Draft Double Taxation Relief and International Tax Enforcement (Luxembourg) Order 2022

Debate between Lucy Frazer and James Murray

Monday 5th September 2022 General Committees

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

It is a pleasure to serve on this Committee with you as Chair, Ms McVey, and I thank the Minister for her opening remarks. I am pleased to respond briefly on behalf of the Opposition.

As we heard from the Minister, the statutory instrument gives relief from double taxation in relation to capital gains tax, corporation tax, income tax and taxes of a similar character imposed by the laws of Luxembourg, as well as relating to international tax enforcement. As we can see, the schedule introduced by the order is largely technical in nature. It follows an approach that is consistent with similar bilateral agreements with other states and territories, and we will not oppose the order. It is important that bilateral agreements concerning taxation are clear.

We also welcome the objective of this double taxation treaty, which the explanatory memorandum makes clear is to

“protect the Exchequer by including provisions to combat tax avoidance and evasion.”

These provisions include

“measures providing for the exchange of information between revenue authorities”,

in order to

“make it more difficult for residents of both territories to evade taxation by concealing assets offshore.”

As the Minister knows from her time in office, the Opposition have been pushing her and her colleagues at every turn to do more to tackle evasion and avoidance. We have pushed them to implement the global minimum corporation tax rate that the OECD and G20 recently agreed, which the Minister mentioned in her speech. Therefore, I will use this opportunity to ask the Minister briefly about the implementation of the OECD agreement.

On 20 July this year, the Treasury published draft legislation that would introduce the new so-called multinational top-up tax. Can the Minister simply confirm whether the new Prime Minister tomorrow will support this legislation? If she cannot confirm that, will she join me in urging the new Prime Minister to continue with this legislation?

[Lucy Frazer]

I am happy to respond to the hon. Gentleman and I am very pleased to see him after the break. Of course he will realise that as the Prime Minister has just been appointed as the leader of the Conservative party and is yet to go to see the Queen, it would be a little bit premature to set out her plans.

Energy (Oil and Gas) Profits Levy Bill

Debate between Lucy Frazer and James Murray

Committee stage
Monday 11th July 2022 Commons Chamber

[Lucy Frazer]

I have read amendment 9 and will address it in due course. In response to the hon. Gentleman’s point, that will be included in guidance. I said it at the Dispatch Box last week, and my right hon. Friend the Chief Secretary to the Treasury has also said it at the Dispatch Box, so I think that point is quite clear.

Clause 5, on the meaning of “disqualifying purposes,” is an anti-avoidance provision to ensure that expenditure is not eligible for the investment allowance if it arises because of any tax avoidance arrangements. Clause 6 ensures that additional expenditure for the investment allowance is available only for new assets, including the acquisition of an interest in an oilfield. It prevents the allowance from being generated on assets that have already been taken into account for the purposes of the levy or that would have been had the levy been in force.

Clause 7 determines when investment expenditure is incurred. For capital expenditure, it is as per the rules set out in the existing capital allowances legislation; for operating and leasing expenditure, it is the date on which it is paid. The clause also makes it clear that expenditure incurred before 26 May 2022 or after 31 December 2025 is not to be treated as expenditure incurred in an accounting period to which the levy applies.

Clauses 8 and 9 define financing and decommissioning costs and are modelled on existing legislation. Clause 10 and schedule 1 set out the loss regime within the levy. This includes group relief and the losses that companies carry back or forward under the levy, such as carrying forward losses to a future qualifying period. Clause 11 applies general corporation tax principles to the levy, which is treated for administrative purposes as an amount of corporation tax. It also prescribes the framework within which the levy will operate.

Clause 12 introduces a requirement for companies making a levy repayment to provide information about that payment to HMRC, so that receipts from the levy can be monitored. Clause 13 provides for necessary adjustments to be made if alterations are made to a company’s ringfenced profits or losses. Clause 14 introduces schedule 2, which makes consequential amendments to enactments in the light of this Bill.

Clauses 15 to 17 set out the rules for apportioning profits for accounting periods that straddle the levy’s start or sunset dates. These rules identify which profits are chargeable to the levy by treating the periods before and after the start or end date as separate accounting periods. In particular, this requires companies to apportion their receipts, expenses, assets and liabilities on a just and reasonable basis. Clauses 18 and 19 simply set out the Bill’s legal interpretation and short title in the usual manner.

This Bill delivers the energy profits levy, a 25% surcharge on the oil and gas sector’s extraordinary profits. The levy will raise around £5 billion over the next year, and it will go towards supporting people via the cost of living measures we announced in May. The Bill also provides for the new 80% investment allowance, which means that businesses will overall get a 91p tax saving for every £1 they invest. Finally, the Bill provides certainty through a sunset provision. It will therefore give businesses further reassurance that the levy is indeed temporary.

[James Murray]

I will now address the detail of the Bill’s key clauses, as well as the amendments and new clauses tabled in my name and those of my hon. and right hon. Friends.

As I set out on Second Reading, this Bill is long overdue. The Government have finally agreed to introduce a windfall tax many months after they should have done. As I noted earlier, Ministers still cannot bring themselves to say “windfall tax” in relation to these measures, so we offer them amendment 8, which would rename the Bill, as one last chance to call this new tax what it is.

It has been six months since, on 9 January, the shadow Chancellor first set out Labour’s plans for a windfall tax on oil and gas producers’ profits to help to fund a cut to people’s home energy bills. Until their U-turn in late May, Ministers were falling over each other to attack our plans. In all the time they opposed our plans, people’s energy bills and oil producers’ profits both soared. Those months of opposing our plans left the public finances missing out on billions of pounds of tax revenue. Those extra funds could have given people further help with their energy bills. Today we are giving the Government the chance to right that wrong.

Clause 1 makes it clear that the windfall tax will apply from 26 May 2022. Our new clause 3 would require the Government to recognise how much extra tax revenue would be raised if the levy instead applied from 9 January. We urge all Conservative MPs to support our amendment and apply the windfall tax from 9 January, the day the shadow Chancellor first laid out Labour’s plans for a windfall tax, rather than leaving it to start only from 26 May, the day the former Chancellor finally changed his mind.

Those extra months would raise an extra £1.9 billion for the public finances, which we would then urge the Government to put toward removing VAT on domestic energy bills for the rest of this year. We have been urging the Government to scrap VAT on this year’s domestic energy bills since last autumn. We know that a VAT cut would provide immediate help to families now. Furthermore, taking VAT off energy bills would help to push inflation downwards from its current 40-year high. Funding for this should come from applying the windfall tax from January this year, when Labour first called for it, rather than only from May, when the Government finally came round.

Conservative leadership hopefuls have been talking a lot over the weekend about how keen they are on tax cuts, although they and their supporters have all failed to explain how any of those would be paid for. Today, we offer them a fully funded tax cut that will help people immediately with the cost of living. Today, we are asking them to follow our plan to cut VAT on home energy bills by applying the windfall tax on oil producers from the start of the year, as should always have been the case. The principle of backdating a windfall tax is not only well established—given that the very principle of windfall taxes is to tax unexpected profits that have occurred—but is included in this Bill, which backdates the levy in its first clause.

We know that oil producers such as BP and Shell reported bumper profits in the first quarter of 2022. As drafted, however, the Government’s Bill ignores those profits entirely, as their levy will not apply until well into the second quarter of this calendar year. I realise that the Financial Secretary has said that she will not support our new clause and that the current Chancellor, a former oil industry executive, is unlikely to change his mind after coming out so firmly against a windfall tax on oil and gas producers back in January, on the grounds that those producers were “already struggling.” But given the situation in the Conservative party, I wonder whether colleagues of the Minister may feel able to think more openly about how to vote. I wonder whether any of the other Conservative leadership candidates may like to support our plan for an immediate, fully funded tax cut to help people with the cost of living and tackle inflation. Later this evening, when we vote on new clause 3, we will find out what judgment they have made.

We would also like to know what judgment those people have made about the Government’s decision to undermine the levy by shamefully giving a third or more of any money raised straight back to the oil producers through the new tax break introduced by clauses 2 to 7. This new tax break offers oil and gas producers an unprecedented subsidy for their spending on oil-related activities. As we made clear on Second Reading, for every £100 an oil and gas producer invests in the North sea, they will receive £91.25 from the taxpayer. That is an astonishing 20 times the £4.50 that companies investing in renewable energy will receive from April next year.

Any argument by Ministers that this tax break is necessary to support investment in oil-related activities has been challenged by the bosses of the oil producers themselves. BP’s chief executive told shareholders just two months ago that the company’s £18 billion investment plans were

“not somehow contingent on whether or not there is a windfall tax”.

Yet despite even oil executives questioning its worth, the Government are pushing ahead with this tax break. Our analysis has shown that that means a third or more of any revenue from the new levy could be handed straight back to oil and gas producers. That money will subsidise projects that almost certainly would have happened anyway, as there is no requirement in the Bill for investment to be additional to what was already planned, and this move stands totally at odds with the paramount need to invest in renewable energy sources.

It is critically important and urgent for us to invest in renewable energy to strengthen our energy security while bringing down people’s bills and tackling the climate crisis. We have set out Labour’s plan to do just that. Alongside insulating 19 million homes over 10 years to cut people’s bills, we would strengthen our energy security and reduce our carbon emissions by doubling our onshore wind capacity, tripling solar power, backing tidal power and nuclear power, and further investing in hydrogen. Yet the Government are today introducing a tax break that seems to fly in the face of tackling the climate crisis.

That is why we have tabled new clause 2, which would force the Government to come clean about the impact of their unnecessary tax giveaway to oil producers on our country’s net zero obligations, energy security and renewable energy supplies. This new clause also asks the Government to spell out what impact their tax break will have on fracking, given the deeply concerning reports in the media that legal advice provided to the campaigning group Uplift suggests that fracking companies would also be eligible for this tax break, based on the way the Bill has been written. I urge the Government to accept new clause 2, to make it clear what impact the tax break in the Bill will have on fracking. If the Minister refuses to do that, will she at least come clean today and confirm or deny whether this tax break could lead to public money being channelled toward dangerous, unpopular and expensive fracking projects?

Customs (Amendments and Miscellaneous Provisions) Regulations 2022

Debate between Lucy Frazer and James Murray

Monday 27th June 2022 General Committees

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

Thank you, Ms Fovargue, for the opportunity to set out the Opposition’s position on this statutory instrument.

As we heard from the Minister, this instrument intends to correct subordinate legislation previously made under the Taxation (Cross-border Trade) Act 2018. It seeks to amend errors and update tariff reference documents that detail the classification and duty of rates on goods included in the UK’s tariff schedule.

We recognise that the areas covered by the statutory instrument are fairly specific, and as the Government are correcting errors, we will not oppose it. While we recognise that corrections and amendments need to be made where defects or errors have occurred, however, it is important that the Government support businesses and minimise further inconvenience, in particular at this difficult and uncertain time.

While we will not oppose the regulations, I want to clarify the impact on the businesses affected. In particular, as the Scottish National party spokesperson said, the explanatory memorandum makes it clear that until the errors were identified, importers may have been under the impression that the import duty was being lawfully applied and in line with stated policy. The notes confirm that HMRC is planning to refund affected traders who have consequently overpaid. Will the Minister expand on her response to the earlier intervention and explain the process by which affected traders will be refunded? Will the refund take place automatically, or will traders need to apply for it? I would also be grateful if the Minister set out in further detail exactly how many traders have been affected by overpayment and over what period, and how much overpaid revenue has been approved or needs to be funded.

Although the Labour party will not oppose the statutory instrument, it is important that we get clarity on exactly how those overpayments will be refunded and on how that refund will operate.

[Lucy Frazer]

I am happy to respond to those points. As I mentioned, those 601 traders were incorrectly charged a total of £1,382,000.90. We have contacted all traders who are owed, and we are in the process of reimbursing them. I am happy to write to the hon. Gentleman on the one question of his that I have not answered.

I am pleased that the hon. Gentleman will not oppose the statutory instrument. Of course, a small part of the SI deals with the three errors that have been identified in the 16,000 tariff lines—I emphasise that those are small errors. The instrument not only deals with those small errors, but updates the code as a whole, so it was necessary to bring it before the House. For all those reasons, I commend the regulations to the Committee.

Draft Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2022 Draft Tax Credits, Child Benefits and Guardians Allowance Up-rating Regulations 2022

Debate between Lucy Frazer and James Murray

Tuesday 22nd February 2022 General Committees

[Lucy Frazer]

In response to the hon. Member for Ealing North, in my opening speech I set out in some detail how the thresholds will increase for those starting to pay NICs. I am happy to combine information on those thresholds with that on the social care levy in writing to the hon. Gentleman.

[James Murray]

On a point of clarification, I was asking about the increase in the primary threshold and the increase in NICs for 2022-23. As the Minister will know, the health and social care levy is not due to come in for another year.

[Lucy Frazer]

In my introductory remarks, I set out how each threshold will be increased, but I am happy to set that out in writing to him. He also spoke about the steps we are taking to protect the most vulnerable. He will know that, last September, we put in place a support package of half a billion pounds to support the most vulnerable. He will have heard the Chancellor’s statement only last month about the steps we are taking in response to the energy price increases. He will also be aware of the £400 billion support provided by the Chancellor in the past two years.

The SIs before us are important to ensure that we continue to uprate the thresholds.

--- Later in debate ---

[Lucy Frazer]

I value the hon. Gentleman’s contribution to the debate. He has obviously followed the issue very closely so he will know of the steps the Chancellor has taken to ensure that we combat fraud not only in relation to the coronavirus schemes but more broadly. The hon. Gentleman will have heard the Chancellor talk about the coronavirus fraud taskforce that has been set up—more than 1,000 people are now engaged to tackle fraud and the taskforce has already recovered half a billion pounds and is set to recover a further billion.

[James Murray]

May I again ask the Minister to respond to my second point about the second SI before the Committee and confirm what the level of the working tax credit basic element will be in April 2022 compared with the same time two years previously?

[Lucy Frazer]

As I said earlier, I am happy to write to him on the subject.

Finance (No. 2) Bill

Debate between Lucy Frazer and James Murray

Report stage
Wednesday 2nd February 2022 Commons Chamber

[Lucy Frazer]

My right hon. Friend is right. We are not seeking to raise revenue; we are seeking to prevent certain circumstances from coming about, and we hope that this deterrent will be sufficient. Of course, if it were not, we would be able to recoup the money by way of tax. He will have spotted that the legislation is only in force for a short period to allow Ofgem to take regulatory action to ensure that we deal with this issue in the appropriate way through regulation rather than by bringing preventive action by way of a tax.

As I was saying, this new tax will have effect where steps are taken to obtain value from assets that materially contribute to a licensed energy supply business entering into special measures or to the increased costs of the business where it is a subject of special measures on or after 28 January this year and before 28 January next year. The tax will apply to the value of the assets that are held in connection with a licensed energy supply business where the assets in scope of the tax exceed £100 million, including assets held by connected persons. This is to ensure that the tax would capture only the very largest energy businesses. The tax will apply at a rate of 75% so as to be an active and effective deterrent against actions that are not in the public interest, and to recoup a substantial proportion of the costs that would otherwise fall to the Government under special administration measures in the event that such action was taken, as my right hon. Friend the Member for Central Devon (Mel Stride) pointed out.

In order to ensure that the tax is robust against avoidance activity, and given the sums at stake, the Government consider it necessary for Her Majesty’s Revenue and Customs to be able to recover the tax from other persons if it cannot recover it from the relevant company. These joint and several liability provisions will apply only to companies under common ownership, as well as investors and persons connected with those investors in limited circumstances. Safeguards are also in place to permit certain affected persons to make a claim for relief to limit the amount of joint and several liability to the amount that they potentially benefit from such transactions. It is our hope and expectation that no business would pursue such action and that the tax will not be charged. The tax is a temporary and necessary safeguard that will protect the taxpayer and energy consumers in the interim period before the regulatory change takes effect.

The Government amendments will ensure that the legislation works as it should and protects the interests of the people of this country. I therefore commend to the House amendments 1 to 33, new clauses 1 and 3, and new schedules 1 and 2, and I urge Members to accept them.

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

Any member of the public hearing that the Government were today voting their Finance Bill through the House of Commons might expect such a Bill to do something to help with the cost of living crisis facing families up and down this country. Our new clause 6 makes this simple point. It asks the Government to set out how the measures in the Bill will affect household finances, the amount of tax working people are paying, and the rate of growth in the economy in the coming year.

I suspect that Ministers will want to avoid our new clause 6 because they know what the answers will be. The truth is that whether through this Bill or any other means, the Government are letting energy bills soar, refusing to cancel their national insurance hike, and failing to set out a plan for growth. The Conservatives’ failure to grow the economy over the last decade, and their inability to plan for growth in the future, has left them with no choice but to raise taxes. This low-growth, high-tax approach to the economy has become the hallmark of these Conservatives in power.

Let me make it clear why our new clause 6 might make such difficult reading for Conservative Members. People see their energy bills going up and about to soar, inflation at its highest rate in decades, and their wages falling in real terms—and what do the Tories do? They raise national insurance by £274 for a typical full-time worker. It is the worst possible tax rise at the worst possible time. We warned that it was wrong when the Government pushed it through Parliament last year. Our arguments have only got stronger since then, so instead of digging in, the Chancellor and the Prime Minister should do the right thing and scrap this tax hike on working people and their jobs. Despite calls on the Government from all sides, they are so far refusing to budge. In this Bill, they offer no relief to working people, who face soaring prices and tax bills. They have managed to find time, however, to put into law a tax cut for banks, as we see in clause 6.

Clause 6, which our amendment 35 seeks to delete, would see the rate of the banking corporation tax surcharge fall from 8% to 3%, with the allowance for the charge raised from £25 million to £100 million. That will cost the public finances £1 billion a year by the end of this Parliament. Throughout the passage of the Bill, the Financial Secretary to the Treasury has used smoke and mirrors desperately to pretend that the Government are not cutting taxes for banks. She has tried to hide this tax cut under a separate change to corporation tax that may never even come to pass.

Oral Answers to Questions

Debate between Lucy Frazer and James Murray

Tuesday 1st February 2022 Commons Chamber

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

Last month, the Government came out against Labour’s plan to help people on modest incomes pay their energy bills using a one-off £1.2 billion windfall tax on the profits of oil and gas producers. The Education Secretary complained that oil and gas companies are “already struggling”. The truth is that pensioners and people on modest incomes are the ones who are struggling. Oil and gas companies are expected to report near-record income this year. Will Ministers now admit that the Government have got it wrong and commit to looking again at our plan?

[The Financial Secretary to the Treasury (Lucy Frazer)]

The hon. Member will know that the oil and gas industry pays a significant amount in taxation—I mentioned the figure earlier. In terms of helping people who are struggling with their bills, he will know that we already have the energy price cap, the winter fuel payment, the warm home discount and the cold weather payment. We are looking out for and supporting those on the lowest income to enable them to get through this difficult period.

Local Government Finance Act 1988 (Non-domestic Rating Multipliers) (England) (No.2) Order 2021

Debate between Lucy Frazer and James Murray

Tuesday 25th January 2022 General Committees

[Lucy Frazer]

I thank the hon. Gentleman for saying that the Opposition will not oppose this sensible measure, which will support and protect businesses. As he rightly said, there was no need for an impact assessment for the reasons that he outlined. If we were to conduct one, of course it would show that the proposal is hugely beneficial to businesses, which will not be paying a significant amount of business rates that they would otherwise pay. They can therefore use that money in their own businesses, benefiting the economy.

The hon. Gentleman asked me to outline the support that we are giving to businesses. He will know that in the past 18 months, we have given significant support to businesses through the provision of loans and grants, and he will have seen the extensive measures contained in the Finance Bill that we had the pleasure to debate together. They include not only the multiplier that we are debating today, but the business rate relief, the investment allowance and a number of other measures.

On business rates, we did a review of those rates and as a result made changes that will benefit businesses to the tune of around £7 billion. But that is not all we have done. The hon. Gentleman will know that we announced our intention to review the online sales tax. That will be conducted shortly.

[James Murray]

To clarify, I asked about the detail of the review process of the SI. The explanatory memorandum says

“The operation of this instrument will be monitored and reviewed as part of the operation of the national non-domestic rates system as a whole.”

I am sure the Minister has a copy of the explanatory memorandum. Can she outline the detail of that review process?

[Lucy Frazer]

As the hon. Gentleman will know, we keep all our taxes under review. The SI will be reviewed in due course, and I would be happy to update him when any such reviews are undertaken.

I commend the order to the Committee.

Question put and agreed to.

Finance (No. 2) Bill (Fifth sitting)

Debate between Lucy Frazer and James Murray

Committee stage
Tuesday 11th January 2022 Public Bill Committees

[Lucy Frazer]

Clause 98 introduces regulation-making powers to allow the Government to make temporary changes to provide income tax relief on certain benefits in kind or expenses in a disaster or emergency of national significance.

Covid has highlighted the limited scope to respond quickly to make changes to the current benefits-in-kind and expenses tax system to support people during the pandemic. The Government are determined to learn from that experience and ensure that we are prepared for future crises. It is expected that during any future disaster or emergency of national significance, it may be necessary to make similar changes on a temporary basis. The current legislation allows only for changes to be made through secondary legislation in limited circumstances. The clause introduces regulation-making powers that will allow the Government to respond quickly and effectively to various future emergency situations—including, but not limited to, pandemics—if deemed necessary.

The clause introduces regulation powers to allow employers to support their employees through the provision of a certain benefit in kind or expense in a disaster or emergency of national significance without creating an additional income tax charge. The powers can be exercised only in a way that provides support to taxpayers, as changes can be wholly relieving only and cannot create a tax charge. The Treasury can determine when it is appropriate to use the powers, but may make changes only to the income tax expenses and benefit-in-kind rules. Any changes made through the powers will have effect only for a limited time, up to a maximum of two complete tax years. The clause allows the Government to respond quickly and effectively to provide support to taxpayers in disasters or emergencies of national significance, and I commend it to the Committee.

[James Murray]

As we have heard, clause 98 relates to the power to make temporary modifications of taxation of employment income. The clause will grant the Treasury the power to make regulations to modify temporarily parts 3, 4 and 5 of the Income Tax (Earnings and Pensions) Act 2003 under ministerial direction, in the event of a disaster or emergency of national significance. The regulations must set out which disaster or emergency they are made in respect of, and the powers can be exercised only in a way that is wholly relieving to the taxpayer and cannot be used to create a tax charge.

This measure has been introduced in the context of the covid-19 pandemic, and indeed covid has highlighted the limited scope to make changes to the current benefits in kind and expenses rules to respond quickly to the pandemic. We understand that the aim of clause 98 is to enable changes to primary legislation to be made rapidly in response to significant national events. In that respect, we do not oppose this clause, provided that it is applied in strictly exceptional circumstances of national importance.

The clause uses the terms “emergency” and “disaster”, but a specific description of these criteria is missing. I would be grateful if the Minister set out what the Treasury would consider to be an emergency or disaster. Without a doubt, the onset of the covid-19 pandemic was a good example, but without a robust and transparent framework to guide the Treasury—given that the use of the power seems to be at its sole discretion—it is important that we are clear about the circumstances in which income tax liability can effectively be waived. Moreover, clause 98 notes that such measures would be temporary and would not apply longer than necessary. Again, guidance and a framework are conspicuously lacking, as the Government has provided no definition of “temporary”.

Early in the covid pandemic, emergency measures were needed, but as the pandemic has gone on the need for emergency measures has lessened. I would be grateful if the Minister assured us that a clear and transparent framework for establishing what constitutes “emergency”, “disaster” and “temporary” will be published, and when. If not, why not?

I am sure that we agree that this is a matter of effective policy rather than politics. As I have said, the context in which the clause has been introduced is uncontroversial, but I would be grateful if the Minister addressed this ambiguity and assessed whether the measure could be applied in a manner that deviates from its stated intention.

[Alison Thewliss]

I agree very much with what the Labour Front-Bench spokesman has said. Clause 98 is very wide-ranging, and vague in a lot of ways. It is important to understand its scope, because one person’s definition of a disaster or emergency might be quite different from another’s. It is important that we define that slightly more than is the case in the clause, which states that the regulations

“may only specify a disaster or emergency which the Treasury considers to be of national significance.”

That could be a lot of things, depending on how the Treasury considers it.

I wonder whether the Minister, in looking at the clause, has taken into account the findings of the Public Accounts Committee and the National Audit Office on the Government’s lack of financial preparedness, specifically coming into the pandemic. There was a lot of talk about medical preparedness, stockpiling and things like that, but both the National Audit Office and the Public Accounts Committee found that there was no preparedness in the Treasury for a pandemic or national emergency of this type.

It would be useful to know what further work, in addition to clause 98, Treasury officials are putting in place to ensure that, should something like this occur in future, the box of learning from this pandemic can be taken off the shelf and easily applied, without having to make a load of new provisions and regulations, so that things are ready to go, and we do not have to scratch around, trying to figure out what happened last time. Another pandemic may occur in five years or 50 years—we do not know. Certainly, our hope in the SNP is that we will not be here in 50 years, if not five, but it would be useful to know what provisions are being considered in the Treasury to ensure that the learning from this pandemic sits very tightly with this clause and can be applied very easily.

--- Later in debate ---

[Lucy Frazer]

The hon. Lady is right to say that a number of measures were reactive, but they were brought it at extremely quick pace and were effective pretty much immediately. She makes a valid point about learning; I know the Treasury is learning and has learned throughout the pandemic. The schemes we put in place at the outset have been refined, including the self-employment income support scheme, the furlough schemes and the coronavirus job retention scheme.

The hon. Lady mentioned the level of fraud; as the pandemic went on and the measures were refined, fraud reduced. She makes a valuable point about learning, and I am sure all Departments are learning. We do not want to be in this position again, which is precisely why we are bringing forward this legislation, to ensure that we are ready for any other emergency that should come our way.

[James Murray]

For the avoidance of doubt, I would like to clarify the point I raised with the Minister earlier. I was not seeking to ask the Government to be entirely prescriptive about what an emergency or disaster is; I merely asked them to publish a clear and transparent framework for establishing what constitutes “emergency”, “disaster” and “temporary”. If the Minister is saying that the Government will refuse to publish a clear and transparent framework for establishing the meaning of those words, will she confirm that it will remain at the sole discretion of the Treasury, based on unpublished guidance or frameworks, as to what constitutes “emergency”, “disaster” and “temporary”?

[Lucy Frazer]

The hon. Member is being a little unfair in his categorisation of what would happen and what we are seeking. That has not been defined in legislation because it is very hard to predict, and we do not want to limit severely the opportunities to exercise that power. The hon. Member has seen how the Treasury would react by the way it has reacted. That should give him some comfort.

Question put and agreed to.

Clause 98 accordingly ordered to stand part of the Bill.

Clause 99

Vehicle CO₂ emissions certificates

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[James Murray]

As we heard from the Minister, clause 100 relates to an increase of two members in the maximum independent representation on the board of the Office of Tax Simplification, bringing the overall membership to 10. The OTS was brought in by the coalition Government in 2010 and put on a statutory footing by the Finance Act 2016. It is an independent body that sits alongside the Treasury to advise the Chancellor on the simplification of the tax system and suggest ways to increase system efficiency. We recognise the value in adding further expertise to the board, although we also recognise the important principle in the SNP’s new clause 9, which would require the Government to report on the diversity of the OTS board.

We note the wider concerns of the Chartered Institute of Taxation, which questions whether the broader changes suggested by the OTS will be implemented. Between 2010 and 2015, only 166 of the OTS’s 403 recommendations to Government were wholly accepted. It is therefore surprising that there is so much enthusiasm for increasing the size of the OTS board, given that the Government do not always seem to listen.

We note a suggestion from the Chartered Institute of Taxation that the Government formally respond to every OTS recommendation within a prescribed timeframe. I would be grateful if the Minister set out whether she is willing to commit to doing so.

[Lucy Frazer]

I thank the hon. Members for Gordon and for Ealing North for their contributions. I was very interested to hear about the new clauses from the hon. Member for Gordon. New clause 9, which was tabled by the hon. Member for Glasgow Central, would require the Government to publish

“an assessment of the composition of the Office of Tax Simplification”

to ensure that it is diverse. I assure hon. Members that the OTS is an independent office of HMT, so all appointments are made in line with the principles of the Office of the Commissioner for Public Appointments. Public appointments to the OTS should therefore reflect the diversity of the society in which we live and increase in diversity. The Government have an ambition that, by 2022, half of all new appointees should be women and 14% of appointments should be made to those from ethnic minorities.

I know that the Government are very committed to this issue, as my first appointment to Government was as a Parliamentary Private Secretary in the Cabinet Office. I dealt with and saw the work of the Cabinet Office on this issue, and it is doing a broad amount of work across Government to ensure diversity.

New clause 10, which was also tabled by the hon. Member for Glasgow Central, would require the Government to publish

“a review of the membership and capacity of the OTS”.

The Government remain committed to supporting the OTS to provide advice on the simplification of the tax system, and published their first five-year review of the OTS’s effectiveness this autumn. The review makes a number of recommendations on the resourcing and governance of the OTS and recognises the value of a mix of skillsets and expertise on the OTS board. It recommends that HMT build on that further and, following the nomination by the chair, appoint additional independent members to bring in expertise in areas not currently represented. Given the recent examination of the OTS’s resourcing and governance, the Government do not believe that a review of the membership and capacity of the OTS is necessary.

To respond to the point the hon. Member for Ealing North made about the value of the work of the OTS, as he will know, the OTS will be looking into how it produces its reports and carries out its reviews. The fact that the Government do not always fully accept the recommendations of the OTS is not a sign that the OTS is not performing an important function: it is performing an important function in making recommendations that the Government can look at. The OTS also has a power to make suggestions on proposals that the Government themselves are thinking about, and it works with officials to make suggestions as to how we can change and improve the legislation and proposals that we are putting forward.

For those reasons, I encourage Members to reject the new clauses.

[James Murray]

The Minister may have missed my question in my earlier comments, which was whether she would commit to responding formally to every OTS recommendation within a prescribed timeframe.

[Lucy Frazer]

I understand why the hon. Member has made that suggestion, but the OTS is independent and can look at what it wishes to look at. That might not necessarily be what the Government are focusing on at any particular moment, so for those reasons and others, I will not be accepting that proposal today.

Question put and agreed to.

Clause 100 accordingly ordered to stand part of the Bill.

Clause 101

Interpretation

Question proposed, That the clause stand part of the Bill.

[Lucy Frazer]

This might be the shortest speech in this sitting. Clauses 101 and 102 simply set out the Bill’s legal interpretation and short title in the usual manner for such legislation. I therefore commend them to the Committee.

[James Murray]

Clauses 101 and 102 are entirely reasonable, and we do not oppose them. I take this opportunity, however, on behalf of myself and my hon. Friend the Member for Erith and Thamesmead to thank other members of the Committee, including of course our Whip, my hon. Friend the Member for Blaydon. I also thank you, Sir Christopher, and all the House of Commons staff who have supported us through this Committee, in particular Chris Stanton, whom I thank for all his help and advice.

Finance (No. 2) Bill (Third sitting)

Debate between Lucy Frazer and James Murray

Committee stage
Wednesday 5th January 2022 Public Bill Committees

[The Financial Secretary to the Treasury (Lucy Frazer)]

It is a pleasure to serve under your chairmanship, Dame Angela. Like you, I wish all members of the Committee a happy new year. As the Committee will know, the Government are determined to bring an end to unsafe cladding, to reassure homeowners and to support confidence in the housing market. As part of the building safety package announced in February 2021, we are introducing a new residential property developer tax, which will raise at least £2 billion over the next decade to help to pay for building safety remediation.

As announced on 10 February 2021 by the previous Secretary of State for Housing, Communities and Local Government, my right hon. Friend the Member for Newark (Robert Jenrick), the RPDT is one of two new revenue-raising measures that will ensure that developers make a fair contribution to the costs of remediation. Clauses 32 and 33 introduce a new residential property developer tax to be charged at a rate of 4% on the profits of businesses carrying out residential property development activity that exceed its allowance for an accounting period. The clauses confirm that the RPDT is charged as if it were an amount of UK corporation tax.

Clause 52 is an anti-avoidance provision, which prevents taxpayers from adjusting their profits arising in an accounting period in order to obtain a tax advantage. The clause will apply where trading profits derived from residential property development activities arise in the accounting period ending before the commencement of RPDT, and arose only because of arrangements made on or after 29 April 2021.

New clause 3, tabled by the hon. Member for Glasgow Central, seeks to require the Government to publish an assessment of the impact of RPDT on the tax gap, and of whether it has increased opportunities for tax evasion and avoidance. As the RPDT has been designed to be aligned with UK corporation tax, the existing corporation tax compliance mechanisms, such as inquiries, information powers and penalties, will apply to RPDT, as well as anti-avoidance rules including transfer pricing and the general anti-abuse rule.

Her Majesty’s Revenue and Customs regularly reports on the taxes that it is responsible for collecting, and the RPDT will be no exception. HMRC will assess the impact of RPDT on the tax gap in its annual “Measuring tax gaps” reports, and will monitor RPDT revenue in its annual tax receipts statistical publications. The Government also carefully assessed the impacts of RPDT throughout the consultation period and published a detailed impact assessment of RPDT at the autumn Budget. For those reasons, I believe that a further impact assessment is not appropriate, and I therefore ask the Committee to reject the new clause.

New clause 18, tabled by the hon. Members for Ealing North, for Erith and Thamesmead and for Blaydon, seeks to require the publication of an annual review of the tax, including the revenue raised, the estimated yield that would have been raised had the tax been set at various differential rates—6%, 8% and 10%—and the wider effects of the higher rates. HMRC regularly reports on the taxes that it is responsible for collecting, and the RPDT will be no exception. The revenue raised from RPDT will be published in HMRC’s annual tax receipts statistics publications.

The RPDT rate was carefully considered in the context of the upcoming increase in the main rate of corporation tax in 2023, other taxes and forthcoming regulatory changes, as well as the wider macroeconomic environment. The 4% rate of RPDT balances the need to raise £2 billion over a decade—at the same time as seeking a fair contribution from the residential property development sector—against the need to ensure that the tax does not have a significant impact on housing supply. The Government monitor the tax system continuously and will keep the tax under review. For those reasons, I believe that a further annual review of RPDT is not appropriate, and I therefore ask the Committee to reject new clause 18.

In conclusion, the clauses in this group form the first part of the legislation needed to introduce RPDT in April 2022 and the necessary anti-avoidance provisions. I therefore recommend that the clauses stand part of the Bill.

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

It is a pleasure to serve on a second Finance Bill Committee under your chairship, Dame Angela.

I will address the clauses that the Minister set out in her remarks, starting with clause 32, which notes that the new residential property developer tax will be applicable from 1 April 2022, as announced at the spring Budget of 2021. As we have heard, this is a new, time-limited tax on the profits of residential property development companies’ property development activity, with a rate of 4% over a £25 million allowance. The Government estimate that it will generate £2 billion over the course of a decade, and they said that the funds are earmarked to help with cladding remediation costs, according to the former Secretary of State for Housing, the right hon. Member for Newark (Robert Jenrick), who spoke to the Building Safety Bill in February 2021. The explanatory note for the clause states that the tax is to

“ensure that the largest developers make a fair contribution to help fund the Government’s cladding remediation costs.”

We support the principle behind the new tax, but I intend to use this Committee sitting to question the Ministers on the detail of its design and to probe their views on its place in the Government’s wider response to the cladding scandal. We know that the Bill has been consulted on, but we also note stakeholders’ disappointment that the consultation process was truncated, as stage 1 —setting out objectives and identifying options—was cancelled. Although we recognise the importance of moving quickly to raise revenue in order to help meet the costs of remediating unsafe cladding on buildings, it is disappointing that the Government were not able to conduct a thorough consultation.

Clause 33 sets the rate of the RPDT charge at 4% on profits that exceed the allowance of £25 million. The tax is charged as if it were an amount of corporation tax chargeable on the developer. As I mentioned earlier, the Government expect that £2 billion of revenue will be generated while the tax is in effect, so I will ask the Minister several questions in order to try to clarify the reasoning behind some of the Government’s decisions on the detail of the tax. First, we note that the tax does not come with a sunset clause, and therefore active legislation will be required to repeal it when it comes to an end. Will the Minister explain the reasoning behind that decision? If the tax is intended to be time-limited, why have the Government have chosen to leave it in need of active repeal, rather than simply adding a sunset clause?

Secondly, I mentioned that the expected revenue from the tax is £2 billion. We know, however, that that is just a fraction of the total cost of remediating unsafe cladding, which was estimated by the then Housing, Communities and Local Government Committee in April 2021 to be about £15 billion. What is more, labour and material shortages have significantly driven up the cost of construction. That is thought to add £1.2 billion to the overall cost of remediation, wiping out most of any gain from this tax. With the cost of cladding remediation already thought to be so much greater than the amount that the tax is expected to raise, and with that gap likely only to increase, will the Minister try to explain further why the rate was set at 4%? Will she confirm whether, if the amount raised should fall short of £2 billion or if costs should increase substantially, the Government would be open to considering raising the level of the tax?

It was in pursuit of an answer to that question that we tabled new clause 18, which would require the Government to publish a review of the residential property developer tax within three months of the end of the first year of it applying, and thereafter annually, within three months of the end of each subsequent year that the tax applies. The review, as updated, must assess how much the RPDT has raised in each year of its operation so far and how much it is estimated that it would have raised at levels of 6%, 8% and 10%.

As I mentioned, the cost of remediating unsafe cladding was estimated last year to be about £15 billion, and the cost of labour and materials has increased due to supply chain crises. Industry experts have estimated an 8% increase in the cost of cladding jobs, compared with last year. As I mentioned, that could increase the total cost by £1.2 billion. As I said, this tax aims to raise £2 billion, which is just a fraction of the total cost and much of which, it seems, will be wiped out by rising costs.

We have therefore tabled this new clause to ask the Government to assess how much they could raise through the tax and how much they could raise with different rates. Given the significant discrepancy between the estimated revenue raised by the RPDT and the estimated cost of remediation, will the Minister set out in further detail, when she responds, exactly how the rate of 4% was reached and what specific consideration was given to alternatives? It was with that in mind that we tabled the new clause. We will not seek to put it to a vote, but we hope that it will help us to debate and probe the important and central issue of the rate at which the RPDT has been set.

In summary, I will be grateful if, in her reply, the Minister could set out exactly how the figure of 4% was arrived at and, furthermore, how she expects the rest of the cost of cladding remediation to be met. I would be grateful if she could set out, either in her reply now or in writing, what other sources of funding she anticipates being used to meet the total cost of cladding remediation.

Finally in relation to this group, I will briefly mention clause 52, which is an anti-avoidance provision preventing taxpayers from adjusting their profits arising in an accounting period in order to obtain a tax advantage for the purposes of this tax. We welcome the intent behind that clause and will not oppose it.

--- Later in debate ---

[Lucy Frazer]

I very much welcome the initial comments of the hon. Member for Ealing North, and that he welcomes the points in principle. That is important, given that we are trying to help those people who have suffered a terrible tragedy and ensure that we have the necessary funds to remedy the situation. He asked several questions, the first of which related to consultation. I reassure him that the Government undertook extensive stakeholder engagement as part of the 12-week consultation —holding 40 consultative meetings—to help ensure that the issues raised in the consultation about the design and impact were considered fully.

The hon. Gentleman also mentioned a sunset clause. We have been clear that this is a measure to raise £2 billion-worth of revenue by way of tax, and that it will be time limited and will be repealed once sufficient revenue has been raised. As with all other taxes, the Government will keep this tax under review.

The hon. Gentleman asked whether the 4% rate was sufficient. However, at the same time, he also mentioned the supply chain issues that might mean that the cost of construction has gone up. It is, of course, important to ensure that what we ask from developers is fair, in order to ensure that their businesses remain viable and sustainable at the same time as contributing to this issue. The rate was carefully considered in the context of the upcoming increase in corporation tax, other taxes, the regulatory changes and the wider macroeconomic environment. We feel that 4% represents the right balance, raising the £2 billion over a decade while being fair and not having an impact on housing supply. The hon. Gentleman asked how we came to this rate; we considered it very carefully and decided on 4%.

[James Murray]

For the sake of clarity, I would be grateful if the Minister could help my understanding. She said that the tax was intended to raise £2 billion over 10 years, but she may have implied that if it has not raised £2 billion over 10 years, it would keep applying until £2 billion was raised. Is it for 10 years, or is it for £2 billion? The Government will not necessarily raise £2 billion over exactly 10 years; one has to come before the other. Is it going to be for 10 years and then finish—no matter what it has raised—or will it keep going until it has raised £2 billion?

[Lucy Frazer]

The Government have made clear that they propose to raise £2 billion from this tax. They have done extensive analysis as to what the appropriate rate is to recover that amount. At a rate of 4%, we anticipate that we will raise that £2 billion—in fact, slightly more than that—in 10 years, and that is when the tax will come to an end.

I will address the points made by the hon. Member for Gordon, because he rightly raised an important point about tax avoidance. It is HMRC’s duty to ensure that we do not have tax avoidance and evasion. However, I reassure him that the existing corporation tax compliance mechanisms that currently exist—which include inquiries, information powers and penalties—will apply to this tax, as well as anti-avoidance rules, including transfer pricing and the general anti-abuse rule. He did not specifically raise any particular measures that he thought would be anti-avoidance or abuse—if there are any, I would be very interested to hear them in due course and discuss that with him.

For those reasons, we ask the Committee to reject the two new clauses and to agree that clauses 32 and 33 stand part.

Question put and agreed to.

Clause 32 accordingly ordered to stand part of the Bill.

Clause 33 ordered to stand part of the Bill.

--- Later in debate ---

[Lucy Frazer]

Clauses 34 to 38 set out key definitions for the residential property developer tax, which collectively set out the conditions that need to be satisfied for a business to be in scope of the tax. Clauses 47 to 51 and schedule 9 address a mix of aims within the tax, including the definition of a group, excluding a deduction for the tax when calculating profits or losses for other tax purposes, and the application of transfer pricing principles for the purpose of the residential property developer tax.

Clause 34 defines a residential property developer, and confirms that to be in scope of the RPDT, a business must be a company that undertakes residential property development activities as further defined in clause 35. Clause 34 provides an exclusion for non-profit housing companies and their wholly owned subsidiary companies from being treated as residential property developers for the purposes of the RPDT. The clause defines a non-profit housing company by reference to existing legislation, and a power has been taken that allows the definition to be updated in future in line with any changes to regulatory frameworks.

Clause 35 provides a non-exhaustive list of what amounts to residential property development activities, and confirms that profits from these activities undertaken by the developer on or in connection with UK land in which it has an interest will form the tax base.

Clause 36 explains that a residential property developer or a related company will have an interest in the land for the purposes of the tax where it has an interest in or over the land that forms part of its trading stock used in its development trade. It explains the tax’s application to related companies and joint venture companies.

Clause 37 provides a definition of residential property and sets out the types of properties that will not be regarded as residential property. The clause excludes certain types of buildings from the definition of residential property, so that any profits or losses from their development are not taken into account when computing profits that are subject to the tax. These include, typically, specialised institutions that provide temporary or longer-term accommodation for a specific class of residents, and buildings that are occupied purely under licence to occupants who do not hold any lasting rights over the property. Finally, the clause sets out the criteria to be met in relation to buildings that are excluded from the definition of residential property as student accommodation. Clause 38 sets out the formula used to calculate the residential profits or losses from residential property development activity by a developer for an accounting period.

Clause 47 introduces an exit charge that applies when a non-profit housing company ceases to meet the conditions to be exempt from the RPDT, and sets out the operation of the exit charge. This rule has been welcomed by the non-profit sector.

Clause 48 provides the definition of a group of companies for the purposes of the RPDT, other than for the group relief rules in schedule 7. Since a group of companies is entitled to a single £25 million allowance, it is important to set out clearly what constitutes a group for that purpose.

Clause 49 introduces schedule 9, which introduces a rule preventing a residential property developer from obtaining any deduction for the tax when calculating any profits or losses for income tax or corporation tax purposes. Clause 50 sets out where the meaning of various terms used in the RPDT legislation can be found.

Clause 51 confirms that the RPDT will apply for an accounting period for UK corporation tax purposes of a developer that ends on or after 1 April 2022. It sets out the treatment of accounting periods that straddle the commencement date of 1 April 2022. The RPDT will be chargeable only in respect of profits calculated from 1 April 2022 to the end of the accounting period, with an apportionment being made of the profits for the whole accounting period on a time basis.

In summary, this group of clauses defines key terms needed for the RPDT to work and provides the essential framework for the administration of the tax. The clauses will be supported by guidance to provide further clarity for taxpayers.

[James Murray]

As we have heard, clauses 34 to 38 concern the key concepts contained in the RPDT legislation. Clause 34 sets the basic conditions that, when satisfied, mean that a company is to be designated as a residential property developer, potentially within the charge of the RPDT. Subsection (1) defines an RP developer as either a company that undertakes residential property development activities or one that holds

“a substantial interest in a relevant joint venture company.”

The company’s interest in such a joint venture is aggregated with those of other members of the same group to determine whether that is a substantial interest.

Subsection (3) clarifies that a non-profit housing association or organisation is not treated as an RP developer for the purposes of the tax. That is a very important distinction that we support. My colleagues in the shadow housing team pressed the Government on that point during Committee stage of the Building Safety Bill, and I welcome that being reflected in this Bill.

Subsection (4) is a logical extension of subsection (3), determining that wholly owned subsidiary companies of non-profit housing companies are also excluded from being treated as RP developers for the purposes of the tax. It makes sense to exclude non-profit housing associations from RPDT, particularly given that they have already made a much more substantial contribution to cladding remediation than private developers. Research by the National Housing Federation in October 2021 found that private developers and cladding manufacturers had allocated £643 million of future profits to remediate unsafe cladding, while non-profit housing associations have estimated that their remediations will cost in excess of £10 billion.

Subsection (5) allows the Treasury to amend the definition of a non-profit housing company by regulation, and to make any consequential changes to this part of the legislation. As we have heard, that allows the definition to be updated, in line with any changes to the regulatory framework for registered social housing providers. It may be understandable that the Government want to be able to adjust definitions to match any changes in the way that social housing providers operate, as well as to recognise the impact of any changes to the regulatory framework. However, so that we can better understand the Government’s concerns, I would be grateful if the Minister could indicate why it may be necessary to amend the definition of a non-profit housing company.

Clause 35 sets out the criteria and definitions of residential property development activities for the purposes of the tax, as well as setting the territorial scope of the legislation. Subsection (1) brings within scope anything that is done by an RP developer or in connection with land in the United Kingdom for the purposes of the development of a residential property. A developer must have an interest in the land at some point for the activity there to be RP developer activity for the purposes of the tax. Land in that respect is taken to include buildings or structures on a piece of land. The requirement for an interest in land means that profits from similar activities undertaken by companies acting purely as third-party contractors, who are not RP developers, do not come within the charge of the tax.

Clause 36 raises an important question about who the RPDT applies to. Subsection (1) sets out the definition of an interest in land for the purposes of the tax. Broadly, it sets out that, when an RP developer has an interest in land, it must have

“an estate, interest, right or power in or over the land”.

That estate, interest, right or power must form

“part of the RP developer’s, or the related company’s, trading stock”.

Subsection (4) elaborates what “trading stock” refers to and makes clear the importance of an estate, interest, right or power in or over land being disposed of. It is the point about disposal that I would like to probe further. Discussions with Clerks about whether new clause 19 was selectable drew out the fact that the residential property developer tax is aimed at developers that do development work in order to trade property once the work has been done. It seems clear to me that the RPDT would apply in the case of a developer who builds homes and sells their freehold interest once the development is complete, but what happens when the developer retains some sort of interest for a specific period of time, or indefinitely?

--- Later in debate ---

[Lucy Frazer]

Clauses 39 to 42 set out how to calculate the tax base for the purposes of RPDT for an accounting period. Clause 39 sets out what adjustments are made to the UK corporation tax trading profits or losses to arrive at the adjusted trading profits or losses of a residential property developer for the purposes of RPDT. The clause provides that any apportionment of in-scope activity and other activities are to be made on a just and reasonable basis. The clause also provides for an exclusion for any trading profits from residential property development activities that are carried out by a company for charitable purposes.

Clause 40 sets out how any joint venture profits or losses attributable to a developer are determined for the purposes of calculating RPDT profits or losses. The clause confirms the criteria for a relevant joint venture company to fall within the charge to RPDT and how the joint venture profits or losses will be attributed to the developer.

Clause 41 introduces parts 1 to 4 of schedule 7, which make provisions for loss relief and group relief for the purposes of RPDT. As they largely replicate the rules that apply generally for corporation tax, I do not propose to spend long taking the Committee through them. Part 1 of schedule 7 allows any unrelieved RPDT loss to be carried forward against RPDT profits in the next accounting period. Parts 2 to 4 of schedule 7 apply equivalent rules for UK corporation tax group relief for the purposes of RPDT.

Clause 42 restricts the amount of a carried forward loss that can be set against profits of a later period for the purposes of RPDT. This ensures that carried forward losses do not reduce profits above the annual allowance that are chargeable to RPDT by more than 50%, in line with the treatment of carried forward losses under UK corporation tax.

In summary, these clauses and the schedule set out important mechanics for the calculation of the base of the tax, and I therefore recommend that they stand part of the Bill.

[James Murray]

As we have heard, clause 39 concerns adjusted trading profits and losses relating to the calculation of the RPDT charge. Subsection (2) lists the circumstances in which trading profit and loss can be ignored in the calculation of the charge. These are those profits, losses, and any allowances or charges under the Capital Allowances Act 2001 that do not relate to residential property development activity, corporation tax loss relief, and group relief, and any amounts that are taken into account in calculating trading income by the operation of the loan relationship and the derivative contracts rules.

Also, any trading profits from residential property development activities that are carried out by a charitable company and apply for the purposes of the charitable company are ignored. Furthermore, we can see that in subsection (3) there is provision whereby corporation tax profits, losses or capital allowances and charges that relate to both the company’s residential property development activity and any other activities may be apportioned between the RP developer activities and other activities on a just and reasonable basis.

Clause 40 focuses on attributable joint venture profits and losses. The clause sets out how an amount a joint venture profits or losses attributable to a developer is determined for the purposes of calculating RP developer profits or losses under clause 38 for the purposes of this tax. The clause confirms the criteria for a relevant joint venture company to fall within the charge of this tax. Notably, we see that where there are five or fewer persons who between them own at least 75% shareholding, the holdings of members of the group are to be aggregated and treated as one holding.

Clause 41 introduces schedule 7 and relates to RPDT reliefs where provision is made for loss relief and group relief for the purposes of RPDT. Part 1 of schedule 7 clarifies that an unrelieved RPDT loss is to be carried forward against RPDT profits in the next accounting period, but its use is subject to the restriction to setting off against 50% of the profits of any future accounting period, as provided for by clause 42, which I shall refer to shortly. Part 2 concerns RPDT group relief, which is comparable to corporate tax group relief that has been set out specifically for the purposes of the tax under discussion today. Part 3 is similar, in that it applies the principles of carried-forward group relief from corporation tax to the RPDT.

Relatedly, we see clause 42 impose a restriction on the use of carried-forward losses for the purposes of the RPDT. That ensures that carried-forward losses do not reduce profits above the annual allowance that are chargeable to RPDT by more than 50%. That corresponds to the treatment of carried-forward losses for the purposes of corporation tax on trading profits. We will not be opposing the clauses or the schedule.

[Lucy Frazer]

I am grateful for the indication that there will be no opposition, so I ask that the clauses stand part of the Bill.

Question put and agreed to.

Clause 39 accordingly ordered to stand part of the Bill.

Clauses 40 and 41 ordered to stand part of the Bill.

Schedule 7 agreed to.

Clause 42 ordered to stand part of the Bill.

Clause 43

Allowance

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Lucy Frazer]

Clauses 43 and 44 provide for the operation of the annual allowance. The RPDT will be charged on the profits that exceed a residential property developer’s £25 million annual allowance. Clause 43 provides for the operation of the £25 million annual allowance that is available to each group of companies before profits become chargeable to RPDT. A power is included that allows HMRC to set the process for a group of companies to allocate its allowance in secondary legislation.

Clause 44 provides for the calculation of the annual allowance for the RPDT where the profits of a member of a joint venture company are not chargeable to UK corporation tax. It provides for the allowance of a JV company to be reduced and for the exempt member to instead have an annual allowance that can be allocated to its joint venture interests. Although the rule may seem complicated at first glance, it will ensure that where a non-taxable investor, such as a pension fund, has interests in several joint ventures, those joint venture companies do not benefit from multiple allowances. In summary, clauses 43 and 44 ensure that RPDT is proportionate, administrable and targeted at the largest developers.

[James Murray]

As the Minister has described, clause 43 relates to allowances and provides for the operation of the allowance that is deducted from profits chargeable under the RPDT. Under clause 43, the £25 million allowance is adjusted pro rata when an accounting period is less than a year. Within a group of developers, the allowance can also be allocated between member companies at the direction of an allocating member. In the absence of an allocating member, the allowance is to be evenly split between the total number of members.

Clause 44 applies a similar principle to joint venture companies and sets out the terms of allowance within the RPDT. Critically, where a member of a joint venture company is outside the scope of corporation tax because it is an offshore entity, a sovereign immune entity or an institutional investor, the allowance afforded to the joint venture company is reduced in proportion to the percentage competition of members that are outside its scope. We support the principle of removing unfair tax advantages and maintaining fair competition in the market, and therefore we will not oppose the clauses.

[Lucy Frazer]

Again, I am very grateful for that indication. I commend the clauses to the Committee.

Question put and agreed to.

Clause 43 accordingly ordered to stand part of the Bill.

Clause 44 ordered to stand part of the Bill.

Clause 45

Application of corporation tax provisions and management of RPDT

Question proposed, That the clause stand part of the Bill.

[Lucy Frazer]

Clause 45 and schedule 8 provide for RPDT to be treated for administrative purposes as an amount of UK corporation tax. Clause 45 outlines the framework within which RPDT will operate and makes necessary amendments to existing administrative legislation to accommodate RPDT. It also introduces schedule 8, which makes further provisions about the management of RPDT, including setting out the circumstances in which a company will not be required to report its RPDT profits, which will reduce any administrative burden for groups with profits that are unlikely to exceed the annual allowance.

In summary, the clause and schedule set out important mechanics for the collection, management and payment of RPDT.

[James Murray]

As the Minister has described, clause 45 and schedule 8 concern the application of corporation tax provisions and management. The clause applies general corporation tax principles to the RPDT and provides that RPDT be treated for administrative purposes as an amount of corporation tax. The clause and schedule outline the framework within which RPDT will operate and make necessary amendments to administrative legislation to accommodate RPDT.

As pointed out by the Chartered Institute of Taxation, the alignment with corporation tax and other existing mechanisms should reduce some administrative burdens for both developers and HMRC, which we welcome. However, we note that the turnaround on this novel tax, as mentioned earlier in this Committee sitting, is rapid. Given the truncated consultation period, I seek reassurances from the Minister that HMRC’s systems will be ready for the collection, management and payment of RPDT. I would be grateful if the Minister could also confirm whether any additional budget allocation has been offered to HMRC to support the roll-out of RPDT and, if so, what the value of the allocation is.

[Lucy Frazer]

I assure the hon. Gentleman, as I assured the hon. Member for Glasgow Central some moments ago, that HMRC will be ready to bring in the tax that we are legislating for. As he will know, we have just gone through a spending review. HMRC will have sufficient funds to ensure that it can comply with its duties and obligations.

Question put and agreed to.

Clause 45 accordingly ordered to stand part of the Bill.

Schedule 8 agreed to.

Clause 46

Requirement to provide information about payments

Question proposed, That the clause stand part of the Bill.

[Lucy Frazer]

Clause 46 provides for RPDT receipts to be monitored. It introduces a requirement for residential property developers making an RPDT payment to state the amount of the payment to HMRC in writing in order to ensure that RPDT receipts can be monitored. It also provides for a penalty if there is a failure to comply with that requirement. In summary, the clause sets out an important requirement to enable HMRC to monitor RPDT revenue.

[James Murray]

As we have heard, clause 46 introduces a requirement for companies making a payment of RPDT to provide information about a payment to HMRC so that receipts for the tax can be monitored. The clause sets out the definition of the responsible company—the company making payment on behalf of the RP developer under relevant group payment arrangements or, in any other case, the RP developer itself.

The clause further requires that the responsible company must notify an officer of HMRC in writing, on or before the date when the payment is made, of the amount of the payment due under RPDT. In addition, the clause refers to penalties for failing to inform HMRC about payments owed. Penalties are aligned with previous legislation on corporation tax notices. We will not oppose the clause.

Question put and agreed to.

Clause 46 accordingly ordered to stand part of the Bill.

Clauses 47 to 49 ordered to stand part of the Bill.

Schedule 9 agreed to.

Clauses 50 to 52 ordered to stand part of the Bill.

Clause 67

Securitisation companies and qualifying transformer vehicles

Question proposed, That the clause stand part of the Bill.

[Lucy Frazer]

Clause 67 introduces a power enabling changes to be made by secondary legislation to stamp duty and stamp duty reserve tax in relation to securitisation and insurance-linked security arrangements. The Government are keen to ensure that the UK’s stamp duty and SDRT rules contribute to maintaining the UK’s position as a leading financial services sector.

On 30 November, the Government published a response document and a draft statutory instrument following consultation on reform of the tax rules for securitisation companies. The consultation explored issues including the application of the stamp duty loan capital exemption to securitisation and ILS arrangements. The consultation sought views on whether uncertainty as to how the existing stamp duty loan capital exemption applies increases the costs and complexity of UK securitisation and ILS arrangements, and whether that is a factor in arrangements being set up outside the UK.

Clause 67 will allow Her Majesty’s Treasury to make regulations to provide that no stamp duty or stamp duty reserve tax charge will arise in relation to the transfer of securities issued by a securitisation company or a qualifying transformer vehicle. A qualifying transformer vehicle is the note-issuing entity in an ILS arrangement. The power will also allow HMT to make regulations to provide that stamp duty or SDRT is not chargeable on transfers of securities to or by a securitisation company. The power allows the Government to make changes to allow UK securitisation and ILS arrangements to operate more effectively, and reduce cost and complexity. There is currently no power to make changes through secondary legislation to the stamp duty and SDRT rules in relation to securitisation and ILS arrangements.

In summary, clause 67 will support the Government to respond flexibly to the evolving commercial practices of the securitisation and ILS markets, and ensure that the UK’s securitisation and ILS regimes remain competitive. I therefore commend the clause to the Committee.

Finance (No. 2) Bill (First sitting)

Debate between Lucy Frazer and James Murray

Committee stage
Tuesday 14th December 2021 Public Bill Committees

[The Financial Secretary to the Treasury (Lucy Frazer)]

It is a pleasure to serve under your chairmanship, Sir Christopher. Clause 1 legislates for the charge of income tax for 2022-23. Clauses 2 and 3 set the main default and savings rate for income tax for 2022-23, and clause 5 maintains the starting rate for savings limit at its current level of £5,000 for 2022-23.

Income tax is one of the Government’s most important revenue streams, expected to raise approximately £230 billion in 2022-23. The starting rate for savings applies to the taxable savings income of individuals with low earned incomes of less than £17,570, allowing them to benefit from up to £5,000 of savings income tax free. The Government made significant changes to the starting rate for savings in 2015. They lowered the rate from 10% to 0%, and increased the band to which it applied from £2,880 to £5,000. These clauses are legislated annually in the Finance Bill.

Clause 1 is essential because it allows for income tax to be collected in order to fund vital public services on which we all rely. Clause 2 ensures that the main rates of income tax for England and Northern Ireland continue at 20% for the basic rate, 40% for the higher rate, and 45% for the additional rate. Clause 3 sets the default and savings rates of income tax for the whole UK—the basic, higher and additional rates of 20%, 40% and 45% respectively. Clause 5 confirms the band of savings income to which it applies, maintaining the starting rate limit at its current level of £5,000 for the 2022-23 tax year. The limit is being held at that level rather than increased by the consumer prices index to ensure simplicity and fairness within the tax system, while maintaining a generous tax relief.

Clauses 1 to 3 ensure that the Government can collect income tax for 2022-23. Clause 5 continues the Government’s commitment to support people of all incomes and at all stages of life to save. Taken with the personal savings allowance and the annual individual savings account allowance of £20,000, those generous measures mean that about 95% of savers will pay no tax on their savings income.

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

I am grateful for the opportunity to respond to the clauses on behalf of the Opposition. As we have heard, clause 1 imposes a charge for income tax for the year 2022-23. It is for Parliament to impose that tax charge for the duration of the financial year. I understand from my well-informed parliamentary researcher that the first income tax that bears a resemblance to the modern graduated form that the clause refers to was introduced by William Pitt the Younger in 1798; as we will see in later clauses of the Bill, there has been some departure from the tax bands of £60 and £200 annually introduced then. We will of course not oppose clause 1, although we note for the record that under this Government the tax burden will rise to its highest level for 70 years.

Clause 2 sets the main rates of income tax for the year 2022-23, which will apply to the non-savings, non-dividend income of taxpayers in England and Northern Ireland. The clause provides that the main rates of income tax for 2022-23 are the 20% basic rate, the 40% higher rate, and the 45% additional rate. Income tax rates on non-savings, non-dividend income for Welsh taxpayers are set by the Welsh Parliament. The UK main rates of income tax are reduced for Welsh taxpayers by 10p in the pound, and the Welsh Parliament sets the Welsh rates of income tax, which are added to the reduced UK rates. Income tax rates and thresholds on non-savings, non-dividend income for Scottish taxpayers are set by the Scottish Parliament.

We note that, although the rates of income tax are not rising in the Bill, the same cannot be said for national insurance. That tax was increased by the Health and Social Care Levy Act 2021, which we debated in September. As I said at the time, that national insurance rise and the new levy being introduced represented a tax rise that falls directly on working people and their jobs, which is why we opposed the progress of that Act.

Clause 3 sets the default rates and savings rates of income tax for the tax year 2022-23. Subsection (1) provides for a basic default rate of 20%, a higher rate of 40% and an additional rate of 45%. Subsection (2) provides for savings rates on income tax at the same rates as the default: 20% for basic, 40% for higher and 45% for additional. Those rates match the rates of earned income, and we will not oppose the clause.

Clause 5 freezes the starting rate limit for savings in the tax year 2022-23 at £5,000. As it is not a devolved matter, the freeze applies across the United Kingdom. The starting rate for savings can apply to an individual’s taxable savings income, such as interest on bank or building society deposits. The extent to which an individual’s savings income is liable to tax at the starting rates for savings rather than the basic rate of income tax depends on the total of their non-savings income, including income from employment, profits from self-employment and pensions income. If an individual’s non-savings income is more than their personal allowance and exceeds the starting rate limit for savings, the starting rate is not available for that tax year. Where an individual’s non-savings income in a tax year is less than the starting rate limit, their savings income is taxable at the starting rate up to that limit.

Income tax is charged at the 0% starting rate for savings rather than the basic rate of income tax on that element of an individual’s income up to the starting rate for savings income. The clause sets the starting rate limit for savings for 2022-23 at £5,000, but it does not override section 21 of the Income Tax Act 2007 in relation to the starting rate limit for savings for 2022-23. We know that the freeze on the limit is taking place in the context of a rising rate of inflation, which will have an impact on savers in real terms. In her reply, I would be grateful if the Minister explained what assessment the Treasury has made of those who will be affected by the freeze.

[Lucy Frazer]

I will make a couple of points in response. First, the hon. Member for Ealing North mentioned the tax burden rising; he will know that we are still in the midst of a pandemic and that the Government have spent £400 billion to ensure that public services, particularly the NHS, get the money they need. He will know why we are introducing a rise in national insurance contributions for the first time: to fix social care. He asked me about savings and those on the lowest incomes. The Government have raised the personal allowance by nearly 50% in real terms in the last decade. It is the highest basic personal tax allowance of all countries in the G20, and remains one of the most generous internationally.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clauses 2, 3 and 5 ordered to stand part of the Bill.

Clause 9

Liability of Scheme Administrator for Annual Allowance Charge

[James Murray]

I beg to move amendment 11, in clause 9, page 5, line 20, leave out “6 years” and insert “5 years and 9 months”

[James Murray]

Clause 9 relates to the liability of insurance scheme administrators for the scheme’s annual allowance charge. I welcome the opportunity to discuss the clause and our amendment to it. The clause amends the period within which an individual can give notice to their pension scheme administrator to pay the annual allowance charge of previous tax years, using a system known as “mandatory scheme pays”.

The clause also amends the period within which a scheme administrator must provide information about and account for an amount of the annual allowance charge. As we know, mandatory scheme pays is the process that helps an individual pay their annual allowance charge liabilities for a current tax year when certain conditions are met. The individual elects for their pension scheme administrator to be jointly liable for their annual allowance tax charge, in return for an actuarial reduction in the value of their pension pot.

The annual allowance is the maximum amount of tax relieved pension savings that an individual can build up during a tax year. Where an individual exceeds the maximum amount of tax relieved pension savings, they will be liable to a tax charge on the excess amount. That tax charge recoups the excess tax relief that the individual has already received on their pension savings. For mandatory scheme pays, the annual allowance charge must exceed £2,000, and the individual’s pension input amount for that pension scheme must exceed the £40,000 annual allowance.

The clause will enable more individuals who meet the conditions to benefit from the mandatory scheme pays facilities because the measure applies to all individuals that receive a retrospective amendment to their pension input amount for the previous tax year. This is a measure we broadly support—the simplification of a relatively complex tax rule is a good thing both for the pension contributors and for those who hitherto had to disentangle its complexity.

However, we would like to raise a point with the Minister; we have tabled amendment 11 as a probing amendment with that in mind. Amendment 11 would affect clause 9, page 5, line 20, by leaving out “6 years” and inserting “5 years and 9 months”. We have tabled the amendment out of concerns drawn to our attention by the Chartered Institute of Taxation about the hard stop deadline being introduced for notices under section 237B of the Finance Act 2004. Clause 9 part 3 introduces a new section

“237BA Time limit for notices under section 237B”.

Subsections (4)(b) and 5(b) provide for a hard stop deadline of

“the end of the period of 6 years beginning with the end of the tax year in question”

for both the scheme administrator providing an individual with information about a change to their pension input and output and the individual member giving notice to the scheme administrator to pay the annual allowance charge through scheme pays.

The result of the two subsections is that it is possible for the scheme administrator to issue a statement with a change to the pension input amount in line with the legislation after, say, five years, 11 months and 30 days, meaning that the member would have just one day to make the scheme pays election and give notice to the scheme administrator that they want to do so. That is clearly an unreasonable timeframe for the member, so our amendment suggests one possible way of making sure the scheme member is given fair warning.

Our amendment proposes a ring-fenced three-month period during which the member would have time to process and make arrangements for a scheme pays election and to give notice to the scheme administrator. I hope we can agree that such an approach would simply allow members some protection against unreasonable circumstances that could arise. We will not push the amendment to a vote, but I would be grateful if the Minister addressed the points it raises in her reply.

[Lucy Frazer]

Clause 9 extends the reporting and payment deadlines so that an individual can ask their pension scheme to settle their annual allowance tax charge of £2,000 or more from a previous tax year by reducing their future pension benefits in a process known as scheme pays. The annual allowance limits the amount of UK tax relieved pension savings that an individual can benefit from in the tax year. If an individual’s pension savings exceed the annual allowance, a tax charge is applied. The tax charge recoups the excess tax relief that the individual has already received.

Scheme pays was introduced to help individuals pay an annual allowance charge in their current tax year where certain conditions are met. The unlawful age discrimination found in the 2015 public sector pension reform known as McCloud, which I will come on to in clause 11, highlighted a need for scheme pays to be available also for previous tax years from when an annual allowance tax charge arises. The changes made by clause 9 extend the date by which an individual can ask their pension scheme to pay an amount of their annual allowance tax charge. That means that where the charge arises because of a change of facts and the charge is £2,000 or more, the scheme pays facility is now another option for the individual to pay their tax charge.

The changes made by clause 9 also extend the date by which the pension scheme administrator must report and pay an annual allowance tax charge to Her Majesty’s Revenue and Customs using the accounting tax return. The extended date applies where the charge has arisen because of a change of facts about an individual’s pension savings. The date for reporting and paying the charge relates to when the scheme administrator is notified of the charge by the individual, following a change of facts rather than a fixed period after the end of the tax year. That means that the scheme pays facility is now available to individuals for their annual allowance tax charge from an earlier tax year.

Amendment 11 seeks to reduce the relevant time for a scheme to notify individuals from six years to five years and nine months. Unfortunately, that would mean that if an individual were notified more than five years and nine months after the tax year, scheme pays would not be available. The individual would, however, still be liable to the tax charge, leaving them to pay it out of their own pocket. I therefore urge the Committee to reject amendment 11.

In summary, clause 9 provides for scheme pays to be an option for individuals to have their pension scheme pay their annual allowance tax charge for a previous tax year where the conditions are met.

[James Murray]

I recognise that the Minister is unwilling to accept the amendment, although I would have welcomed a reassurance that she would take the principle behind the amendment away, discuss it with her officials and perhaps report back to the Committee at a later stage. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 ordered to stand part of the Bill.

Clause 10

Increase of normal minimum pension age

Question proposed, That the clause stand part of the Bill.

[Lucy Frazer]

Clause 10 makes changes to increase the normal minimum pension age to 57. It also establishes a protection regime, which will enable some individuals to continue to access their pension before the age of 57 without any adverse tax impacts. The normal minimum pension age is the age at which most savers can access their pension without incurring an unauthorised payment tax charge. The coalition Government announced in 2014 that the normal minimum pension age would rise to 57 in 2028, reflecting long-term trends in longevity and changing expectations of how long we will remain in work and in retirement.

Clause 10 legislates to increase the normal minimum pension age to 57 on 6 April 2028. That increase will not apply to members of the police, firefighters, or armed forces public service pension schemes, who will receive protected pension ages to reflect the special nature of their work. Those who have an unqualified right in their scheme rules to take their pension before age 57 will also receive protected pension ages. Those who made a substantive request to transfer their pension before 4 November 2021 will still be able to complete their transfer into a pension scheme that already offered unqualified rights to a pension below age 57 and get a protected pension age.

That is a shorter window during which pension scheme members can transfer their pension to keep a protected pension age than was initially published in the summer. The Government listened carefully to stakeholder concerns that a longer window could have adverse impacts on the pensions market. The shorter window still delivers the original policy intent, so that those who were in the process of transferring their pension when the protection regime was first announced do not lose their protected pension age. Closing the window without prior notice avoided unnecessary turbulence in the pensions market and helped to protect consumers.

Those with protected pension ages will be able to access their pension benefits before age 57 without incurring an unauthorised payment tax charge. A protected pension age is specific to an individual as a member of a particular scheme. If an individual has a protected pension age in one scheme, they will not automatically have a protected pension age in another scheme: that would depend on the second scheme’s rules. Increasing the normal minimum pension age to 57 in 2028 reflects the principle that the normal minimum pension age should be set 10 years below the state pension age. The protection regime balances the need for fairness to pension savers with simplicity for pension providers. I therefore commend the clause to the Committee.

[James Murray]

As we have heard, clause 10 relates to the increase of the normal pension age to 57 from 6 April 2028. The stated intention of the clause is to protect members of the registered pension schemes who, before 4 November 2021, had a right to take their entitlement to benefit under those schemes at or before the existing normal minimum pension age. It exempts members of certain uniformed service pension schemes from the increase, and it introduces new block and individual transfer rules specific to the new protection framework in order to reduce the restrictions on retaining a protected pension age following a transfer. The UK has a long tradition of protecting and rewarding those who have served their country. It is therefore right that we support clause 10, as it provides that protection by safeguarding recipients’ right to retain entitlement to benefits when transferring schemes.

We note, however, that the Low Incomes Tax Reform Group has concerns about the transitional arrangements relating to the clause. Paragraph 28 of the Government’s explanatory note regarding this clause states:

“There may be some transitional issues. For example, an individual who does not have a protected pension age and at 5 April 2028 will have reached age 55 and has started but not completed the process of taking pension savings before the change in normal minimum pension age. The government will provide further advice on the proposed transitional arrangements and provisions in due course.”

That raises concerns about when further advice on the proposed transitional arrangements will be made available, as well as questions about the extent to which that advice will be effectively communicated to the people concerned.

It is vital that people have full detail of any transitional provisions well before the increase to age 57 comes into effect; otherwise, there is a risk that people reaching age 55 in the run-up to 6 April 2028 will make decisions without knowing all they need to know. For example, an individual could cash in a pension in full and put the money in the bank so as to crystallise access to those funds, which may well leave them worse off in the long term, having likely incurred a large tax liability on the encashment and potentially affected their means-tested benefit entitlement. They might also have triggered the money purchase annual allowance, therefore restricting—perhaps unwittingly—their ability to make further contributions. In light of this, will the Minister clarify precisely when “due course” is, in relation to the Government’s further advice regarding the proposed transitional arrangement for the provisions? Will she also confirm what measures the Government will take to make sure that people are aware of the advice when it is finalised?

--- Later in debate ---

[Lucy Frazer]

The clause allows for regulations to be made to address the tax impacts of the remedy to the unlawful age discrimination that arose from the 2015 public service pension reforms. The Government reformed most public service pensions in 2015, but excluded those closest to retirement from the reforms. The court found that that exclusion amounted to unlawful discrimination on the basis of age. That is known as the McCloud case.

Following consultation, the Government are introducing a remedy to rectify that discrimination, which affects about 3 million people. The remedy includes options for them to choose at retirement what type of pension rights they will receive for the remedy period. The remedy period covers the years between 2015 and 2022, with an exception for the judiciary, who will instead make their choice in 2022. That was decided following consultation with the sector.

Most of the legislation required to implement the remedy is contained in the Public Service Pensions and Judicial Offices Bill, which is progressing through the Commons. However, where those changes mean that the Government will provide individuals with different historical pension rights, changes to pension tax legislation are also required. The purpose of clause 11 is therefore to allow the Government to make regulations to put the individual, as far as possible, in the tax position in which they would have been had the discrimination never happened. It also ensures that regulations can be put in place to address the tax impacts of the public service pensions remedy on the employers and those responsible for the tax affairs of the pension schemes.

I mentioned that the legislation implementing the remedy is going through Parliament. Once it is finalised, the Government will use the power in clause 11 to draft regulations that will provide for the tax changes needed as part of our move to rectify the discrimination. For example, the Government will use the power to ensure that compensation payments payable as a result of the remedy can be made tax free, as they are calculated on that basis under the Public Service Pensions and Judicial Offices Bill.

The Government will also use the power in clause 11 to ensure that pensions and lump sums payable as a result of the remedy that would have been authorised payments had they been made at the relevant time are treated as meeting the conditions to be authorised. One further example is that members may choose benefits for the period 2015 to 2022 that lead to a significant increase in their pension accrual in a single tax year. Without a change to legislation, that could result in individuals paying more tax than if the pension that they ultimately chose had accrued annually.

The Government will use the power in clause 11 to make good the tax treatment of those affected by the remedy set out in the Public Service Pensions and Judicial Offices Bill. Regulations made under the power will ensure that, broadly, those affected will be in the tax position that they would have been in had they not suffered discrimination. I therefore commend the clause to the Committee.

[James Murray]

As we have heard from the Minister, clause 11 relates to public service pension schemes and the rectification of unlawful discrimination. It provides the Treasury with the power to make regulations to address the tax impacts that arise in consequence to or in connection with the rectification of unlawful discrimination set out in part 1 of what is expected to become the Public Service Pensions and Judicial Offices Act 2022. Those changes will have effect on or after 6 April 2022, and are capable of having retrospective effect.

As we are aware, when reformed public service pension schemes were introduced in 2014-15, the Government agreed, following discussions with trade unions, to allow active members of pre-existing public service pension schemes who were close to retirement to remain in those schemes, rather than requiring them to start to accrue pension benefits in a new scheme. That was called transitional protection. In December 2018, the Court of Appeal found in what is known as the McCloud judgment that the transitional protection unlawfully discriminated against younger members of the judicial and firefighter pension schemes, and gave rise to indirect sex and race discrimination.

On 15 July 2019, the then Chief Secretary to the Treasury, the right hon. Member for South West Norfolk (Elizabeth Truss), made a written ministerial statement setting out that the Government considered that the Court of Appeal’s judgment had implications for all public service pension schemes, and planned to introduce proposals to remedy the discrimination across the schemes. On 19 July 2021, the Government introduced the Public Service Pensions and Judicial Offices Bill. The provisions of part 1 of that Bill will apply retrospectively, to provide a remedy for the discrimination. The rectification affects individuals who were members of a public service pension scheme on or before 31 March 2012 and at any time between 1 April 2015 and 31 March 2022, and so had pensionable service during that time.

Under chapter 1 of part 1 of Public Service Pensions and Judicial Offices Bill, individuals who were moved to a new scheme will be retrospectively returned to their previous scheme for the period of remediable service. Any member with remediable service will be able to choose to receive pension scheme benefits based on the rules of either the legacy scheme or the new scheme, although for most individuals there will be no significant change in the tax position. The legislation will provide the Treasury with the power to make regulations that make the necessary changes to tax legislation so that, as far as possible, individuals can be put in the position in which they would have been, absent the discrimination. We will therefore not oppose the clause.

[Lucy Frazer]

I am grateful for the hon. Member’s indication that he will not oppose the clause, and have nothing further to add.

Question put and agreed to.

Clause 11 accordingly ordered to stand part of the Bill.

Clause 13

Structures and buildings allowances: allowance statements

Question proposed, That the clause stand part of the Bill.

[Lucy Frazer]

Clause 13 makes provisions to improve the operation of the structures and buildings allowances for taxpayers. The clause will require relevant allowance statements to include the date that qualifying expenditure is incurred or treated as incurred in cases where its absence could prevent future owners of an asset from claiming the full amount that they are entitled to.

The SBA allows companies to reduce their taxable profits each year by 3% on the cost of construction, acquisition, renovation or conversion of non-residential buildings and structures. The investment is fully relieved after 33 and a third years. A business must hold a valid allowance statement to claim SBA. That document records information such as the relevant building or structure and the amount of qualifying expenditure incurred. It is passed on to subsequent owners to ensure the right records are kept for an asset.

The allowance period is the period over which SBA can be claimed, and it typically begins on the date when the structure or building is first brought into non-residential use. However, in cases where expenditure is incurred or treated as incurred after non-residential use has commenced, the allowance period will begin from that later date. That may be the case where renovation work is being carried out in a multistorey office building and the first tenants move in to one floor of the office building even though some construction continues on a different floor.

Without the inclusion of that date on the allowance statement, subsequent owners of a structure or building may not claim all the relief they are entitled to. Instead, they may reasonably assume that the allowance period began on the day the asset was first brought into non-residential use, not the date of the subsequent expenditure. Clarity for businesses on the remaining length of the allowance period for each portion of expenditure means they will be able to claim the full relief to which they are entitled.

The changes made by clause 13 are wholly relieving and will only benefit firms towards the end of the allowance period of 33 and a third years. The measure will apply across the UK. The clause will be effective for qualifying expenditure incurred or treated as incurred on or after the date of Royal Assent of the Bill. Therefore, it will not be retrospective and will not impact allowance statements already in existence. Clause 13 ensures that, in future, businesses can claim the full tax relief to which they are entitled.

[James Murray]

Clause 13 concerns the structures and buildings allowance statements. As we heard, it introduces a new requirement for allowance statements to include the date that qualifying expenditure is incurred or treated as incurred when that is later than the date on which the building or structure was first brought into non-residential use. The clause has effects for qualifying expenditure incurred or treated as incurred on or after the date of Royal Assent.

As we know, SBAs are a capital allowance available for the cost of constructing, renovating, converting or acquiring non-residential structures and buildings. When SBAs were first introduced, from 29 October 2018, the allowances were given at 2% per annum of qualifying expenditure on a straight-line basis. That rate was increased to 3% per annum with effect from April 2020. The period over which SBAs are available to be claimed is known as the allowance period.

A business must hold an allowance statement to claim SBAs, which includes certain details such as the date the asset is first brought into non-residential use. As we heard, that is normally the date that the SBA’s allowance period of 33 and a third years commences. However, where qualifying expenditure is incurred after the asset is brought into non-residential use, the allowance period starts on a later date. The new paragraph inserted by the clause adds an additional requirement to record that later date on the allowance statement, where relevant, to ensure the correct amount of SBAs may be claimed over the allowance period. The minor amendment to section 270IA(4)(b) of the Capital Allowances Act 2001 ensures consistency with the new paragraph.

We do not oppose the clause, as it is important to ensure the correct amount of SBA is claimed over the correct time to avoid unnecessary hardship or disruption.

[Lucy Frazer]

I am happy that the hon. Gentleman recognises that this is a clause worthy of Bill.

Question put and agreed to.

Clause 13 accordingly ordered to stand part of the Bill.

Clause 14

Qualifying Asset Holding Companies

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Lucy Frazer]

Clause 14 and schedule 2 introduce a new regime for the taxation of certain asset-holding companies being used by funds and institutional investors to make their investments. Asset management firms manage the savings and pensions of millions of UK citizens. The majority of UK households use an asset manager’s services, either directly or indirectly, for example through their workplace pensions. The reforms have been developed following extensive consultation as part of the wider review of the UK funds regime announced at Budget 2020. A key objective of the review is to consider reforms to enhance the UK’s competitiveness as a location for asset management and investment funds. It is a well-established principle that investors in funds should be taxed broadly as if they had invested directly in the underlying assets.

The new qualifying asset holding companies regime seeks to ensure that, where intermediate holding companies are used to facilitate the flow of capital, income and gains between investments and investors, the tax they pay is proportionate to the limited activities that they perform. With that policy objective in mind, the regime comprises a number of features, including a gains exemption for the disposal of certain shares and overseas property; specific rules where investment returns are passed to investors; withholding tax removed from payments of interest; and exempting repurchases of share and loan capital from stamp tax charges.

The new regime also contains safeguards. For example, the existing taxation of profits from trading activities, UK land and intangibles will not be affected. Furthermore, the new regime will be available only in certain circumstances—to prescribe investment arrangements involving diversified investment funds, charities, long-term insurance business, sovereign immune entities, certain pension schemes and public bodies.

Government amendments 1 to 6 seek to address three technical points better to reflect the original policy intention of the new regime and to ensure consistency with wider tax rules. Those include refinements to the eligibility criteria and ensuring that they are applied consistently. They follow engagement with the industry on the legislation since the introduction of the Finance Bill.

The clause introduces a new regime for qualifying asset holding companies from April 2022 that will build on the UK’s strengths as an asset management hub by enhancing the attractiveness of the UK as a location for the establishment of asset holding companies. I recommend that the clause and schedule 2 form part of the Bill.

[James Murray]

As we have heard, the clause concerns qualifying asset holding companies, and sits alongside schedule 2. The aim of the clause, we understand, is to recognise certain circumstances where intermediate holding companies are used only to facilitate the flow of capital, income and gains between investors and underlying investments to tax investors, broadly as if they had invested in the underlying assets, and to enable the intermediate holding companies to pay tax that is proportionate to the activities they perform.

At Budget 2020, the Government announced that they would carry out a review of the UK funds regime, covering tax and relevant areas of regulation. The review started with a consultation on the tax treatment of asset holding companies in alternative fund structures, also published at Budget 2020. The Government responded to that consultation in December 2020, launching a second-stage consultation on the detailed design features of a new regime for asset holding companies. The Government’s response to that consultation was published on 20 July 2021.

The clause and schedule 2 introduce the new regime. We understand that the purpose of the measures is to deliver a proportionate and internationally competitive tax regime for qualifying asset holding companies that will remove barriers to the establishment of such companies in the UK. The Government have said that the new regime will include the following key features: eligibility criteria to limit access to the intended users; tax rules to limit the qualifying asset holding company’s tax liability to an amount that is commensurate with its role; and rules for UK investors to ensure that they are taxed so far as possible as if they had invested in the underlying assets directly.

We understand that the eligibility criteria will ensure that the asset holding companies may only be used as part of investment structures where funds are managed for the benefit of a broad pool of investors or beneficiaries. An asset holding company cannot carry out other activities, including trading, to any substantial extent. The tax benefits arising from asset holding company status apply only in relation to qualifying investment activity. The tax treatment of any limited trading activity or any non-qualifying investment activity that is carried on by an asset holding company will not be affected by the company’s status as an asset holding company.

We note that the Government have tabled six amendments to schedule 2, which accompanies the clause. Amendments 1 and 2 seek to pin down the definition of investment management profit-sharing arrangements. According to the explanatory statement, that is to ensure that the legislation is capable of encompassing arrangements in which an entitlement to profits arising in connection with the provision of investment management services by an investment manager arises to another person, such as a company or a trust.

Amendments 3 and 6 provide that a fund that is 70% controlled by category A investors meets the diversity of ownership condition. Amendment 4 seeks to allow existing funds marketed before the commencement of the qualifying asset holding company regime to be treated as meeting regulation 75(2) of the Offshore Funds (Tax) Regulations 2009 if certain information has been produced by the fund and has been made available to Her Majesty’s Revenue and Customs. Amendment 5 modifies the way in which the interests of creditors are accounted for in determining whether a fund is closed. We will not be opposing clause 14 or the Government’s amendments to it.

[Alison Thewliss]

I am a wee bit concerned that the Government have brought these amendments so late in the day. I appreciate that they have brought them now, rather than seeking to come back and amend legislation further down the road. That is something, I suppose. Does the Minister intend to review this legislation, and on what timescale? I am a wee bit worried about the letter we received yesterday, which said that, as originally drafted, the legislation includes some inconsistencies with wider tax rules and within the regime’s eligibility criteria. Given those worries and these amendments, I would like some reassurance from the Minister that the Government are going to keep an eye on this legislation to make sure that it is not exploited or used in the way that it is not intended to be. We need to make sure that people are paying the tax that they ought to be and that the legislation is not used as some kind of dodge.

--- Later in debate ---

[Lucy Frazer]

Clause 16 makes changes to the film tax relief to give added flexibility to film producers who might decide to change their distribution method. The Government are ensuring that film producers can claim the film tax relief for films that are broadcast or streamed rather than released in cinemas, provided that the film meets the criteria for high-end television tax relief.

There is an imbalance between release for film and TV where some films that are no longer intended for a cinematic release and switch to streaming lose eligibility for tax relief. The distribution landscape has changed significantly since the introduction of these reliefs, and more films are released directly to video on demand services. This trend has accelerated recently due to the covid pandemic.

The changes made by the clause to the film tax relief will provide greater certainty for producers, ensuring that relief is not lost should a company decide to change its distribution method. This will help ensure that the UK remains an attractive place to invest and encourage the production of culturally British films.

New clause 14 would require the Government to review the effectiveness and potential misuse of clause 16 within six months of the Act coming into force, and would include within it an evaluation of misuse of the film tax relief. That evaluation would include the total number of enforcement actions, and the number of successful enforcement actions, taken against the companies suspected of misusing film tax relief.

The Government oppose the new clause on the basis that it is not necessary, as the Government are already monitoring and evaluating the success of their tax reliefs. This follows the structured approach to evaluating tax reliefs that HMRC began in October 2020 as a general good practice policy approach. HRMC has contracted an independent research agency to evaluate the screen tax reliefs, including film tax relief and high-end television tax relief. That evaluation aims to provide a thorough and independent evaluation of the reliefs, including their effect on employment and business growth. The impact of clause 16 will be noted as part of the evaluation, which is expected to be published next year, although that evaluation will not cover misuse of the relief. The requirement in new clause 14 that a review of clause 16 be published in six months is also impractical, because the measure only comes into effect for accounting periods ending on or after 1 April 2022. It is likely to be at least a year before companies make claims in relation to clause 16, and even longer before enforcement action is taken.

It is also worth noting that HMRC is taking actions to clamp down on the abuses that the new clause is concerned about. The current film tax relief was introduced in 2007 to replace film partnership reliefs. It is a corporate relief, and now focuses on film producers, not on investing partnerships. HMRC continues to settle and litigate historic schemes related to the old film partnership reliefs, but the current regime has not been subject to the same abuse, and has had a positive reputation in the industry.

The corporate film tax relief has proved very successful at attracting inward investment. It is highly popular with film-makers, and has contributed to making the UK a top film-making destination. This new relief is well targeted and has not been subject to abuse like the previous scheme. The change made by clause 16 is therefore to support businesses that meet the qualifying criteria for the relief, and while HMRC will remain vigilant regarding any emerging risks, we do not believe that clause 16 poses any significant additional risk. Further, reviews and disclosure of enforcement action statistics as requested by the new clause would not be useful. As such, I urge the hon. Gentleman to withdraw it.

The changes made by clause 16 will help ensure that the film tax relief continues to support the UK’s thriving film-making scene. I therefore commend it to the Committee.

[James Murray]

As we have heard, clause 16 allows films to remain eligible for film tax relief even if those films are no longer intended for theatrical release, provided they are intended for broadcast and meet the four conditions required for high-end television tax relief. The clause is effective for accounting periods ending on or after 1 April 2022. We do not oppose measures that support the entertainment and hospitality industry, particularly given the ongoing challenges brought about by the covid-19 pandemic. Indeed, the measures contained in clause 16 are, in themselves, sensible and appropriate.

More widely, though, we are aware that film tax relief was introduced by the Finance Act 2006, and applied only to films intended to receive theatrical release. That intention must be met at the end of every accounting period. Similarly, high-end television tax relief was introduced by the Finance Act 2013, and allows companies to claim relief on television programmes so long as they meet certain conditions.

The intention to broadcast must be met at the outset of production activities, and is then treated as being met for the remainder of production activities, regardless of the intention for the programme. That raises the possibility that a film that was initially intended for theatrical release may miss out on either relief if the intention changes part-way through production, and it is instead planned to have a television release. This is the case even when such a film would have been eligible for television tax relief if the decision had been made at the very start of production activities. Clause 16 ensures that where a film would have been eligible for high-end television tax relief if not for the date that the broadcast intention was decided on, it will not miss out on that relief, but will be eligible to claim it.

I am sure that the measures in this clause will provide welcome relief to those in the film industry. However, we would like to take this opportunity to ask the Minister about the operation of the film tax relief more widely, which is a debate that our new clause 14 seeks to encourage. Looking back briefly to 2014, the Public Accounts Committee reported on the misuse of tax relief, including the film tax relief, to which it made explicit reference. The report found:

“There is a lack of transparency and accountability for tax reliefs and no adequate system of control, following their introduction….Tax expenditures are often alternatives to spending programmes, but are not managed or evaluated as closely…The Departments do not keep Parliament adequately informed of changes in the costs of reliefs…The Departments are unable to cope with the demands of an increasingly complex tax system, including tax reliefs…The Departments do not respond promptly to unexpected increases in the costs of tax reliefs. Data on movements in the cost of reliefs is not available until tax returns are received, and HMRC takes time to react when it notices a cost increase, as it wants to ensure its response is appropriate. However, a longer elapsed time in reacting to an increase in the cost of a tax relief raises the total amount of public money at risk. In the case of film tax relief, it took ten years to resolve the problems and cost over £2 billion.”

I am aware that the operation of the film tax relief has been changed in recent years, but it is important to ensure that the tax relief continues to be effective. We need the Government to reassure us that they are taking adequate action against the possible misuse of tax reliefs. With that in mind, we tabled new clause 14, which would require the Government to include an assessment of the extent of, and potential for, misuse of the relief provided in clause 16. That assessment must also include an evaluation of the misuse of existing film tax relief more widely.

In relation to that wider potential misuse of existing film tax relief, our new clause requires the Government to set out, first, the number of total and successful enforcement actions taken against companies suspected of misusing film tax relief; secondly, a report of what action has been taken against the promoters of schemes designed to enable to misuse of film tax relief; and thirdly, what plans the Government have for further action against the misuse of film tax relief in the future.

The Minister has set out that she will not accept our new clause, but I ask her to commit to a firm timetable for a review of existing film tax relief that would have a similar effect. There are already reports suggesting that the use of film tax relief is increasing. I remind her that the 2014 Public Accounts Committee report said that

“Departments do not respond promptly to unexpected increases in the costs of tax reliefs.”

If the Minister will not commission a review along the lines that we have suggested, I would be grateful if first she could reassure us on the record that she does not believe that there are significant levels of misuse of film tax relief. Following the point that she made earlier, I would be grateful if she could also explain what the timetable is for the publication of the evaluation of film tax relief. If she does not have that to hand, could she write to me before the recess?

[Alison Thewliss]

I am more than happy to support what the Government are proposing here. Consistency in these tax reliefs is really important to allow businesses to plan. My constituency particularly has a booming TV and film production sector, with the recent announcement of the BBC Studioworks development at Kelvin Hall in my constituency, and an £11.9 million investment, £7.9 million of which is coming from the Scottish Government to invest in the high quality TV and film production in Glasgow.

It is important to acknowledge the wider picture. This is not just about one tax relief; it is about the wider ecosystem. We have lots of independent production companies in Glasgow Central, and more widely in Glasgow, working away and producing high quality stuff. We have post production as well in companies such as Blazing Griffin, which does high-end stuff for the likes of Netflix. However, I would be doing them all a wee bit of a disservice if I did not mention the significance of Channel 4, and the importance of keeping it in its current model and standing away from the plans to privatise it. That model is what supports the wider ecosystem in the city of Glasgow—the model where independent production companies are able to keep their intellectual property and products, and sell them. That allows all the certainty within the sector to continue.

As I said, the issue is not just about this one tax relief; it is about the Government looking at and acknowledging the wider ecosystem that supports independent production within Glasgow. Companies such as Blazing Griffin have pointed out to me that, were it not for Channel 4, we would not have Netflix. One thing in the ecosystem depends on another, and I urge the Government to look at that in the round when it considers such tax reliefs. Where tax reliefs have been withdrawn or changed in the United States, all that happens is that production companies lift and shift, and go elsewhere. We do not want to risk doing that with such changes as those that the Government propose for Channel 4.

--- Later in debate ---

[Lucy Frazer]

Clauses 17 to 22 make a series of changes to the creative industry tax reliefs, in order to support the cultural sector as it recovers from the effects of the pandemic. These changes include temporary rate increases for theatre tax relief, orchestra tax relief, museums and galleries exhibition relief and an extension of the museum and exhibitions tax relief. The changes ensure that reliefs remain targeted, free from abuse and sustainable.

The effects of covid on the creative industries have varied depending on the nature of the medium. Social distancing and wider restrictions have had a particular impact on theatres, orchestras, museums and galleries, as they rely on live performances and exhibitions to generate revenue. Clauses 17 and 21 temporarily double the headline rate of relief for theatre tax relief and museums and galleries exhibition tax relief, from 20% for non-touring productions and 25% for touring productions to 45% and 50%, respectively. From April 2023, the rates will be reduced to 30% and 35%, and they will return to 20% and 25% on 1 April 2024.

Clause 19 temporarily doubles the headline rate of relief for the orchestra tax relief from 27 October 2021, from 25% to 50%, reducing to 35% from 1 April 2023 and returning to 25% on 1 April 2024. The temporary higher rates of relief will provide a further incentive for theatres, museums, galleries and orchestras to put on new productions, exhibitions and concerts over the next two and a half years. This is a tax relief for culture worth almost a quarter of a billion pounds.

Clauses 18 and 20 make changes to theatre tax relief and orchestra tax relief to help clear up areas of legislative ambiguity and reinforce the original policy intent. The changes will apply to any new productions commencing from 1 April 2022. The clarifications are as follows: first, the commercial purpose condition for theatre tax relief and orchestra tax relief will be clarified so that productions must be separately ticketed to be considered as having been performed before a paying audience.

Secondly, the educational purposes condition will clarify that it is the audience that is being educated, not the performers. Thirdly, the legislation clarifies that productions made for training purposes will be excluded. Fourthly, teaching costs incurred by educational establishments, which are not directly related to performances, will be specifically excluded from relief. Finally, the definition of a “dramatic piece” will be clarified, so that to qualify for the relief, productions must contain a story or a series of stories and must have an expected audience of at least five people.

Clause 22 extends the sunset clause of museums and galleries exhibition tax relief from April 2022 to April 2024 in order to give certainty to museums and galleries through the recovery from the effects of the pandemic. The Government will also take steps to prevent abuse or attempted abuse of museums and galleries exhibition relief by clarifying the existing legislation. The clause makes minor changes to clear up areas of legislative ambiguity and reinforce the original policy intent. The changes will apply to any new exhibitions commencing from 1 April 2022.

The first clarification will be to the definition of an exhibition, which will be clarified so that the

“display of an object or work”

cannot be secondary to another activity. Secondly, to prevent private companies that are not museums or galleries from claiming on temporary outdoor sites, it will be clarified that being responsible for an exhibition is not sufficient for a company to qualify as maintaining a museum or gallery. Finally, the Government are relaxing the criteria for qualifying as a primary production company to allow more flexibility for museums and galleries scheduling touring exhibitions.

The changes will help UK theatres, orchestras, museums and galleries bounce back by incentivising new productions over the next two and a half years; continue Government support for charitable companies to put on high-quality museum and gallery exhibitions; and ensure that the relief is targeted and sustainable.

[James Murray]

Clause 17 will temporarily increase the rate of theatre tax credit for theatrical productions that commence production on or after 27 October 2021. From 27 October 2021 to 31 March 2023, companies will benefit from relief at a rate of 50% or 45% for touring and non-touring productions. From 1 April 2024, the rates of relief will return to the existing levels of 25% and 20% respectively.

Companies qualifying for theatre tax relief can surrender losses in exchange for a payable tax credit. The amount of loss able to be surrendered in a period is dependent on several factors, but will ultimately depend on the amount of core production expenditure that has been incurred in the UK or European Economic Area. A higher rate of relief is also available to theatrical productions that take place at more than one premise and are considered touring productions. I would be grateful if the Minister could clarify how the definition of touring will be applied.

Section 1217K(6) of the Corporation Tax Act 2009 defines touring thus:

“A theatrical production is a ‘touring production’ only if the company intends at the beginning of the production phase—

(a) that it will present performances of the production in 6 or more separate premises, or

(b) that it will present performances of the production in at least two separate premises and that the number of performances will be at least 14.”

Paragraph (b) indicates that if a theatre company puts on 14 performances that were split between two venues—perhaps in the same town, just round the corner from one another—it would be eligible for 5% more tax credits than if it kept all 14 performances in the same venue. Perhaps the Minister could confirm whether that is the case.

As we have heard, clause 18 concerns theatrical production tax relief. It amends part 15C of the Corporation Tax Act 2009 to clarify several areas of legislative ambiguity relating to eligibility for theatre tax relief in relation to theatrical productions where the production phase will begin on or after 1 April 2022. We understand that the amendments are made to narrow the focus of the legislation and, according to the background of its explanatory note, to

“reinforce the original policy intent”.

Subsection (2) requires the intended audience to number at least five people for a production to be considered a “dramatic production”. It also stipulates that for a dramatic piece to qualify as a dramatic production, it must tell

“a story or a number of related or unrelated stories.”

Subsection (3) adds productions made for training purposes to the list of productions that are not regarded as theatrical and do not qualify for relief.

Subsection (4) amends the commercial purpose condition in section 1217GA of the 2009 Act so that a performance will not meet the condition unless it is separately ticketed and such ticketing is expected to make up a significant proportion of the performance’s earnings. A ticket may cover things besides admission to the performance, so long as such things are incidental to the performance and it is possible to apportion the ticket price between the performance and anything else included in the price. The subsection additionally clarifies that for a performance to meet the commercial purpose condition by being educational, it must be provided mainly to educate the audience.

As we have heard, clause 19 provides a temporary increase to orchestra tax credit. It temporarily increases the rate of orchestra tax relief for concerts or concert series that commence production on or after 27 October 2021. From 27 October 2021 to 31 March 2023, companies will benefit from relief at a rate of 50%. From 1 April 2023 to 31 March 2024, the rate of relief will be set at 35%. From 1 April 2024, the rate of relief will return to its existing level of 25%.

Companies qualifying for orchestra tax relief can surrender losses in exchange for a payable tax credit. The amount of loss that can be surrendered in a period is dependent on several factors, but ultimately it depends on the amount of core production expenditure that has been incurred in the UK and the European Economic Area. This temporary rate rise is also being introduced to theatre tax relief, in clause 17, and museums and galleries exhibition tax relief in clause 21. It allows companies to claim a larger tax credit and is designed to support the industries as they recover from the adverse economic impact of the covid-19 pandemic.

Orchestral productions are a tremendously important cultural asset in this country, and we are pleased to support the clause, which provides additional support to a cultural industry that has been hit hard by the pandemic. However, will the Minister outline what measures are in place to support musicians of other genres, or who perform in non-orchestral configurations? This is a welcome relief for orchestras, but other musical groups could be left out.

As we have heard, clause 20 pertains to tax relief for orchestras. This clause amends part 15D of the Corporation Tax Act 2009 to clarify several areas of legislative ambiguity within orchestra tax relief. These changes have effect in relation to concerts or concert series where the production process begins on or after 1 April 2022, and they are comparable to the changes concerning theatre productions in clause 18, in so far as the Bill clarifies that relief is not applicable to orchestral productions that take place for training purposes. It amends the Corporation Tax Act so that a concert will not meet the definition unless it is separately ticketed and such ticketing is expected to make up a significant proportion of the performance’s earnings.

Those are uncontroversial provisions that we do not oppose, because they reduce the risk of the tax relief being misused and maintain the spirit in which the legislation was originally developed. However, we note the Chartered Institute of Taxation’s concern that orchestras that made a series election before the Budget—for example, an orchestra that made a series election in September for its whole annual season—would appear to lose out on the higher rate of relief for their entire season. That is perceived to be unfair, and we would welcome clarity over whether that is the Government’s intention.

Clause 21 provides a temporary increase to the rate of relief afforded to museums and gallery exhibitions that commence production on or after 27 October 2021. From 27 October 2021 to 31 March 2023, companies will benefit from relief at a rate of 50% or 45% for touring and non-touring exhibitions respectively. From 1 April 2023 to 31 March 2024, the rates of relief will be set at 35% and 30%. From 1 April 2024, the rates of relief will return to their existing levels of 25% and 20%.

Companies qualifying for this relief can surrender losses in exchange for a payable tax credit. The amount of loss that can be surrendered in a period is dependent on several factors, but it ultimately depends on the amount of core production expenditure that has been incurred in the UK and European Economic Area. We do not oppose the measure, because it relates to another sector that has been hurt by the pandemic and that we want to see back on its feet, providing the best educational and cultural enrichment that it can to the British people.

However, will the Minister clarify where world heritage sites fit into the legislation, and whether they could be considered museums or gallery exhibitions? According to UNESCO, the UK and Northern Ireland have 33 world heritage sites: 28 cultural, four natural and one mixed.

Finally, clause 22 concerns the aforementioned tax relief to museums and gallery exhibitions, clarifying some legislative ambiguities and amending criteria for primary production companies. Those amendments have effect in relation to exhibitions where the production stage begins on or after 1 April 2022. The relief was introduced with a sunset clause and was due to expire from 1 April next year, but this clause extends the relief for a further two years. Any expenditure incurred after 1 April 2024 will not qualify for relief unless there is a further extension.

As we can see, subsection (1) amends the definition of an exhibition so that a public display of an object is not an exhibition if it is subordinate to the use of that object for another purpose. For example, if a historic passenger train offers rides between two towns, although the train may have historical or cultural significance, its main purpose is to provide passenger transport. This does not preclude the possibility of there being an exhibition on board the train.

Finally, and more broadly, we are aware of concerns from within the industry regarding productions that straddle the commencement dates of these reliefs. For each relief, the increased rate applies only to productions where the production stage for the exhibition began on or after the Budget on 27 October 2021, when the change was announced. So, a production that received the green light on 26 October, or earlier, would not gain the benefit of the increased rate, however long it ran for after the commencement date for the increased rate. We understand there are those in the sector who perceive that as harsh and arbitrary, and we welcome the Minister’s thoughts on the matter.

Finance (No. 2) Bill (First sitting)

Debate between Lucy Frazer and James Murray

Tuesday 14th December 2021 Public Bill Committees

The Financial Secretary to the Treasury (Lucy Frazer)

-

It is a pleasure to serve under your chairmanship, Sir Christopher. Clause 1 legislates for the charge of income tax for 2022-23. Clauses 2 and 3 set the main default and savings rate for income tax for 2022-23, and clause 5 maintains the starting rate for savings limit at its current level of £5,000 for 2022-23.

Income tax is one of the Government’s most important revenue streams, expected to raise approximately £230 billion in 2022-23. The starting rate for savings applies to the taxable savings income of individuals with low earned incomes of less than £17,570, allowing them to benefit from up to £5,000 of savings income tax free. The Government made significant changes to the starting rate for savings in 2015. They lowered the rate from 10% to 0%, and increased the band to which it applied from £2,880 to £5,000. These clauses are legislated annually in the Finance Bill.

Clause 1 is essential because it allows for income tax to be collected in order to fund vital public services on which we all rely. Clause 2 ensures that the main rates of income tax for England and Northern Ireland continue at 20% for the basic rate, 40% for the higher rate, and 45% for the additional rate. Clause 3 sets the default and savings rates of income tax for the whole UK—the basic, higher and additional rates of 20%, 40% and 45% respectively. Clause 5 confirms the band of savings income to which it applies, maintaining the starting rate limit at its current level of £5,000 for the 2022-23 tax year. The limit is being held at that level rather than increased by the consumer prices index to ensure simplicity and fairness within the tax system, while maintaining a generous tax relief.

Clauses 1 to 3 ensure that the Government can collect income tax for 2022-23. Clause 5 continues the Government’s commitment to support people of all incomes and at all stages of life to save. Taken with the personal savings allowance and the annual individual savings account allowance of £20,000, those generous measures mean that about 95% of savers will pay no tax on their savings income.

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

- - Excerpts

I am grateful for the opportunity to respond to the clauses on behalf of the Opposition. As we have heard, clause 1 imposes a charge for income tax for the year 2022-23. It is for Parliament to impose that tax charge for the duration of the financial year. I understand from my well-informed parliamentary researcher that the first income tax that bears a resemblance to the modern graduated form that the clause refers to was introduced by William Pitt the Younger in 1798; as we will see in later clauses of the Bill, there has been some departure from the tax bands of £60 and £200 annually introduced then. We will of course not oppose clause 1, although we note for the record that under this Government the tax burden will rise to its highest level for 70 years.

Clause 2 sets the main rates of income tax for the year 2022-23, which will apply to the non-savings, non-dividend income of taxpayers in England and Northern Ireland. The clause provides that the main rates of income tax for 2022-23 are the 20% basic rate, the 40% higher rate, and the 45% additional rate. Income tax rates on non-savings, non-dividend income for Welsh taxpayers are set by the Welsh Parliament. The UK main rates of income tax are reduced for Welsh taxpayers by 10p in the pound, and the Welsh Parliament sets the Welsh rates of income tax, which are added to the reduced UK rates. Income tax rates and thresholds on non-savings, non-dividend income for Scottish taxpayers are set by the Scottish Parliament.

We note that, although the rates of income tax are not rising in the Bill, the same cannot be said for national insurance. That tax was increased by the Health and Social Care Levy Act 2021, which we debated in September. As I said at the time, that national insurance rise and the new levy being introduced represented a tax rise that falls directly on working people and their jobs, which is why we opposed the progress of that Act.

Clause 3 sets the default rates and savings rates of income tax for the tax year 2022-23. Subsection (1) provides for a basic default rate of 20%, a higher rate of 40% and an additional rate of 45%. Subsection (2) provides for savings rates on income tax at the same rates as the default: 20% for basic, 40% for higher and 45% for additional. Those rates match the rates of earned income, and we will not oppose the clause.

Clause 5 freezes the starting rate limit for savings in the tax year 2022-23 at £5,000. As it is not a devolved matter, the freeze applies across the United Kingdom. The starting rate for savings can apply to an individual’s taxable savings income, such as interest on bank or building society deposits. The extent to which an individual’s savings income is liable to tax at the starting rates for savings rather than the basic rate of income tax depends on the total of their non-savings income, including income from employment, profits from self-employment and pensions income. If an individual’s non-savings income is more than their personal allowance and exceeds the starting rate limit for savings, the starting rate is not available for that tax year. Where an individual’s non-savings income in a tax year is less than the starting rate limit, their savings income is taxable at the starting rate up to that limit.

Income tax is charged at the 0% starting rate for savings rather than the basic rate of income tax on that element of an individual’s income up to the starting rate for savings income. The clause sets the starting rate limit for savings for 2022-23 at £5,000, but it does not override section 21 of the Income Tax Act 2007 in relation to the starting rate limit for savings for 2022-23. We know that the freeze on the limit is taking place in the context of a rising rate of inflation, which will have an impact on savers in real terms. In her reply, I would be grateful if the Minister explained what assessment the Treasury has made of those who will be affected by the freeze.

Lucy Frazer

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I will make a couple of points in response. First, the hon. Member for Ealing North mentioned the tax burden rising; he will know that we are still in the midst of a pandemic and that the Government have spent £400 billion to ensure that public services, particularly the NHS, get the money they need. He will know why we are introducing a rise in national insurance contributions for the first time: to fix social care. He asked me about savings and those on the lowest incomes. The Government have raised the personal allowance by nearly 50% in real terms in the last decade. It is the highest basic personal tax allowance of all countries in the G20, and remains one of the most generous internationally.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clauses 2, 3 and 5 ordered to stand part of the Bill.

Clause 9

Liability of Scheme Administrator for Annual Allowance Charge

James Murray

- - Excerpts

I beg to move amendment 11, in clause 9, page 5, line 20, leave out “6 years” and insert “5 years and 9 months”

James Murray

- - Excerpts

Clause 9 relates to the liability of insurance scheme administrators for the scheme’s annual allowance charge. I welcome the opportunity to discuss the clause and our amendment to it. The clause amends the period within which an individual can give notice to their pension scheme administrator to pay the annual allowance charge of previous tax years, using a system known as “mandatory scheme pays”.

The clause also amends the period within which a scheme administrator must provide information about and account for an amount of the annual allowance charge. As we know, mandatory scheme pays is the process that helps an individual pay their annual allowance charge liabilities for a current tax year when certain conditions are met. The individual elects for their pension scheme administrator to be jointly liable for their annual allowance tax charge, in return for an actuarial reduction in the value of their pension pot.

The annual allowance is the maximum amount of tax relieved pension savings that an individual can build up during a tax year. Where an individual exceeds the maximum amount of tax relieved pension savings, they will be liable to a tax charge on the excess amount. That tax charge recoups the excess tax relief that the individual has already received on their pension savings. For mandatory scheme pays, the annual allowance charge must exceed £2,000, and the individual’s pension input amount for that pension scheme must exceed the £40,000 annual allowance.

The clause will enable more individuals who meet the conditions to benefit from the mandatory scheme pays facilities because the measure applies to all individuals that receive a retrospective amendment to their pension input amount for the previous tax year. This is a measure we broadly support—the simplification of a relatively complex tax rule is a good thing both for the pension contributors and for those who hitherto had to disentangle its complexity.

However, we would like to raise a point with the Minister; we have tabled amendment 11 as a probing amendment with that in mind. Amendment 11 would affect clause 9, page 5, line 20, by leaving out “6 years” and inserting “5 years and 9 months”. We have tabled the amendment out of concerns drawn to our attention by the Chartered Institute of Taxation about the hard stop deadline being introduced for notices under section 237B of the Finance Act 2004. Clause 9 part 3 introduces a new section

“237BA Time limit for notices under section 237B”.

Subsections (4)(b) and 5(b) provide for a hard stop deadline of

“the end of the period of 6 years beginning with the end of the tax year in question”

for both the scheme administrator providing an individual with information about a change to their pension input and output and the individual member giving notice to the scheme administrator to pay the annual allowance charge through scheme pays.

The result of the two subsections is that it is possible for the scheme administrator to issue a statement with a change to the pension input amount in line with the legislation after, say, five years, 11 months and 30 days, meaning that the member would have just one day to make the scheme pays election and give notice to the scheme administrator that they want to do so. That is clearly an unreasonable timeframe for the member, so our amendment suggests one possible way of making sure the scheme member is given fair warning.

Our amendment proposes a ring-fenced three-month period during which the member would have time to process and make arrangements for a scheme pays election and to give notice to the scheme administrator. I hope we can agree that such an approach would simply allow members some protection against unreasonable circumstances that could arise. We will not push the amendment to a vote, but I would be grateful if the Minister addressed the points it raises in her reply.

Lucy Frazer

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Clause 9 extends the reporting and payment deadlines so that an individual can ask their pension scheme to settle their annual allowance tax charge of £2,000 or more from a previous tax year by reducing their future pension benefits in a process known as scheme pays. The annual allowance limits the amount of UK tax relieved pension savings that an individual can benefit from in the tax year. If an individual’s pension savings exceed the annual allowance, a tax charge is applied. The tax charge recoups the excess tax relief that the individual has already received.

Scheme pays was introduced to help individuals pay an annual allowance charge in their current tax year where certain conditions are met. The unlawful age discrimination found in the 2015 public sector pension reform known as McCloud, which I will come on to in clause 11, highlighted a need for scheme pays to be available also for previous tax years from when an annual allowance tax charge arises. The changes made by clause 9 extend the date by which an individual can ask their pension scheme to pay an amount of their annual allowance tax charge. That means that where the charge arises because of a change of facts and the charge is £2,000 or more, the scheme pays facility is now another option for the individual to pay their tax charge.

The changes made by clause 9 also extend the date by which the pension scheme administrator must report and pay an annual allowance tax charge to Her Majesty’s Revenue and Customs using the accounting tax return. The extended date applies where the charge has arisen because of a change of facts about an individual’s pension savings. The date for reporting and paying the charge relates to when the scheme administrator is notified of the charge by the individual, following a change of facts rather than a fixed period after the end of the tax year. That means that the scheme pays facility is now available to individuals for their annual allowance tax charge from an earlier tax year.

Amendment 11 seeks to reduce the relevant time for a scheme to notify individuals from six years to five years and nine months. Unfortunately, that would mean that if an individual were notified more than five years and nine months after the tax year, scheme pays would not be available. The individual would, however, still be liable to the tax charge, leaving them to pay it out of their own pocket. I therefore urge the Committee to reject amendment 11.

In summary, clause 9 provides for scheme pays to be an option for individuals to have their pension scheme pay their annual allowance tax charge for a previous tax year where the conditions are met.

James Murray

- - Excerpts

I recognise that the Minister is unwilling to accept the amendment, although I would have welcomed a reassurance that she would take the principle behind the amendment away, discuss it with her officials and perhaps report back to the Committee at a later stage. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 ordered to stand part of the Bill.

Clause 10

Increase of normal minimum pension age

Question proposed, That the clause stand part of the Bill.

Lucy Frazer

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Clause 10 makes changes to increase the normal minimum pension age to 57. It also establishes a protection regime, which will enable some individuals to continue to access their pension before the age of 57 without any adverse tax impacts. The normal minimum pension age is the age at which most savers can access their pension without incurring an unauthorised payment tax charge. The coalition Government announced in 2014 that the normal minimum pension age would rise to 57 in 2028, reflecting long-term trends in longevity and changing expectations of how long we will remain in work and in retirement.

Clause 10 legislates to increase the normal minimum pension age to 57 on 6 April 2028. That increase will not apply to members of the police, firefighters, or armed forces public service pension schemes, who will receive protected pension ages to reflect the special nature of their work. Those who have an unqualified right in their scheme rules to take their pension before age 57 will also receive protected pension ages. Those who made a substantive request to transfer their pension before 4 November 2021 will still be able to complete their transfer into a pension scheme that already offered unqualified rights to a pension below age 57 and get a protected pension age.

That is a shorter window during which pension scheme members can transfer their pension to keep a protected pension age than was initially published in the summer. The Government listened carefully to stakeholder concerns that a longer window could have adverse impacts on the pensions market. The shorter window still delivers the original policy intent, so that those who were in the process of transferring their pension when the protection regime was first announced do not lose their protected pension age. Closing the window without prior notice avoided unnecessary turbulence in the pensions market and helped to protect consumers.

Those with protected pension ages will be able to access their pension benefits before age 57 without incurring an unauthorised payment tax charge. A protected pension age is specific to an individual as a member of a particular scheme. If an individual has a protected pension age in one scheme, they will not automatically have a protected pension age in another scheme: that would depend on the second scheme’s rules. Increasing the normal minimum pension age to 57 in 2028 reflects the principle that the normal minimum pension age should be set 10 years below the state pension age. The protection regime balances the need for fairness to pension savers with simplicity for pension providers. I therefore commend the clause to the Committee.

James Murray

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As we have heard, clause 10 relates to the increase of the normal pension age to 57 from 6 April 2028. The stated intention of the clause is to protect members of the registered pension schemes who, before 4 November 2021, had a right to take their entitlement to benefit under those schemes at or before the existing normal minimum pension age. It exempts members of certain uniformed service pension schemes from the increase, and it introduces new block and individual transfer rules specific to the new protection framework in order to reduce the restrictions on retaining a protected pension age following a transfer. The UK has a long tradition of protecting and rewarding those who have served their country. It is therefore right that we support clause 10, as it provides that protection by safeguarding recipients’ right to retain entitlement to benefits when transferring schemes.

We note, however, that the Low Incomes Tax Reform Group has concerns about the transitional arrangements relating to the clause. Paragraph 28 of the Government’s explanatory note regarding this clause states:

“There may be some transitional issues. For example, an individual who does not have a protected pension age and at 5 April 2028 will have reached age 55 and has started but not completed the process of taking pension savings before the change in normal minimum pension age. The government will provide further advice on the proposed transitional arrangements and provisions in due course.”

That raises concerns about when further advice on the proposed transitional arrangements will be made available, as well as questions about the extent to which that advice will be effectively communicated to the people concerned.

It is vital that people have full detail of any transitional provisions well before the increase to age 57 comes into effect; otherwise, there is a risk that people reaching age 55 in the run-up to 6 April 2028 will make decisions without knowing all they need to know. For example, an individual could cash in a pension in full and put the money in the bank so as to crystallise access to those funds, which may well leave them worse off in the long term, having likely incurred a large tax liability on the encashment and potentially affected their means-tested benefit entitlement. They might also have triggered the money purchase annual allowance, therefore restricting—perhaps unwittingly—their ability to make further contributions. In light of this, will the Minister clarify precisely when “due course” is, in relation to the Government’s further advice regarding the proposed transitional arrangement for the provisions? Will she also confirm what measures the Government will take to make sure that people are aware of the advice when it is finalised?

Alison Thewliss (Glasgow Central) (SNP)

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This issue speaks to what I and my colleagues have often asked for in Finance Bills—that is, to be able to take evidence. We have received some very good written evidence from different organisations—I thank Scottish Widows, the Low Incomes Tax Reform Group and the Chartered Institute of Taxation for sending evidence to the Committee—but some of the detail requires a bit more interrogation. It would be useful if Finance Bill Committees were able to take evidence on the detail.

I agree with much of what the hon. Member for Ealing North said. Saying that something will happen in due course is not a great reassurance to many people. We have seen the terrible mess that the Government left for the WASPI women—the Women Against State Pension Inequality—who did not receive enough notice of state pension age changes. As a result, many have lost out on what they expected to happen when they reached retirement.

In its evidence, Scottish Widows makes the point well:

“Simplicity is a key driver of engagement with pensions… The average person has 11 jobs in their lifetime—with auto enrolment that could mean them having at least 11 pension pots. Some of these will now be accessible at age 55, others at 57.”

It also notes that

“some customers may have different pension ages within the same pension pot.”

That is not the simplicity that people really need when it comes to planning for their retirement.

There is a range of views. Scottish Widows appears to welcome the changes. The Chartered Institute of Taxation is not convinced that a change to the normal minimum pension age is necessary or desirable. What ought to be at the centre of this discussion is the people who will claim that pension. They need the clearest possible advice and the longest possible amount of notice in order to plan. I ask for clarity from the Government. It is just not acceptable to come before the Committee today without a date and say, “in due course”. People need to be able to plan for one of the most important events in their lives.

Lucy Frazer

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The clause allows for regulations to be made to address the tax impacts of the remedy to the unlawful age discrimination that arose from the 2015 public service pension reforms. The Government reformed most public service pensions in 2015, but excluded those closest to retirement from the reforms. The court found that that exclusion amounted to unlawful discrimination on the basis of age. That is known as the McCloud case.

Following consultation, the Government are introducing a remedy to rectify that discrimination, which affects about 3 million people. The remedy includes options for them to choose at retirement what type of pension rights they will receive for the remedy period. The remedy period covers the years between 2015 and 2022, with an exception for the judiciary, who will instead make their choice in 2022. That was decided following consultation with the sector.

Most of the legislation required to implement the remedy is contained in the Public Service Pensions and Judicial Offices Bill, which is progressing through the Commons. However, where those changes mean that the Government will provide individuals with different historical pension rights, changes to pension tax legislation are also required. The purpose of clause 11 is therefore to allow the Government to make regulations to put the individual, as far as possible, in the tax position in which they would have been had the discrimination never happened. It also ensures that regulations can be put in place to address the tax impacts of the public service pensions remedy on the employers and those responsible for the tax affairs of the pension schemes.

I mentioned that the legislation implementing the remedy is going through Parliament. Once it is finalised, the Government will use the power in clause 11 to draft regulations that will provide for the tax changes needed as part of our move to rectify the discrimination. For example, the Government will use the power to ensure that compensation payments payable as a result of the remedy can be made tax free, as they are calculated on that basis under the Public Service Pensions and Judicial Offices Bill.

The Government will also use the power in clause 11 to ensure that pensions and lump sums payable as a result of the remedy that would have been authorised payments had they been made at the relevant time are treated as meeting the conditions to be authorised. One further example is that members may choose benefits for the period 2015 to 2022 that lead to a significant increase in their pension accrual in a single tax year. Without a change to legislation, that could result in individuals paying more tax than if the pension that they ultimate chose had accrued annually.

The Government will use the power in clause 11 to make good the tax treatment of those affected by the remedy set out in the Public Service Pensions and Judicial Offices Bill. Regulations made under the power will ensure that, broadly, those affected will be in the tax position that they would have been in had they not suffered discrimination. I therefore commend the clause to the Committee.

James Murray

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As we have heard from the Minister, clause 11 relates to public service pension schemes and the rectification of unlawful discrimination. It provides the Treasury with the power to make regulations to address the tax impacts that arise in consequence to or in connection with the rectification of unlawful discrimination set out in part 1 of what is expected to become the Public Service Pensions and Judicial Offices Act 2022. Those changes will have effect on or after 6 April 2022, and are capable of having retrospective effect.

As we are aware, when reformed public service pension schemes were introduced in 2014-15, the Government agreed, following discussions with trade unions, to allow active members of pre-existing public service pension schemes who were close to retirement to remain in those schemes, rather than requiring them to start to accrue pension benefits in a new scheme. That was called transitional protection. In December 2018, the Court of Appeal found in what is known as the McCloud judgment that the transitional protection unlawfully discriminated against younger members of the judicial and firefighter pension schemes, and gave rise to indirect sex and race discrimination.

On 15 July 2019, the then Chief Secretary to the Treasury, the right hon. Member for South West Norfolk (Elizabeth Truss), made a written ministerial statement setting out that the Government considered that the Court of Appeal’s judgment had implications for all public service pension schemes, and planned to introduce proposals to remedy the discrimination across the schemes. On 19 July 2021, the Government introduced the Public Service Pensions and Judicial Offices Bill. The provisions of part 1 of that Bill will apply retrospectively, to provide a remedy for the discrimination. The rectification affects individuals who were members of a public service pension scheme on or before 31 March 2012 and at any time between 1 April 2015 and 31 March 2022, and so had pensionable service during that time.

Under chapter 1 of part 1 of Public Service Pensions and Judicial Offices Bill, individuals who were moved to a new scheme will be retrospectively returned to their previous scheme for the period of remediable service. Any member with remediable service will be able to choose to receive pension scheme benefits based on the rules of either the legacy scheme or the new scheme, although for most individuals there will be no significant change in the tax position. The legislation will provide the Treasury with the power to make regulations that make the necessary changes to tax legislation so that, as far as possible, individuals can be put in the position in which they would have been, absent the discrimination. We will therefore not oppose the clause.

Lucy Frazer

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I am grateful for the hon. Member’s indication that he will not oppose the clause, and have nothing further to add.

Question put and agreed to.

Clause 11 accordingly ordered to stand part of the Bill.

Clause 13

Structures and buildings allowances: allowance statements

Question proposed, That the clause stand part of the Bill.

Lucy Frazer

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Clause 13 makes provisions to improve the operation of the structures and buildings allowances for taxpayers. The clause will require relevant allowance statements to include the date that qualifying expenditure is incurred or treated as incurred in cases where its absence could prevent future owners of an asset from claiming the full amount that they are entitled to.

The SBA allows companies to reduce their taxable profits each year by 3% on the cost of construction, acquisition, renovation or conversion of non-residential buildings and structures. The investment is fully relieved after 33 and a third years. A business must hold a valid allowance statement to claim SBA. That document records information such as the relevant building or structure and the amount of qualifying expenditure incurred. It is passed on to subsequent owners to ensure the right records are kept for an asset.

The allowance period is the period over which SBA can be claimed, and it typically begins on the date when the structure or building is first brought into non-residential use. However, in cases where expenditure is incurred or treated as incurred after non-residential use has commenced, the allowance period will begin from that later date. That may be the case where renovation work is being carried out in a multistorey office building and the first tenants move in to one floor of the office building even though some construction continues on a different floor.

Without the inclusion of that date on the allowance statement, subsequent owners of a structure or building may not claim all the relief they are entitled to. Instead, they may reasonably assume that the allowance period began on the day the asset was first brought into non-residential use, not the date of the subsequent expenditure. Clarity for businesses on the remaining length of the allowance period for each portion of expenditure means they will be able to claim the full relief to which they are entitled.

The changes made by clause 13 are wholly relieving and will only benefit firms towards the end of the allowance period of 33 and a third years. The measure will apply across the UK. The clause will be effective for qualifying expenditure incurred or treated as incurred on or after the date of Royal Assent of the Bill. Therefore, it will not be retrospective and will not impact allowance statements already in existence. Clause 13 ensures that, in future, businesses can claim the full tax relief to which they are entitled.

James Murray

- - Excerpts

Clause 13 concerns the structures and buildings allowance statements. As we heard, it introduces a new requirement for allowance statements to include the date that qualifying expenditure is incurred or treated as incurred when that is later than the date on which the building or structure was first brought into non-residential use. The clause has effects for qualifying expenditure incurred or treated as incurred on or after the date of Royal Assent.

As we know, SBAs are a capital allowance available for the cost of constructing, renovating, converting or acquiring non-residential structures and buildings. When SBAs were first introduced, from 29 October 2018, the allowances were given at 2% per annum of qualifying expenditure on a straight-line basis. That rate was increased to 3% per annum with effect from April 2020. The period over which SBAs are available to be claimed is known as the allowance period.

A business must hold an allowance statement to claim SBAs, which includes certain details such as the date the asset is first brought into non-residential use. As we heard, that is normally the date that the SBA’s allowance period of 33 and a third years commences. However, where qualifying expenditure is incurred after the asset is brought into non-residential use, the allowance period starts on a later date. The new paragraph inserted by the clause adds an additional requirement to record that later date on the allowance statement, where relevant, to ensure the correct amount of SBAs may be claimed over the allowance period. The minor amendment to section 270IA(4)(b) of the Capital Allowances Act 2001 ensures consistency with the new paragraph.

We do not oppose the clause, as it is important to ensure the correct amount of SBA is claimed over the correct time to avoid unnecessary hardship or disruption.

Lucy Frazer

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I am happy that the hon. Gentleman recognises that this is a clause worthy of Bill.

Question put and agreed to.

Clause 13 accordingly ordered to stand part of the Bill.

Clause 14

Qualifying Asset Holding Companies

Question proposed, That the clause stand part of the Bill.

Lucy Frazer

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Clause 14 and schedule 2 introduce a new regime for the taxation of certain asset-holding companies being used by funds and institutional investors to make their investments. Asset management firms manage the savings and pensions of millions of UK citizens. The majority of UK households use an asset manager’s services, either directly or indirectly, for example through their workplace pensions. The reforms have been developed following extensive consultation as part of the wider review of the UK funds regime announced at Budget 2020. A key objective of the review is to consider reforms to enhance the UK’s competitiveness as a location for asset management and investment funds. It is a well-established principle that investors in funds should be taxed broadly as if they had invested directly in the underlying assets.

The new qualifying asset holding companies regime seeks to ensure that, where intermediate holding companies are used to facilitate the flow of capital, income and gains between investments and investors, the tax they pay is proportionate to the limited activities that they perform. With that policy objective in mind, the regime comprises a number of features, including a gains exemption for the disposal of certain shares and overseas property; specific rules where investment returns are passed to investors; withholding tax removed from payments of interest; and exempting repurchases of share and loan capital from stamp tax changes.

The new regime also contains safeguards. For example, the existing taxation of profits from trading activities, UK land and intangibles will not be affected. Furthermore, the new regime will be available only in certain circumstances—to prescribe investment arrangements involving diversified investment funds, charities, long-term insurance business, sovereign immune entities, certain pension schemes and public bodies.

Government amendments 1 to 6 seek to address three technical points better to reflect the original policy intention of the new regime and to ensure consistency with wider tax rules. Those include refinements to the eligibility criteria and ensuring that they are applied consistently. They follow engagement with the industry on the legislation since the introduction of the Finance Bill.

The clause introduces a new regime for qualifying asset holding companies from April 2022 that will build on the UK’s strengths as an asset management hub by enhancing the attractiveness of the UK as a location for the establishment of asset holding companies. I recommend that the clause and schedule 2 form part of the Bill.

James Murray

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As we have heard, the clause concerns qualifying asset holding companies, and sits alongside schedule 2. The aim of the clause, we understand, is to recognise certain circumstances where intermediate holding companies are used only to facilitate the flow of capital, income and gains between investors and underlying investments to tax investors, broadly as if they had invested in the underlying assets, and to enable the intermediate holding companies to pay tax that is proportionate to the activities they perform.

At Budget 2020, the Government announced that they would carry out a review of the UK funds regime, covering tax and relevant areas of regulation. The review started with a consultation on the tax treatment of asset holding companies in alternative fund structures, also published at Budget 2020. The Government responded to that consultation in December 2020, launching a second-stage consultation on the detailed design features of a new regime for asset holding companies. The Government’s response to that consultation was published on 20 July 2021.

The clause and schedule 2 introduce the new regime. We understand that the purpose of the measures is to deliver a proportionate and internationally competitive tax regime for qualifying asset holding companies that will remove barriers to the establishment of such companies in the UK. The Government have said that the new regime will include the following key features: eligibility criteria to limit access to the intended users; tax rules to limit the qualifying asset holding company’s tax liability to an amount that is commensurate with its role; and rules for UK investors to ensure that they are taxed so far as possible as if they had invested in the underlying assets directly.

We understand that the eligibility criteria will ensure that the asset holding companies may only be used as part of investment structures where funds are managed for the benefit of a broad pool of investors or beneficiaries. An asset holding company cannot carry out other activities, including trading, to any substantial extent. The tax benefits arising from asset holding company status apply only in relation to qualifying investment activity. The tax treatment of any limited trading activity or any non-qualifying investment activity that is carried on by an asset holding company will not be affected by the company’s status as an asset holding company.

We note that the Government have tabled six amendments to schedule 2, which accompanies the clause. Amendments 1 and 2 seek to pin down the definition of investment management profit-sharing arrangements. According to the explanatory statement, that is to ensure that the legislation is capable of encompassing arrangements in which an entitlement to profits arising in connection with the provision of investment management services by an investment manager arises to another person, such as a company or a trust.

Amendments 3 and 6 provide that a fund that is 70% controlled by category A investors meets the diversity of ownership condition. Amendment 4 seeks to allow existing funds marketed before the commencement of the qualifying asset holding company regime to be treated as meeting regulation 75(2) of the Offshore Funds (Tax) Regulations 2009 if certain information has been produced by the fund and has been made available to Her Majesty’s Revenue and Customs. Amendment 5 modifies the way in which the interests of creditors are accounted for in determining whether a fund is closed. We will not be opposing clause 14 or the Government’s amendments to it.

Alison Thewliss

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I am a wee bit concerned that the Government have brought these amendments so late in the day. I appreciate that they have brought them now, rather than seeking to come back and amend legislation further down the road. That is something, I suppose. Does the Minister intend to review this legislation, and on what timescale? I am a wee bit worried about the letter we received yesterday, which said that, as originally drafted, the legislation includes some inconsistencies with wider tax rules and within the regime’s eligibility criteria. Given those worries and these amendments, I would like some reassurance from the Minister that the Government are going to keep an eye on this legislation to make sure that it is not exploited or used in the way that it is not intended to be. We need to make sure that people are paying the tax that they ought to be and that the legislation is not used as some kind of dodge.

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Lucy Frazer

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Clause 15 makes targeted changes to the tax rules for real estate investment trusts. These changes alleviate certain constraints and administrative burdens to enhance the attractiveness of the UK’s real estate investment trust regime for real estate investment.

A real estate investment trust, or REIT, is a collective vehicle that allows investors to obtain broadly similar returns from an investment in property as they would have had had they invested directly through a specific set of tax rules. This regime has proved popular since its introduction in 2006, with around 100 UK REITs currently established. However, recent consultations issued as part of the Government’s review of the UK funds regime have identified a number of areas where the REIT regime could be reformed to remove unnecessary barriers and make it more competitive. The Government are now acting to amend these areas of their regime to make the UK a more attractive location for holding real estate assets.

The changes to the REITs tax rules will reform a number of areas. They will remove some administrative and cost burdens for existing UK REITs and remove some barriers to entry, widening the scope of businesses able to elect to be a UK REIT. In particular, the changes will remove the requirement for REIT shares to be admitted to trading on a recognised stock exchange where institutional investors hold at least 70% of the ordinary share capital. They will amend the definition of an overseas equivalent of a UK REIT to allow it to be met by companies and jurisdictions without an equivalent regime and remove the “holder of excessive rights” charge, where property income distributions are paid to investors entitled to receive them without deduction of withholding tax.

Finally, the changes will introduce a new, simplified balance of business test, which are the rules requiring that at least 75% of the rights, profits and assets relate to the property rental business, and exclude certain activities relating to the planning obligations from the test.

The targeted changes introduced by the clause and schedule will make the existing rights regime more attractive, consistent with the Government’s objective for the review of the UK funds regime. The changes will come into force on 1 April 2022.

James Murray

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As we have heard, clause 15 and schedule 3 concern real estate investment trusts. The clause and schedule amend the REIT rules and, as the Government have said, seek to remove superfluous restraints and administrative burdens. That includes the removal of the requirement for REIT shares to be admitted to trading in certain circumstances; the amendment of the definition of an overseas equivalent of a UK REIT; the amendment of the “holder of excessive rights” charge to corporation tax; and changes to the rules which ensure that a REIT’s business is primarily focused on its property rental business. The changes take effect from 1 April 2022.

A REIT is a company through which investors can invest in real estate directly. Specific tax rules for UK REITs were introduced in the Finance Act 2006. The regime has proved popular, and the number of UK REITs steadily increased to 92, as of June 2021. Subject to meeting certain relevant conditions, the company may notify Her Majesty’s Revenue and Customs that it is to be treated as a UK REIT. Its property rental profits and gains are then, in broad terms, treated as exempt from corporation tax, subject to ongoing conditions such as the requirement to distribute 90% of its exempt profits as property income distributions, which are in turn treated as property rental income in investors’ hands.

At Budget 2020, the Treasury launched a consultation on the tax treatment of asset holding companies, which included questions about investments in real estate. Responses to the consultation led to the inclusion of proposals for changes to the REIT regime in a second consultation on asset holding companies, which was launched in December 2020. The schedule introduces those changes, which are intended to remove restrictions and administrative burdens where they are no longer necessary. For that reason, we do not oppose the clause or schedule.

Alison Thewliss

- - Excerpts

I have a question about transparency and how the regime will interact with the Government’s draft Registration of Overseas Entities Bill. I remember some discussion about people moving ownership to trusts and other things, but I am not quite clear how this interacts with that work on transparency.

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Lucy Frazer

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Clause 16 makes changes to the film tax relief to give added flexibility to film producers who might decide to change their distribution method. The Government are ensuring that film producers can claim the film tax relief for films that are broadcast or streamed rather than released in cinemas, provided that the film meets the criteria for high-end television tax relief.

There is an imbalance between release for film and TV where some films that are no longer intended for a cinematic release and switch to streaming lose eligibility for tax relief. The distribution landscape has changed significantly since the introduction of these reliefs, and more films are released directly to video on demand services. This trend has accelerated recently due to the covid pandemic.

The changes made by the clause to the film tax relief will provide greater certainty for producers, ensuring that relief is not lost should a company decide to change its distribution method. This will help ensure that the UK remains an attractive place to invest and encourage the production of culturally British films.

New clause 14 would require the Government to review the effectiveness and potential misuse of clause 16 within six months of the Act coming into force, and would include within it an evaluation of misuse of the film tax relief. That evaluation would include the total number of enforcement actions, and the number of successful enforcement actions, taken against the companies suspected of misusing film tax relief.

The Government oppose the new clause on the basis that it is not necessary, as the Government are already monitoring and evaluating the success of their tax reliefs. This follows the structured approach to evaluating tax reliefs that HMRC began in October 2020 as a general good practice policy approach. HRMC has contracted an independent research agency to evaluate the screen tax reliefs, including film tax relief and high-end television tax relief. That evaluation aims to provide a thorough and independent evaluation of the reliefs, including their effect on employment and business growth. The impact of clause 16 will be noted as part of the evaluation, which is expected to be published next year, although that evaluation will not cover misuse of the relief. The requirement in new clause 14 that a review of clause 16 be published in six months is also impractical, because the measure only comes into effect for accounting periods ending on or after 1 April 2022. It is likely to be at least a year before companies make claims in relation to clause 16, and even longer before enforcement action is taken.

It is also worth noting that HMRC is taking actions to clamp down on the abuses that the new clause is concerned about. The current film tax relief was introduced in 2007 to replace film partnership reliefs. It is a corporate relief, and now focuses on film producers, not on investing partnerships. HMRC continues to settle and litigate historic schemes related to the old film partnership reliefs, but the current regime has not been subject to the same abuse, and has had a positive reputation in the industry.

The corporate film tax relief has proved very successful at attracting inward investment. It is highly popular with film-makers, and has contributed to making the UK a top film-making destination. This new relief is well targeted and has not been subject to abuse like the previous scheme. The change made by clause 16 is therefore to support businesses that meet the qualifying criteria for the relief, and while HMRC will remain vigilant regarding any emerging risks, we do not believe that clause 16 poses any significant additional risk. Further, reviews and disclosure of enforcement action statistics as requested by the new clause would not be useful. As such, I urge the hon. Gentleman to withdraw it.

The changes made by clause 16 will help ensure that the film tax relief continues to support the UK’s thriving film-making scene. I therefore commend it to the Committee.

James Murray

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As we have heard, clause 16 allows films to remain eligible for film tax relief even if those films are no longer intended for theatrical release, provided they are intended for broadcast and meet the four conditions required for high-end television tax relief. The clause is effective for accounting periods ending on or after 1 April 2022. We do not oppose measures that support the entertainment and hospitality industry, particularly given the ongoing challenges brought about by the covid-19 pandemic. Indeed, the measures contained in clause 16 are, in themselves, sensible and appropriate.

More widely, though, we are aware that film tax relief was introduced by the Finance Act 2006, and applied only to films intended to receive theatrical release. That intention must be met at the end of every accounting period. Similarly, high-end television tax relief was introduced by the Finance Act 2013, and allows companies to claim relief on television programmes so long as they meet certain conditions.

The intention to broadcast must be met at the outset of production activities, and is then treated as being met for the remainder of production activities, regardless of the intention for the programme. That raises the possibility that a film that was initially intended for theatrical release may miss out on either relief if the intention changes part-way through production, and it is instead planned to have a television release. This is the case even when such a film would have been eligible for television tax relief if the decision had been made at the very start of production activities. Clause 16 ensures that where a film would have been eligible for high-end television tax relief if not for the date that the broadcast intention was decided on, it will not miss out on that relief, but will be eligible to claim it.

I am sure that the measures in this clause will provide welcome relief to those in the film industry. However, we would like to take this opportunity to ask the Minister about the operation of the film tax relief more widely, which is a debate that our new clause 14 seeks to encourage. Looking back briefly to 2014, the Public Accounts Committee reported on the misuse of tax relief, including the film tax relief, to which it made explicit reference. The report found:

“There is a lack of transparency and accountability for tax reliefs and no adequate system of control, following their introduction….Tax expenditures are often alternatives to spending programmes, but are not managed or evaluated as closely…The Departments do not keep Parliament adequately informed of changes in the costs of reliefs…The Departments are unable to cope with the demands of an increasingly complex tax system, including tax reliefs…The Departments do not respond promptly to unexpected increases in the costs of tax reliefs. Data on movements in the cost of reliefs is not available until tax returns are received, and HMRC takes time to react when it notices a cost increase, as it wants to ensure its response is appropriate. However, a longer elapsed time in reacting to an increase in the cost of a tax relief raises the total amount of public money at risk. In the case of film tax relief, it took ten years to resolve the problems and cost over £2 billion.”

I am aware that the operation of the film tax relief has been changed in recent years, but it is important to ensure that the tax relief continues to be effective. We need the Government to reassure us that they are taking adequate action against the possible misuse of tax reliefs. With that in mind, we tabled new clause 14, which would require the Government to include an assessment of the extent of, and potential for, misuse of the relief provided in clause 16. That assessment must also include an evaluation of the misuse of existing film tax relief more widely.

In relation to that wider potential misuse of existing film tax relief, our new clause requires the Government to set out, first, the number of total and successful enforcement actions taken against companies suspected of misusing film tax relief; secondly, a report of what action has been taken against the promoters of schemes designed to enable to misuse of film tax relief; and thirdly, what plans the Government have for further action against the misuse of film tax relief in the future.

The Minister has set out that she will not accept our new clause, but I ask her to commit to a firm timetable for a review of existing film tax relief that would have a similar effect. There are already reports suggesting that the use of film tax relief is increasing. I remind her that the 2014 Public Accounts Committee report said that

“Departments do not respond promptly to unexpected increases in the costs of tax reliefs.”

If the Minister will not commission a review along the lines that we have suggested, I would be grateful if first she could reassure us on the record that she does not believe that there are significant levels of misuse of film tax relief. Following the point that she made earlier, I would be grateful if she could also explain what the timetable is for the publication of the evaluation of film tax relief. If she does not have that to hand, could she write to me before the recess?

Alison Thewliss

- - Excerpts

I am more than happy to support what the Government are proposing here. Consistency in these tax reliefs is really important to allow businesses to plan. My constituency particularly has a booming TV and film production sector, with the recent announcement of the BBC Studioworks development at Kelvin Hall in my constituency, and an £11.9 million investment, £7.9 million of which is coming from the Scottish Government to invest in the high quality TV and film production in Glasgow.

It is important to acknowledge the wider picture. This is not just about one tax relief; it is about the wider ecosystem. We have lots of independent production companies in Glasgow Central, and more widely in Glasgow, working away and producing high quality stuff. We have post production as well in companies such as Blazing Griffin, which does high-end stuff for the likes of Netflix. However, I would be doing them all a wee bit of a disservice if I did not mention the significance of Channel 4, and the importance of keeping it in its current model and standing away from the plans to privatise it. That model is what supports the wider ecosystem in the city of Glasgow—the model where independent production companies are able to keep their intellectual property and products, and sell them. That allows all the certainty within the sector to continue.

As I said, the issue is not just about this one tax relief; it is about the Government looking at and acknowledging the wider ecosystem that supports independent production within Glasgow. Companies such as Blazing Griffin have pointed out to me that, were it not for Channel 4, we would not have Netflix. One thing in the ecosystem depends on another, and I urge the Government to look at that in the round when it considers such tax reliefs. Where tax reliefs have been withdrawn or changed in the United States, all that happens is that production companies lift and shift, and go elsewhere. We do not want to risk doing that with such changes as those that the Government propose for Channel 4.

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Lucy Frazer

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Clauses 17 to 22 make a series of changes to the creative industry tax reliefs, in order to support the cultural sector as it recovers from the effects of the pandemic. These changes include temporary rate increases for theatre tax relief, orchestra tax relief, museums and galleries exhibition relief and an extension of the museum and exhibitions tax relief. The changes ensure that reliefs remain targeted, free from abuse and sustainable.

The effects of covid on the creative industries have varied depending on the nature of the medium. Social distancing and wider restrictions have had a particular impact on theatres, orchestras, museums and galleries, as they rely on live performances and exhibitions to generate revenue. Clauses 17 and 21 temporarily double the headline rate of relief for theatre tax relief and museums and galleries exhibition tax relief, from 20% for non-touring productions and 25% for touring productions to 45% and 50%, respectively. From April 2023, the rates will be reduced to 30% and 35%, and they will return to 20% and 25% on 1 April 2024.

Clause 19 temporarily doubles the headline rate of relief for the orchestra tax relief from 27 October 2021, from 25% to 50%, reducing to 35% from 1 April 2023 and returning to 25% on 1 April 2024. The temporary higher rates of relief will provide a further incentive for theatres, museums, galleries and orchestras to put on new productions, exhibitions and concerts over the next two and a half years. This is a tax relief for culture worth almost a quarter of a billion pounds.

Clauses 18 and 20 make changes to theatre tax relief and orchestra tax relief to help clear up areas of legislative ambiguity and reinforce the original policy intent. The changes will apply to any new productions commencing from 1 April 2022. The clarifications are as follows: first, the commercial purpose condition for theatre tax relief and orchestra tax relief will be clarified so that productions must be separately ticketed to be considered as having been performed before a paying audience.

Secondly, the educational purposes condition will clarify that it is the audience that is being educated, not the performers. Thirdly, the legislation clarifies that productions made for training purposes will be excluded. Fourthly, teaching costs incurred by educational establishments, which are not directly related to performances, will be specifically excluded from relief. Finally, the definition of a “dramatic piece” will be clarified, so that to qualify for the relief, productions must contain a story or a series of stories and must have an expected audience of at least five people.

Clause 22 extends the sunset clause of museums and galleries exhibition tax relief from April 2022 to April 2024 in order to give certainty to museums and galleries through the recovery from the effects of the pandemic. The Government will also take steps to prevent abuse or attempted abuse of museums and galleries exhibition relief by clarifying the existing legislation. The clause makes minor changes to clear up areas of legislative ambiguity and reinforce the original policy intent. The changes will apply to any new exhibitions commencing from 1 April 2022.

The first clarification will be to the definition of an exhibition, which will be clarified so that the

“display of an object or work”

cannot be secondary to another activity. Secondly, to prevent private companies that are not museums or galleries from claiming on temporary outdoor sites, it will be clarified that being responsible for an exhibition is not sufficient for a company to qualify as maintaining a museum or gallery. Finally, the Government are relaxing the criteria for qualifying as a primary production company to allow more flexibility for museums and galleries scheduling touring exhibitions.

The changes will help UK theatres, orchestras, museums and galleries bounce back by incentivising new productions over the next two and a half years; continue Government support for charitable companies to put on high-quality museum and gallery exhibitions; and ensure that the relief is targeted and sustainable.

James Murray

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Clause 17 will temporarily increase the rate of theatre tax credit for theatrical productions that commence production on or after 27 October 2021. From 27 October 2021 to 31 March 2023, companies will benefit from relief at a rate of 50% or 45% for touring and non-touring productions. From 1 April 2024, the rates of relief will return to the existing levels of 25% and 20% respectively.

Companies qualifying for theatre tax relief can surrender losses in exchange for a payable tax credit. The amount of loss able to be surrendered in a period is dependent on several factors, but will ultimately depend on the amount of core production expenditure that has been incurred in the UK or European Economic Area. A higher rate of relief is also available to theatrical productions that take place at more than one premise and are considered touring productions. I would be grateful if the Minister could clarify how the definition of touring will be applied.

Section 1217K(6) of the Corporation Tax Act 2009 defines touring thus:

“A theatrical production is a ‘touring production’ only if the company intends at the beginning of the production phase—

(a) that it will present performances of the production in 6 or more separate premises, or

(b) that it will present performances of the production in at least two separate premises and that the number of performances will be at least 14.”

Paragraph (b) indicates that if a theatre company puts on 14 performances that were split between two venues—perhaps in the same town, just round the corner from one another—it would be eligible for 5% more tax credits than if it kept all 14 performances in the same venue. Perhaps the Minister could confirm whether that is the case.

As we have heard, clause 18 concerns theatrical production tax relief. It amends part 15C of the Corporation Tax Act 2009 to clarify several areas of legislative ambiguity relating to eligibility for theatre tax relief in relation to theatrical productions where the production phase will begin on or after 1 April 2022. We understand that the amendments are made to narrow the focus of the legislation and, according to the background of its explanatory note, to

“reinforce the original policy intent”.

Subsection (2) requires the intended audience to number at least five people for a production to be considered a “dramatic production”. It also stipulates that for a dramatic piece to qualify as a dramatic production, it must tell

“a story or a number of related or unrelated stories.”

Subsection (3) adds productions made for training purposes to the list of productions that are not regarded as theatrical and do not qualify for relief.

Subsection (4) amends the commercial purpose condition in section 1217GA of the 2009 Act so that a performance will not meet the condition unless it is separately ticketed and such ticketing is expected to make up a significant proportion of the performance’s earnings. A ticket may cover things besides admission to the performance, so long as such things are incidental to the performance and it is possible to apportion the ticket price between the performance and anything else included in the price. The subsection additionally clarifies that for a performance to meet the commercial purpose condition by being educational, it must be provided mainly to educate the audience.

As we have heard, clause 19 provides a temporary increase to orchestra tax credit. It temporarily increases the rate of orchestra tax relief for concerts or concert series that commence production on or after 27 October 2021. From 27 October 2021 to 31 March 2023, companies will benefit from relief at a rate of 50%. From 1 April 2023 to 31 March 2024, the rate of relief will be set at 35%. From 1 April 2024, the rate of relief will return to its existing level of 25%.

Companies qualifying for orchestra tax relief can surrender losses in exchange for a payable tax credit. The amount of loss that can be surrendered in a period is dependent on several factors, but ultimately it depends on the amount of core production expenditure that has been incurred in the UK and the European Economic Area. This temporary rate rise is also being introduced to theatre tax relief, in clause 17, and museums and galleries exhibition tax relief in clause 21. It allows companies to claim a larger tax credit and is designed to support the industries as they recover from the adverse economic impact of the covid-19 pandemic.

Orchestral productions are a tremendously important cultural asset in this country, and we are pleased to support the clause, which provides additional support to a cultural industry that has been hit hard by the pandemic. However, will the Minister outline what measures are in place to support musicians of other genres, or who perform in non-orchestral configurations? This is a welcome relief for orchestras, but other musical groups could be left out.

As we have heard, clause 20 pertains to tax relief for orchestras. This clause amends part 15D of the Corporation Tax Act 2009 to clarify several areas of legislative ambiguity within orchestra tax relief. These changes have effect in relation to concerts or concert series where the production process begins on or after 1 April 2022, and they are comparable to the changes concerning theatre productions in clause 18, in so far as the Bill clarifies that relief is not applicable to orchestral productions that take place for training purposes. It amends the Corporation Tax Act so that a concert will not meet the definition unless it is separately ticketed and such ticketing is expected to make up a significant proportion of the performance’s earnings.

Those are uncontroversial provisions that we do not oppose, because they reduce the risk of the tax relief being misused and maintain the spirit in which the legislation was originally developed. However, we note the Chartered Institute of Taxation’s concern that orchestras that made a series election before the Budget—for example, an orchestra that made a series election in September for its whole annual season—would appear to lose out on the higher rate of relief for their entire season. That is perceived to be unfair, and we would welcome clarity over whether that is the Government’s intention.

Clause 21 provides a temporary increase to the rate of relief afforded to museums and gallery exhibitions that commence production on or after 27 October 2021. From 27 October 2021 to 31 March 2023, companies will benefit from relief at a rate of 50% or 45% for touring and non-touring exhibitions respectively. From 1 April 2023 to 31 March 2024, the rates of relief will be set at 35% and 30%. From 1 April 2024, the rates of relief will return to their existing levels of 25% and 20%.

Companies qualifying for this relief can surrender losses in exchange for a payable tax credit. The amount of loss that can be surrendered in a period is dependent on several factors, but it ultimately depends on the amount of core production expenditure that has been incurred in the UK and European Economic Area. We do not oppose the measure, because it relates to another sector that has been hurt by the pandemic and that we want to see back on its feet, providing the best educational and cultural enrichment that it can to the British people.

However, will the Minister clarify where world heritage sites fit into the legislation, and whether they could be considered museums or gallery exhibitions? According to UNESCO, the UK and Northern Ireland have 33 world heritage sites: 28 cultural, four natural and one mixed.

Finally, clause 22 concerns the aforementioned tax relief to museums and gallery exhibitions, clarifying some legislative ambiguities and amending criteria for primary production companies. Those amendments have effect in relation to exhibitions where the production stage begins on or after 1 April 2022. The relief was introduced with a sunset clause and was due to expire from 1 April next year, but this clause extends the relief for a further two years. Any expenditure incurred after 1 April 2024 will not qualify for relief unless there is a further extension.

As we can see, subsection (1) amends the definition of an exhibition so that a public display of an object is not an exhibition if it is subordinate to the use of that object for another purpose. For example, if a historic passenger train offers rides between two towns, although the train may have historical or cultural significance, its main purpose is to provide passenger transport. This does not preclude the possibility of there being an exhibition on board the train.

Finally, and more broadly, we are aware of concerns from within the industry regarding productions that straddle the commencement dates of these reliefs. For each relief, the increased rate applies only to productions where the production stage for the exhibition began on or after the Budget on 27 October 2021, when the change was announced. So, a production that received the green light on 26 October, or earlier, would not gain the benefit of the increased rate, however long it ran for after the commencement date for the increased rate. We understand there are those in the sector who perceive that as harsh and arbitrary, and we welcome the Minister’s thoughts on the matter.

Alison Thewliss

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Of course, I support the proposed tax credits. They will be a useful part of the picture of support for theatres, museums and orchestras, of which there are many in my constituency of Glasgow Central—which is, of course, the best constituency in the country, as I am sure everyone would agree. We have the Royal Scottish National Orchestra, the BBC Scottish Symphony Orchestra and Scottish Ballet, as well as Tron Theatre company and the Citizens Theatre company. These proposals may be of assistance to them, so I ask the Minister what communication has been put out to the sector to ensure that it is aware of the relief and taking it up as required.

I share the concerns expressed by the hon. Member for Ealing North, and I, too, seek answers from the Minister to the questions that the hon. Gentleman asked. It strikes me that many of these proposals provide assistance for productions of some kind, but that misses the other side of the equation. It is good to support companies, but if the venues and theatres in which they wish to perform go bust because they do not have the support that they need, that will not solve the problems that the companies have faced for the past year as a result of the pandemic. I urge the Minister to look at support for the sector more widely.

Many who work in the sector—in orchestras and in theatres, behind the scenes and on the stage—are freelancers, and many have received no support whatsoever from the Government during the pandemic. They have faced a very difficult time, and the Government need to resolve that part of the equation. They could perhaps do so by looking at extending the VAT relief that they introduced, as the SNP has called for.

We were very glad that the Government brought in the reduction in the rate of VAT, but it would be useful to see that continued beyond the cut-off in April next year. That would give a sector that has faced such a difficult time a bit of extra support into next year. It does not make much sense to me to cut that off, and not to incentivise people to go out and make use of the theatres and music venues we all have in our constituencies.

The sector has had a very difficult time. The proposed tax credits are useful, but we need to look at the wider picture. If there is no venue in which to perform or to showcase an orchestra, ballet, theatre production or pantomime, because those venues have gone bust and no longer exist, the Government are missing a trick. It is important that we support the venues and those who work in the sector, wherever that is, and that we look at the wider picture, rather than at a narrow bracket of tax reliefs.

Draft Customs Safety and Security Procedures (EU Exit) (No. 2) Regulations 2021

Debate between Lucy Frazer and James Murray

Wednesday 8th December 2021 General Committees

[Lucy Frazer]

Let me respond briefly. The hon. Member for Ealing North spent some time talking about security. He will note that these requirements were not in place before, so this waiver simply maintains the status quo. There is therefore no additional risk in continuing it. I am sure that he is aware, from having listened to my predecessor in previous debates, that Border Force will continue to undertake intelligence-led risk assessments of imports into GB, as it has done during the current waiver period. I am happy to give him that reassurance.

[James Murray]

I must press the Minister on that point. Surely she cannot have it both ways. To follow on from the point made by the right hon. Member for Maldon, either the requirements are necessary, in which case their delay is having an impact, or they are not necessary, which raises the question of why we are here at all.

[Lucy Frazer]

I am happy to answer that point and those made by my right hon. Friend at the same time. We need to bring in the checks, as well as the staged controls, which we committed to in January, because we are required to do so for customs in the round under the terms of our arrangements. I was addressing the element of security risk. As we are simply maintaining the status quo, there is no additional risk in continuing that arrangement.

I will touch on border security more broadly in terms of migration. Border Force regularly reviews its capacity, plans and resources, and it deploys and recruits staff when necessary to maintain border security. The reason why we are not bringing in and extending those arrangements at this time is simply to do with timing and the disruption that has hit businesses so far.

The hon. Member for West Dunbartonshire mentioned a whole range of issues that really relate to Brexit as a whole. That decision has passed; we have left the EU and we are now dealing with the arrangements that we need to bring in as a result of that decision.

Finance (No. 2) Bill

Debate between Lucy Frazer and James Murray

Committee stage
Wednesday 1st December 2021 Commons Chamber

[James Murray]

Will the Minister give way?

[Lucy Frazer]

I am not going to give way because I want to make a number of points and the hon. Member has had an opportunity to put forward his points.

The hon. Gentleman also mentioned the loan charge and asked for a review. He will have heard in my speech and will know that we had a review less than two years ago. I know that this is an issue that concerns many Members. We did legislate as a result of that. We legislated on 3 December 2020. As a result of the review, 30,000 individuals benefited. In fact, 11,000 were removed from the loan charge.[Official Report, 6 December 2021, Vol. 705, c. 2MC.]

--- Later in debate ---

[Lucy Frazer]

VAT is our third-biggest tax. It raised £130 billion in 2019-20, making a major contribution to the public finances. It helps to pay for our schools, hospitals and police throughout the UK.

Now that we have left the EU, we are free to set our own VAT rules and are already using that freedom to create a fairer, more robust tax system. We have altered how VAT is paid on low-value consignments from overseas suppliers. We have also implemented changes to passengers’ policy and introduced a zero rate on women’s sanitary products. On top of all that, we are reviewing the UK funds regime, including the VAT treatment of fund management fees. We are establishing an industry working group to review how financial services are treated for VAT purposes. As I have illustrated, this Government are focused on using our new freedoms to create a VAT system that is ready for the future, and the measures in the Bill build on that work.

Some clauses being discussed today will be of most relevance to businesses and consumers in Northern Ireland. The UK has implemented the Northern Ireland protocol in a way that seeks to protect the UK internal market. Today’s clauses play a part in achieving that objective by allowing Northern Ireland businesses and consumers to have the same economic opportunities as those in the rest of the UK.

Finally, as Members will be aware, freeports are an important part of the Government’s levelling-up agenda. We see them as central to our goal of sparking regeneration, creating jobs and inspiring innovation throughout the country. One of the clauses that we are debating today supports the delivery of their VAT benefits.

Let me turn to the clauses themselves. The second-hand car sector in Northern Ireland relies heavily on sourcing vehicles in Great Britain for resale in Northern Ireland. Clauses 68 to 70 will together ensure that second-hand car dealers in Northern Ireland can continue to sell cars and other motor vehicles sourced in Great Britain and the Isle of Man on an equal footing with their counterparts in the rest of the UK.

Under the Northern Ireland protocol, the VAT second-hand margin scheme is not available for goods in Northern Ireland if they were purchased in Great Britain or the Isle of Man. This means that motor vehicle dealers in Northern Ireland must account for VAT in full on sales of these vehicles rather than on the profit margin. That would disrupt the UK’s internal market, potentially increase prices for consumers or costs for businesses and risk undermining the trade in motor vehicles in Northern Ireland altogether. It is only right that the Northern Ireland used car industry has the same economic opportunities as that of the rest of the country. That is why the Government are actively discussing arrangements with the EU to enable the margin scheme to continue in Northern Ireland for cars sourced from Great Britain.

Clause 68 provides the legislative basis for an interim arrangement that allows dealers in Northern Ireland to continue to use the VAT second-hand margin schemes for vehicles sourced in Great Britain once an agreement is reached with the EU. This interim arrangement will be available for motor vehicles first registered before 1 January 2021. It will end once the second-hand export refund scheme is introduced.

Clause 69 introduces a power to bring in an export refund scheme, which the Government intend to apply to second-hand motor vehicles. The aim of this permanent scheme, once introduced, is to give dealers in Northern Ireland a comparable financial outcome to the margin scheme. The clause achieves this by enabling businesses to claim a refund equivalent to VAT on the price they paid on used vehicles. The scheme will be available for used motor vehicles moving to Northern Ireland and the EU from Great Britain. Legislation to implement the scheme will be introduced once we have held further discussions with the industry.

Clause 70 simply makes some consequential changes to VAT to limit the zero rate for export or removal of goods where they are subject to the margin scheme. This is a technical measure that will ensure that businesses are not at an advantage compared with before the end of the transition period. Businesses will still be able to export goods at zero rate outside the margin scheme. This ensures consistency of treatment across the UK.

These clauses are necessary to ensure that the motor vehicle sector and consumers in Northern Ireland are not disadvantaged. Taken together, they will benefit the 500 businesses that trade in used cars in Northern Ireland.

Clause 71 makes changes to extend a VAT exemption to the importation of dental prostheses. Before the end of the transition period, such prostheses were supplied by registered dentists or dental technicians between Great Britain and Northern Ireland, and were exempt from VAT because an exemption applies to domestic sales. However, following the end of the transition period, the exemption no longer applies to the movement of these goods between GB and Northern Ireland. As the VAT that is due cannot be recovered by the registered dentist, there is a risk that it might be passed on to patients. The changes made by clause 71 extend the current domestic UK VAT exemption to include dental prostheses imported into the UK, including those moving between GB and Northern Ireland, ensuring that we meet our international obligations, and that VAT treatment between GB and Northern Ireland is consistent.

Clause 93 and schedule 14 concern the treatment of goods in the customs-free zones, which are located in freeports. Freeports will help to regenerate areas across the country and bring prosperity to the regions. The Government have already legislated for a beneficial VAT regime on certain business-to-business transactions while in the free zone of a freeport. Clause 93 makes additional VAT elements to freeports by introducing an exit charge to ensure that VAT is collected on goods that have benefited from a zero rate of VAT in a free zone to prevent tax losses or unintended VAT advantage. It therefore maintains a level playing field for UK businesses.

The clause also amends existing VAT legislation to remove any conflict with the new free zone rules. Finally, the clause gives HMRC the power through regulations to adapt the exit charges provisions as necessary. This will ensure that the exit charge is correctly targeted—for instance, to prevent any abuse of the VAT zero rate. Clause 93 and schedule 14 therefore prevent tax loss by introducing an exit charge, and provide clarity to free zone rules by amending existing legislation that may conflict with them.

Our VAT measures take advantage of the opportunities following our exit from the EU to allow our businesses to prosper. I urge the Committee to ensure that clauses 68 to 71, and 93, stand part of the Bill, and that schedule 14 be the fourteenth schedule to the Bill.

[James Murray]

Thank you, Mr Evans, for the opportunity to respond on behalf of the Opposition to the clauses selected for this debate on particular aspects of the operation of VAT. As the scope of these clauses is quite limited, I suspect that you will not allow me to speak in detail about our call on the Government immediately to cut VAT to zero on domestic energy bills.

Draft Double Taxation Relief and International Tax Enforcement (Taiwan) Order 2021

Debate between Lucy Frazer and James Murray

Thursday 25th November 2021 General Committees

The Financial Secretary to the Treasury (Lucy Frazer)

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I beg to move,

That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Taiwan) Order 2021.

It is a pleasure to appear before you again, Ms Rees.

The draft order will give effect to a protocol that was agreed in August to amend the existing double taxation agreement, or DTA, with Taiwan. The order inserts into legislation important provisions recommended by the Organisation for Economic Co-operation and Development and the G20’s project on base erosion and profit shifting, or BEPS, to prevent abuse of the DTA and to improve dispute resolution.

The draft order also includes the latest exchange-of-information provisions following the OECD model tax convention, which informs bilateral treaty negotiations and is largely followed by the UK. Furthermore, the order adds a rule to protect the UK’s taxing rights over dividends paid from investment vehicles linked to land and property such as UK real estate investment trusts, or REITs.

I will now give a brief explanation of the draft order’s context before talking in more detail about the changes that it makes. As Members may recall, the BEPS project was an international effort co-ordinated by the OECD to tackle tax avoidance and improve the operation of double taxation agreements generally. It recommended a range of provisions that could be adopted in DTAs to ensure that they continued to fulfil their main purpose of supporting global trade and investment while limiting the opportunity for the agreements to be used for tax evasion or avoidance.

The draft order includes all the minimum standards that were recommended by the BEPS project to prevent avoidance through the abuse of tax treaties and to improve dispute resolution in relation to the Taiwan DTA. Specifically, the order gives effect to the minimum standard on preventing treaty abuse by adding a rule known as the principal purpose test. This ensures that the DTA does not provide opportunities for non-taxation or reduced taxation through evasion or avoidance, including through so-called treaty shopping arrangements, where transactions are routed through particular jurisdictions to take advantage of benefits provided by its DTA. Furthermore, the order changes the preamble of the DTA to make it clear that the contracting parties do not intend it to be used to avoid tax.

The draft order gives effect to the minimum standard on improving dispute resolution set out in the final recommendations of the BEPS project by changing the provisions that govern how disputes involving the application of the DTA are resolved. Those changes mean that, where a taxpayer considers that the DTA has not been applied correctly, they can present their case to either tax authority, rather than just that of the territory where they are resident. It will also ensure that any resolution of the dispute must be implemented even if the time limits in the domestic law of either territory would otherwise prevent that.

The draft order includes other changes that were optional recommendations of the BEPS project. Such provisions clarify the treatment of fiscally transparent entities and insert a so-called saving clause, which makes it clear that the DTA cannot be used to sidestep domestic anti-avoidance rules. In addition, the order updates the tiebreaker rule, which determines the residence of dual resident companies under the DTA. Furthermore, a new provision ensures that, where a dividend is paid out of investment vehicles linked to land and real property, such as UK real estate investment trusts, the UK has the right to withhold tax at 15% on the dividend. That is an important provision included in recent UK DTAs and it protects the UK’s taxing rights over income from land and property situated in its territory.

Finally, the draft order updates the provision relating to capital gains. This allows the UK to tax gains on shares and comparable interests that derive at last 50% of their value from immovable property. I hope hon. Members have found this explanation of the context and detail of the order helpful. To sum up, the order implements improvements to the DTA in relation to Taiwan to tackle tax avoidance and evasion and to improve dispute resolution in line with current international standards. I commend the order to the Committee.

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

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Thank you for the opportunity to respond on behalf of the Opposition, Ms Rees, as we consider this order on double taxation relief and international tax enforcement with the territory of Taiwan. It is a pleasure to serve under your chairmanship again.

The schedule to the order contains a protocol that amends an agreement in relation to the territory of Taiwan dealing with the elimination of double taxation with respect to capital gains tax, corporation tax and income tax, the prevention of tax avoidance and evasion and international tax enforcement. The agreement aims to eliminate the double taxation of income gains arising in one territory and paid to residents of another territory. As we have heard, that is done by allocating the taxing rights that each territory has under its domestic law over the same income and gains, and by providing relief from double taxation. There are also specific measures combating discriminatory tax treatment and providing for assistance in international tax enforcement.

As we can see, the amendments to the agreement are relatively minor and technical in nature, mostly updating terminology to bring about consistency with similar bilateral agreements with other states and territories. Various articles within the schedule replace outdated terminology, and further technical amendments are added to the schedule, relating to persons covered, taxes covered, general definitions, residents, dividends, interest, royalties, capital gains, limitation of relief, non-discrimination, mutual agreement procedure and exchange of information. An article relating to entitlement of benefits is also added to the agreement.

The Opposition will not oppose this order. It is, of course, important that bilateral agreements concerning taxation are clear and up to date, and that revenue generated from taxation is neither inappropriately drawn nor inappropriately allocated. Similarly, we support the measure to reduce the administrative burden on Her Majesty’s Revenue and Customs, which would otherwise have to process rebate applications.

While we are on the matter of international taxation, however, I would like to briefly ask the Minister, as this is the first time we have had the chance to discuss the matter, her view on the global minimum corporation tax rate that the OECD and G20 recently agreed. In her response, I would be grateful if the Minister could confirm whether 15% is the rate the Government had hoped for, or whether they had hoped it might be higher or lower.