration on this issue. I am not absolutely sure but I am almost sure; I suspect that there have not been.
This debate has confirmed that personal service companies play a vital role in the UK economy. However, there are those who seek to exploit such arrangements to gain a tax advantage. Because of this, in our view there is still a clear need for IR35. However, there is still more to be done in improving its administration, and HMRC, in partnership with the IR35 Forum, is working very hard on this. We welcome the committee’s recommendations, which will help with this very important work.
Lord Palmer of Childs Hill
Before the Minister sits down, I wish to take up the point about the £500 million saving, which the Minister said I had little regard for. My regard is that it is mythical—there is no proof of it. If HMRC has proof of this, will it bring it forward? The problem with a deterrent is that it is hard to tell what you have deterred and how much you have gained. If there are people who should have been in IR35 and were then brought into it, specific details would be available of the money that had been recovered. I say to my noble friend the Minister that I have no confidence in the figure of £500 million; if I had, I would not have raised the matter.
Lord Newby
My Lords, I think the point is: what would happen if the restraint were lifted? Would individuals pay more or less tax? HMRC has looked at the behaviour of individuals in a whole raft of other areas where it has a lot of experience, and has drawn what it believes to be reasonable conclusions—which I have looked at and which seem reasonable to me. By definition, though, you cannot absolutely pinpoint how much evasion of tax you have deterred; that is impossible to do with any degree of certainty.
Financial Crime: Legislation
Lord Palmer of Childs Hill Excerpts(13 years, 3 months ago)
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Lord Palmer of Childs Hill
My Lords, the difference between tax evasion and tax avoidance was once said to be the thickness of a prison wall: evasion is illegal, whereas avoidance was and is legal, when one sticks to the letter if not the spirit of the law. In recent years the difference between evasion and avoidance has been less clear. In 2005, the UK’s chief inspector of taxes said that he wanted to get rid of the distinction and talk about the level of compliance, not avoidance and evasion.
Let me say at the start of my comments that if one reduces one’s tax bill to the lowest possible, which is within the spirit of the law, that is called tax mitigation, as mentioned by the noble Viscount, Lord Eccles, and is considered non-objectionable—even a duty to oneself so to do. It is when devices are created purely for avoiding tax that they become objectionable and can land the person in trouble.
A recent example of legal tax avoidance or mitigation which hit the newspapers was that of a captain of industry who was perceived to be the owner and operator of a large UK business—employing many employees, who, he said, pay tax—that pays VAT and corporation tax. However, the majority of the shares of that company are held in the name of the entrepreneur’s wife, who lives in a tax haven and to whom the company dividends are legally paid.
It is my belief that the UK needs to look further into these legal methods of taxation avoidance, which I believe do not obey the spirit of the law—indeed, in the view of some, they do not obey the law itself. Things are gradually changing, as significant cases have seen tax saving schemes struck down if the scheme lacks “a business purpose”. I am told that the term “money-laundering”—which we have mentioned here today—was coined to describe the activities of Al Capone, the Chicago mobster who used his laundry business to clean dirty money. Noble Lords may well remember that Mr Capone was imprisoned for tax evasion rather than for the other criminal activities.
Given that HMRC aims to stop tax evasion and discourage tax avoidance, I would like to spend a little time today talking about what is an effective agreement between the UK and Liechtenstein, whereby HMRC offers a genuine, if only partial, tax amnesty that is designed to stop evasion practice and—a point made by one noble Lord—bring in sizeable funds into UK tax coffers. In August 2009, HMRC announced the Liechtenstein disclosure facility, which is based on, and can operate because of, the tax information exchange agreement between the UK and Liechtenstein. The aim of the disclosure facility is to eliminate all UK tax evasion with a Liechtenstein connection. At the time, HMRC’s Permanent Secretary for Tax said:
“Those who have been evading UK tax on assets held in Liechtenstein banks must now settle with us. There are no alternatives”.
Financial intermediaries in Liechtenstein are now required to send a formal notification to any customers who have a UK tax exposure. The customer must provide evidence of UK tax compliance. Those who use that disclosure process benefit, in that only unpaid taxes from April 1999 are due—in other words, there is a real, if partial, amnesty. The fixed penalty is only 10 per cent of the tax due plus, of course, the tax itself. If innocent error can be shown, the settlement may be reduced to only six years of the tax with no penalty. The idea is to get people out of the cupboard and paying their taxes so that moneys they have been salting away are brought into the public sector.
As a practical way of raising taxation, both past and future, and of stopping the further hiding away of assets, the Liechtenstein disclosure facility must be applauded and encouraged, and spread to other jurisdictions and secretive tax havens mentioned by other noble Lords here today. It would be useful if the Minister could provide this House with details of the amounts raised by this scheme and indeed any similar schemes. Reducing tax avoidance and evasion is the best way for the UK to raise funds to carry out its duties and obligations in government areas such as social services and education—or whatever else noble Lords would think relevant—which I am grateful to the noble Lord, Lord McFall, for mentioning.
I have not dealt today with the loss of tax and income to the UK from non-doms, who by their very nature have assets abroad so behave differently from other UK citizens. Non-doms not only broadly pay no tax on foreign unremitted income but they use their funds deposited abroad to shop in Paris, Madrid and New York, and do not use those funds to shop and spend their money in the UK.
No one, including noble Lords, likes paying tax. When in the 18th century Benjamin Franklin said,
“nothing is certain but death and taxes”,
he was unaware of the era of tax avoidance and evasion. Regarding the comment made about tax conferences, I must tell you that many people in the industry—and I am a chartered accountant—believe that people go to these conferences to find out ways of avoiding, if not evading, taxes. Listening to the debate today, I was reminded of Sir Walter Scott, who said:
“Oh what a tangled web we weave,
When first we practise to deceive!”.