Draft Cash Controls (Amendment) (EU Exit) Regulations 2019 Draft Customs (Economic Operators Registration and Identification) (Amendment) (EU Exit) Regulations 2019

Debate between Mel Stride and Anneliese Dodds

Monday 25th March 2019 General Committees

[Mel Stride]

I thank the hon. Lady for her questions, which, as usual, were very thorough and detailed. I will do my best to answer them all. The first related to the whole issue of why we are using secondary legislation. In general terms, I hope the hon. Lady recognises that, given the kind of detail involved in some of this secondary legislation, the sheer practicalities of setting all that out in advance in primary legislation would have been prohibitive, not least because the relevant Bill went through some time ago and we are now considering these matters nearer to the event of our potential departure from the EU without a deal—although that is certainly not our desired departure. She will also have noticed that both instruments were considered by the European Statutory Instruments Committee and, on its recommendation, turned from negative instruments into affirmative instruments.

The hon. Lady asked very specifically whether these instruments relate to a no-deal scenario. Indeed they do. Of course, if we have a deal—the current deal, which has been negotiated with the European Union—we will go into an implementation period until the end of 2020. Under those terms, we would continue to trade with the EU27 on broadly the same basis as we do today.

The hon. Lady asked specifically why £10,000 was used, rather than the sterling equivalent of €10,000, that being—I will take her figure at face value—about £8,500. She suggested that it might be because it is a nice round number, and I guess perhaps it is. It certainly maintains the figure 10,000, albeit there is a relatively marginal change in value at today’s exchange rate; as we know, that may change over time.

The hon. Lady made some very important points about the Northern Ireland border and, with regard to the cash controls instrument, the level of security that may or may not be in place as a result of no deal. In the case of the border between Northern Ireland and Ireland, the instrument really would maintain the status quo. Of course, as a member of the European Union at the moment, we do not have cash controls between ourselves and other member states, including between Northern Ireland and the Republic of Ireland. We have a variety of intelligence-based arrangements in place to track down those who may be moving cash for the wrong reasons across any of our borders with any member state, and we have always had very close co-operation with the Irish Government and the Garda in respect of such matters.

I turn to EORI. The hon. Lady asked how many operators trade only across the Northern Ireland-Republic of Ireland border and, because they do not already trade with a country outside the EU27, have not already been registered for an EORI number. I do not have a precise figure, but we estimate that about 245,000 businesses in the UK as a whole—145,000 that we can identify as being above the £85,000 VAT registration threshold, and an estimated 100,000 further that are below that threshold—trade solely intra-EU, so it will be a fraction of that number.

The hon. Lady touched on whether the arrangements relating to Northern Ireland in both statutory instruments would be compliant under WTO arrangements. Our belief is that they would be, albeit that they would be exceptional arrangements. In the case of both instruments, we would hope to be in constructive discussions with the Irish Government about how to move forward if we end up in a no-deal situation.

The hon. Lady asked some specific questions about EORI registration and referred to her letter. I am grateful to her for having raised that with me before this Committee. The answer to her question is that approximately 60,000 EORI registrations have now been made in the group we are targeting. That is 24.8% of those that we believe are in the scope of requiring an EORI. She asked what happens if a business turns up in the UK without the relevant EORI registration, and I point her to the transitional simplified procedures that we have set out.

The hon. Lady’s final point was about businesses that might provide a service to facilitate EORI registration. Quite rightly, she pointed out that is a free-of-charge service that can be completed very quickly, and it is not that complicated to do it online. If she has any specific examples that she would like to bring to my attention, where she believes that anybody is in any way misrepresenting the complexity of this process simply in order to profit from the interaction with the business concerned, I will look at them very closely.

[Anneliese Dodds]

I am grateful to the Minister for those clarifications, which are enormously helpful. I mentioned in my letter the name of one outfit that operates in that direction, but I will have another look and send it on. On his penultimate point about how companies would cope with not having an EORI, it was my understanding that, in order to participate in the new transitional simplified procedures scheme, businesses had to have signed up for that, and we do not know how many have. They could be in a double bind if they are not in either scheme. I know that the Government say they will completely suspend many of the normal reporting requirements, which opens up many concerning questions, but unless I am misunderstanding the transitional simplified procedures scheme, it is not clear that those who do not have an EORI would drop into that other scheme. Perhaps he can explain that further.

[Mel Stride]

The hon. Lady poses a fair question. Although what happens going the other way will be in the control of the EU27, in the event that a business came into the United Kingdom, arrived without an EORI number, was not in the TSP arrangements and was not in transit with the various suspensions that go with that, we would take a proportioned, flexible approach at the border under those circumstances. We would make sure, as we have always said, that we prioritise flow over other aspects, while in no way compromising on security.

Question put and agreed to.

Draft Customs (Economic Operators Registration and Identification) (Amendment) (EU Exit) Regulations 2019

Resolved,

That the Committee has considered the draft Customs (Economic Operators Registration and Identification) (Amendment) (EU Exit) Regulations 2019.—(Mel Stride.)

Oral Answers to Questions

Debate between Mel Stride and Anneliese Dodds

Tuesday 29th January 2019 Commons Chamber

[Mel Stride]

My hon. Friend raises two issues. On non-tariff barriers, we have made it very clear that we will implement a solution in the event of no deal, for example, that will be as friction-free as possible. But there will be requirements in that scenario for us to handle pre-custom declarations and various checks, which will come with having a border under those circumstances with the EU27. On our tariff policy, we will come to that in due course.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

Stockpiling by business is at its second highest rate since 1992. The Treasury suggests that new customs paperwork for no deal would cost UK business £13 billion. When will the Minister’s boss, the Chancellor, stop arguing privately against no deal’s staying on the table and publicly take on the scorched-earth fantasists in his own party?

[Mel Stride]

The questions I have just responded to are in a similar vein and all lead back to one conclusion, which is that, if we are to avoid a no-deal scenario, there has, by definition, to be a deal that is agreed with the United Kingdom. We have a very good deal that the Prime Minister has negotiated and will be negotiating further with the European Union. It sees us respecting the outcome of the 2016 referendum but, most importantly, making sure that flows across our borders are as frictionless as possible.

HMRC Estate Transformation

Debate between Mel Stride and Anneliese Dodds

Tuesday 29th January 2019 Commons Chamber

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

I was given advance notice of the contents of this statement while I was in the Chamber for Treasury questions, and therefore time has been limited to prepare for it. I am surprised that we are now discussing this matter given that I and many of my colleagues have repeatedly raised problems with the Building our Future programme and generally been met with one-sentence answers from the Government.

The Minister maintains that this announcement has come today because of the successful securing of sites for 13 regional centres, so I hope that he will indicate to this House which centre was secured yesterday to justify this statement being presented today. When will he publish the list of precise locations of each of these centres, given that he maintains that we have today secured those new places? That would be enormously helpful for us, because without that information we will be forced to conclude that this statement has been made today for reasons other than its newsworthiness.

In July 2014, HMRC published the Building our Future proposals on reforming tax collection services for the next five years. In November 2015, HMRC announced plans to cut the number of offices from 170 to the 13 that are, apparently, having their locations announced today. In January 2017, the National Audit Office published its report on that process. It indicated that that original plan was unrealistic. It stated that the estimate of estate costs over the next 10 years had risen by nearly £600 million—almost a fifth—with more than half of that being due to higher than anticipated running costs for the new buildings. The National Audit Office also forecast a further 5,000 job losses and said that the costs of redundancy and travel had tripled from £17 million to £54 million due to this programme.

So what exactly is happening now among the HMRC workforce as a result of Building our Future? Some 73% of HMRC staff surveyed said that the Building our Future plans will undermine their ability to provide tax collection services. Half of them said that it would actually undermine their ability to clamp down on tax evasion and avoidance. I have to say that that was my assessment as well when I visited a number of current and former HMRC offices right across the country— 10 of them—over the past few months.

The Government say in this statement that

“90% of the staff that”

HMRC

“had at the start of this transformational journey”—

a piece of jargon if ever I heard one—

“will move to a new regional centre or finish their careers in their current offices.”

During the visits that I conducted, I did hear about staff finishing their careers—they were finishing their careers early because they could not travel to the new regional centres that the Minister is trumpeting today. People from Wrexham were being expected to travel every single day to Cardiff or to Liverpool. People from Exeter were being expected to travel to Bristol. These journeys are simply not feasible for people with caring responsibilities and simply not feasible on public transport.

I note that the Minister said that having city centre locations leads to a situation where it will be possible to recruit local graduates, but of course what his Department has forgotten, and what the NAO reminded him of a couple of years ago, is that in many of these city centre locations the labour market is far tighter, so we often find that there is actually an enormous recruitment problem rather than the bonanza that might be suggested to people who read his statement uncritically.

At the end of the statement, the Government accept, it seems, the need to learn from expertise. I will quote the sentence, although it pains me a little to do so given its construction:

“As HMRC gears up to manage the workload resulting from exiting the European Union, it is also providing additional space in regional centre cities”,

which I assume means offices,

“for additional staff and retaining some space for longer so that the planning”—

of what, we do not know—

“can benefit from the knowledge and experience of existing personnel.”

Well, that raises almost as many questions as it answers. The situation is still unclear about where 5,000 extra customs staff will go—a point I will return to later.

None the less, that sentence, as garbled as it is, suggests that HMRC wants to build on existing experience, but that principle is just not being followed in the Building our Future programme. We had within HMRC centres of excellence across a whole range of different specialisms, whether income tax fraud or the different kinds of multifarious problems that taxpayers can have in filling out their self-assessment forms. Many of the staff who were employed in those specialisms have either already left or are thinking of leaving. A great example of this is what we have seen happening in Swindon, which was previously a centre for income tax fraud. There is now a centre of excellence being built up on that in Liverpool, but with none of the same staff and with none of that expertise. It is being built up from scratch, creating huge inefficiency.

The Government have dogmatically refused to reassess the Building our Future programme apart from when they have been forced to do so—as they acknowledge very, very briefly in this statement—and that is exacerbating problems in HMRC. The attrition rate is greater than the hire rate. We saw in 2014 an absolute reduction in staff of over 3,000 and in 2015 an absolute reduction in staff of over 4,000. In 2017, the UK had the second highest attrition rate out of the 55 countries that share data on their tax services. There has also been incredible mismanagement, with the release of 5,600 customer services staff and then, in 2015, the hiring of 2,400 new customer services staff. It is no surprise that morale is at rock bottom in HMRC.

I therefore want to ask some very quick questions of the Minister. Which new regional centre was secured yesterday? When will we have the list of locations of regional centres? If 90% of positions are retained or vacated due to people finishing their careers, does that mean that 10% of people in HMRC are going to be made redundant? Have there been any reviews of these plans in the context of Brexit? Has the Minister thought about the impact of this on the local economies that are so dependent on these jobs, as raised by many of my colleagues?

[Mel Stride]

I thank the hon. Lady for her response. I will pick up on some of the points that she has raised.

The hon. Lady asked why this statement is being delivered today. I think that she partly, at least, supplied the reason for that herself, in that she has shown a very keen interest in these matters, as have many other Members across the House, quite rightly. It is right, as we have always said, that we will be transparent in the roll-out of this transformation programme, and today is part of that process.

Towards the end of the hon. Lady’s remarks, she called for a review of our arrangements in the context of Brexit and the customs arrangements that our country may face. That is the second reason why it is important that we consider these matters. The debate this afternoon will rightly focus on preparedness, among other matters, and HMRC and its transformation programme lies at the heart of the issues that will be debated.

The hon. Lady asked for the locations of these sites. I believe they are all in the public domain, but I am happy to provide her with a list. She also made several observations about the NAO report and value for money. We are still confident that we will meet our roll-out end date of around 2025. In terms of value for money, there will be savings of some £300 million across the 10 years. I remind the hon. Lady that we will be getting out of a substantial number of private finance initiative contracts that the existing offices are engaged with—PFI contracts that were brought in under her party’s Government in 2001. One driver of additional value for money is that we will be able to unpick the unfavourable arrangements that her party’s Government got us into in the first place.

The hon. Lady asked about the cost of redundancy. I said in my opening remarks that some 90% of those who will be impacted by these moves will either conclude their career in their existing offices or relocate to the new regional hub. The overall thrust of these changes is to ensure that we are better equipped at getting in more tax. It is very much a Labour philosophy that every solution has to involve more money and more people, whereas our approach is adjusting with the times and getting offices in place that are fit for the 21st century, often using complicated data-based interrogation techniques, for which large regional hubs are the way forward.

Some of the 170 legacy offices that the hon. Lady seems so intent upon protecting had under 10 staff in them. Most of the processes carried out by those staff were manual in nature rather than technology-driven, so they were far less efficient. For example, over 80% of self-assessment returns are now done in a digital format, which is why it is important that we move to this model.

I turn to the hon. Lady’s remarks about the staff themselves, who have been at the heart of our considerations as we have rolled out this process. All staff are given at least one year’s notice of any proposed change. They are quite rightly given face-to-face meetings with their managers to discuss the changes and assistance that they may require. In determining the locations of the regional hubs, HMRC mapped out the journey to work of the staff who would be impacted, to ensure that that was one of the principles taken into account when assessing where the locations should be. Those who have extended travel arrangements as a consequence of any move may be given assistance with additional travel costs for between three and five years. Transitional offices, which the hon. Lady raised, will provide additional opportunities for continuity of HMRC’s work and the opportunity of employment for those within these arrangements.

There is a purpose to this. It is not just about saving money, closing offices, suggesting that we are ready for the 21st century or making change for the sake of change. The purpose of these changes is to ensure that we continue the excellent work that HMRC is carrying out in clamping down on avoidance, evasion and non-compliance. The proof of the cake is in the eating: some £200 billion has been brought in or protected since 2010, and we have one of the lowest tax gaps in the world at 5.7%. That does not happen by magic; it happens by having an HMRC that is lean, efficient and up to the job. I commend this statement to the House.

Finance (No. 3) Bill (Ninth sitting)

Debate between Mel Stride and Anneliese Dodds

Committee Debate: 9th sitting: House of Commons
Tuesday 11th December 2018 Public Bill Committees

[The Financial Secretary to the Treasury (Mel Stride)]

It is a pleasure to serve again under your chairmanship, Ms Dorries. I thank the hon. Ladies opposite for their contributions, and I will deal with some of the specific points that were raised and then deal in more general terms with the measures and the amendments.

The hon. Member for Aberdeen North raised the issue of retrospectivity. I can assure her that the Law Officers have confirmed that there is nothing retrospective about the measures in the clause. It is the case that no investigation that has been closed, for example, will be reopened as a consequence of the measures here. At the point that the measures come into effect, no one who is, at that point in time, out of scope of the changes would be brought into scope.

On the issue raised by the hon. Members for Aberdeen North and for Oxford East on consultation, we held a public consultation on the details of the reform on 19 February 2018. The consultation closed on 14 May, and the response to the consultation and the draft legislation were published on L-day, on 6 July.

The hon. Member for Oxford East raised the issue of the de minimis amount and referred to LITRG. It is not true that we are not securing significant amounts from the most wealthy, whether individuals or corporations. For the last year for which we have records, 2017-18, HMRC secured £1 billion in tax from the wealthiest individuals and £9 billion from the largest and most complex businesses operating in the UK—tax that would otherwise have gone unpaid.

The hon. Member for Oxford East also raised at length the important issue of why corporation tax is not included along with inheritance tax and income tax. As she said, we consulted on this aspect at some length. The vast majority of responses did not support extending the measure to corporation tax and raised a number of new practical and legal issues with such an extension. The hon. Lady identified some of them, although I know she was not persuaded by the arguments that were put. However, there were a number of them.

For example, the rules that identify offshore issues were not designed for corporates and would result in a wide range of genuine commercial transactions being caught that were never considered when the rules were originally designed. Tax indemnity agreements on the sale or purchase of businesses could also be affected retrospectively, as a 12-year time limit was never anticipated. The 12-year time limit could create major complications for corporates with control of foreign companies—the hon. Lady spoke about that at length. Some corporates are also subject to other rules, such as the senior accounting officer rule, so it was seen as unnecessary to extend the measure to such companies.

The hon. Lady also specifically mentioned Google and Amazon, or a similar type of business, in this context. She should not overlook the fact that we are right at the forefront of looking at a digital services tax to make sure that those companies pay their fair share of tax in the United Kingdom.

[Anneliese Dodds]

Will the Minister explain whether those firms were strongly in favour of the measures that have been taken in relation to them and others, such as the diverted profits tax, or whether they have argued against them, potentially in consultations? Is consulting those who may, or whose clients may, have a revenue hit as a result of the measure and only listening to them really the appropriate way to make policy?

[Mel Stride]

I was making a slightly different point. It was not so much about what the response may or may not have been—I do not know the answer to that, regarding the measure that is under consideration by the Committee—but rather about our push to make sure that just those companies pay the appropriate level of taxation in the United Kingdom. Frankly, I think the businesses themselves want to be seen to be paying a fair level of tax. That is the impression that I get from the Treasury perspective. We are not on the back foot on this; we are very much on the front foot, pushing within both the OECD and the European Union to make sure that we can come up with a multilateral solution, which has particular advantages over going it alone. However, we have made it clear, as the Chancellor set out in the recent Budget, that in the event that there is not a multilateral solution, we will of course act unilaterally by 2020.

[Mel Stride]

Yes, of course. I would be very happy to do that and in some detail. As I have already suggested, the general point is that those businesses that would not be in scope of these new arrangements, at the moment that they come into effect, would remain out of scope of these arrangements. That is the important point, I think, but I will certainly write to provide further detail.

My final point is about whether we are going soft on larger businesses, which I think was the overarching implication of the hon. Member for Oxford East. She should bear it in mind that at any one time, about half the 210 largest businesses in the United Kingdom are under active investigation. That does not mean that they are doing anything wrong—it may be far from it—but I sincerely believe that HMRC are very good at making sure that those businesses are thoroughly engaged with, particularly the large ones, because that is where a lot of yield lies.

[Anneliese Dodds]

We are not talking about whether those large businesses are taxed at all, are subject to new tax measures or are investigated at all. What we are talking about are the time limits for that investigation. There is an anomaly in what the Government are presenting between the time limits for corporates against individuals. Surely that is what needs to be addressed.

[Mel Stride]

I am reflecting the fact that while corporation tax is not covered by these measures, that is not the same thing as saying that we do not have an appropriate regime overall for making sure that large businesses pay their fair share. I was giving some examples such as the diverted profits tax, common reporting standards and all sorts of things, including base erosion and profit shifting, that the hon. Lady will know feed into that particular argument.

To turn to the generality of the measures, clauses 79 and 80 make changes to help ensure that everyone pays the tax they owe. Individuals under inquiry by HMRC for offshore non-compliance will now face assessment for 12 years of back taxes for income tax, capital gains tax and inheritance tax. It applies only to cases where tax losses arise in respect of offshore matters or offshore transfers.

Those clauses will affect only individuals with offshore structures who are not paying the correct amount of tax. The measure is not retrospective as it does not give HMRC the power to reopen any currently closed cases. It is right and fair that everyone pays the tax they owe. It can take longer for HMRC to establish the facts where offshore non-compliance is involved. In some complex offshore cases, tax cannot be collected as the time limits for HMRC to assess the tax run out before the facts can be established.

The changes made by clauses 79 and 80 will ensure that HMRC is able to deal with offshore cases effectively, where the facts are often difficult to establish. The time limit for assessment by HMRC will be extended for non-deliberate behaviour from four years in ordinary circumstances and six years in cases where there was carelessness, to 12 years. The time limit for assessment will remain at 20 years for deliberate behaviour. This measure will help to prevent individuals from avoiding a full investigation by HMRC because of the difficulty in assessing information on offshore structures and investments.

The new extended time limits will not enable HMRC to assess any tax that can no longer be assessed under current rules at the time the legislation comes into force. That was the point at the heart of the concerns expressed by the hon. Member for Aberdeen North. The new time limits will not apply where HMRC has received information in accordance with certain international agreements from other tax authorities, on the basis that it was reasonable to expect an assessment to be made within the existing time limit. The clauses will raise £30 million by 2024.

Amendment 105 would unbalance the safeguards that ensure that the new time limits only apply if HMRC already has the information to make an assessment and could reasonably make it within the current time limits. If the amendment was passed, HMRC could receive information on a tax compliance case that it would be unable to act on. If, for example, information was provided from overseas immediately before the end of the current time limit, HMRC would be timed out of collecting the lost tax. That could incentivise slow responses from overseas intermediaries when partner jurisdictions gather information in response to HMRC requests.

Amendments 106 and 107 would change the years for which the clause would have effect. Where loss of tax is brought about carelessly, that would change from 2013-14 to 2019-20, and where brought about in any other case from 2015-16 to 2019-20. The amendments would water down the Government’s commitment to tackling offshore non-compliance now and delay, for at least a further four years, the additional time that the provision gives HMRC, so that the time limits would only begin to extend from tax year 2023-24. The Government are clear that the provision should start helping HMRC’s compliance work as soon as possible.

Amendment 139 would insert a de minimis threshold of £50 tax loss before the time limit applied. As currently drafted, the clause ensures that HMRC has the time necessary to conduct complex investigations. It is right therefore that HMRC can collect the tax due, regardless of the amount, once it has been calculated. It would be fundamentally unfair if the de minimis principle applied to offshore cases but not to onshore cases.

[Anneliese Dodds]

Forgive me, but is there a 12-year time limit for onshore cases for individuals?

[Mel Stride]

No is the short answer.

[Anneliese Dodds]

I am grateful to the Minister for very generously giving way again. He said that it would be unfair to create an anomaly between the tax affairs of those with offshore and onshore business, but we have just established that there is not a 12-year time limit for those onshore. Is there not therefore an anomaly?

[Mel Stride]

This is probably a classic case of me speaking too quickly and the hon. Lady not being given the fair opportunity to digest exactly what I said, which I will repeat, because it is a slightly different point. We are talking about the £50 de minimis, not the 12-year extension. I will reiterate exactly what I said for the hon. Lady’s benefit, so she is absolutely certain that I am not bamboozling her on this point. I said that it is right therefore that HMRC can collect the tax due, regardless of the amount, once it has been calculated. It would be fundamentally unfair if the de minimis principle—I am referring to the £50 threshold—applied to offshore cases but not to onshore cases. In other words, it is her amendment that would create the anomaly.

[Anneliese Dodds]

rose—

[Mel Stride]

I am happy to give way again if the hon. Lady desires.

[Anneliese Dodds]

I thank the Minister for allowing me to comment on this again. We are surely talking about very different cases. One deals with the normal process of tax collection and investigation, which most individuals assume would apply for seven years, and people need to keep papers for that long. The other is fundamentally different, and deals with the extension of the time limit to 12 years. If we were to do that onshore, then we may also wish to introduce a de minimis for that process, which would, as his measure introduces, go back between seven and 12 years. That is a point that needs to be made.

[Mel Stride]

I sense that the hon. Lady might have accepted my earlier point that my reference was actually to the £50 de minimis rather than the time limit. She has now introduced another argument, which she prosecuted during her opening remarks—that somehow we should not have a difference in the amount of time to investigate such matters pertaining to whether they are offshore or onshore-related. The whole crux of what we are doing rests on the, I think, fair belief that offshore transactions are less transparent. Those situations are more complicated and often involve dealing with different jurisdictions and intermediaries in order to establish the information that is required for HMRC to carry out its duties. That lies at the heart of why there should be a longer period for offshore entities than for those that are onshore.

[Anneliese Dodds]

I was talking about the application of a de minimis. I was trying to say that, if the Government were looking, for example, to extend the investigation period for domestic tax affairs beyond the existing time limits, they might even wish to consider a de minimis of £50. I was cognisant of the de minimis—my confusion was caused by the Minister’s remarks. He seemed to suggest that having a de minimis only in relation to offshore tax affairs and not to domestic affairs would be peculiar. We are talking about a de minimis only in those cases of that very long period, not in relation to general tax affairs. I would never say that we should have a de minimis on tax generally, which would mean that we could not pay tax on anything—VAT and so on. That is not what I suggested at all.

[Mel Stride]

This is probably a discussion for another day, in the sense that the hon. Lady is asking that, in the event that we revisit the issue of the time limits for onshore investigation, we should on that basis consider her amendment anew, because it might dispense with the different treatment between onshore and offshore. We might come to that in another world on another occasion, in another Finance Bill.

I am anxious to make progress—the hon. Member for Bootle sits there looking like he has got all day, but we have to make progress. Amendments 141, 142 and 143 on clause 79, and amendments 144 and 145 on clause 80, would require the Government to review the impact and effectiveness of the clauses within six months of the passing of the Act. Such reviews, however, would not have the intended effect: no data in relation to the characteristics of persons affected, the revenue effects of the changes, or the effects of the changes on incentives on persons to comply, will be available after six months. That is because it is unlikely that a full assessment of any relevant cases will be conducted within the six months after Royal Assent. Thus a report would likely be impossible or meaningless.

On that basis, I commend the clauses to the Committee.

--- Later in debate ---

[Kirsty Blackman]

I do not have much to add other than that I still want to press amendment 137 to a vote.

[Anneliese Dodds]

Briefly, the Minister referred to TIINs. I wonder whether, for the next Finance Bill, he will commit to ensuring clear linking from the Bill website to the different TIINs so that we can quickly see which one applies to each clause. It has been quite a waste of time having to search for them randomly.

As to the question whether the provisions should be examined using the affirmative procedure or should have to be prayed against using the negative procedure, I take on board the points made by the hon. Member for Poole. However, we all know that, when measures are dealt with by the affirmative procedure by default, much greater attention needs to be given to them. That is the reality. Generally, I fear that attention is not always paid to matters that may superficially appear technical but that, when one delves into them, may be discovered to have a concrete impact on different groups. Even with the affirmative procedure, the level of debate on taxation matters has, I would argue, traditionally been quite limited. I note that, for the first time in Parliament’s history, we have recently had votes in relation to tax treaties. I was pleased that we motivated those votes, yet UK tax treaties with other countries have never been subjected to proper scrutiny in the House.

Many matters covered by Delegated Legislation Committees are not purely technical. In fact, this has been talked about by my hon. Friend, who represents Leeds—help me out. [Hon. Members: “Stalybridge!”] I am sorry, I am not great at the memory game. In talking recently about some of the no-deal planning, my hon. Friend the Member for Stalybridge and Hyde has been talking about the potential for some of those measures to have such a significant impact that the Government themselves are not au fait with it. Given the time allotted, they seem to expect the Opposition to pass them with a rather cursory glance. I am afraid, therefore, that the suggestion that we already have a failsafe system for dealing with some of those significant matters is simply incorrect, so if the SNP presses amendment 137 to the vote, we shall support it. However, we will not press our amendments.

[Mel Stride]

Perhaps I may quickly respond, Ms Dorries, just to say that on the important matter of the TIINs, and the link from the website, I know that the hon. Lady raised that on a previous clause, and I should be happy to look into it for her. If she has any specific ideas that she would like to put to me in that respect, I should be grateful to receive them.

Finally, on the matter of negative SI procedure, and prayers against such measures, in the event that we have an effective, strong, organised, united and well led Opposition, I am sure that that will not be beyond them.

Question put, that the amendment be made.

--- Later in debate ---

[Mel Stride]

There is no need for consultation on this measure because, as the hon. Gentleman will know, it was just putting beyond doubt what has been established practice over a very long period. He raised the issue of retrospection. The measure is retrospective, inasmuch as it is putting beyond doubt the fact that these rates were appropriate in the past. We are just bringing the long-standing practice out of any sense of uncertainty.

The hon. Gentleman suggested that the loan charge was retrospective. It is not, because the arrangements entered into under the loan charge scenario were always defective. They never worked at the time when they were entered into, and therefore the tax was due in the past. It is being collected in the present.

[Anneliese Dodds]

In that case, when advisers advised individuals to undertake these schemes, were they promoting illegal schemes? It would help to have a clear answer on that.

[Mel Stride]

They were in many cases promoting schemes that did not work and were defective, and in many cases promoting schemes that had been taken through the courts by HMRC—and, in a case involving Rangers football club, through the Supreme Court. On each occasion, they have been found defective.

[Anneliese Dodds]

The Minister says those schemes were defective; is he saying that they were illegal?

[Mel Stride]

I am saying that the schemes were taken through the courts and were found defective; they were found not to work. As this is the third exchange between us, let us be clear about what lies at the heart of the way in which these schemes operate. If as an employer I said to an employee, “Instead of paying you normal earnings, from which you would pay your national insurance and your income tax—as the employer, I would pay the national insurance—I will pay you by way of a loan. You and I know it is not really a loan, as there is no intention of you ever repaying it. I may well send that loan to an offshore trust”—as many of these schemes do—“before sending it back to you. The consequence is you pay no, or next to no, tax, because it is treated as a loan, not earnings or income.” That lies at the heart of these schemes. That model never worked, and the schemes were always defective at the time they were entered into.

[Anneliese Dodds]

However, those taxpayers who are required to face the loan charge have been told that they have done something illegal. I am asking the Minister whether those who advised them to undertake these schemes were advising them to do something illegal, because the advisers have not faced anything as a result of this, whereas the taxpayers have.

[Mel Stride]

The enablers and promoters of those schemes have been subject to various pieces of legislation, going back a number of years. In almost every Finance Act, or every year, there has been legislation clamping down on them. They are subject to a penalty of up to £1 million as a consequence of that kind of behaviour. Where they have acted inappropriately, the legislation is there, and HMRC has the powers to pursue them.

Question put and agreed to.

Clause 87 accordingly ordered to stand part of the Bill.

Clause 88

Regulatory capital securities and hybrid capital instruments

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

Finance (No. 3) Bill (Sixth sitting)

Debate between Mel Stride and Anneliese Dodds

Tuesday 4th December 2018 Public Bill Committees

[Mel Stride]

The central point is that if someone is UK tax resident, their income is taxed, albeit that some of it may occur in other jurisdictions and perhaps be subject to double taxation arrangements between that jurisdiction and our jurisdiction. None the less, my hon. Friend’s assumption is correct that if someone has a property overseas, it is effectively counted as if it were a domestic property in the context of this clause. The easements that the clause introduces in terms of greater time to put in an application for a rebate at the higher rate apply equally whether one of the properties is overseas or here in the United Kingdom.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

As the Minister explained, the clause would change the parameters for claiming a refund on the additional dwelling SDLT by quadrupling the time that claimants have to reclaim the funds, potentially for up to a whole year after they have sold their old home, if that is later than a year after the filing date for the SDLT date for the new home—so the second parameter stays the same, if that makes sense. It is quite a complex change to understand.

The “major interest” provision is also tightened to make it clearer that a major interest in a dwelling includes an undivided share in a dwelling for the purpose of the higher rates for additional dwellings. I understand that the Government have suggested that the extended time period is necessary to enable those who might find it difficult to claim to do so—for example, those who are elderly or vulnerable due to serious illness.

In principle, the changes do not water down the Government’s initial stated commitment to charge additional SDLT for those owning additional properties, provided they are held on to for more than three years and provided that they fall outside the multiple dwellings category, which I will come back to in a moment. None the less, given that the changes appear to be focused on the context for the provision of additional dwellings, as against continuously occupied single dwellings, we feel it is necessary to subject their effectiveness to review, in order to ensure that they do not water down the initial measure in any way. That is what new clauses 10, 11 and 12 ask for.

--- Later in debate ---

[Mel Stride]

Clauses 44 and 48 will simplify and strengthen the current financial institution resolution regime by introducing an automatic exemption from stamp taxes on shares for public bodies and creditors whose interests are converted into shares, and stamp duty land tax—SDLT—for certain transfers of land arising from the exercise of resolution powers.

Under the Banking Act 2009, the Government have the power to exempt from stamp taxes on shares and SDLT transfers of property, in the form of shares or land that arise from an exercise of resolution powers. However, the current legislation requires the Government to pass secondary legislation exempting a defined set of transfers. This introduces potential timing challenges and creates additional complexity when resolving a failing financial institution.

The changes made by clause 48 avoid that by specifying exempt transfers in primary legislation. The stamp taxes on shares exemption will be limited to transfers of shares to a bridge entity or a public body that holds the shares temporarily while the institution is being resolved, and to the transfer of shares in exchange for temporary certificates issued to creditors that demonstrate their entitlement to the shares. The exemption does not cover the private sale and transfers of shares in a failing institution to a private sector purchaser, where stamp taxes on shares will be charged as usual.

Similarly, the changes made by clause 44 specify SDLT transfers in primary legislation. This exemption will be limited to transfers of land to a bridge entity or public body that holds the land temporarily while the institution is being resolved. The exemption does not cover the private sale and transfer of land of a failing institution to a private sector purchaser, where SDLT will be charged as usual.

The changes will simplify and strengthen the process of resolving a failed institution. In the event that a creditor is found to be worse off as a result of resolution action, when compared with an ordinary insolvency, they are entitled to compensation, which would be paid by the Treasury. The changes will protect taxpayers by reducing the risk of the Government having to compensate creditors in order to prevent the “no creditor worse off” principle being violated. They were announced in the autumn Budget 2017 and the draft legislation was subject to consultation. Officials from the Treasury and HMRC have worked closely with officials from the Bank of England to develop the legislation.

Turning to the amendments that have been tabled, amendment 90 seeks a review, within three months of the enactment of the Bill, of the viability of establishing a public register on the use of the exemption from stamp duty—something that I have already raised—and would require a report of the review to be laid before the House of Commons soon after its completion. The clauses do not create any tax exemptions for failing institutions themselves. The exemption would apply to creditors of failing financial institutions who see their debt holdings bailed in for equity, to ensure that affected creditors are not penalised inadvertently. The exemption also applies to the Bank of England, which may, in certain circumstances, need to take temporary ownership of a failing institution’s assets, in order to protect financial stability.

The clauses will strengthen and add transparency to the resolution process by providing further clarity for affected creditors and the taxpayer. The register would impose an additional and unnecessary burden on the Bank of England and provide no great benefit to the public. By creating an exemption from stamp taxes on shares and SDLT for certain transfers arising from the use of resolution powers, the Government are simplifying and strengthening the UK’s resolution regime, and I therefore commend the clauses to the Committee.

[Anneliese Dodds]

I am grateful to the Minister for his explanation. As he intimated, clause 44 ensures that SDLT is not charged on transfers of land following the exercise of certain resolution powers under the special resolution regime. It is paralleled by clause 48 for stamp duty. As he has intimated, our amendment 90 would require the Government to produce a review and potentially introduce a register of financial institutions in resolution that might benefit from the exemptions for SDLT and stamp duty for certain financial transactions resulting from the measure.

We are asking for such a review to have a clearer understanding of which firms might be relieved of SDLT and stamp duty in this manner. This is without prejudice to the function of the clauses, which we understand and support. In other words, we support the concept that the Bank of England should be able to use its resolution stabilisation powers to manage failing financial institutions in an orderly manner and should as part of that, where required, be able to transfer property, potentially including land held by that body, to a temporary holding entity appointed by the Bank of England or to a temporary public body. In that context, we agree that it does not make sense for SDLT or stamp duty to be paid. We are willing not to press our amendment, because of the general acknowledgment of the importance of the measure.

--- Later in debate ---

[Mel Stride]

Taking up the points made by the hon. Member for Oxford East, I will begin with her final point about why we have approached this by way of primary legislation rather than relying on existing powers to make regulations. At the heart of that is our ability to act quickly in the circumstances of the resolution powers being brought into effect, to ensure that everything goes smoothly and we do not end up in a situation where compensation might be due, where it could be shown that the measures we had taken had not been as effective as they might otherwise have been under a normal insolvency process. That is why relying on a general position in primary legislation would be preferable to a number of exercises of secondary powers.

The question of why we have made changes to the Finance Act 2003 rather than the Banking Act, and the associated question that the hon. Lady asked about whether the Office of Tax Simplification was content with our approach, are highly technical and certainly not questions to which I have a ready answer, I am afraid. I undertake to the Committee to go away and ensure that I write to the hon. Lady with a full explanation on both those points.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Clause 45

Changes to periods for delivering returns and paying tax

[Anneliese Dodds]

I beg to move amendment 95, in clause 45, page 29, line 19, at end insert—

“(11) The Chancellor of the Exchequer must lay before the House of Commons a report on any consultation undertaken on the provisions in this section.

(12) A report of the review under subsection (9) must be laid before the House of Commons within two months of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to report on any consultation undertaken on the provisions in Clause 45.

[Anneliese Dodds]

I am grateful to be serving on this Committee with you in the Chair, Ms Dorries; I do not think I have said that before, and I apologise for that.

This clause reduces the time limit that purchasers have to file an SDLT return and pay the tax due from 30 days after the effective date of the transaction to 14 days. It applies to transactions to purchase land in England and Northern Ireland with an effective date on or after 1 March 2019. Of course, since 2015 there has been a separate land and buildings transaction tax in Scotland, and since earlier this year there has also been a different regime in Wales, where the relevant tax is the land transaction tax.

SDLT was introduced—we were just referring to the relevant Act—in 2003, replacing stamp duty on land transactions. Data from SDLT returns are used by a variety of actors, after being submitted to the Valuation Office Agency, to carry out activities such as valuations for the purposes of council tax and business rates.

This clause obviously has some similarities with clause 14, to the extent that it requires a faster turnaround for the payment of a tax, but clearly in this case it is payment of SDLT rather than capital gains tax. Many of the concerns expressed in relation to that change also apply in this case. They include the question whether taxpayers and, above all, their agents are likely to be sufficiently aware of the new deadline. As a result, with amendment 95, we are asking the Chancellor of the Exchequer to

“lay before the House of Commons a report on any consultation undertaken on the provisions in this section.”

It appears that many taxpayers—some 85% of them, according to HMRC’s figures—already submit their return in line with the proposed new timetable. However, the remaining 15% may have reasons for failing to submit so quickly and those surely should be examined before we embark on this halving of the deadline. Indeed, there appeared to be significant concern among respondents to the consultation about the proposed reduction to the filing and payment window. The consultation response stated:

“Many felt it would be manageable for straightforward transactions—for example most purchases of residential property. Many envisaged difficulties for more complex transactions where the property purchased is subject to leases. Although only a small proportion of reportable transactions are likely to be affected, they amount to approximately 50,000 transactions every year.”

That is clearly a very large number, and those transactions may be particularly concentrated in their effects among certain segments of the population. It is for that reason that new clause 13 would require a full impact assessment of the measure to be undertaken and to consider its impact on people with protected characteristics, people with different incomes and people living in different regions.

I note in the consultation document that, at least at the time of the consultation, there was no HMRC facility for filing and paying SDLT simultaneously. It would be helpful to understand from the Minister whether that facility is coming, as it would surely make the system more efficient.

I was also surprised to see in the consultation document that more than 40% of the returns submitted on paper included errors. That is an incredibly high rate. It would be helpful to know what has been done to deal with that problem, as that system clearly cannot be helping either the taxpayer who has—presumably inadvertently, most of the time—made the error or the HMRC officer who has to try to rectify it. The very high usage of cheques, which need to be accompanied by the correct 11-figure unique taxpayer reference number, also seems almost designed to create an inefficient and error-ridden system.

It was stated in the consultation document that the shorter timescale would be accompanied by a number of other measures to improve the effectiveness of SDLT filing, but it is unclear to me whether and when those new measures are coming into place. One such measure would be requiring all agents to file online, which does seem sensible, but I was intrigued to see in the consultation document the claim that online filing may not be

“reasonably practicable…because of remoteness of location, or on grounds such as religious beliefs.”

It would be helpful if there were more joined-up thinking across Government. For example, it is very difficult for claimants of universal credit to receive it without using the online system. Surely more of them are likely to be affected by living remotely than professional agents involved in property transactions. It would also be useful if the Minister could clarify why religious faith might impact on an individual’s ability to use the internet and why that might be the case for those filing returns for stamp duty and not for those attempting, for example, to claim universal credit.

It was stated in the Government’s response to the consultation that they would look to potentially introduce electronic payment at the same time as the reduction of the reporting period to 14 days, so can the Minister please inform us whether electronic payment will indeed be available when this measure comes into play?

[Mel Stride]

Clause 45 makes changes to improve the SDLT filing and payment process. In answer to the hon. Lady’s question about whether we will provide facilities on the site to pay simultaneously, we do not have plans to do so. That is because the online service cannot be combined with Bacs and CHAPS services at present.

The hon. Lady made a more general point about the mistakes that are made in filing. As she knows, we consulted on the information being sought as part of the process, and we will be applying various simplifications as a consequence, most notably around complex commercial lease arrangements. The information that we have hitherto sought in that respect will now no longer be sought. That simplification, and others, should be beneficial in cutting down the mistakes that the hon. Lady referred to.

Currently, the purchaser of land, or the purchaser’s agent, must make a stamp duty land tax return and pay tax due within 30 days of the effective date of the transaction—usually the completion date. The changes made by clause 45 will reduce the time allowed to make an SDLT return and pay the tax due from 30 days after the effective date of transaction to 14 days. That is in line with other initiatives in recent years that bring tax reporting and payment closer to the date of the transaction. The hon. Lady referred, I think, to clause 14 on capital gains tax, where a similar approach has been taken. This is in line with these other initiatives.

The measure will not change liabilities for the purchaser, but will lead to tax being paid earlier. The change applies to purchases of land situated in England and Northern Ireland where the effective date of the transaction is on or after 1 March 2019. This change will directly affect approximately 20,000 businesses, mainly agents, such as licensed conveyancers and solicitors. Each year, this will directly affect fewer than 500 individuals who file their own SDLT returns without using an agent. However, the impact on administrative burdens for businesses is expected to be negligible.

The Government announced the change at autumn statement 2015 and consulted on it, as the hon. Lady described, in 2016. The Government confirmed at autumn Budget 2017 that it would come into effect on 1 March. To help purchasers and agents to comply with the new time limit, HMRC has worked with key representative bodies to agree simplifications to the SDLT return, for example, by reducing the amount of information required. These improvements will be in place when the new time limit begins. The measure will result in a yield of £60 million in 2018-19—the year of implementation—and a small ongoing yield in future years.

Amendment 95 would require a report on any consultation undertaken on the provisions in this section.

[Mel Stride]

HMRC will, as a matter of course, issue guidance on all major tax changes, and that will be available online. As part of the consultation, as I have outlined, a number of these organisations were consulted in detail, not just about the measures but to make sure that those businesses are ready and appropriately informed.

The amendment is not necessary. I can give the Committee the information it requires now, because it is already in the public domain. The Government published a document on 20 March 2017 in response to the consultation that we published in the autumn of 2016, and we published draft legislation in July 2018 for technical consultation. HMRC also held meetings with stakeholders, which included representative bodies from the property and conveyancing industries. Their views on the information required in the return are reflected in the changes being made to make compliance with the new time limit easier.

New clause 13 would require a review of the equality impact of clause 45. The new clause is not necessary either, because the Government set out in the tax information and impact note published on this change in July 2018. It is not anticipated that there will be any impact on groups with protected characteristics. Clause 45 does not change anyone’s SDLT liability; it just brings a requirement to file a return and pay the tax closer to the date of the transaction. For that reason, direct impacts on different types of households will be negligible, and the type of analysis required by the amendment would not be meaningful.

Regarding other regions of the UK, Land and Property Services in Northern Ireland—an agency of the Department of Finance of the Northern Ireland Executive—was consulted and is content with the measures. The changes will improve the SDLT filing and payment process, and I commend the clause to the Committee.

[Anneliese Dodds]

I am grateful to the Minister for his comments. However, I am sure the whole Committee is looking to the Government to ensure that the payment and reporting systems can be calibrated as soon as possible. Surely, the very high rate of error is a terrible waste of taxpayers’ and, indeed, HMRC’s time. I hope he prioritises sorting that out and having the relevant discussions with the Bacs and CHAPS systems so it can be dealt with.

--- Later in debate ---

[Anneliese Dodds]

The clause makes a minor change to ensure that existing stamp duty relief continues to apply to both non-approved and approved share incentive plans. Our amendment 91 calls for a review of the revenue effects of that measure compared with the status quo, under which only approved plans are covered. The amendment is intended to give us a better handle on the overall cost of SIPs and how that relates to their benefits.

As I am sure Committee members know, SIPs have been tax advantaged since 2001, when stamp duty and what was then stamp duty reserve tax—it is now SDLT—were removed from the transfer of shares in a SIP from trustees to an employee. The requirement for approval was removed in 2014, but the appropriate corrections to legislation were not made. I note that the changes in the clause are required purely because of errors of omission back then, which perhaps highlights some of the issues the Committee has discussed.

SIPs avoid many of the problems with other share incentive plans, not least by being provided to all employees rather than only to a subset. We have seen how share plans have been manipulated when they have been provided only to the top management of companies. SIPs avoid that. Although so-called free shares can be linked to the achievement of performance targets, they cannot be allocated individually. They can be provided only to a particular business unit or to the whole company, so they cannot be manipulated by, for example, very top management.

Some categories of shares can be removed from employees who leave the firm through either voluntary resignation or dismissal within three years of their joining the SIP. That and the stake that SIPs create for employees in their company are viewed by some commentators as positive aspects of the plans. In addition, there is a considerable cost saving for firms of up to £138 for every £1,000 invested in SIPs by their employees. We must acknowledge, however, that the people who gain most from such schemes are those who are already in a higher-rate tax band, who by my calculation gain around an additional third of the tax they would otherwise pay, compared with a basic rate taxpayer.

In addition, SIPs have complex interactions with the social security system. I want to ask the Minister for clarification in that respect. Information provided to SIP holders states clearly that a small number of people may be affected by the fact that, because of their salary sacrifice—I suppose in practical terms that is what this is—for their SIP, they will not have paid enough national insurance contributions to qualify for particular benefits. However, it is unclear whether contributions to a SIP are treated differently for tax and social security purposes.

Some claimants of tax credits have received mixed messages about whether contributions to SIPs should be added back on to their gross pay for the purpose of informing the Department for Work and Pensions about their income. Individuals do not have to declare their SIP contributions for the purpose of income tax, or at least those contributions generally are not chargeable to income tax. There is a peculiar and potentially unfair difference there.

That is compounded by the fact that tax becomes payable on some of the different types of shares within a SIP if an individual sells them within five years—for example, if they have to switch jobs. Some individuals have said that that is almost a form of double taxation for people who claim social security. They suggest it is a bit of an anomaly, and I can see why. For people affected in this way, they would be better off buying their firm’s shares at market prices rather than taking part in a SIP in the first place. That is the situation with tax credits, but I cannot find any information anywhere about the treatment of these schemes for those claiming universal credit.

I looked at the IR177 document “share incentive plans and your entitlement to benefits” but that was produced in January 2011, and there seems to have been no amendment of it since then. There does not seem to have been any amendment to the SIP manual relating to universal credit either, or at least not since November 2015. Having gone through all the iterations of the manual, I did not wish to waste any more time searching for a potentially non-existent needle in a haystack.

Will the Minister clarify whether contributions to SIPs are counted as income for the purposes of calculating working tax credit or universal credit? If so, will the Department be looking at this issue? Might it be trying to devise a different approach, given that individuals will be affected by the counting of those shares as income if they leave a SIP scheme early? People on low incomes may well have to switch jobs more regularly than others do, so it would be helpful if he looked into that. Perhaps he knows the answer already. If not, will he write to us? Some people would find that enormously helpful.

[Mel Stride]

On the hon. Lady’s specific question about the interaction of SIP contributions and the reporting of income, and the further interaction with working tax credits and universal credit, I do not know the answer, and I do not think my officials can immediately answer it. I will have a closer look at that and write to her, as she requests.

Clause 49 makes a minor correcting amendment to section 95 of the Finance Act 2001 concerning stamp duty and stamp duty reserve tax exemptions for SIPs. Stamp duty and stamp duty reserve tax exemptions for SIPs were introduced in the Finance Act 2001. Until 2014, share incentive plans had to be approved by HMRC before an employer could operate them. These were referred to as approved share incentive plans. The Finance Act 2014 removed the requirement for HMRC to approve share incentive plans and replaced it with a self-certification process. All references to approved share incentive plans should have been removed from legislation, but a change to section 95 of the Finance Act 2001 was omitted. The clause changes the wording of section 95 of the Finance Act 2001 to ensure that it is consistent with other provisions of the share incentive plans code. No taxpayers should have incurred stamp duty on self-certified SIPs since the rule changed in 2014, and this provision confirms and clarifies the position. No changes are made to the existing exemptions available for share incentive plans.

Amendment 91 would require a review of the revenue effects if the stamp duty exemptions for SIPs had not applied to self-certified share incentive plans from 2014. This provision is a minor technical change that brings the wording of the legislation back in line with its application. There will be no revenue impact as a result of the correction. SIPs offer a combination of tax incentives to employers, and estimates for the cost of the stamp duty exemptions for SIPs are not available. The clause makes a minor correcting amendment to exemptions for share incentive plans, and I commend it to the Committee.

[Anneliese Dodds]

I am willing to withdraw amendment 91, given the Minister’s clarification, and I am grateful for his willingness to write to me about the issue that I raised. I make the general point that it is important that we consider these interactions between the social security system and the taxation system. It is particularly important for people on low incomes that we always bear that in mind. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 49 ordered to stand part of the Bill.

Clause 50

Duty of customers to account for tax on supplies

--- Later in debate ---

[Mel Stride]

Clause 51 and schedule 16 make changes to ensure that we can properly collect VAT when purchases are made using vouchers. It amends the Value Added Tax Act 1994, introducing new section 51B, 51C and 51D and new schedule 10B. These clarify the VAT rules for postage stamps and set out new rules for the VAT treatment of vouchers issued after 1 January 2019.

Members of the Committee will be familiar with tokens—for example, those used in the purchase of books—but the world of vouchers has expanded significantly in recent years. The UK vouchers market is now estimated to be worth about £6 billion a year. As well as the traditional use of vouchers as Christmas presents, vouchers now play a large part in business promotion programmes and staff incentive schemes, which rely heavily on complex distribution systems using electronic, plastic and internet-based products, as well as the traditional paper voucher. Some businesses issue and redeem their own vouchers, whereas others issue vouchers to be redeemed by others. VAT law has been slow to adapt to these changes. This new law modernises the rules and introduces a simpler system.

[Anneliese Dodds]

The Minister is extolling the virtues of vouchers and noting how innovative many of the company schemes that use them are, but why are the Government still committed to removing individuals’ capacity to benefit from childcare vouchers?

[Mel Stride]

I think that issue may be outside the scope of the clause, tempted though I am to be drawn into the issue of childcare and vouchers. The hon. Lady will have noted the delay that we implemented in that respect, to make the transition that little bit easier for some of those who might have been impacted.

The clause transposes new EU law, which we pressed the European Commission to introduce, to help combat tax avoidance. The new law has to be in place by 1 January 2019 and the Provisional Collection of Taxes Act 1968 will give the measure effect until Royal Assent of this Finance Bill.

From a VAT perspective, vouchers are unexpectedly complex. That is because, for one payment, a buyer gets two things: a voucher and an underlying good or service. Without special rules, we risk taxing twice: once for the voucher and a second time for the underlying supply. Gift vouchers could be used to buy products with different VAT rates. It is therefore often difficult to apply VAT at the time the gift voucher is bought. Furthermore, gift vouchers are now often sold at a discount to the face value, via distributors to businesses, which give them away for free in business promotion or staff incentive schemes. It is then not always clear to the shop accepting the voucher exactly what has been paid.

Finally, trading vouchers across borders resulted in problems of double and non-taxation, as different countries have different rules. The changes made by clause 51 and new schedule 16 will standardise these rules. First, the legislation specifies the type of voucher covered. Quite a few things nowadays look similar to vouchers, but are not recognised as vouchers under the VAT system—for example, the type of card many of us store money on to go on holiday or give to our children. We are not talking about vouchers that are totally free from when they are issued to when they are used to buy something, such as discount vouchers found in magazines or toothpaste money-off tokens.

The legislation identifies two distinct types of voucher and sets out specific VAT treatments for each. If we know what the voucher can buy and where, that can be charged at the point of issue and at any subsequent transfer of a voucher through its distribution network. If these details are not known at the time of issue, because it is a general gift voucher, we must wait until it is used to be able to apply the correct VAT. Therefore, the law identifies single-purpose vouchers, such as a traditional CD token that can be used only to buy CDs, which are limited to specific products, and multi-purpose vouchers, such as a WHSmith gift voucher, which can be used to buy many things,.

To avoid charging VAT twice, single-purpose vouchers are subject to VAT throughout distribution, but no VAT is charged on redemption. In contrast, multi-purpose vouchers are VAT-free through distribution, but are subject to VAT at redemption. For the multi-purpose voucher, the redeemer—the shop—must account for VAT. If they know the amount paid for the voucher, they should account for the VAT on that value. If they do not know the amount paid, they should account for VAT on the face value of the voucher.

Because the activities of any distributor of multi-purpose vouchers are disregarded for VAT purposes, there will be certain restrictions on the extent to which they can reclaim VAT incurred on related costs. I hope that the Committee is following this very closely, because it is an extremely important series of elaborations on how these vouchers work. HM Treasury and HMRC have consulted with the relevant businesses represented, and HMRC will be clear in guidance on how the rules will work.

The two new clauses would require two reviews by the Government within three months of the passing of the Act. New clause 8 concerns the impact of the provisions on the circulation and distribution of vouchers in the UK and the EU. New clause 9 concerns potential revenue and other impacts that could arise if UK law were to diverge from EU law.

Collecting VAT when vouchers are used is always complex, and it will inevitably take some time for the new rules to bed in. Throughout the negotiations about the changes in the underlying EU law, the Government were in regular contact with the UK businesses affected by the changes, and it was generally felt that this option was the best of the various options identified. Officials have worked hard with businesses to ensure as smooth a transition as possible, and HMRC has offered to be pragmatic as businesses get to grips with the new system.

I can reassure the Committee that the Government will continue to monitor the effects of the change and other developments in this area, including impacts on revenues. With regard to divergence from EU law, it is far too early to consider such impacts, given that we do not yet know the future agreement with the EU and what it will look like in respect of the VAT system more generally. However, I stress to the Committee that a key advantage of this measure is to ensure a level playing field across the EU, so that UK businesses are not disadvantaged by different rules in other EU member states, which they would need to understand and which could result in double taxation or—in terms of Exchequer impact—no taxation at all. I therefore ask the Committee to reject the new clauses, and I commend the clause and schedule 16.

Finance (No. 3) Bill (Fourth sitting)

Debate between Mel Stride and Anneliese Dodds

Thursday 29th November 2018 Public Bill Committees

[The Financial Secretary to the Treasury (Mel Stride)]

I will be brief, as I am conscious that the Committee is moving fairly slowly through the clauses, and we have quite a lot of the Bill still to cover.

The hon. Member for Oxford East mentioned the diverted profits tax and the digital services tax. Earlier on in her speech, in a different context, she used the expression “comparing apples with pears”. I think that is what we are doing here, and that lies at the heart of the objection to her amendment.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

The Minister knows that I have a lot of respect for him. However, that was exactly my point: the two taxes are based on a fundamentally different view of what should be taxed. Obviously, a digital services tax would be revenue based, whereas DPT is still profit based, and based on the arm’s length principle. Surely one should therefore compare them in terms of their efficacy at generating tax revenue, preventing avoidance, and so on. The fact that they are different does not mean that it is not legitimate to compare them.

[Mel Stride]

I understand what the hon. Lady says, but the expression “preventing avoidance”, which she has just used, lies at the heart of the meaningful distinction. DPT is about avoidance, as eloquently expressed by my hon. Friend the Member for Poole, whereas the digital services tax is not about avoidance at all; it is about reflecting the fact that the international tax regime is no longer fit for purpose when it comes to taxing certain types of digital businesses—those that operate through digital platforms, and that have a relationship with UK users and generate value as a consequence. She mentioned Google specifically, but it covers search engines in general, certain online marketplaces and social media platforms.

The two taxes are so distinct. It is important to place on the record that the digital services tax is not an anti-avoidance measure; it is about redefining the way in which those businesses pay their fair share of tax.

[Mel Stride]

It is important to review or consider all taxes in relation to other taxes as a matter of course, because they all have their own positive aspects, distortionary effects, negative aspects, impacts on the economy that might not be desirable, and so forth. It is important that we do that for all taxes. I say to the hon. Lady that, in the case of the digital services tax, we are now consulting on the detail of how that might operate should we introduce it in 2020, in the event that there is not a multilateral movement across the OECD or the European Union that allows us to work in conjunction with other tax jurisdictions. In the case of the specific tax that we are considering in Committee, there will be ample opportunity to look at it in the kind of detail that I know she will be keen on.

The hon. Member for Oxford East raised the issue of the split, as I understood it, between the impact of DPT as directly revenue raising through the additional corporation tax that is paid, and the deterrent effect that protects revenues that otherwise would have been avoided. We publish annual statistics that show how much tax DPT raises directly and how much it raises indirectly through corporation tax. This year, we published a detailed note setting out the methodology that was used to calculate the revenue raised by DPT, and I am happy to provide the hon. Lady with either that information or a signpost to where it can be found.

The hon. Lady raised the specific issue of the three-month extension that we have been considering in Committee. She made the point well: rather than extending the period by three months, why do we not stick to 12 months and expect the corporation in question to speed up their process? I think we would still be left with the problem that there would have to be a moment in time when that company could still provide information—HMRC would be required to take it into account—which might be of a very complex nature. It would be very difficult for HMRC to make an immediate and reasonable judgment at the last minute. I think that is what drives the importance of separating the time available to the corporation in those circumstances from the additional time that is available solely to HMRC to conduct its final review without additional information suddenly appearing at extremely short notice. I should also point out that the 12-month process is already an accelerated process, and typically we are—in circumstances where the additional three-month time period becomes pertinent—looking at very complex situations, which take time to consider fully.

On the basis of the extract that the hon. Member for Aberdeen North presented to the Committee, it seems to me that more information could have been given in the explanatory notes to make it absolutely clear what it refers to. I will have a closer look at that outside the Committee.

[Anneliese Dodds]

I am grateful to the Minister for his clarifications. I would like to accept his kind offer to share with me and the Committee—I am sure other Members will be interested as well—the information that he referred to, which sets out the different components of DPT. I think that would be enormously helpful.

The hon. Member for Poole seemed to suggest that there would be two reasons for fluctuation across years. I think he used the word “random” to describe HMRC’s choice of which companies to investigate—they could be large or small. I would hope that it would not be a random process, although I am not suggesting he was intimating that. I would hope that it was based on intelligence and that HMRC—I would like it to undertake more of this than it does at the moment—used some of the data sources available to it to drive the process of determining which companies to look at. Hopefully that would not be a source of too much variation.

The hon. Gentleman also suggested that there might be variation because it would be, in some way, a reflection of the compliance-mindedness of tax practitioners in different corporations at any one point. Surely that should improve over time, rather than fluctuate. There may be other reasons for the variation, but I feel we still need to have a clear understanding of it.

--- Later in debate ---

[Anneliese Dodds]

I am grateful for that clarification of the hon. Gentleman’s comments. I suppose on that basis one would assume that the take would go down, if there was truly a deterrent action. It is not clear to me that that has occurred, but it would be interesting to have the analysis and review, so that we could see whether it is so. That is what our amendments aim to do.

I took on board what the Minister said about the review period, but I am a little confused. As I understand it, the additional time provided for the review period in the Bill is not of a different character from the rest of the review period. It is not a question of the additional three months being just for HMRC to deliberate. It is also a period during which the company can provide additional information—so, potentially, they can now do that right up to the end of 15 rather than 12 months. Therefore it is unclear to me that HMRC will necessarily be helped—unless I am missing something, which I may well be.

[Mel Stride]

To clarify, briefly, it is not as the hon. Lady views it: the additional three months would be solely for HMRC to carry out its deliberations, albeit that up to the 11th hour within the 12-month period further information could be provided by the company.

[Anneliese Dodds]

I am grateful to the Minister for clarifying that. It was not completely clear to me from the material provided to us. I underline the points that have been made by the SNP in that regard: it would have helped us to understand the impact of some of the measures if the explanatory notes had included a bit more of the thinking behind them.

In view of what the Minister has said, we are willing to drop some of our amendments. However, we shall want to vote on amendment 40, which is quite similar to the SNP’s amendment 37, and amendments 43 and 46.

Question put and agreed to.

Clause 18 accordingly ordered to stand part of the Bill.

Schedule 6

Diverted profits tax

Amendment proposed: 46, in schedule 6, page 220, line 2, leave out paragraph 11.—(Anneliese Dodds.)

This amendment removes the proposed extension of the review period to 15 months.

Question put, That the amendment be made.

--- Later in debate ---

[Mel Stride]

The clause makes changes to ensure that foreign businesses operating in the UK cannot avoid creating a taxable presence by splitting up their activities between different locations and companies. A non-resident company is liable to UK corporation tax only if it has a permanent establishment here—I shall use the abbreviation PE for permanent establishment. A PE may be a fixed place of business, also referred to as a branch, or the activity of an agent. We are mostly concerned here with branches.

As the hon. Member for Oxford East has outlined, certain preparatory or auxiliary activities, which are normally low value, such as storing the company’s own products, purchasing goods or collecting information for the non-resident company, are classed as exempt activities and do not create a permanent establishment. Some foreign businesses could artificially split their operations among different group companies or between different locations to take advantage of those exemptions and so avoid being liable to corporation tax.

To counter that, the OECD and G20 recommended modifying the definition of permanent establishment. The UK has adopted that change in its tax treaties, the bilateral tax arrangements that divide up taxing rights between countries, with which the hon. Lady and I are most familiar, having taken a series of pieces of secondary legislation through this House on those matters. It has given effect to that change through the BEPS multilateral instrument, as she pointed out, which entered into force for the UK on 1 October 2018.

Clause 21 replicates that treaty change in UK domestic law to make the change to tax treaties effective. It is most likely to affect non-resident manufacturing and distribution businesses that might try to structure their UK operations in order to minimise their UK tax footprint. The measure sends a signal that the UK Government are determined to tackle tax avoidance by foreign multinationals.

Turning to the two amendments tabled by the Opposition, amendment 47 would require the Chancellor of the Exchequer to review the revenue effects of the changes made by this clause within six months of the Bill becoming law. I cannot support this amendment. Information on revenue effects will not be available six months after the passing of the Act, given that the first accounting periods likely to be affected are those ending on 31 March 2019, for which the filing date of company tax returns will be 31 March 2020.

The Government also cannot support amendment 48, which would require publication three months after the passing of the Act of a list of all additional PEs created as a result of this measure. HMRC would not know, as a company is not required to disclose, whether a declared PE has occurred as a result of this measure or for some other reason. The information would be available to HMRC only if it opened an inquiry into every non-resident company that newly declared a permanent establishment. That, as I hope the Committee would agree, is impractical. It would not be an appropriate use of inquiry powers and it would impose a significant burden on HMRC and the taxpayer for little revenue benefit. The Exchequer impact assessment has scored this measure as likely to have negligible yield. I therefore commend the clause to the Committee and invite Members to reject the amendments.

[Anneliese Dodds]

I am grateful to the Minister for his clarifications and comments. I think we would be willing to withdraw the amendment, but I note that he did not refer to the critique that I mentioned by the BEPS monitoring group on whether the definition of fragmentation coming within the OECD process was sufficient. I do not want to detain the Committee on that point any longer, but I ask him to bear that critique in mind as we go through any additional tax treaties; I am sure we will come to some in the future with developing countries, because arguably this is a significant problem for them. It can be difficult for them to apply even the conventions in the model tax treaty to capture economic activity within their boundaries when they need to build up their tax base. Of course, we give many of those countries development aid.

As I said, I am willing to withdraw the amendment, but I would be grateful if the Minister kept those points in mind. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 21 ordered to stand part of the Bill.

Clause 24

Group relief etc: meaning of “UK related” company

--- Later in debate ---

[Anneliese Dodds]

The clause extends the definition of “UK-related company” for the purposes of group relief to include non-UK resident companies that are within the charge to corporation tax. That change follows previous announcements concerning the tax treatment of non-resident companies carrying out property-related business.

I think it will be helpful to indicate exactly what group relief relates to and why it is relevant. As I am sure the Committee is aware, group relief relates to the process whereby a so-called surrendering company that makes a corporate tax loss can pass certain kinds of losses to another company in its group. The benefiting company—the “claimant company”—can use the loss passed on to it to reduce its corporation tax liability. Apparently, the claimant company often then pays the surrendering company for the loss it received, up to the value of the tax that was saved. That payment is not counted for tax purposes. The surrendering company benefits from that arrangement, as it has access to those funds from the claimant company rather than having to hang on to the loss for subsequent years. There is no change to the circumstances of the claimant company—it cancels out some of its corporation tax and just passes that saving on to its fellow group member.

That regime was partially liberalised in 2016, albeit that it was then counteracted by the introduction for large companies of a limit, which means that only 50% of profits can be offset against losses carried forward. That ceiling applies across the group, not to individual firms. There are a number of stipulations concerning the extent of common share ownership, which are intended to prevent the false creation of groups in relation to group relief. It is necessary for one company to be the owner of three quarters or more of the other company’s share capital, or for a third company to own three quarters or more of the share capital of both companies involved, in order for them to be counted as part of a group for this purpose.

Other tests attempt to ensure that a genuine rather than a spurious group is involved. In addition, only certain types of income loss qualify, including trading losses, excess interest charges and management expenses. Until now, both the surrendering company and the claimant company had to be resident in the UK or carrying on a trade through a permanent establishment in the UK, although in some circumstances European economic area-based companies have been able to act as surrendering companies.

The Opposition have tabled four amendments to the clause. Amendments 51 and 53 would require a review of the impact on payments of corporation tax of the different elements of these proposals. Amendments 52 and 54 would require an examination of the proposals’ impact on property markets.

As I said, amendments 51 and 53 would require a review of the revenue effects of the clause, particularly on corporation tax. The measures in the clause appear to be part of a group of measures in the Bill that attempt to equalise the treatment of non-UK and UK-resident property companies when it comes to taxation. We have already discussed the fact that such companies will be transferred into corporation tax and standard capital gains tax. In many cases, although the measures concerned might be viewed as levelling the playing field, they might also be viewed as causing risks to revenue, not least due to the reduced rate of corporation tax, which we discussed before lunch.

Clearly, this change would benefit non-resident firms by enabling them more easily to plan when to pay corporation tax with the group of which they are a member. It would therefore to be helpful to have a clearer indication than has already been provided of the likely revenue effects of the clause. I am not saying that that ease and greater facility, in terms of planning corporation tax incidence, is necessarily a problem, but it will potentially have a revenue impact.

On a related note, we surely need a review of the impact of the clause on the UK property market, as would be required by our amendments 52 and 54. It will be particularly helpful if that review examines whether or not more non-EEA companies will be brought into the scope of this kind of intra-group transfer. It seems that that may well be the case. Currently, aside from UK-resident companies, only EEA-based companies, under certain circumstances, benefit from the ability to transfer loss, and thus tax incidence, across the group of which they are a member.

It would also be helpful to understand whether the new measures could help to incentivise more complex group structures that stretch beyond the UK and both into and outwith the EEA. There may be merits in the resultant diversification of risk, given the national specificities and risk profiles of different property markets in different countries and so on, but equally there could be a risk of contagion from poorly regulated property markets in some non-EEA countries. Those countries are not currently within the scope of these measures but will potentially be brought in by the Bill.

It would be helpful to be provided with a better understanding of the broader implications of the proposals in the clause than is currently set out in the explanatory notes. That is why we tabled amendments 52 and 54.

[Mel Stride]

The clause extends the definition of UK-related companies for the purposes of group relief to include non-UK resident companies within the charge to corporation tax. Non-UK resident companies are not simply those within the EEA but any company anywhere in the world.

[Anneliese Dodds]

With this.

[Mel Stride]

Yes. As the hon. Lady pointed out, clause 17 provides that a non-UK resident company that carries on a UK property business will be charged to corporation tax, rather than income tax, as we discussed earlier. This will deliver equal tax treatment for UK-resident and non-UK resident companies that carry on UK property businesses, including the application of anti-avoidance measures within the corporation tax regime, as I pointed out.

However, under the current rules, non-UK resident companies within the charge to corporation tax are not able to make use of group relief, which, as the hon. Lady described extremely well, is the mechanism by which a company is able to surrender its tax losses to another member of the group to relieve their taxable profits. Group relief is available to UK-resident companies and helps to ensure that the tax charged reflects the economic reality of the entire group.

The clause will extend the definition of a UK-related company for the purposes of group relief to include non-UK resident companies that are within the charge to corporation tax. This change will also apply to non-UK resident companies developing UK land that were brought within the charge to corporation tax from July 2016. The clause will ensure that the UK tax regime does not discriminate against non-UK resident companies. These changes come at a negligible cost to the Exchequer.

Amendments 51 and 53 would require a review of the impact of the clause on corporation tax receipts. The Office for Budget Responsibility’s certified assessment of the impact of the clause on corporation tax receipts has been estimated together with clause 17 and schedule 5, which we debated earlier. That is set out in table 2.2 of the 2018 Budget and will be updated in table 2.2 of the 2019 Budget.

Amendments 52 and 54 would require an analysis of the effects of the clause on the UK property market. The impact on the UK property market was considered in the design of the policy, but it is not expected to have any notable effect. The OBR did not consider that the clause, nor clause 17 and schedule 5, would have any impact on its UK property market forecast.

The clause is a necessary element of levelling the playing field between UK-resident companies and companies not resident in the UK. It provides for equal tax treatment so that companies in receipt of similar types of UK property income will face the same tax rules. I commend the clause to the Committee.

[Anneliese Dodds]

I am grateful to the Minister for that explanation and for the clarifications. It is important for the Committee to be aware that while this is part of a suite of measures to equalise tax treatment in terms of tax responsibilities, obviously the measure also provides some of the benefits of the UK tax system to non-EEA firms. Doing so could potentially increase the attractiveness of the UK property market for those non-EEA firms, which might be a good thing, but might also have other consequences. That is all I wish to say in response. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 24 ordered to stand part of the Bill.

Clause 25

Intangible fixed assets: exceptions to degrouping charges etc

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

[Mel Stride]

The clause amends the corporate intangible fixed assets regime, which I will refer to as the IFA regime, to align the degrouping adjustment rules more closely with the equivalent rules in the chargeable gains code. The clause responds to concerns expressed during the Government’s consultation on the IFA regime, and in previous consultations, that the IFA degrouping adjustment is distorting how genuine commercial transactions are structured. The main criticism is that there are two different tax treatments for intangible assets, depending on whether the chargeable gains code or the IFA regime operates in respect of such assets.

The IFA regime provides corporation tax relief to companies on the cost of their intangible assets, such as patents or trademarks. The IFA regime, like the chargeable gains regime, allows groups to transfer assets between companies within the same group on a tax-neutral basis. That prevents gains or losses arising on transactions between companies within the same corporate group and reflects the fact that the group can constitute a single economic entity. Instead of recognising the market value of the asset on transfer, the company acquiring the asset inherits the tax history and costs of the transferor.

The rules contain an anti-avoidance provision which applies when an asset leaves the group. That is often referred to as a degrouping adjustment or charge. The degrouping adjustment effectively removes the benefit of a previous tax-neutral transfer to ensure the full economic gain or loss made by the group is taxed.

The chargeable gains tax code includes a similar set of rules, which were, however, amended in 2011 to refine the degrouping anti-avoidance rules where the sale of the shares in the degrouping company is exempt from a tax charge under the substantial shareholding exemption rules.

The clause seeks to address concerns commonly expressed by stakeholders during the recent IFA regime consultation and those raised during the 2016 review of the substantial shareholding exemption. Part 8 of the corporation tax code is amended so that the degrouping adjustment will not apply when a company leaves a group as a result of a share disposal that qualifies for the substantial shareholding exemption. That exemption applies only to disposals of trading companies, or parent companies of trading groups. In doing so, it aligns the clause with the treatment in the chargeable gains regime.

In summary, the clause makes a sensible change to the degrouping rules in the IFA regime to align them with the treatment elsewhere in the tax system. The clause responds to legitimate business concerns that existing legislation is distorting how genuine commercial transactions are structured. I therefore commend the clause to the Committee.

Finance (No. 3) Bill (Third sitting)

Debate between Mel Stride and Anneliese Dodds

Thursday 29th November 2018 Public Bill Committees

[Mel Stride]

I assure the hon. Gentleman that in these tax matters—as with all tax matters—given our firm commitment to honour our climate change commitments, we are in regular contact with car manufacturers and those producing electric vehicles, through my hon. Friend the Exchequer Secretary.

As with all policy changes, the fiscal impact of the measure will be monitored by HMRC, and the Office for Budget Responsibility may request for it to be reviewed as the new out-turned data becomes available. The fiscal impact on taxpayer compliance has been considered and is included in the overall costing of the measure. HMRC publishes annual updates to its tax gap analysis, which will reflect the effect of capital gains tax policy changes. I therefore urge the Committee to resist the amendments and I commend the clause and schedule to the Committee.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve on this Committee with you in the Chair, Mr Howarth. I am grateful to the Minister for his introductory comments and for his comments on our amendments.

As the Minister explained, the clause and schedule extend, from 6 April next year, the existing capital gains tax requirements in relation to reporting and payment for non-UK residents who are disposing of UK property, in order to include new interest that will henceforth be taxed. They also introduce, on the same date the following year, reporting and payment-on-account obligations for residential property gains for UK residents and UK branches and agencies of non-UK resident people.

The measure has been quite a long time coming. Back in 2015, the Government signalled their intention to introduce from April 2019 the requirement that capital gains tax on gains from selling or disposing of residential property be paid within 30 days of the disposal being completed. As the Minister intimated, that will be a payment on account towards the person’s tax liability for the tax year in which the disposal is made. However, the measure was deferred until 2020, and the consultation on it undertaken earlier this year, as the Minister mentioned. As I understand it, there is already a payment-on-account scheme for non-UK residents, so these measures will just extend that approach to UK residents, as well as expanding the range of taxable interest for non-UK residents.

We have tabled two amendments. Amendment 31 would delay commencement of the provisions in paragraph 3 of schedule 2 until the Government have released further details of HMRC’s consultation with representative bodies concerning awareness of those provisions among those who may be covered by them. The rationale for the amendment is that the proposed measures, as we have just discussed, introduce a new payment-on-account scheme for capital gains tax on residential property that requires filing of a return far earlier than is currently required, and far earlier than the potential 22 months to which the Minister referred, right down to 30 days after the disposal of that property.

During the consultation on the proposals, some respondents expressed their concern that taxpayers, not expecting that they needed to make such a return until the end of the tax year, might fail to inform their accountant and thus miss the deadline. Of course, in doing so they would incur interest on non-payment. Our amendments would enable details of HMRC’s discussions with representative bodies to be asked for in order to ensure that potentially affected taxpayers were forewarned of the new measures and therefore did not fall foul of them and incur that interest on non-payment.

I understand why respondents to the consultation might have been concerned by that. Their responses were summarised in the consultation response document as concerning the fact that

“taxpayers may not be aware of the new rules until after the end of the tax year when they tell their accountants about their disposals, resulting in late filing penalties.”

Some of those making that argument pointed out that HMRC charges interest for those filing late, set at 3%. That, of course, contrasts with the repayment interest of 0.5%. I completely understand why there is a difference in rates, but that difference surely adds some grist to the mill of needing to ensure that all potential taxpayers are definitely made aware of the change. After all, 30 days is not that long a period within which to act.

The Government’s response to the consultation maintains that where information needed to be obtained from third parties for the purposes of calculating the capital gains tax that should be accommodated within the periods required for marketing and conveying any such property, and that estimated declarations could be corrected later, as the Minister mentioned. I am a little concerned by some of the ambiguity in the language used in the consultation response about what will happen if a taxpayer cannot make the payment on time. This is a question not of the amount of tax owed, but of the calibration of when it will be paid.

--- Later in debate ---

[Mel Stride]

Thank you, Mr Howarth; I am sure the Committee has taken note of your guidance. I say to my hon. Friend the Member for Poole that there is another aspect to that, and while 30 days is 30 days—not a year or more as has been the case under current arrangements—there are two points that I will make.

One is that, clearly, there is typically a moment of exchange before property transfer completes, which is an additional period of time in which paperwork is brought together. The second point is that, to the extent that it is not possible to immediately complete the information with absolute certainty within the 30 days—perhaps because of third-party valuation issues, for example—it is possible, as I said earlier, to have a balancing arrangement further on down the line in the future. That could work either way: the Revenue might owe the individual money or vice versa. That is facilitated within the arrangements.

I point my hon. Friend to the HMRC website where, should he have any more specific questions about how CGT operates, there is a user-friendly interface. He can put in all the numbers and variables, and the website will provide him with the answers.

The hon. Member for Oxford East raised the time-to-pay arrangements. Clearly, where tax is due, the Revenue takes a measured and responsible approach towards those who find it difficult to pay any tax, perhaps for reasons of personal financial difficulty or otherwise. I know from conversations that those at a senior level at HMRC have always been very keen to ensure that it operates in a sympathetic and responsible manner to negotiate the very difficult line between being sympathetic, responsible and helpful, where appropriate, and equally, making sure that we are all treated the same and that, where tax is due, individuals and companies actually pay it.

Another point that has been raised is HMRC capacity. The premise of those concerns is the assumption that, to a significant degree, the changes might generate lots of additional work for HMRC. I suspect the contrary, for the reasons that I have given. If, when the capital gain is crystallised, there is a shorter period for people to hand in the paperwork as required, it means that they will get on and do it, rather than delaying and discovering that, as a consequence, they have to contact HMRC to get involved in negotiations and discussions.

On the overarching point about HMRC and capacity, as the hon. Lady will know, we have of course invested an additional £2 billion in HMRC since 2010. We have 24,000 individuals or full-time equivalents in HMRC who are focused on tax collection. The total head count of HMRC, which stands at around 70,000, is the highest that it has been for some years. I commend the clause and the schedule to the Committee.

[Anneliese Dodds]

I am grateful to the Minister for his comments. We on this side do not oppose the measures and are willing not to press our two amendments to a Division. I will, however, make two points. It would help if the Minister provided some information on the criteria that would be used by HMRC for adopting deferred arrangements with individual taxpayers. Such criteria exist for time-to-pay arrangements, but none has been set out in relation to this clause, so it would be helpful to know what they are. I agree with him that there needs to be a balance between sympathy and responsiveness, to enable people to pay the tax that is due. On the other hand, there is the matter of equal treatment.

--- Later in debate ---

[Mel Stride]

Clause 17 and schedule 5 provide that a non-UK resident company that carries on a UK property business will be charged corporation tax, rather than income tax as at present. The provisions will deliver equal tax treatment for UK and non-UK resident companies that carry on UK property businesses. They will prevent persons from using the existing difference in treatment to reduce their tax bill on UK rental property or land through offshore ownership.

Until 1965 all companies were subject to income tax on their profits. When corporation tax was introduced in that year for UK resident companies and for non-resident companies trading in the UK through a UK permanent establishment, other non-resident companies remained chargeable under the income tax rules. From July 2016, non-resident companies that deal in or develop UK land were brought within the UK tax net under corporation tax, but for UK property businesses, two companies, one domestic and one offshore, currently have different rules for calculating tax from a UK property income, even if their property businesses are otherwise identical.

The clause provides for a more coherent and fair tax regime by bringing the UK property business income of non-resident companies into the corporation tax regime from 6 April 2020. The transition will mean that those companies will be subject to the recently implemented policies to combat tax avoidance, including the corporate interest restriction, hybrid mismatch rules, carried-forward income loss restriction and the carried-forward capital loss restriction announced at Budget 2018. The businesses will now be taxed at the corporation tax rate and, in combination with clause 24, they will be eligible for the loss relief rules available to companies and groups. The latest estimate by the Office for Budget Responsibility is that the changes will raise £365 million over the next five years.

Amendment 39 would require the publication of a register of named individual non-UK resident companies who are charged corporation tax rather than income tax as a result of the measure. The Government do not identify specific individuals or companies that are brought within the scope of particular tax charges, and it would be inappropriate to do so. Amendments 35 and 38 would require a review of the impact of schedule 5 on corporation tax receipts. The OBR certified impact of the measure on tax receipts is set out in table 2.2 of Budget 2018. It will be updated in table 2.2 of Budget 2019 before the schedule comes into effect on 6 April 2020, so the amendments are unnecessary.

New clause 4 would require the Government to undertake a review of the effects of schedule 5, specifically to consider the effect of not bringing schedule 5 into effect and increasing the corporation tax rate to 26%. If schedule 5 was not brought into effect, non-UK resident companies with income from UK property would remain chargeable to income tax. In that situation, raising the corporation tax to 26% would create a clearly enhanced incentive for companies with a UK property business to set up offshore in order to benefit from paying the basic rate of income tax.

I urge the Committee to reject the new clause, along with the amendments, and I commend clause 17 and schedule 5 to the Committee.

[Anneliese Dodds]

I am grateful to the Minister for that explanation of the clause and schedule. As he explained, they set out new arrangements for non-UK resident companies that carry on a UK property business or that have other UK property income. The clause and schedule will shift those companies from the income tax regime into the corporation tax regime. The Government appear to intend the measure to deliver more equal treatment for UK and non-UK resident companies in receipt of similar income, and to prevent those that use the difference to reduce their tax bill on UK property through offshore ownership.

The measures were subject to consultation from March last year and the Government released their response in autumn 2017. In that Budget the Government announced they would make the change in two years’ time, in 2020. I anticipate that in our discussion we will return to some of the themes that characterised our discussion on clauses 13 and 14. The measure seeks to align the treatment of non-UK investors with that of UK investors in the field of real estate. On Tuesday we discussed some of the limitations that the Opposition believes there are with the Government’s approach.

--- Later in debate ---

[Anneliese Dodds]

The Minister is trying to suggest that it would be a great cost, but I made it clear that HMRC would have to compile a list of these individuals anyhow in order to inform them of their tax liabilities. There would not be a collation cost. There may be a cost from other aspects of it, but not from the collation.

[Mel Stride]

The hon. Lady is right that HMRC will be privy to the information, but there is a difference between being privy to the information and treating with individuals and companies in terms of their tax return. Collating all that information and presenting it in the form that she envisages is a distinct activity.

I undertake to write to the hon. Member for Aberdeen North about the online number that she discovered and the numbers that were provided in the policy document. I wish I was so good that I just knew all the answers and was over the detail to that degree, but I will certainly write to her on that, and on the cost of making the changes to the system. I am happy to have a look at the £160,000 figure that she raised and see how it breaks down.

[Mel Stride]

I think I am right in saying that over the longer term, in revenue terms the measure is likely to be broadly neutral. The OBR, of course, will only cast out across the scorecard period. It will not analyse the fiscal impacts beyond that, but if the hon. Lady would care to write to me with any questions on that, to the extent that I can answer them of course I will do so.

I commend the clause and the schedule to the Committee.

[Anneliese Dodds]

I am grateful to the Minister for his comments, but we will press amendment 38 to a vote. Although I took on board his responses, I am concerned that we have a lack of clarity about the revenue impact of a measure, which means that as a Committee it is difficult for us to make a judgment on it. When he tried to explain why there might be a negative amount on some projections of the impact in subsequent years, he stated that that was due to the different timing of reporting of corporation tax revenue and income tax revenue. That would explain a difference for one year, but not for subsequent years, so I am still concerned about why there might have been a negative suggested figure into subsequent years.

In addition, it is not clear to me whether the figures that have been set out, whether that is one set or another, take into account the impact of coming within the scope of anti-avoidance measures and so on. That would obviously just be a projection in any case, but we surely need to have more information before we can take an informed view.

Finance (No. 3) Bill (First sitting)

Debate between Mel Stride and Anneliese Dodds

Tuesday 27th November 2018 Public Bill Committees

[Mel Stride]

I thank the hon. Members for Bootle and for Aberdeen North for their wide-ranging contributions to the important debate about corporation tax. As we know, clause 2 brings in the corporation tax charge for 2020, the rate of 17% having been set in part 2 of the Finance Act 2016.

The hon. Member for Bootle referred to slashing tax for big businesses. It is a typical Opposition characterisation of our tax policy to say that the largest companies are being treated to corporate welfare, as he put it, but tax cuts apply right across the board, including to the smallest businesses in our country. Given that we are reducing tax to 17% by 2020 for both small and large businesses, the Opposition’s proposal to increase it to 26% for large businesses and 21% for smaller businesses would represent overall tax increases of 50% and 25% respectively.

[Anneliese Dodds]

rose—

[Mel Stride]

I see that the hon. Lady is itching to intervene.

[Anneliese Dodds]

Does the Minister acknowledge that we are talking about profitable businesses and not about unprofitable businesses, of which unfortunately there are a large number in many parts of the country? I am pleased to hear him acknowledge that Labour’s tax plans include a differential rate for small businesses, but surely he must acknowledge the sunk cost in what his Government have done. Through their cuts to central Government funding, they have forced local authorities to rely more on business rates and council tax, so the fixed costs that all businesses pay have gone up.

[Mel Stride]

The hon. Lady correctly identifies that Labour’s position is for small businesses to pay 21% in corporation tax. Given that we are taking it down to 17%, her party’s policy would result in the tax bill for hard-pressed companies on high streets rising by some 25% for smaller businesses—a pretty extraordinary and hefty increase—and by some 50% for larger businesses. One has to ask what the effect of those tax increases would be. They would not drive productivity, as the hon. Member for Bootle would have us believe, but do quite the reverse: they would increase the costs on businesses, increase the pressures to drive up prices for their products and, critically, reduce returns to investors. The hon. Gentleman mentioned the importance of investment in our country, but we cannot increase that by driving up corporation tax rates.

As the hon. Members for Oxford East and for Aberdeen North rightly said, business rates are a fixed cost that cannot be avoided, irrespective of whether a business is profitable, but we are driving those rates down. In the last Budget, because of the prudent stewardship of our economy, we were able to announce a 30% reduction in rates for retailers at or below the rateable value of £51,000. That will take a huge amount of pressure off about 90% of the high street retailers in our country.

--- Later in debate ---

[Anneliese Dodds]

On that point, the current incarnation of GAAR is focused on abuse rather than avoidance, as the Minister mentioned. I wonder whether he can clarify something. I understand that the GAAR panel has given 12 opinions, but there are only nine on the website, although in any case that seems a relatively small number of decisions taken. Does he not feel that it would be appropriate to review the GAAR panel’s operations at this stage?

[Mel Stride]

I do not, for the reasons that I have given. On the matter of how many references there have been, nine in total have supported HMRC’s position. That said, if the hon. Lady has information that suggests there have been 12 referrals, I will look into what might be a further three and what the status of those was.

[Anneliese Dodds]

I received notice that there were 12 in a ministerial response to a written question that I tabled. That might indicate that the panel did not support HMRC in three cases. If that is the case, it would be enormously helpful for us to know why.

As the Minister knows, when the panel was created, considerable concern was expressed about the variety of its membership. The individuals themselves are obviously upright, knowledgeable people of good standing, but they come from a restricted group of people, many of whom have been involved in devising some of the tax schemes that the panel might be required to look at.

[Mel Stride]

The hon. Lady makes an entirely reasonable request for that information. As I indicated, I am happy to provide it to her. In fact, divine inspiration has just arrived—I have an answer; I knew it was lost somewhere in my mind. There have, in fact, been 12 opinions, all of which have been supportive of HMRC. If she would care for any further information, I am happy to provide it outside the Committee.[Official Report, 3 December 2018, Vol. 650, c. 5MC.]

Amendment 11 would make the clause contingent on a review of how the application of globally agreed measures to combat avoidance by multinationals would impact the tax gap. HMRC publishes annual updates on its tax gap analysis. The corporation tax gap is estimated to have declined from 12.4% of total theoretical liabilities in 2005-6, under the previous Government, to 7.4% in 2016-17.

--- Later in debate ---

[Mel Stride]

If it is in order, Ms Dorries, I will give the hon. Member for Oxford East an additional piece of information on the issue of referrals to the panel. There were nine cases rather than 12; there were 12 opinions on those nine cases, all of which supported HMRC. That might explain how I had a figure of nine while the hon. Lady was focused on 12.[Official Report, 3 December 2018, Vol. 650, c. 5MC.]

[Anneliese Dodds]

How can there be more than one opinion about an individual case?

[Mel Stride]

I shall write to the hon. Lady on this matter and any others that she wishes to inquire about.

Question put, That the amendment be made.

Finance (No. 3) Bill (Second sitting)

Debate between Mel Stride and Anneliese Dodds

Committee Debate: 2nd sitting: House of Commons
Tuesday 27th November 2018 Public Bill Committees

[Anneliese Dodds]

It is an enormous pleasure to be in this Committee with you in the Chair, Ms Dorries, and to make my first brief speech here. I would like clarification from the Minister on the specific issue of tax treatment of council tax reduction schemes. Subsection (5) on page 8 of the Bill refers to “a” council tax reduction scheme, stating that

“Payment under a council tax reduction scheme”

is exempt from income tax. However, page 26 of the explanatory notes refers to

“the” council tax reduction scheme.

I am sure that colleagues will know that there is no longer one council tax reduction scheme across the UK, since central Government decided to top-slice that form of social security and devolve the design of it to different local authorities, albeit with the stipulation that the protection should be maintained for older people. Only a very small number of local authorities still provide full council tax relief, including council tax relief for low-income families. I am enormously proud that Oxford City Council is one of those.

Central Government have washed their hands of responsibility for this benefit. They have refused to provide figures on take-up, for example, in response to parliamentary questions that I have tabled. They have also refused to provide figures on the number of low-income people now being taken to court because they cannot pay council tax, because they are no longer provided with the relief. I am not cavilling over semantics when I ask the Minister to make crystal clear that the exemption from income tax provided in the Bill will apply to all council tax reduction schemes, not to some particular version of those schemes that the Government might wish to focus on.

Related to that, I heard a very worrying rumour that the Government might seek spuriously to argue that funds spent on council tax relief for families by local authorities should not be counted in central Government’s assessment of local authorities’ expenditures, because they are, in theory, discretionary. I disagree fundamentally with that position, because it would penalise those authorities that support the worst off. It would be helpful if the Minister confirmed that, just as I hope he will confirm that council tax relief for families is viewed as legitimate in the Bill, and for income tax purposes, it will be viewed as legitimate expenditure when it comes to the allocation of central Government support for local authorities.

[Mel Stride]

I start by addressing the specific points raised by the hon. Members for Aberdeen North and for Oxford East. On the explanatory notes and the value or otherwise of a specific reference to input from the Scottish Government, I will certainly be happy to look at that in the future. I assure the hon. Member for Aberdeen North that there were significant discussions on these measures between the Treasury and Scottish officials in the appropriate manner. On the technical point raised by the hon. Member for Oxford East around “the” scheme versus “a” scheme, the information I have is that the scheme came into force in April 2013. However, I will look into her specific question about whether the measures apply to “a” scheme or “the” scheme. I am afraid that I do not immediately have an answer to that, but I will get back to her as soon as I can.

Clause 12 clarifies and confirms the tax treatment of nine social security benefits. The income tax treatment of social security benefits is legislated for in part 10 of the Income Tax (Earnings and Pensions) Act 2003, which provides certainty about existing benefits and needs to be updated when new benefits are introduced. For example, the Scottish Government are introducing five new payments following the devolution of powers, including the young carer grant, the discretionary housing payment and the carer’s allowance supplement. Other payments covered by the clause have been in operation elsewhere in the UK for some time, such as the council tax reduction scheme and the flexible support fund, but are not yet covered clearly in legislation.

The changes made by clause 12 ensure that such payments are taxed appropriately, and that that is clear in legislation. The clause clarifies and confirms that such payments are exempt from tax, with one exception—the carer’s allowance supplement—which is taxable. That is in accordance with “The agreement between the Scottish Government and the UK Government on the Scottish Government’s fiscal framework”, which states:

“Any new benefits or discretionary payments introduced by the Scottish Government will not be deemed to be income for tax purposes, unless topping up a benefit which is deemed taxable such as Carer’s Allowance.”

Amendment 2 would require the Chancellor of the Exchequer to review the revenue effects of the clause and lay a report of that review before the House within six months of the passing of the Bill. Such a review is unnecessary. The Government have already published a tax information and impact note for this measure, and our assessment, supported by the OBR, is that the Exchequer effects are negligible.

On the carer’s allowance supplement, which was introduced in Scotland in 2018, as a general rule benefits are taxable if they replace lost income. The carer’s allowance has therefore always been taxable. The vast majority of those receiving the supplement have income below the personal allowance and would therefore not be expected to pay any income tax. That is an important point in respect of the point made by the hon. Member for Bootle. I will not dwell on each payment covered by the clause, but I reiterate that eight of these payments are exempt from taxation. HMRC has not and will not collect any tax from these payments.

As the tax information and impact note sets out, the taxation of the carer’s allowance supplement is expected to have negligible Exchequer effects because, as I have said, the vast majority of those carers receiving the additional payment do not earn sufficient income to pay any income tax at all. However, any income tax receipts from that will of course go to the Scottish Government.

The Committee will also know that taxable social security income is aggregated and reported to HMRC through self-assessment after the end of the tax year. This is an important point in the context of the amendment. That income will not need to be reported until January 2020. A review would therefore be impractical only six months after the Bill’s passing. I therefore ask the Committee to reject the amendment. I commend the clause to the Committee.

Draft Double Taxation Relief and International Tax Enforcement (Guernsey) Order 2018 Draft Double Taxation Relief and International Tax Enforcement (Isle of Man) Order 2018 Draft Double Taxation Relief and International Tax Enforcement (Jersey) Order 2018

Debate between Mel Stride and Anneliese Dodds

Tuesday 13th November 2018 General Committees

[Mel Stride]

I thank the hon. Members for Oxford East and for Aberdeen North for their contributions to this important debate. I always expect a rattle gun of deep and technical questions from the hon. Member for Oxford East, and I was not disappointed. I will endeavour to answer as many questions as I can, and on those I cannot answer, I am happy to write to her in due course.

The hon. Member for Oxford East raised a lack of engagement, as she termed it, with the treaties that we are scrutinising. I took that to refer both to matters of transparency, on which she elaborated at some length, and also the scrutiny of the treaty, which is an issue that she has raised in relation to other DTAs that we have debated in Committee. I hope that she therefore welcomes the fact that we have made improvements, for example to the information memorandum, which now points out the differences and changes between the 1950s and the later iterations of the treaties and, indeed, the treaty to which we have been asked to give our consent.

I shall make the general points that I usually make on scrutiny. International treaties are complicated negotiations and do not necessarily lend themselves, nor would it be appropriate for them to do so, to discussion and rumination, as the hon. Lady may be seeking. The treaty was published in July this year, so there has been plenty of time to review it. Of course, these international agreements go through the process that we are going through at the moment, giving this treaty scrutiny.

I appreciate that the transparency debate is a hook on which one could add the whole issue of the public registers of beneficial ownership, about which we have had various parliamentary debates. The hon. Lady knows the Government’s position in that respect. It is important to stress that we have a common reporting standard between Her Majesty’s Revenue and Customs and the tax authorities of the three other jurisdictions in question, so we do have an exchange of information relevant to tax affairs between our two authorities, which is an important tool in clamping down on avoidance, evasion and non-compliance.

The hon. Lady asked specifically why we did not insist on the treaties containing a provision that public registers be set up. I think the answer to that is that these matters are outside the general context of these treaties. In addition, the treaties are entered into by bilateral agreement, and I think if we had insisted on that—indeed, had it been our desire to insist on that at this moment—it is unlikely that we would have had the improved version of the treaties that we are discussing today.

[Anneliese Dodds]

I am grateful to the Minister for giving way, but surely these treaties contain provisions that make it less likely that such a public register, which the Government committed to, will be set up, because they include the commitment to keeping information secret. It is just that these treaties do not include reference to public registers, which one would have expected if the Government were working on this, as they committed to do, to the Opposition; it is also the fact that they include a commitment to keeping information secret, which goes against what the Government said in this House that they would do.

[Mel Stride]

I do not think that these treaties require further secrecy than the appropriate confidentiality, as some might term it, of information that is, after all, highly sensitive; it involves the tax affairs of individuals and businesses between our various jurisdictions. It would only be right that confidentiality is respected in those circumstances.

[Anneliese Dodds]

I am grateful to the Minister for that clarification. However, we were just talking about having a register that is similar to the UK register, which is public, and surely any concerns about confidentiality have already been dealt with in our own jurisdiction.

[Mel Stride]

I had understood the hon. Lady in her earlier intervention to be suggesting that the treaties would make a move to public registers of beneficial ownership less likely. To the extent that I do not think they impose any additional confidentiality on the exchange of information over and above what was there before, I do not think that argument holds water, with respect to her.

On the information exchange issue that the hon. Lady raised, the agreement contains a new “assistance of collection of debt” provision, compared with the agreements that it supersedes. I hope that she would welcome the information requirements around that, and the fact that we can now actively seek the assistance of those jurisdictions to collect tax debt, for example.

On the general issue of anti-avoidance, as all Committee members will know—because they follow these affairs in intricate detail, as they have done during this debate—we have very much been in the vanguard of BEPS programme in the OECD. Members may see the footprints of that in these treaties through the main purpose test, to ensure that we do not have companies or individuals exploiting the tax advantages around these treaties for no other reason than to avoid or reduce their tax liability. Of course, in respect at least of the interest on royalty payments, as distinct from dividend payments, there are different categories of entity, and various tests accordingly that will be required to trigger the reliefs in that respect.

The hon. Lady mentioned the blacklisting process that is going on at the moment and the UK Government’s involvement. We have been actively involved in discussions with our overseas territories to ensure that we encourage them not to be blacklisted—to ensure that they comply with the EU code group’s provisions.

Oral Answers to Questions

Debate between Mel Stride and Anneliese Dodds

Tuesday 11th September 2018 Commons Chamber

[Mel Stride]

When it comes to business rates, which are the heart of the taxes that my right hon. Friend referred to, we have done a great deal since 2016. We will by 2023 have provided reliefs totalling some £10 billion, much of which will fall as relief to the high street. I take on board the comments he has made. As with all taxes, we will keep business rates under review.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

Contrary to the comments of the Financial Secretary to the Treasury, international co-ordination on tax has frequently been blocked by the Government. We saw that particularly when it came to the taxation of trusts with both David Cameron and now the current Government arguing against more transparency. It is no surprise that, as a result, a director of Fidelity International and other experts are saying that the Amazon case shows

“how tax policy hasn’t moved on.”

Why are this Government letting giant multilaterals get away with it and letting everybody else down?

[Mel Stride]

Let me be extremely clear to the House: this Government have an exemplary record on clamping down on avoidance, evasion and non-compliance. We have one of the lowest tax gaps in the entire world, at 5.7%, far lower than was the case under the Labour party. We have brought in a number of rules under the base erosion and profit-shifting project—a project of which we were in the vanguard. For example, tax deductions for interest expense came in in 2016 and yielded £3.9 billion by 2021, and the diverted profits tax that we introduced in 2015 has already raised some £700 million.

Oral Answers to Questions

Debate between Mel Stride and Anneliese Dodds

Tuesday 3rd July 2018 Commons Chamber

[Mel Stride]

I slightly detected from the hon. Gentleman’s question the suggestion that that meeting between HMRC and the EBT did not take place, and it most certainly did. He and I have discussed this matter, both formally in a meeting and informally, and we have debated it in the House. I have always stressed that there is a dividing line between HMRC and Treasury Ministers: we cannot intervene in the tax affairs of individuals or organisations. I am confident that HMRC is progressing in an appropriate manner.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

Eight years of economic failure from this Government have been exacerbated—[Interruption.] I suggest that it is economic failure, with productivity growth down, GDP growth down and investment growth down, and in comparison with our comparators. Economic failure: if it smells like it and looks like it, that is what it is. Let me finish my question. That failure has been exacerbated by the Government’s reorganisation of HMRC, with cuts in our country deeper than in any other, outside Greece. Will they abandon this failing reorganisation, which also means that there will not be a single customs hub anywhere along the south coast or north of the central belt?

[Mel Stride]

The simple fact is that we need an HMRC that is fit for the 21st century, for the new digital ways in which we are working, and for our targeted approach on clamping down on avoidance, evasion and non-compliance, for example. That requires these sophisticated hubs that have the right skills to do that job, so I defend our reorganisation entirely.

On the portrayal of the economy that the hon. Lady has just given, we have the highest level of employment in our history, more women in work than at almost any time in our history and unemployment lower than at any time in the past 45 years. We are bearing down on the deficit and have debt falling as a percentage of GDP.

Draft Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018 Draft Double Taxation Relief (Switzerland) Order 2018 Draft Double Taxation Relief and International Tax Enforcement (Uzbekistan) Order 2018

Debate between Mel Stride and Anneliese Dodds

Wednesday 9th May 2018 General Committees

[Anneliese Dodds]

I am grateful to the Minister for seeking clarification. The reason I mentioned it was that, with the adoption of the MLI, we have what many would view as quite a lax approach to defining permanent establishments, compared with article 12, if we had adopted that. However, in that consultation, the Government seemed to suggest a stricter approach. There seems to be a contradiction, which in itself is contradicted by what the Chancellor said at the informal ECOFIN—he seemed to say that we need to have US agreement before we can have stricter rules.

[Mel Stride]

I thank the hon. Lady for that clarification. I take this in two parts. These are different situations. When it comes to taxation of profits derived from digital platforms, be they social media, search engines or online marketplaces, the critical thing is to ensure that we tax the value that accrues to the interaction of consumers with those marketplaces. We are working with the OECD and the European Union, as the hon. Lady pointed out, to come up with an appropriate way to address that particular challenge of the current international taxation regime. As to the Chancellor’s remarks about whether we might go it alone or have to wait for America, I am not entirely sure that he said what was reported. That is the information I received, although I did notice those comments in the press, as did the hon. Lady.

We have debated mandatory arbitration before. The essential point is that, in order to enter into a DTA, both sides have to agree that it is an appropriate treaty to enter. Both sides have to be comfortable in the round with it. There is no circumstance in which the United Kingdom could therefore force a country against its will to enter into agreement with mandatory binding arbitration.

[Anneliese Dodds]

Surely it would be helpful, given the differences in resource that could none the less be provided between developing and developed nations, for the Government to carry out that analysis into the use of mandatory binding arbitration, and whether it exemplifies policy clearance for development. It would be wonderful to hear a Treasury Minister say that the Government might consider adopting this and doing so explicitly.

[Mel Stride]

The Government’s view is that mandatory binding arbitration is a very useful element of these agreements. In the absence of that, the process undertaken might be ultimately inconclusive. In order to ensure that these agreements work efficiently, we believe there is great merit to that approach.

I lastly turn to parliamentary scrutiny. Matters reserved against will be for the Government to determine in time although, as I have indicated, we have already put out preliminary suggestions of what we will do. As time goes forward, this or any other Government may decide to remove some of those reserved powers. It is down to this Committee and this moment to take a decision on whether in the round all those possible changes are agreed to or not. On that basis, I urge that we move forward with the recommendations.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018.

DRAFT DOUBLE TAXATION RELIEF (SWITZERLAND) ORDER 2018

Resolved,

That the Committee has considered the draft Double Taxation (Switzerland) Order 2018.—(Mel Stride.)

DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (UZBEKISTAN) ORDER 2018

Resolved,

That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Uzbekistan) Order 2018.—(Mel Stride.)

Stamp Duty Land Tax

Debate between Mel Stride and Anneliese Dodds

Thursday 26th April 2018 Commons Chamber

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

The Government appear to have arranged to give this statement so that they can pat themselves on the back, while reducing the amount of time spent on customs union with the EU. I appreciate that that issue may be controversial—albeit only for the Government; every other actor seems to feel that some kind of customs union is a good idea—but that should not prevent democracy from running its course on the matter. The Government’s cunning plan to introduce the statement today has spectacularly backfired, because rather than offering an opportunity for congratulation and digression, it has merely provided a chance to indicate the Government’s failure to deal with the housing crisis.

The Government have said—we heard it again just now—that their stamp duty cut is intended to back home ownership, but home ownership has fallen to a 30-year low under this Government. They say that the cut was intended to help first-time buyers, but there are now a million fewer under-45s who own their own home than there were in 2010. Home ownership was up by some 1 million under Labour, but it has fallen since 2010 under Conservative Ministers as part of this Government’s eight years of failure on housing.

At the root of that failure is an inability to increase the supply of genuinely affordable housing. I do not need to set out how the stamp duty cut has failed to deal with that issue; I will use the words of the Office for Budget Responsibility, which stated that

“the main gainers from the policy are people who already own property,”

not first-time buyers. In contrast, measures from the Government to increase supply are woefully inadequate. To take just one example, local authorities will only be able to bid into a pot in order to borrow to build—a farcical situation when demand is so pressing. The number of genuinely affordable homes is declining, not increasing, under this Government.

We parliamentarians see all around us the worst impact of the Government’s failure on housing, whether it is on the people we walk past who are rough sleeping in the city of London—rough sleeping is now at record levels here, as it is in many other cities—or the 120,000 children who are living in temporary accommodation, and whose families come to see us in our constituency surgeries. I am keen to hear the Minister’s response to the question of whether he has commissioned research into the impact of this flagship measure on prices, in the absence of decisive measures to increase affordable supply.

It would be helpful to hear from the Minister how Her Majesty’s Revenue and Customs is dealing with what appears to be a quadrupling of money-back claims related to a malfunctioning online calculator. What HMRC rather amusingly—it is not amusing for the people affected—calls a “ready reckoner” appears to be anything but, in view of its failure to take into account relevant stamp duty discounts. I would be grateful to hear from the Minister when it will be amended so that it properly reflects mixed-use properties.

On the subject of confusion over what stamp duty should be paid, it would be good to hear from the Minister about what the Government are doing to deal with those who make bulk purchases of individual flats, thus avoiding the buy-to-let surcharge. Let us imagine, as a hypothetical example, someone purchasing seven flats, worth between £450,000 and £1 million each, in a seaside town. They might try to do so using their own company, rather than as an individual. If so, I would hope that they registered the beneficial ownership of that company with Companies House—a matter that I look forward to debating with the Minister next week in our consideration of the Sanctions and Anti-Money Laundering Bill. Aside from beneficial ownership, however, by undertaking such a bulk purchase, our imaginary, hypothetical person would avoid a significant amount of stamp duty—say, around £100,000—which could have gone into our cash-strapped NHS. Can the Minister please inform the House what he is doing to deal with that loophole?

Above all, can we please have genuine action from the Government to deal with our appalling housing crisis— we parliamentarians cannot fail to notice that it is causing much misery to our constituents and blighting the lives of many children—rather than misplaced self-congratulation?

[Mel Stride]

I thank the hon. Lady for her contribution and her questions. She opened by asking what was the motivation for giving this statement today. I reassure her that it is that we believe that housing policy is one of the great issues of our age and we are determined to get on top of it, as the Chancellor set out in the autumn Budget. That is why—to move on to her question about how we will drive up the level of home ownership—the Chancellor made it clear at Budget that a further £15 billion would be made available, taking us up to £44 billion over the next five years, to drive up the supply of new homes. That is alongside planning changes and the review that my right hon. Friend the Member for West Dorset (Sir Oliver Letwin) is undertaking to ensure that where planning permission is granted, houses are actually built. I suggest that we look at our record. Last year there were 217,000 new properties in this country, which is the largest figure since 2005-06. That indicates that our move towards having 300,000 more properties on the market by the middle of the next decade is realistic.

The hon. Lady asked specific questions about the effect of stamp duty relief on house prices, and she will know that the OBR forecast a small impact of 0.3%. She will also know that that projection did not take into account the various supply-side measures that I have mentioned, and other measures that we have undertaken. She asked about the specific case of properties bought within a corporate wrapper, and I hope she will be familiar with the annual tax on enveloped dwellings, which stands at 15% if the property is put into the wrapper. Indeed, on the basis she outlined where a property is then rented out, ongoing charges recruit tax in that way.

Finance (No. 2) Bill

Debate between Mel Stride and Anneliese Dodds

3rd reading: House of Commons & Report stage: House of Commons
Wednesday 21st February 2018 Commons Chamber

[Mel Stride]

The hon. Lady is suggesting that one particular set of analyses is an ideal set to present, and can be seen as in no way misleading, but entirely robust and entirely objective. If we are to reach such a quality of data, we will have to achieve certain specific aims, and one of the aims is to deal with the fact that a lot of the analysis to which she is referring is very selective—it does not look at the entire picture. For example, some of the analysis reflecting changes in income tax may show a benefit for one sex over another, but it may not take into account the impact of increased spending on childcare.

[Anneliese Dodds]

Will the Minister give way?

[Mel Stride]

If I may finish this point, I will then certainly give way to the hon. Lady.

A lot of these analyses simply look at the static situation, without taking into account the fact that the measures we are bringing forward will in themselves have a dynamic effect on the economy—for example, by driving up employment. Several Members have spoken very eloquently about the record level of female employment at the moment. That is benefiting women, but the interaction of our policies with that benefit would not be reflected in such an analysis. I have already mentioned that a lot of the information being sought is very difficult to verify and very difficult to obtain, particularly where it pertains to protected characteristics, such as sexuality, gender reassignment and pregnancy. It is very hard to identify those groups and the way in which they are affected, particularly in terms of all the taxes in new clause 9—I will come on to them in a moment—that the Opposition want us to address.

[Anneliese Dodds]

rose—

[Mel Stride]

I will make a final point before I give way to the hon. Lady. It has been a long time since we have jousted, and I have missed it, so I will certainly give way to her. There is a very important point about the impact in particular on households, which is one of the major thrusts of new clause 9. It is very difficult to disentangle the effect of income that may go to one member of the household, but is of course subsequently shared across the household. The Institute for Fiscal Studies has itself highlighted that as a particular barrier to getting robust information. I will now gladly give way.

[Anneliese Dodds]

I am very grateful to the Minister for his generosity in giving way, and for his kind words. I want briefly to mention that the Department for Work and Pensions does produce this kind of modelling for social security changes, which may be similarly complex in looking at the interactions of different elements, so why does the Treasury take a different approach? In relation to that, would not the assumptions be spelled out, so that any ambiguity could be made clear?

[Mel Stride]

I thank the hon. Lady for her intervention, but I bring her back to new clause 9. Whatever the DWP happens to be doing, whether it is right or wrong or whether it works, what we are facing here today and making a decision on is new clause 9. As I am working through new clause 9, I am arguing that it is not a practical way to seek to achieve that which the Opposition, quite genuinely and sincerely, are attempting to achieve.

--- Later in debate ---

[Mel Stride]

There was a ripple of dissatisfaction when you failed to call me to speak, Madam Deputy Speaker, but it was almost imperceptible. Thank you for correcting your error.

In this debate we have heard about a range of issues, including the changes the Finance Bill makes to the bank levy, the taxation of private finance initiatives, and tax avoidance and evasion. I will respond to each in turn, starting with the bank levy. Opposition Members have raised a number of objections to the changes to the levy made by the Finance Bill and to the Government’s broader approach to bank taxation. These are unjustified. This Government remain committed to ensuring that banks make an appropriate additional tax contribution, beyond that paid by other businesses, that reflects the unique risks they pose to the UK financial system and to the wider economy.

I shall address some of the arguments put forward by the shadow Chief Secretary to the Treasury, the hon. Member for Bootle (Peter Dowd), which I felt focused far too much on the bank levy. It is indeed declining, but there is good reason for that. In 2015, when we took the relevant decisions on this, we recognised that the risks presented by our banks had eased quite considerably. Indeed, the Bank of England has recently carried out rigorous stress testing on the banks, and that was the first occasion on which not a single bank failed its stress test. That is indicative of the fact that one of the raisons d’être for the bank levy has started to recede. That is to say that the banks are less of a risk than they were before, and the charges on the assets and liabilities that they hold are therefore becoming less relevant. The hon. Gentleman did not focus so much on the surcharge to the banking tax, which came in from 1 January 2016 and which represents an additional 8% on the profitability of banks at the present time. Whereas corporations are paying 19%, we are now looking at a total rate of around 27% for banks.

[Anneliese Dodds]

I am grateful to the Minister for that explanation, but as we have said before, when we take both those measures together, we see that the reduction in the levy along with the surcharge results in a lower overall contribution over time. We have spelled out clearly in our previous debates that the overall amount coming from the banks is receding over time, even with the surcharge.

[Mel Stride]

That is not the case. I will explain some of the figures in a moment, but there are other elements that are not being taken into account. One is that the banks are not permitted to offset against their profits the PPI compensation payments. Also, they are now working to a more restrictive corporate interest restriction regime, under which they are allowed to roll forward only 25% of their interest chargeable to offset against profits. Taking all those measures together, we have raised some £44 billion more from the banks since 2010 than we would have done if we had treated them simply as any other corporate business.

Opposition Members have cited changes in revenue from the bank levy. They argue that this is declining, but it is misleading to consider bank levy changes in isolation when they form part of a set of wider changes to bank taxes announced in 2015 and 2016, including introducing the 8% surcharge. Overall, rather than reducing revenue, these tax changes are expected to raise £4.6 billion over the current forecast period. I think that the hon. Lady will be interested to hear that figure.

[Anneliese Dodds]

We have just looked at the projections up to 2022-23. For the current year, we see £3 billion coming in from the levy and £1.6 billion coming in from the surcharge. The projection for 2022-23 is £1.3 billion from the levy and £1.1 billion from the surcharge. That appears to be a significant reduction; in fact, it is almost half.

[Mel Stride]

Taking into account the respective changes, we will raise £4.6 billion over the forecast period as a consequence. My point is that it is simply not right to focus only on the declining part of the equation—the reduction in the banking levy charge—and not on the fact that we are raising more as a consequence of the 8% surcharge and the increased profitability of banks on our watch.

[Anneliese Dodds]

rose—

[Mel Stride]

Perhaps we can get into the nitty-gritty of this offline.

The average revenue from the bank levy between its introduction in 2011 and 2015-16 was around £2.6 billion. As a result of this package, however, yield from the surcharge and the levy in 2022-23 is forecast to be £3.2 billion. By 2023, as I have said, we will have raised around £44 billion in additional bank taxes since the 2010 election.

Opposition Members have also suggested that our bank levy is set at a low level compared with other countries. In fact, not all financial centres have a bank levy. The USA, for example, chose not to introduce one at all, and while several EU countries introduced bank levies following the financial crisis, it is not possible to make direct comparisons between these levies as the rules for each are different.

We have heard the argument this afternoon that we should reintroduce a tax on bankers’ pay. One of the aims of the changes to bank taxation announced in 2015 and 2016 is to ensure a sustainable long-term basis for taxing banks, based on taxing bank profits and the bank levy. By contrast, the bank payroll tax referred to in new clause 3 was always intended as a one-off tax. Reintroducing it would be ineffective and unsustainable compared with the package of banking tax measures that we have introduced. Even the last Labour Chancellor pointed out that it could not be repeated without significant tax avoidance.

Opposition Members also propose that HMRC should publish a register of tax paid by individual banks under the levy. Taxpayer confidentiality is rightly a core principle for trust in our tax system and HMRC does not publish details of the amount of tax paid by any individual business. While the Government continue to consider measures to support transparency over businesses’ tax affairs, we must balance that with maintaining taxpayer confidentiality in order to maintain public confidence in our tax system.

--- Later in debate ---

[Mel Stride]

If we look at bringing forward this exemption, the important thing is that we should look solely at that element that relates to low-emission vehicles, rather than applying it to all taxis, as indeed amendments 10, 11 and 12 do, as tabled by the hon. Member for Ilford North (Wes Streeting). However, having listened to the representations from my hon. Friends the Members for Hornchurch and Upminster (Julia Lopez) and for Rugby (Mark Pawsey) and indeed from the hon. Gentleman who has tabled the amendments, we are minded to look sympathetically at bringing forward the exemption by a year for those taxis that have low emissions, albeit that they cost £40,000 or more. I know that my hon. Friend the Exchequer Secretary will shortly be meeting representatives from the London Taxi Company and that he will be furthering those discussions with them.

In the one minute remaining, perhaps I could turn to new clause 10, which calls for a review of the consequences of not backdating the refund of VAT in respect of the Scottish Fire and Rescue Service. The Chancellor made it clear in the Budget that, after lobbying from our Conservative colleagues in particular, we would allow such refunds going forward. In 2012, when the Scottish Government entered into those arrangements, they did so knowing what the VAT consequences would be, but we are taking action going forward.

Finally, I understand the desire of the right hon. Member for Twickenham (Sir Vince Cable) to have information on the effects of increases of income tax by 1%. However, there is no need for that now, as information is available on that. Time does not allow me to explain what that is, but I will speak to him after this debate, and on that basis, I hope that he will not press his amendment. I also take on board his comments about dormant companies and pension fund arrangements, but we do have to look to HMRC to make those judgments so that we ensure that these scams are prevented.

[Anneliese Dodds]

We have no time left, so I will press new clause 7 to a Division.

Question put, That the clause be read a Second time.

Draft Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2018 Draft Tax Credits and Guardian’s Allowance Up-rating etc. Regulations 2018

Debate between Mel Stride and Anneliese Dodds

Wednesday 7th February 2018 General Committees

[Mel Stride]

When looking at the impact of inflation on potential savings such as the hon. Gentleman describes, we have to bear in mind that many costs are going up for the Government as a consequence of increased levels of inflation. It is not simply something that can be looked at in isolation.

[Anneliese Dodds]

I am grateful to the Minister for giving way; he is being very generous. Is he aware that analysis by groups such as the Women’s Budget Group has shown that any benefits, particularly for the worst-off families, that might have come through the increase in the personal allowance and the national living wage are cancelled out by the social security changes? When those changes are taken into account, people’s incomes have been falling. Furthermore, the very worst-off families often do not benefit from the changes, because they are simply unable to accrue enough hours to reach the threshold in the first place.

[Mel Stride]

As I have been explaining, the national living wage increases and the rise in the personal allowance are clearly elements of this. We are also now rolling out universal credit, which will increasingly make sure that work pays. We believe that that is the best way out of poverty and the best way to improve living standards. To make some broader points, as a responsible Government we need to balance the costs of benefits with the compelling need to look after and support the most vulnerable in our society. I argue that that is why today’s measures effectively exempt from the freeze the categories of individuals whom we are discussing today, who are indeed among the most vulnerable in our society.

Between 2008 and 2015, jobseeker’s allowance rose by about 21%, child tax credits by about 33%, but earnings by only about 12%. The total spend on benefits in 1980-81 was £30 billion in real terms. By 2014-15, that had risen to £96 billion. We have to place this debate within the context of that overall fiscal framework.

[Anneliese Dodds]

I am very happy to talk about how the overall balance of benefits has changed over time. The most significant difference between the 1980s and now, when we look at the overall balance of social security, is the gigantic increase in housing benefit that has occurred over the period, particularly over the last seven years. We have seen a radical increase in the cost of housing, which has left many families struggling when their wages have not been increasing. That is the major difference.

If we were to look at a pie chart of social security in those two periods, housing benefit has driven most of the change—certainly not increases in support for unemployed people, where the amount of support that people get in relation to wages has fallen precipitously. It has fallen more in the UK than in most comparable countries. I am very pleased to put the debate in that context; it is important that we do so, and remind ourselves that changes in the overall burden of social security payments have often been the result of a failure to deal with structural problems, such as the arguably overheated housing market that we have at the moment.

The Minister mentioned increases in different tax credits and JSA. I do not believe that they have been above inflation. Certainly, unemployment support has gone down substantially. The element of JSA that is linked to contribution-based national insurance has substantially decreased over time. It is simply not the case that we are moving towards a more contributory system. Most analysts would suggest that we have actually had a residualisation over recent years.

[The Chair]

Order. Interventions should be short. I think that was about three interventions.

--- Later in debate ---

[Mel Stride]

My hon. Friend is entirely right, and he will know that prior to the very recent figures, which still show that the level of income inequality is the lowest since 2010, it was the lowest in 30 years.

[Anneliese Dodds]

rose—

[Mel Stride]

I know that the hon. Lady is itching to tell me about it excluding housing and raise various points, but it is a recognised measure within the Gini coefficient. I do believe that this Government have a record of which they can be truly proud. There is more to be done, but I think we can all agree on these measures, to the extent that they are relieving measures for particular categories of individuals whom we all, on both sides of the Committee, seek to support. I hope that on that basis we can approve these measures.

Question put and agreed to.

DRAFT TAX CREDITS AND GUARDIAN’S ALLOWANCE UP-RATING ETC. REGULATIONS 2018

Resolved,

That the Committee has considered the draft Tax Credits and Guardian’s Allowance Up-rating etc. Regulations 2018.—(Mel Stride.)

Taxation (Cross-border Trade) Bill (Seventh sitting)

Debate between Mel Stride and Anneliese Dodds

Thursday 1st February 2018 Public Bill Committees

[Anneliese Dodds]

It is a pleasure to see you in the Chair, Ms Buck, and a pleasure to see the rest of the Committee.

Our amendments would qualify the powers in clause 30 that enable the Treasury to make, by regulation, a wide range of provisions relating to the imposition of import duty. In particular, amendment 81 advocates the inclusion of a sunset clause, whereby no regulations can be made under clause 30 after the end of the two-year period, beginning with exit day, when the UK is set to leave the EU.

The Government suggested on Tuesday that the Opposition’s contributions had been on the theme of greater parliamentary accountability, for which I suspect many of our constituents would thank rather than criticise us. Today, one of our themes will be the use of sunset clauses where appropriate. I hope the Minister will listen to our arguments with an open mind.

It is not just the Opposition who have argued for the use of sunset clauses in the Bill and more generally. The House of Lords Committee that examined the subject also recommended their greater use. My hon. Friends will elaborate on that point later. I will point out the Government’s inconsistent approach to this Bill compared with the use of sunset clauses in other areas.

The European Union (Withdrawal) Bill commits to ensure that delegated powers in many of the areas it covers will not be available in perpetuity but only for the period necessitated by leaving the EU, and yet even that approach is not adopted here. The Enterprise and Regulatory Reform Act 2013—not necessarily an Act that I would otherwise support, because of its negative impact on health and safety regulation—appropriately suggested that sunset clauses could be a helpful mechanism to ensure that provisions are kept up to date. That commitment was placed into guidance on the conduct of impact assessments, which advocates that

“opportunities to use sunset clauses should be explored where appropriate.”

The use of sunset clauses was a core element of the better regulation agenda. In theory, the Government are still committed to that, although I was pleased to hear from the Prime Minister that she will remove some elements of it, such as the one in, two out rule.

There are many other historical parallels. Sunset clauses applied to legislation used during the first and second world wars, and to legislation dealing with a heightened terrorist threat. The lack of a time limit on some temporary legislation passed in the second world war exposed Governments to legal action in the late 1970s, when they tried to implement new control orders on the export of goods using the temporary legislation that had never been repealed.

I am not saying that sunset clauses are never abused. Arguably, in the US, President Bush sprayed them around routinely and inserted them into tax-cutting measures to try to hide the magnitude of revenue that the US Government would lose over time. However, they can play an important role when they are used appropriately, especially in trade and customs policy. The OECD’s policy framework for investment explicitly mentions the need to consider including sunset clauses in trade facilitation measures.

Antonios Kouroutakis published an interesting book a couple of years ago on sunset clauses. He shows that they have been used for centuries as a means of balancing the powers of the Executive with those of the legislature, especially when there is a need to develop parliamentary consensus and accelerate decision making when time is tight.

I am not sure about other Committee members, but I cannot imagine an epoch that fits those characteristics more fully than this one. The Government should aim to build trust across Parliament, not diminish it, and to achieve parliamentary consensus. I hope they will heed our call for a sunset clause in clause 30 and take it as the constructive suggestion that we intend it to be.

[Mel Stride]

Clause 30 allows the Treasury to make regulations for the purposes of import duty, which will prove necessary to ensure that the UK’s import duty regime operates effectively. As the Committee will be aware by now, the Bill contains several new powers to make regulations. As I have explained, although the Bill sets out the requirements for import duty, the need for more detailed rules will likely arise once the new regime is implemented. That is what the power in the clause allows for.

The clause permits regulations to be made to deal with administrative matters, the needs of which cannot be identified at this time because, for example, of unforeseeable changes in business practice. It is worth noting that the Union customs code, which establishes the current customs regime, provided powers to the Commission to make implementing and delegated Acts to supplement the rules set out in that code.

Amendment 81 seeks to limit the period in which the power to make regulations under clause 30 can be exercised to two years after exit day, as the hon. Lady outlined. The power will ensure that the UK can make the regulations necessary to deliver an effective import regime into the future. It allows the Treasury to respond as necessary to any future developments that might have a bearing on import duty.

The power will play an important part in ensuring we have the ability to address any circumstances that arise in the future that might require modification in the UK’s import duty regime, conceivably beyond the term of the period that the hon. Lady has suggested. It is for that reason that the power in the clause is not subject to a time limit. Amendment 81 seeks to impose just such a time limit of two years following exit day. If it were accepted, there would be a risk of limiting the Treasury’s capacity to make or require changes to the UK’s import duty regime in the future.

To pick up on a specific point raised by the hon. Lady about the Lords Committee and its assessments around sunsetting, it should be noted that the aims of this Bill are somewhat different from some of the other Brexit Bills that were referred to in that report. For example, while the European Union (Withdrawal) Bill makes provision for day one, with the understanding that further primary legislation will be made to supplement it, this Bill will be required in order to maintain a functioning customs regime and effective VAT and excise regimes on an ongoing basis. That is a key point. For those reasons, I urge the hon. Lady to withdraw the amendment.

Amendments 131 and 132 seek to apply the draft affirmative procedure to regulations under clause 30. As I set out to the Committee previously, the Bill ensures that the scrutiny procedures that apply to the exercise of each power are appropriate and proportionate, taking into account what could be covered by the regulations and the frequency and speed at which changes may need to be made. The Government believe that the negative procedure for regulations made under clause 30 provides an appropriate level of parliamentary scrutiny. The Government need to be able to administer the tax system effectively, for example to collect the right amount of tax from the right person at the right time. That clearly applies to the collection of real-time taxes such as import duties. Changes in circumstances, for example the emergence of a new category of goods or the proliferation of one means of importing goods, may need to be addressed in real time. Therefore, application of the draft affirmative procedure to regulations made under clause 30 is inappropriate. Unlike the negative procedure, the draft affirmative procedure will not be capable of implementing those essential policy changes immediately. Before the UK joined the EU, none of the provisions that could be made in secondary legislation in relation to import duty were subject to the draft affirmative procedure. For those reasons, the Government do not support the amendments.

[Anneliese Dodds]

I am grateful to the Minister for that explanation. However, I wonder if I could probe a little further. First, will it be possible for the Government to legislate in order to extend some of the provisions if necessary? Is that a theoretical or actual possibility? It is my understanding that it would be both. Therefore, it is not clear to me why he does not accept the sunset clause.

Secondly, the Minister referred to the need to insure that the Government can respond to calls for frequency and speed in processing new measures. He appeared to imply that that need might go beyond two years after the Government’s planned exit day. I wonder how many years exactly he envisages that we might need the last-minute decision-making proposed in the Bill. Will it continue indefinitely? If that is the plan, it might concern many constituents.

[Mel Stride]

The hon. Lady knows the answer to her theoretical question—whether in theory Parliament could, in the absence or with the existence of a sunset clause, none the less extend the provisions in the Bill—as well as I do. It is, of course, yes: Parliament can decide to do broadly that which it wishes to do in the legislative sphere.

How long we expect to rely on the provisions in the Bill and whether that will be beyond two years depends on a wide variety of circumstances, some of which will almost certainly necessarily be completely unknown at the current time. We do not actually know for certain whether there will be an implementation or transition period with the European Union and what the length of that would be, for example. That situation and the fact that, on an ongoing basis, we will need to make adjustments to regulations, potentially into the future, justify the measure.

The final point is that the clause and its powers do not amend primary legislation. They introduce new secondary legislation and the scope is restricted solely to those matters in relation to import duty. I hope that, on that basis, the hon. Lady might consider withdrawing her amendment.

[Anneliese Dodds]

We are willing not to have a vote on the amendment, but we hope that the Government have listened to our concerns, particularly on the need to ensure that there is appropriate review. The intention behind much of the push for greater use of sunset measures is the concern that these provisions could be extended to cover other areas potentially not directly connected to the UK leaving the EU, as the Government have said they wish to do. I hope the Government continue to be mindful that there are concerns that the measure is part of a wider attempt to allocate more power to the Executive, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 30 ordered to stand part of the Bill.

--- Later in debate ---

[Mel Stride]

New clause 14 and amendments 121 to 125 seek to add further parliamentary scrutiny of the way that certain powers in the Bill to make secondary legislation can be exercised. The Bill allows the powers in question to be exercised under the made affirmative procedure; the amendments would change that in certain circumstances to the draft affirmative procedure.

The Committee is aware that the Bill contains a range of powers to make regulations on a number of different aspects of VAT, customs and the excise regime, which will come into effect after the UK leaves the EU. New clause 14 is concentrated on a small subset of these powers, namely those that apply with respect to setting or increasing tariff rates, charging export and excise duty, some of the general rules for excise duty, and provisions under clauses 51 and 54, to the extent that they amend or repeal primary legislation. All those powers are subject to the made affirmative procedure.

In each case, the amendment would require a Minister who wished to exercise a power using the made affirmative procedure to make, on each occasion, a declaration that such a procedure is warranted, either for reasons of urgency, revenue protection or security continuity in the administration of the tax system. When a Minister does not make such a declaration, the regulation in question would default to the draft affirmative procedure.

I fully understand concerns about the inappropriate use of parliamentary procedures, but there is a compelling case for using the made affirmative procedure for the powers referred to in the amendments. We must not lose sight of the fact that the Bill is primarily concerned with the charging of tax and duty. Usual procedure when giving effect to changes in tax policy is the made affirmative procedure—that is a very important point in the context of the other examples I appreciate the hon. Lady making in this regard. The reasons for that are that any changes need to come into effect quickly—in some cases immediately. The made affirmative procedure is the standard mechanism for achieving that aim.

It is generally accepted that change in tax policy—such as when the Government change a rate of tax—should come into effect immediately. The use of the made affirmative procedure allows the Government to give effect to such changes immediately, in order to avoid a gap in UK legislation. The same principle will apply for matters covered by the Bill. At some point in the future, the Government might wish to amend the customs tariff quickly to reflect a change in international trade. That is vital for tax matters, and the reason why the made affirmative procedure is the norm for tax legislation. Because tax entails financial consequences for both taxpayers and the Exchequer, clarity and certainty are essential.

Although the intention of the amendments may be to improve parliamentary scrutiny, if they were adopted, they would create uncertainty for businesses, and that uncertainty would be in nobody’s interest. On that basis, I hope that the hon. Lady will not press new clause 14 and amendments 121 to 125. If not, I urge the Committee to resist them.

[Anneliese Dodds]

I am grateful to the Minister for his explanation. I question, however, whether the circumstances he just described as appropriate for the use of the made affirmative procedure do not fall precisely within the circumstances we ask the Government to demonstrate are in place within the declaration we are asking for. We say that it is possible for the made affirmative procedure to be used, provided the Government make clear that these measures are necessary for the protection of the public revenue or continuity in the administration of the tax system. Those are exactly the kinds of circumstances that the Minister has referred to, so it is not clear to us why he would not accept our amendment. We are saying that we do accept the use of the procedure in such circumstances as he just described: it is when things go beyond them into other areas that we are not satisfied with the use of the procedure.

[Mel Stride]

I understand the hon. Lady’s argument, but the matter comes down ultimately to the relevant level of scrutiny. The argument is strong that the circumstances that we are discussing, of a quick response and the ability immediately to set the tariff or change duties—things of that kind—lend themselves to the approach in question. If the central argument is about scrutiny, the question is whether the made affirmative procedure provides sufficient scrutiny. I maintain that it does. It requires in-depth scrutiny by the House, which would be subject to a Division if there were differences of opinion on the matter in hand.

Perhaps I may briefly pray in aid Joel Blackwell, the witness from the Hansard Society, who is getting a lengthy outing in our discussions today. I take on board the Opposition points about its being important, from his perspective, to maintain impartiality in the deliberations of the Hansard Society; we all respect it, which is why we were pleased to have him in particular as a witness. However, he did state that

“the Brexit Bills are going to have to be framework Bills—based on the fact that the legislation for Brexit is going to need some speed and flexibility”—[Official Report, Taxation (Cross-Border Trade) Public Bill Committee, 23 January 2018; c. 47, Q63.]

That is at the heart of our arguments that we are putting on these matters in general.

[Anneliese Dodds]

I shall not return to what the witness did or did not say. I think there may be a difference of opinion there. I am afraid I do not agree with the Minister’s description of the made affirmative procedure. In practice, of course, that procedure means that measures are in place from the moment they are laid, so they are immediately enacted. There need be no effective scrutiny by way of discussion by the House or other bodies, to allow them to stay in place over time. We are talking about a mechanism very different from what would usually be applied.

I shall not push the point. I appreciate the Minister’s comments. I just hope that the Government will heed our call for them to restrict the use of the measure to exactly the kinds of areas that the Minister just described—only those where the procedure is necessary to protect public revenue, or for continuity in the administration of the tax system. If its use goes beyond that, we fear we shall be in tricky waters. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Taxation (Cross-border Trade) Bill (Eighth sitting)

Debate between Mel Stride and Anneliese Dodds

Thursday 1st February 2018 Public Bill Committees

[Mel Stride]

I will respond because, as ever, the hon. Lady made some helpful comments.

On taking into account sustainable development and the interests of producers, I refer the hon. Lady to the point that she made herself, which is that the clause does not prohibit any of those matters being taken into account. The point I made earlier was that the Government certainly do not see the need to specifically reference those matters—or, indeed, the many other matters that the Committee and individual parliamentarians may feel are important in this context—in order that we do not have an exhaustive list, but rely on the common sense and good public policy making of the people who make such decisions.

Duties, whether they are import duties or export duties, which are potential though unlikely, are a slightly strange instrument to use in the food safety context. It would be much more appropriate for the Department for Environment, Food and Rural Affairs to look at those issues and use its powers to take action where clear breaches of food safety have occurred or are likely to occur.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to see you in the chair, Mrs Main. I am grateful to the Minister for those remarks. I want to focus on amendment 79 and press him a bit on sustainable development.

There is an important consideration here, which relates to our discussion earlier about what will happen if the UK leaves the EU without a deal and falls back on World Trade Organisation provisions—something I hope will not happen, but that the Government have not ruled out. The hon. Member for Aberdeen North asked the Under-Secretary of State for International Trade exactly where the powers are to create WTO schedules. I do not know if the Minister has the answer yet—perhaps we will find out later. There is a pertinent issue when it comes to laying those schedules if we have to accede to the WTO as a new member—that is, if we do not conclude a customs and trade arrangement that means we do not need to join separately. A number of the countries that have joined the WTO recently have found it difficult to apply the provisions of the general agreement on tariffs and trade that enable sustainable development, environmental considerations, human health and so on to outweigh having low or non-existent tariffs. When that has been offered to one country, it should therefore be offered to all.

China’s recent dispute about raw materials is a pertinent example. As with all the most recent accessions to the WTO, when China acceded, it was required to submit commitments on export duty that bound it to keep export duty at its current rate or to reduce it in relation to different product lines. If that had been part of the general agreement on tariffs and trade, China would have been able to invoke the WTO’s GATT provisions that say that human health can trump those other considerations, but because there were separate agreements, it was not allowed to invoke environmental considerations.

--- Later in debate ---

[Mel Stride]

I thank the hon. Members for Aberdeen North and for Oxford East for their contributions. On the issue of sustainable development, I can provide the Committee with reassurance that the Government take that area of policy extremely seriously. As the Committee will know, the UK Government have stated their commitments to the UN sustainable development goals that were agreed in September 2015. A publication released on 14 December 2017 outlined the Government’s response to the UN SDGs and their relevance to individual departmental plans. Trade policy is explicitly referenced in five of those 17 goals.

The hon. Member for Oxford East asked me about the letter regarding WTO scheduling, upon which I believe she may still be waiting.

[Anneliese Dodds]

I am so sorry—I think it has been received.

[Mel Stride]

Oh, it has been received. I was going to say that if it had not been, she would receive it imminently. I am pleased that my desire has already been put into effect. I would also be very happy to write to the hon. Member for Aberdeen North about the various issues she raised regarding WTO accession.

--- Later in debate ---

[Anneliese Dodds]

I am sorry about the complexity of all the different amendments, but they reflect the Members’ concerns about the Bill as it stands in these particular clauses. I will not speak at length, because many of the issues have already been covered in our previous discussions.

In relation to amendment 14, my hon. Friend the Member for Stalybridge and Hyde has already detailed why we think it would be appropriate to use the expertise and the opportunities for consensus building provided by the Select Committee system in the Bill. I will not go over those arguments again; suffice to say, I hope the Government will consider the arguments that my hon. Friend made, take the opportunity afforded by the Select Committee system and apply it here when it comes to setting export duty and scrutinising the setting of it.

We have covered many of the principles underlying amendments 15 and 16 and new clause 8. Again, we are asking for greater parliamentary scrutiny—this time in the area of export duties. I was thinking about how else I could try to persuade the Government of our arguments, and one issue I decided to focus on was that we have often heard the word “technical” applied to many of these measures. Of course, they are technical when they are about minimal changes to rates, or just alignments between different measures, but we need to appreciate that they can have a significant impact on our constituents, because there are winners and losers when we change the parameters of trade.

Capital is largely mobile, but workers often are not. Academic evidence shows that there can be considerable dislocation when there are changes to trade rules. It may well be the case that, in the past, those matters were often seen as technical, but they have had real-world implications. That is particularly important in our country, where the kind of active labour market measures that might have enabled labour to be more mobile when there are changes to duties that affect working patterns do not exist to the same extent that they do in many countries. Recent research by the Resolution Foundation suggests that people have become less mobile in their jobs, potentially because they do not have that help to alter jobs. It is important to consider these issues carefully when there are not those compensatory measures there for people who might be negatively affected by trade measures that alter the pattern of economic activity in our country.

It is absolutely right and proper that we seek appropriate parliamentary scrutiny of measures that could have a significant impact on the availability of manufacturing jobs, especially in our constituencies. I hope that the Government will bear that in mind. Yes, some of the measures could be described as technical, but they will certainly have impacts on our constituents, and we should all be aware of that while we discuss them.

[Mel Stride]

Clause 39 enables the UK to establish an export duty if it is considered appropriate to do so. Clause 40 sets the parliamentary procedure for doing so. An export duty is, as the name suggests, a tax on goods leaving the country. I used the term “considered appropriate to do so” quite deliberately. The EU has no standing export duty. Indeed, I believe the last time the EU imposed an export duty was in the late 1990s, in respect of wheat.

However, the revised Union customs code, which came into force only in 2016, maintained the EU’s ability to impose an export duty. The EU decided it still needed to maintain the option to impose one in the future. Therefore, in an implementation period, where the UK may be following the EU’s common external tariff for a limited period of time, we may need to retain the ability to impose an export duty in case the EU chooses to apply one. In the longer term, it is right to maintain at least the option to establish one if the circumstances demand, just as the EU retained that flexibility when it overhauled its customs code. In allowing for an export duty, but not introducing one, these clauses reflect the status quo, except with a stronger role for Parliament in approving any future export duty.

Clause 39 allows for the imposition of a new export duty tax and for replication of any part of the customs regime in part 1 as may be necessary to administer it. In recognition of the exceptional nature of export duties, clause 40 specifies that the first regulations made under clause 39, imposing an export duty, are subject to the affirmative resolution procedure.

Amendment 14 would require the Treasury to consider recommendations about the imposition and rate of export duty made by a relevant Select Committee or contained in a resolution of the House of Commons when considering whether to impose export duty. The Treasury will listen closely to recommendations from a range of interested parties, including relevant Select Committees and Members of the House. In addition, Select Committees already have the power to question Ministers on the policy within their departmental remit. The Treasury will answer any questions from the relevant Select Committees.

The Bill will ensure that the Government can respond quickly to exceptional circumstances and impose an export duty, while still giving the House a vote through the made affirmative procedure. Therefore, the Government believe that it is not necessary to include this additional requirement in the Bill.

New clause 8 and consequential amendments 15 and 16 seek to put in place additional parliamentary processes for the introduction of, and any increase to, the rate of export duty. For indirect tax matters, it is common to have a framework in primary legislation supplemented by secondary legislation. The Bill introduces a comprehensive framework for a new stand-alone customs regime, which will be underpinned by the detailed and technical secondary legislation.

The Bill ensures that the scrutiny procedures applied to the exercise of each power are appropriate and proportionate, taking into account the technicality of the regulations and the frequency with which they are likely to be made. As currently drafted, the House of Commons would have a vote on regulations introducing export duty under the made affirmative procedure. The Government believe that to be appropriate and proportionate.

To sum up, although an export duty should be applied only in exceptional circumstances, it is right that the UK has the ability to impose one if it becomes necessary, including if the EU decides to impose one for a limited period while we may be aligned with the common external tariff.

--- Later in debate ---

[Mel Stride]

I am grateful to the hon. Gentleman for his invitation to do some gymnastics, but I do not think they will be necessary, because his questions are easily answered. He referred to my cut and paste button in respect of “appropriate” and “proportionate” and he is right; there is a cut and paste button for those terms, because they are extremely important. At the heart of this is his cut and paste button, in which he regularly says something along the lines of, “All we are asking for is appropriate scrutiny on these important matters.” So the argument has gone back and forth over every area of the Bill as we have ranged across the various clauses.

Moving on to the hon. Gentleman’s remarks about the House of Lords Delegated Powers and Regulatory Reform Committee and its comments on sunset clauses, and his specific question about why we would have sunset clauses in the context of the European Union (Withdrawal) Bill but they would not be appropriate in the case of this Bill, the answers are clear and require no gymnastics at all. They are that the aims of this Bill are different from those of other Brexit Bills.

For example, while the European Union (Withdrawal) Bill makes provision for day one, with the understanding that further primary legislation will be made to supplement it, this Bill will be required in order to maintain a functioning customs regime, an effective VAT regime—as we are currently discussing in the context of these clauses—and an excise regime on an ongoing basis. There is a fundamental distinction between bringing the EU acquis into UK law and handling that process, which is the principal rationale for the European Union (Withdrawal) Bill, and what is happening on a dynamic, ongoing basis in terms of a customs, VAT and excise regime.

[Anneliese Dodds]

Can I read from the Minister’s remarks that the European Union (Withdrawal) Bill does not seek to create new institutions in, for example, environmental policy or other areas, which potentially need to be just as flexible in many ways as the taxation and customs system? I am struggling to grasp the essence of the Minister’s distinction here. Maybe he could provide more information.

[Mel Stride]

I have made the point about the day one situation with the European Union (Withdrawal) Bill and the primary legislation, and so on, that will follow. I will resist the urge to start debating another Bill, other than to repeat the points I have made about this Bill. We are of necessity in the context of customs, customs duties, export duties, import duties, VAT, excise regimes and excise duty. We are dealing with a rapidly changing set of measures going forward. We are in the middle of a complex negotiation, the outcome of which is not clear at this particular moment. That is why in many instances in this Bill where we have had these ongoing repeated debates about whether a stiffer, tougher form of scrutiny is necessary, we feel that a balance has to be struck, which is appropriate and proportionate—to use my cut and paste button again—between the needs of parliamentary scrutiny where it is appropriate, and the ability to get on with the job and ensure that this country is match fit for life outside of the European Union in terms of its imports, exports and trade.

[Anneliese Dodds]

I am grateful to the Minister for his response. However, we have been informed that the reason why sunset clauses are appropriate in the EU (Withdrawal) Bill and not in this Bill is because this Bill needs a more dynamic system—if I understand the Minister’s comments correctly—whereas that is not necessary in the EU (Withdrawal) Bill. I am still struggling, because if we look at an area such as environmental legislation, we have the institutions that are created, the overall framework and then the calibration within it that would respond to scientific information—levels of pollution, for example. There is also an international context with different treaties. Perhaps this is something we could correspond about another time, but I am struggling to discern the fundamental qualitative difference between this policy area, which apparently cannot be amenable to sunset clauses, and those contained in the EU (Withdrawal) Bill.

[Mel Stride]

I will be brief, because we are beginning to go around in circles, but I am very happy to discuss any of these matters offline, or to receive a letter from the hon. Lady, on the points she has raised.

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[Anneliese Dodds]

We have already discussed clause 47 to an extent, so I will just offer a couple of brief observations in relation to amendment 134. My reading of clause 47 is that it disapplies the European Union (Withdrawal) Bill provision that EU legislation should be copied into UK law, and empowers the Treasury to make alternative provisions on excise duty.

Some of our witnesses suggested that that could result in an unnecessarily complicated approach, and I do not feel that the Minister explained why the Government will not just retain the EU customs code during the transition period. The Minister has referred to a cut-and-paste approach. Yes, there is a lot of cutting, but then there is some spraying about of some elements and not others. It is perhaps not as well thought through as we might have hoped.

As with many Opposition amendments, amendment 134 asks the Government to include a sunset clause of two years for the application of these measures. We seek to ensure that the empowerment of the Treasury in these provisions is time limited. As my hon. Friend the Member for Stalybridge and Hyde said in relation to the sunset clause he discussed, the measures could be extended by Parliament if that was felt necessary, but having a sunset clause would prevent the inappropriate extension of the powers that the clause grants.

[Mel Stride]

Clause 47 makes changes that ensure that the status of EU law in relation to excise is clear. The European Union (Withdrawal) Bill lays out the Government’s general approach to EU legislation after EU exit. We need to ensure the consistency and certainty of the existing excise and VAT regimes to ensure that they work effectively after exit.

Excise is an important contributor to national revenue—receipts for 2016-17 were around £48 billion—so it is important that we have clarity on the rules, including the status of EU law in relation to excise. The approach adopted by this clause is consistent with the European Union (Withdrawal) Bill. It results in EU legislation being retained only where it is sensible to do so in respect of excise. There is a similar provision for VAT in clause 42.

--- Later in debate ---

[Anneliese Dodds]

Surely in that case it would be possible to specify that one of the two options will be chosen and that that is a necessary choice between the two. I am struggling to grasp the need to avoid the word “necessary”.

[Mel Stride]

The point I would make to the hon. Lady is that if we had more than one option, one of them may be appropriate but not necessary, because if we chose that particular option there would necessarily be another option that could be chosen. The essential point is that the word “necessary” is not necessary, but in fact unhelpful—[Interruption.]

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[Anneliese Dodds]

I am grateful for the hon. Lady’s support. Due to the changes to the deployment of HMRC in Scotland, the issue is very relevant to many of her constituents. I am pleased that the Government seem to be moving in the right direction. We have a commitment to more staff, which is positive, and the Minister’s responses to my written questions seem to focus more on additional numbers and less on redeployment, as they did in the concerning responses previously. Surely, given the potentially increased amount of activity that a new customs regime would necessitate, we need to be on stronger ground if we are to avoid a difficult time for British businesses and retaliatory measures from the rest of the EU if it feels that we are not upholding our obligations.

[Mel Stride]

Amendments 17 and 20 and new clause 9 seek to require HMRC to review its staffing and IT requirements, with the Chancellor to report that to Parliament before commencement. The Government oppose the amendments. It is not appropriate to legislate to require such a review, because HMRC staffing and IT requirements largely depend on the outcome of the negotiations with the EU and the details of the new customs regime, which will be set out in secondary legislation.

I assure the Committee that the Government are preparing for every possible outcome, and the activities required by the amendments are already happening as part of HMRC’s business planning. I am in discussions with HMRC on a regular basis, including with the head of HMRC, on the details of how we will ensure we have the technology in place.

We have had a number of conversations in Committee about the customs declaration service and the challenges of all the additional declarations that that system may yet have to handle, as well as the hon. Lady’s points on personnel. I am aware of the points she made on access to the various ports, given the changes to the structure of offices in the transformation programme that HMRC is undergoing. She is correct that the figure we will be looking at in terms of additional personnel is between 3,000 and 5,000. I suspect it will be nearer the upper limit than the lower limit, but those decisions are imminent. I hope that those reassurances will lead her not to move her new clause and to withdraw the consequential amendments.

[Anneliese Dodds]

I am grateful to the Minister for those clarifications and commitments, particularly on staffing. It is good to hear that the Government are considering ensuring that there are sufficient human resources. However, as I hopefully made clear in my remarks, I am concerned that, from an international perspective, we will still be under capacity. There may be reasons for that, but I would like the Government to explain them. We seem to be radically below par compared with other comparable nations.

When it comes to IT, the Government have now accepted that there are many challenges, and I understand that the CHIEF—customs handling of important and export freight—system will now be run on for a period. That is sensible, but it would have been good to get that agreement earlier, because not having that assurance before caused business some concern. Obviously, the CDS programme was announced before the European referendum—it has been a long-running process—but it is important that we recognise the additional pressure that that switchover will put on services at the very time a new customs regime might be coming in. I will not press the amendment, but we may move the new clause, as with a number of other new clauses. I am grateful to the Minister for those clarifications, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Taxation (Cross-border Trade) Bill (Sixth sitting)

Debate between Mel Stride and Anneliese Dodds

Tuesday 30th January 2018 Public Bill Committees

[Mel Stride]

That will be determined to a large degree by the negotiation that is in play with the European Union and by whether we have an implementation period. We are hopeful that such a period will be seen to be in our interest and that of the European Union. The measures will be brought in at the appropriate time, as and when we require our own stand-alone system, so that we are ready on day one and have the regulations that will allow us quickly and effectively to introduce AEO status. It is not about having a one-size-fits-all model. It is about having different classes so that we are able to be helpful in particular to the small and medium-sized enterprises that we recognise may benefit from a different approach from that for larger businesses.

Amendments 129 and 130 would apply the draft affirmative procedure to all regulations made under clause 22. The Bill ensures that the scrutiny procedures that apply to the exercise of each power are appropriate and proportionate considering the nature, length and technicality of the regulations and the frequency with which they are likely to be made. The Government believe that using the negative procedure under clause 22 provides a sufficient level of parliamentary scrutiny, while having regard to the technical nature of the regulations. The regulations may, for example, be used to specify the criteria and processes that HMRC uses when determining whether a business can be authorised as an AEO. Regulations may also set out where and when HMRC must take account of AEO status when administering the customs system. Adopting the draft affirmative procedure for these types of regulations will affect the expediency and efficient administration of the customs regime. For those reasons, I urge the hon. Lady to withdraw the amendment.

[Anneliese Dodds]

I do not want to try the patience of the Committee—I know we have been here for three hours—but I hope it is acceptable to push a little on one element of amendment 116 that the Minister did not address explicitly. The amendment, which was tabled by the SNP, demands that there should be a report on

“the level of proposed resources to be allocated by the HMRC Commissioners for the authorisation of new authorised economic operators”.

The Committee still lacks clarity on how many of the new processes will be delivered in taxes.

I was grateful to the Minister for responding to a parliamentary question that I laid just before Christmas on the comparative strength of the UK in customs officers as compared to other nations. His response suggested that it was not possible to have a comparative analysis. He said that the European Commission collated figures, but they were not directly compared and would not be comparable.

I have since looked at the World Customs Organisation’s annual report for 2016-17, which compiles information given to it directly by customs organisations. What came out of that is concerning. It suggests that we have about 5,000 customs officers, and there is a commitment from the Government that we might have an additional 3,000 to 5,000, although it is unclear when that will be decided. Those customs officers currently process 77 million declarations for import and export—that number could go up substantially if we shift out of the EU customs union—so each customs officer has to process about 15,400 declarations per annum. According to the report, that is 10 times as many as every US or Canadian customs officer. It is 15 times as many as German customs officers, more than 30 times as many as Australian customs officers and about three times as many as customs officers in Hong Kong, Norway and Switzerland. There may be issues with comparability with some of those data sources, but they must be pretty big issues if that large gap can be accounted for just through different reporting processes. The SNP is absolutely right to call for more clarity on how exactly the new procedures will be resourced adequately.

Taxation (Cross-border Trade) Bill (Third sitting)

Debate between Mel Stride and Anneliese Dodds

Committee Debate: 3rd sitting: House of Commons
Thursday 25th January 2018 Public Bill Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

I am grateful to you for being in the Chair, Ms Buck. If I may, I will question the Minister on his explanation. I am grateful for it, but on Tuesday we learned that after HMRC’s ongoing restructuring programme there will not be a single HMRC hub north of Edinburgh and Glasgow, nor will there be one anywhere along the south coast, including Dover. We heard ample evidence in the witness sessions that that is the busiest and most concerning port from the point of view of customs procedures going wrong. In the light of that evidence, should we reconsider that HMRC reorganisation programme?

[Mel Stride]

I welcome the hon. Lady to the Committee. She mentions the location of the new HMRC hubs as they are rolled out, and I will make two important points. First, Border Force, which is very much part of the frontline, is in the Home Office’s remit, not HMRC’s. Secondly, proximity to the hubs or otherwise is not critical in determining whether HMRC provides the support that Border Force and other agencies require. The absence of a hub close to a need does not mean that HMRC staff cannot be in proximity to that point; they do not need to be based constantly at any one hub.

--- Later in debate ---

[Mel Stride]

I thank the hon. Lady for that intervention and I fully appreciate that she is taking up recommendations made by the Law Society of Scotland, but let me comment on the two fundamental points she has raised.

First, relating to the relevance—that relevant considerations should be taken into account. The relevance of having the word “relevant” in there, prompts the question whether anybody would ever take decisions based on things that were entirely irrelevant, or at least not relevant. If one went down the road suggested by the hon. Lady, the word “relevant” would probably be inserted in multiple places throughout all the legislation that we ever pass in this House. It is understood that rational Ministers and others would take relevant decisions, rather than irrelevant decisions.

Secondly, before I go too far down this tongue-twisting route—

[Anneliese Dodds]

rose—

[Mel Stride]

Will the hon. Lady indulge me for a second? Parliament—through secondary legislation and in many cases in this Bill—will have the opportunity to test whether any of these measures are being taken on the basis not only of relevant considerations, but of all sorts of other considerations that will be taken into account as to whether these measures that come forward should proceed.

As to the specific point about the amendment relating to the insertion of the numbers, that clause already refers to reference or consideration being made of the quantity of the goods concerned. I think the meaning of the word “number” is, in that context, subsumed by the meaning of the word “quantity”. The Government have received the opinion that the clause already does that which the hon. Lady would like to see it do, namely ensure that the number of goods is also relevant to the function of that particular clause in the legislation.

[Anneliese Dodds]

It is just a brief—the Minister may feel, facetious—comment, but in the Help-to-Save regulations that we recently discussed there is reference to sufficient proof of death from a GP being required. The Government apparently felt that the word “sufficient” was necessary in that context, but most people would think it was not necessary if there is proof of death. Therefore, if an expert body such as the Law Society of Scotland feels that a word such as “relevant” is required, perhaps I would take its word for it.

[Mel Stride]

I am not a legal expert. I obviously appreciate that different words have different meanings in different legal contexts, but from the Government’s point of view, we are satisfied that there is not a requirement to have the word “relevant” inserted. That would be superfluous—to throw in another term—as would be the insertion of the word “number”, for reasons I have given to the hon. Member for Aberdeen North, because it would not affect the functioning or meaning of that clause.

Taxation (Cross-border Trade) Bill (Fourth sitting)

Debate between Mel Stride and Anneliese Dodds

Thursday 25th January 2018 Public Bill Committees

[Mel Stride]

Current trading partners and others. Obviously, as an EU member, we are bound not to enter into any other arrangements prior to our departure, but I am confident that we are having appropriate conversations at this stage of our withdrawal.

In addition, as set out in the trade White Paper, after leaving the EU, the UK will have the opportunity to

“look to forge new and ambitious trade relationships with our partners around the world”.

Clause 9 provides a basis for those aims.

The clause enables the UK to implement preferential import duties on goods originating in territories covered by a preferential arrangement. That will cover arrangements made bilaterally with a Government of another territory. A recent example is the comprehensive economic and trade agreement between the EU and Canada.

The Bill refers to making arrangements to allow preferential rates of import duties to apply before an agreement is ratified. That is common when implementing FTAs and is the case under the comprehensive economic and trade agreement, which has been provisionally adopted but is not yet fully ratified.

The clause will also enable the UK to continue to provide preferential tariff treatment to those British overseas territories, including the British Virgin Islands and the Falkland Islands, that currently receive that access under the EU via the overseas association decision.

As I was looking through new clause 2 during the hon. Member for Bootle remarks, my eagle eye spotted what I think is an error. Although subsection (1)(a) of the new clause would do what is intended—that the first regulations to be made under clause 9 will be subject to the provisions of the new clause—the explanatory statement and the points made in his speech suggest that subsection (1)(b) should relate to instances where there has been a lowering of import duties. In fact, as currently drafted, subsection (1)(b) refers to

“the effect of which is an increase in the amount of import duty”.

I can only imagine that that is a drafting error or has been lifted from new clause 1, which does refer to the increase in import duties. However, I fully understand what the hon. Gentleman intended, and I will deal with new clause 2 on the basis of its intention and of the way in which he describes it in the explanatory statement.

The new clause would put in place an additional parliamentary process for regulations giving preferential import duty arrangements to other countries. As I previously set out, for indirect tax matters, it is common to have framework primary legislation supplemented by secondary legislation. The Bill introduces a comprehensive framework for a new stand-alone customs regime. It ensures that the scrutiny and procedures that apply to the exercise of each power are appropriate and proportionate, taking into account the technicality of the regulations, the frequency with which they are likely to be made and how quickly the law may need to be changed.

Clause 9 allows the Treasury to give effect to the tariff section of trade arrangements once they have been negotiated. It is therefore appropriate and proportionate for the negative procedure to apply. Any delays in implementing preferential duties in trade arrangements could have significant impacts on UK supply chains or exporters who rely on the arrangements. As set out in the trade White Paper the Government are considering how to ensure that the process for negotiating new trade deals is transparent, efficient and effective, and we will ensure that Parliament is engaged throughout.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to see you in the Chair, Mrs Main. I have a couple of questions for the Minister. I am grateful for his comments. He seemed to suggest that the appropriate time to consider these matters might be at the time of ratification of any preferential trade agreement and that the provisions are merely enabling. How will we be able to scrutinise at that stage? Will we be able to have a developed and involved discussion at that stage? My understanding is that we would not be able to do that.

In his opening remarks—perhaps this is unfair—the Minister referred to the existing preferential trade arrangements that we have with the overseas territories and the EU and those between the EU and other countries, but, as many others have mentioned, we could be concluding new trade arrangements, particularly with the US, and there are all the concomitant problems that that might cause as well as potential opportunities. Have the Government considered whether the scope of the clause could be reduced so that it relates only to areas where we already have preferential trade arrangements?

[Mel Stride]

There are a couple of important points to make here. This particular clause enables the Government to put into effect the tariff-related elements of an FTA, for example. When it comes to the points that the hon. Lady understandably makes about treaties that we may enter into with other countries or with countries with which we already have existing arrangements that we wish to continue on our departure from the European Union, those kinds of debates and issues do not rest within this clause. As the trade White Paper sets out, they rest with the Government whose duty it is to make sure that we consult during the negotiation of those treaties so that we conclude them in an appropriate manner.

[Anneliese Dodds]

I find that very helpful because it has clarified that there is not a detailed parliamentary process for us to consider the matters that are covered by the clause. We believe that they will not be scrutinised in an appropriate and thoroughly democratic manner. Also, there will not be much opportunity for parliamentarians to engage with the issues raised by free trade agreements.

[Mel Stride]

I do not think my response to the hon. Lady earlier suggested that there would not be any parliamentary scrutiny of the provisions in clause 9. Indeed there will be, as she knows. If we are going to change duties or introduce tariffs, such matters will be subject to secondary legislation and statutory instruments in the normal manner.

[Anneliese Dodds]

I did not say “any”. I said that there would not be scrutiny of the type that is necessary and of an appropriate thoroughness, which would not be of a one-shot nature whereby it is difficult to have the kind of debate that we all think is necessary, given the impact that the provisions could have on major sectors of our industry.

Question put and agreed to.

Clause 9 accordingly ordered to stand part of the Bill.

Clause 10

Preferential rates given unilaterally

Finance (No. 2) Bill (Fifth sitting)

Debate between Mel Stride and Anneliese Dodds

Tuesday 16th January 2018 Public Bill Committees

[The Financial Secretary to the Treasury (Mel Stride)]

Good morning, Sir Roger. As ever, it is a great pleasure to serve under your chairmanship.

Clauses 30 and 31 will ensure that companies operating overseas cannot benefit from tax relief twice for the same loss. Many UK companies operate overseas through branches. To prevent double taxation on the profits of those branches—tax payable both in the UK and overseas—rules exist that provide relief in the UK for foreign tax paid. However, we are aware that some companies with foreign branches set losses incurred by those branches against the profits of other overseas group companies, rather than against the future profits of the branch. As a result, foreign tax is paid on future branch profits without taking into account past losses. That foreign tax is then used to claim double tax relief against UK tax on the branch profits.

Relieving foreign losses in that way creates an unfair outcome for the UK Exchequer. UK companies effectively get tax relief twice in the UK—once as a deduction from their taxable UK profits for the loss, and again by way of double tax relief. Clause 30 will address that by restricting double tax relief when the losses of an overseas branch have been used to relieve foreign tax paid by other overseas group companies. The clause will stop companies exploiting the UK’s double tax relief system to disadvantage unfairly the UK Exchequer. The measure will apply only to future claims for double tax relief. However, to be effective and protect significant revenues, it will apply where losses have already been relieved against the profits of other group companies.

The Opposition’s new clause 13 calls for a statutory review of the impact of that restriction of double tax relief. I think it would be useful, in response, to review the processes and track record of Her Majesty’s Revenue and Customs in this area. First, the costings of the measure were prepared by HMRC’s central analytical team, which specialises in quantifying the impact of changes to tax legislation. Secondly, HMRC has significant experience in amending tax legislation to restrict opportunities for companies unfairly to reduce the tax they pay. For example, an amendment to the double taxation relief for loan relationships income in the 2014 Finance Act successfully protected tax revenue. Thirdly, HMRC regularly carries out reviews of tax legislation to ensure that it continues to meet its objectives, and the assessment of tax receipts is an important part of those reviews. The Opposition’s proposed review would not add to that analysis, and it is therefore unnecessary.

Clause 31 will amend the targeted anti-avoidance rule, which protects against certain ways of artificially creating or increasing a double tax relief claim. At present, the obligation to apply the TAAR lies with HMRC, not with the taxpayer. That puts HMRC at a disadvantage. In some cases, HMRC does not have sufficient information to identify, within the relevant statutory time limit, whether the TAAR is applicable. To address that, we are updating the double taxation relief TAAR to align it with more recent TAARs. The clause will remove the requirement for HMRC to give notice that the TAAR is being applied. Instead, the onus will be on the taxpayer to consider, during their self-assessment, whether the TAAR is applicable. We are also slightly extending the scope of the TAAR to ensure that it applies to double taxation relief schemes that involve transactions across a group.

Clauses 30 and 31 will ensure that companies pay a fair amount of tax in the UK and will protect significant tax revenue. I therefore urge the Committee to support them.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is good to be here under your chairmanship, Sir Roger. I appreciate the Minister’s explanation of clauses 30 and 31, but the Opposition request a review of their effectiveness in deterring the inappropriate use of double taxation relief, particularly as they relate both to funds received by the Exchequer and to the companies potentially affected by them.

Colleagues will be aware that, as the Minister said, double taxation arrangements have been under discussion for an extremely long time—effectively since the beginning of globalisation, if we take that term as referring to the proliferation of multinational companies. The international finance conference in Brussels in 1920 raised the need to consider the impact of double taxation on firms, and from 1923 to 1927 some of the first agreements to avoid double taxation came into force. Such agreements have been under continual discussion in more recent years within the OECD, as have been provisions to prevent the contrary: double non-taxation, which we are discussing today.

The extent of double non-taxation is believed by many commentators to be extremely significant, which is part of the reason why the Opposition are not convinced by claims that the tax gap has recently reduced; that tax gap does not include international profit shifting, such as that obtained by manipulating double taxation rules. That is why Labour’s tax transparency and enforcement programme offers a series of measures to deal with profit shifting.

The measures under discussion follow on from attempts made in the 2009 Finance Bill to clarify measures in the Finance Act 2005 that examine double taxation relief specifically for banks. That Act limited credit for foreign tax paid on trade receipts of a bank to no more than the corporation tax arising on the relevant part of the trade profits. Changes were made after the Act to prevent income being artificially diverted to non-banking companies in bank groups. That loophole, which was being exploited, was shut down by ensuring that the restriction applied to all relevant receipts going across a group. Such profit shifting was therefore prevented. The clauses under discussion will offer a similar tightening for non-bank companies, as well as other alterations and restrictions on the use of double taxation relief.

The Opposition are asking for a review for a variety of reasons. First, it would be helpful to understand from the banking sector’s experience whether the new rules are likely to have a positive effect, and what the magnitude of that effect is anticipated to be. Secondly, alternative approaches are available, and it would be helpful to assess the Government’s approach against those. In particular, I understand that the US has adopted a different approach to limiting the benefits of relief from double taxation. The UK’s approach, which I accept is in common with the OECD’s, is to focus the dissuasion from using an appropriate double taxation relief on the transaction and its nature. By contrast, the US approach relates to those entities that can benefit from favourable tax treatment; it focuses on the entity, rather than the transaction. As I discovered when looking at the debates on the 2003 agreement between the UK and the US on double taxation and non-taxation, the two approaches have to come together when we have a treaty with the US on tax matters. It would be helpful to know whether the Government have considered the apparently more restrictive approach adopted by the US.

It would also be helpful to know more about the removal of the counteraction notice specified in the clauses. Colleagues may remember—though they probably have more important things to think about—that in the discussion on hybrid mismatches, I asked whether a counteraction notice was still required. I do not recall receiving a totally clear answer, although the Minister offered many other helpful clarifications. Clause 31 removes the requirement to give a notice to trigger the double taxation relief targeted anti-avoidance rule, as the Minister mentioned. That seems to follow an approach of amending provisions to remove such notices when the measures concerned are otherwise under review, as part of a wholesale approach to reviewing the measures. The explanatory notes state that the approach follows that adopted under new TAARs, but it is not clear that there has been a more holistic investigation by the Government of this issue. It would be interesting for us to know whether the Government plan to review the existing use of any remaining requirements for counteraction notices in the area of international profit shifting.

The Minister can correct me if I am wrong, but the principle seems to have been accepted that such counteraction notices are no longer necessary before HMRC is able to act, at least in relation to this kind of international artificial profit shifting. He gave us quite a strong rationale for that when he indicated the problems with having to issue a notice when time limits can be relatively tight: it could impact on HMRC’s ability to take appropriate action against those engaging in international profit shifting.

It would be useful to know whether there is a broader review of the use of counteraction notices in this regard, but as I said, we are also calling for a review of the effectiveness or otherwise of the measures in deterring the manipulation of double taxation relief, and of whether the measures will deal with the international profit shifting that existing practices seem to be promoting.

[Mel Stride]

I thank the hon. Lady for her characteristically thorough dissection of the clause. She gave us something of a history lesson about double taxation agreements going back to the 1920s, before we came into the era of the OECD and more recent activities.

This is not directly relevant to the clause, but the hon. Lady mentioned the tax gap and the veracity or otherwise of the figure for it. The figure is produced by HMRC on an annual basis and audited by the National Audit Office. It is a statistic described by the International Monetary Fund as one of the most robust of its kind in the world. We are very proud of the fact that we have, at 6%, one of the lowest tax gaps in our history.

Interestingly, the hon. Lady introduced the subject of the movement of losses out of branches overseas by way of a discussion of the profits under the banking arrangements, and the shifting from banking to non-banking entities as an approach to avoiding tax. That approach, which certain corporations have taken to avoid tax, is long-established and lies at the heart of the measures that we, the OECD and others have been pursuing to clamp down on avoidance.

This measure is very important. As I described, overseas entities with branches are able to move losses into other overseas entities and claim a tax benefit there, but equally gain a double tax benefit with the UK authorities by way of double tax relief and the impact of the losses on profits that would otherwise fall to corporation tax. We do not believe that the review that new clause 13 calls for is necessary, largely for the reasons I gave in my opening remarks, and in particular because we keep all these measures under review. Indeed, the measures are a product of a review of earlier approaches to clamping down on avoidance, evasion and non-compliance.

The hon. Lady raised several questions that I will attempt to address. The first was whether we had considered the US model and focusing more on entities, which is an interesting point. I would be interested to take any representation from her, and to look at that in more detail with my officials. I do not have a comprehensive answer to her point at the moment, but my door is open for us to look at that in greater detail.

The hon. Lady also mentioned the operation of counteraction notices. As she recognised, the main thrust of the changes to the TAAR is to ensure we do not end up in a situation in which one might reasonably expect HMRC not to understand that something untoward was going on, and in which, by the time it came to the activity, it was out of time. That is the critical point. Once again, if there are further issues of a more detailed or granular nature that the hon. Lady would like to raise with me, I would be very happy indeed to have a look at those. On that basis, I hope we can accept the clause.

Question put and agreed to.

Clause 30 accordingly ordered to stand part of the Bill.

Clause 31 ordered to stand part of the Bill.

Clause 32

Double taxation arrangements specified by Order in Council

[Anneliese Dodds]

I beg to move amendment 54, in clause 32, page 23, line 37, at end insert—

“(2A) After section 6 of TIOPA 2010 (the effect given by section 2 to double taxation arrangements), insert—

“6A Review of changes made by section 32 of Finance Act 2018

(1) Within twelve months of the passing of the Finance Act 2018, the Chancellor of the Exchequer must review the effects of the changes made by section 32 of that Act on the operation of double taxation arrangements.

(2) The review under this section must consider in particular—

(a) the extent to which those changes facilitate UK law giving effect to the Multilateral Instrument in a way which coheres with the principles of Policy Coherence for Development;

(b) the extent to which those changes facilitate UK law giving effect to the Multilateral Instrument in a way which coheres with the UN Model Tax Treaty;

(c) the effect of those changes on the number of disputes decided by arbitration;

(d) the counterparties in each such case;

(e) the outcome in each such case; and

(f) the effects of those changes on the public revenue of the United Kingdom.

(3) The Chancellor of the Exchequer must lay before the House of Commons the report of the review under this section as soon as practicable after its completion.

(4) In this section—

“the Multilateral Instrument” means the Multilateral Treaty to Implement Tax Treaty related Measures to Prevent Base Erosion and Profit Shifting;

“the principles of Policy Coherence and Development” are to be interpreted in the light of relevant publications of the Organisation of Economic and Development Cooperation and of the 2011 Busan Partnership for Effective Development Cooperation, the UN Millennium Declaration and the 2010 UN Millennium Development Goals Summit; and

“the UN Model Tax Treaty” means the United Nations Model Double Taxation Convention between Developed and Developing Countries published in 2011.””

--- Later in debate ---

[Anneliese Dodds]

This is about the arrangements for the incorporation of the multilateral instrument, if I am correct.

[Mel Stride]

Correct.

[Anneliese Dodds]

I am looking forward to more detailed explanations on this part of the Bill, because they are enormously important. Our amendment 54 requests a review of the operation of the provisions enabling the MLI’s implementation in the UK, and especially of the extent to which it promotes the principles of policy coherence for development, and the outcomes that would have been produced had the UN’s model tax treaty been used instead.

The MLI is, in many ways, a milestone for international tax law. Rather than being an amending protocol of the type we might have seen before in wholesale changes to international treaties, the MLI provides an instrument to swiftly and consistently implement a range of standards in taxation in existing treaties. It also provides the means, through the OECD, of monitoring its implementation—and, potentially, mechanisms for the future adaptations of treaties; it is important that we consider those, and I will come back to them.

Given that those bodies looking to engage in “treaty shopping” and their advisers are often highly sophisticated international actors that will readily search out new loopholes, the design of the MLI, which makes possible future alterations and provisions to deal with new tax challenges, is surely to be welcomed. I understand that the UK was one of the first 26 signatories to the MLI. There are now 69—more have probably signed since I looked that up. I understand that a UK Treasury official chaired the OECD working group that determined many of its provisions.

The MLI includes six articles to address treaty abuse. Many of them are already in accordance with the UK’s approach to international tax matters. One element of the MLI that seems particularly propitious is the principal purposes test,

“a subjective test based on an assessment of the intentions behind a transaction or arrangement”,

intended to rule out the obtaining of any benefits from a treaty if those benefits are not in accordance with the object and purpose of that treaty. That amounts to a general power, which could be useful for many countries encountering abuse.

In that connection, however, it is surely necessary for tax authorities to be sufficiently staffed, both overall and in terms of expertise, to make any accusation under these powers stick in court, not least if that court is a private international one, which the UK appears to have committed itself to by accepting multilateral binding arbitration. It would be helpful to hear from the Minister whether he feels that Her Majesty’s Revenue and Customs and the Treasury possess sufficient staff with sufficient knowledge of and expertise on international arbitration for our country to be able to defend its interests adequately, should the need arise. As well as measures concerning treaty abuse, the MLI also introduces uniform approaches —or rather, approaches that should be uniform in their outcomes, if not in specific details—to dispute resolution, permanent establishment and hybrid mismatches.

While in many respects there are very positive elements of the MLI, other elements might raise concerns. I will focus the rest of my remarks on those, and will be interested to hear the Minister’s response. First, the UK appears, in its adoption of the MLI, to have ruled in using mandatory binding arbitration where mutual agreement procedures have failed to produce an acceptable outcome within two to three years. Following the discussion last week of the use of mandatory binding arbitration in the UK’s new tax treaty with Lesotho, it was interesting to find, when I was reading the UK’s MLI position paper last night, that we already have mandatory binding arbitration in 18 of our tax treaties, including those concluded with Algeria, Armenia, Albania, Kosovo and Tajikistan, as well as a number concluded with higher-income countries. The UK appears to apply the principle already in relation to developing countries, but it strikes me that we have not had much discussion of that in the House.

--- Later in debate ---

[Anneliese Dodds]

I am grateful to the Minister for those enormously helpful clarifications. I was particularly pleased to hear his commitment to ensuring that the draft affirmative statutory instrument will be tabled in the House and that we will have a proper chance to debate it. As part of that discussion, I would urge him to ensure that additional information is provided on the Government’s reasoning around adopting a number of the provisions that are within the OECD but not the UN approach.

I fully accept that the OECD approach is supported by a large number of countries; that is absolutely right. None the less, as the Minister himself stated, there are then choices to be made by signatories to the MLI about how to interpret different elements. Those choices can make that approach either more like the UN’s or more like traditionally the OECD’s.

As the Minister said, mandatory binding arbitration is an approach that countries can decide to adopt or otherwise. It was positive to hear that that will be adopted only when both countries, as signatories to a double tax treaty, wish to adopt it. I am interested to know, first, on what basis we have already chosen to adopt mandatory binding arbitration or otherwise. I would again point to the inconsistency between the tax treaty agreed last week on Lesotho, and that which was proposed, albeit not yet discussed, around Kyrgyzstan, which seem to have very different approaches to mandatory binding arbitration. Why is there that difference?

Secondly, it would be helpful for us to assess the claim that mandatory binding arbitration promotes certainty and the ability to tax appropriately for all countries if we saw what some of the outcomes from existing cases subject to mandatory binding arbitration have been, particularly for our country’s ability to retain the revenue that is its due. I have not yet seen that kind of consolidated examination of outcomes from mandatory binding arbitration, and it would be very useful for us to have that in relation to our country and the impacts on our ability to collect revenue, and for developing countries as well. We need that before we can assess whether we want to adopt this in a more wholesale manner. The Minister is absolutely correct to say that we already have it in operation—I mentioned that before—but we need to have more detail.

One final point—I am sorry, but I managed to miss this in my previous remarks—is that it would be helpful for us to understand what transatlantic discussions the UK has been having with the US around the adoption of the MLI. It has not yet adopted the MLI and, sadly, some elements within the US have resisted the OECD’s action in this area—a lot of the time for totally unnecessary, politicised reasons—but it would be useful to know whether the US is likely to adopt this approach. That is because when we talk about double taxation, much of the time we will be talking about multinational companies that have the US as their host country or source country, and when those companies then conduct operations in the UK we need to be able to know that we can protect revenue from them.

[Mel Stride]

On the hon. Lady’s point around the different models—the OECD and the UN models—a number of countries have signed up to the MLI, and implicit in those discussions will be the kinds of issues that she has touched on, but it might be of interest to her that the Government do expect the UN to update them on the treaty in the light of what has been agreed within the MLI, which clearly we will be keeping a close eye on.

I said earlier that I did not have an answer to the hon. Lady’s specific question, but I now do—through a form of divine inspiration known as the officials of Her Majesty’s Treasury. Saudi Arabia is indeed not a signatory to the MLI initiative, but we hope that it will be signing in future, at which point we would intend that our treaty be amended accordingly to accommodate that.

On the hon. Lady’s point about mandatory binding arbitration, one of the points that I should have made earlier is in the context of how fair or otherwise this is on the countries with which we enter into those particular arrangements. Once arbitration is entered into, two arbitrators are appointed—one by each country—so this is not a stacked jury in any sense, and it will be for them, impartially and properly, through the normal processes, to come to their conclusions.

The issue of transparency and the disclosure of the outcomes of arbitrations really falls within the area of tax confidentiality. Inevitably, within those arrangements where companies, and indeed eventually individuals, are involved, it is important that we maintain the rigorous tradition that we have in our country of complete impartiality when it comes to HMRC, our tax affairs, investigations, arbitrations and so on.

The hon. Lady asked specific questions about US policy, which is probably a stretch too far for me to reach on this occasion, but if she has specific questions that relate to UK Treasury interaction with the US as an overseas tax authority, I would be happy to consider any representations that she would like to make.

[Anneliese Dodds]

I am grateful to the Minister for those clarifications. He rightly said that it is very important that HMRC conducts its affairs in a manner that is impartial between taxpayers and that is fair. That is absolutely right. However, we are surely not talking about anything that would threaten that impartiality when we talk about more transparency; we are not talking about the decisions themselves being altered, but rather the transparency around decisions that are taken. That would not affect the process leading up to those decisions being taken.

If there were concerns about this somehow negatively affecting taxpayers, I am sure that there could be some way of anonymising the results from different arbitration situations. However, I genuinely think it would be helpful for us, whatever side of the House we are on, to see more information about the use of that mechanism, because it can make a significant difference for taxpayers and, indeed, for our revenue.

Finally, on the difference between OECD and UN processes, it is absolutely right that some developing countries were involved in the OECD’s development of its approach. However, they were only observers—as we know, the OECD is a club of generally rich countries. Those developing country members were consultees, not full members. I look forward to seeing exactly that development of the UN model in the light of the OECD’s approach. Developing countries have full status in UN discussions, which they lack within the OECD process.

Question put, That the amendment be made.

--- Later in debate ---

[Anneliese Dodds]

Thank you, Sir Roger, and I will aim to keep my remarks brief. This measure was requested by stakeholders during consultations in autumn 2016, particularly on the use of the cash basis in general. As the Minister said, it appears to offer more consistency for different groups of taxpayers, particularly self-employed traders and employees, and unincorporated property businesses. None the less, Labour Members are requesting a review of the measure because we think it important to have more information about its potential revenue effects. The Minister has said that the change is largely to the basis of calculation, but if we are talking about a shift to mileage rates rather than the value of the business technology used in the first place—the car—that could be significant for the amount of tax levied, and it would be helpful to have more information on that.

We know that public services and revenues are under a huge amount of pressure, but we do not have a clear view of the overall impact of reliefs on Government revenue. That point came up in our discussions last week, and a number of my colleagues rightly intervened on it. It would be helpful to have more information about that, and about whether there could be unintended consequences. Such consequences would affect self-employed traders and employees who use mileage rates—it is not just a matter for landlords who might be covered by the new provisions—and it would be helpful to know whether, for example, there has been any consideration of trying to reduce car use in general. Some of the small one-man, one-woman bands who might be covered by the measure could be landlords of a small number of properties in a small geographical area. The Government should consider how to enable people not to use a car in the first place, and it would be helpful to hear their thinking on that.

I fondly remember how, when I was a student, my landlord used to cycle around with his dog—sadly now deceased—in the basket of his bike, and that was how he got around his properties. [Interruption.] The landlord is still going, as I understand it; only the dog is deceased.

[Mel Stride]

What about the bike?

[Anneliese Dodds]

The bike, I think, is still going as well. I still see my previous landlord cycling between his properties, and perhaps we should aim to promote that model, particularly when we are talking about small concerns. I am not belittling the transport requirements of larger landlords or those with properties that are geographically spread out, but it would be helpful to consider such measures. It would also be useful to know whether a thorough analysis has been made of the administrative burdens that the measure might create. The Minister alluded to that, but more information would be helpful.

May we have an indication of the extent to which the Government will try to prevent abuse in this area? I am aware that that already applies to the use of this basis by self-employed traders and employees, but during the Minister’s remarks I was reminded of debates about the business use of private jets, which came up in discussions on the Paradise papers. I have talked to the Isle of Man’s representatives about this. They maintain that activities have generally been above board, and that they are sorting out activities that have not been. We all remember the video of Lewis Hamilton enjoying his new private jet, which, in theory, was just for business use. It appears that appropriate safeguards had not been put in place to make sure that the jet was just for private use.

How are we ensuring that, in these kind of cases and more generally, cars are used overwhelmingly for business use? I believe it is a question of whether they are predominantly for business use. We are talking about small landlords, so it could be quite difficult to make that distinction. It is about how we prevent abuse while protecting the interests of small business.

[Mel Stride]

I thank the hon. Member for Oxford East for her observations, particularly the curious incident of the dead dog and the bike, which I think might end up being one of the most memorable statements in the passage of the Bill.

The hon. Lady eloquently alluded to the impact of such measures on the size or type of vehicles used to carry out the business activities that we are discussing. I point to my earlier remark that, if a fixed rate per mile can be claimed, there is an incentive to use a less expensive means of transport, be it a bicycle or a less polluting vehicle, while claiming the mileage. A useful dynamic, in terms of her interest in this area, is built into the system.

As I have pointed out, the measure is a simplification, not a tax reduction. That is a pertinent point when it comes to a review of behavioural change, because it does not change the overall weight of the tax burden on this group. As I have set out, the Office for Budget Responsibility has stated that the fiscal impact of the measure will be negligible—meaning that the impact will not exceed £5 million in any year—in every year of the scorecard period, albeit that 1.8 million businesses are affected by it.

The hon. Lady asked how we will know if people are abusing the system by claiming mileage allowances for a use other than business use, or for travel that has not occurred. That problem is implicit in any arrangement of this nature, in which expenses are claimed as a tax deduction. HMRC has become more and more sophisticated in how it looks at tax returns—that is clearly how such information would be provided—and it uses technology to look for patterns and abnormalities. It sometimes looks at whole subsets of taxpayers that have a greater propensity to do certain things, and it therefore investigates members of those groups more rigorously. That would be part of the approach.

Overall, I do not think it is necessary to have a review, particularly given the negligible impact of the change. On the grounds of proportionality, I ask the hon. Lady to consider withdrawing the new clause.

Finance (No. 2) Bill (Sixth sitting)

Debate between Mel Stride and Anneliese Dodds

Tuesday 16th January 2018 Public Bill Committees

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to be speaking with you in the Chair, Mr Owen. I thank the Minister for his clarifying comments. We on the Labour Benches still wish to have the review proposed in new clause 16. The review would, exactly as described by the Minister, examine the impact of the APD changes on the usage of aeroplanes and their emissions.

On one hand, it is helpful that we are shifting towards greater predictability for air operators and consumers around air passenger duty. It seems appropriate that we have the lag so that we can discuss and determine future rates, rather than having short-term change, but we would like a much stronger indication of the direction of Government thinking in relation to the tax.

The Minister offered the same argument for air passenger duty, to a word, as the one we were given in the previous Finance Bill discussion:

“With no tax on aviation fuel or VAT on international and domestic flights, APD ensures that the aviation sector plays its part in contributing towards general taxation, raising £3.1 billion per annum.”––[Official Report, Finance Public Bill Committee, 24 October 2017; c. 111.]

In our discussions in Committee on APD changes in the previous Finance Bill, we went on to talk about the potential environmental impact. I note that at that stage, the Minister said:

“Like all taxes, it will also change behaviour to some degree, and to the extent that it makes flying a little bit more expensive, it could be expected to have the effect of diminishing demand for air travel. The lower rates for economy, which takes up more space on aircraft than first class, assist in ensuring that flights are as full as they can be.”––[Official Report, Finance Public Bill Committee, 24 October 2017; c. 114.]

We would find it very helpful to have a review. I take on board the Minister’s point about regular information about the operation of APD, but what we do not have at the moment, to my knowledge—if I am wrong, the Minister can set me right—is an indication of the relative merits of this approach against potential others.

A number of transport economists and environmentalists have looked at the impact of levying duty on entire planes, rather than on individuals. The thought was that that would somehow lead to more incentives for more efficient use of space. I take on board the differential rates for private jets and small planes as against larger planes, which tend to be fuller during economy use, but it would be helpful to know whether there will be more impetus towards more intensive use of planes that are already in the air but all of whose seats are perhaps not being used. For the Opposition, that would be part of the stronger analysis of the impact of the duty, compared with other approaches. It would be part of the more general review that we feel we need on the overall impact of environmental taxes and reliefs, so that we can be sure that they are targeted as well as they can be for both economic and environmental purposes.

There are a couple of other issues on which we need clarification. We had a debate on the first during proceedings on the previous Finance Bill. My hon. Friend the Member for Luton North (Kelvin Hopkins) and others raised the matter when they talked about the extent of consultation on existing measures. There are higher rates for long haul in the proposals, as in the existing APD regime, but many Britons have no choice but to travel long haul if their family is in the Caribbean, the Indian subcontinent and so on. The Minister at the time made a commitment to write to my hon. Friend on the extent of consultation with groups of people who might be particularly affected. It would be helpful to have on the record the thoughts of the Minister in Committee on that issue, especially because, in many ways, short-haul flights are a lot easier for people to avoid than long-haul ones, because they can adopt other forms of transport instead. Any indications about that would be useful.

It would also be helpful to have an indication of the Government’s thinking about the extent to which they will be able to protect, or otherwise, revenue from APD. Arguably, we are seeing a race to the bottom on the duty. In previous Finance Bill Committees, we have discussed the new system in Scotland—the air departure tax. Clause 43 increases the band B multiplier in Northern Ireland. From the way in which it is written, I assume that that is happening in the absence of the Stormont arrangements coming back into play and giving the Northern Ireland Assembly control, so we are talking about an increase until the Assembly can make a determination.

Generally, however, the direction of travel appears to be downward, and it would be helpful to know the Treasury’s long-term thinking. We have a lot of pressure from airports, particularly those near Scotland, about whether they can protect their business given the potential reductions in the duty in Scotland. My hon. Friend the Member for Newcastle upon Tyne North (Catherine McKinnell) has made that point in the House.

Furthermore, we need consideration of the issue, given the discussion we had in the Chamber only a couple of hours ago, when a Minister—I appreciate that it was not the one in Committee, who is well apprised of all the issues relating to air passenger duty—seemed to indicate that we might change the extent to which we levy duty on incoming flights to the UK, departing from the existing practice under EU rules. That might be a possibility, but it would naturally have an impact on revenues. It would be helpful, again, if the Government indicated how the revenue—the £3.1 billion to which the Minister referred—will be protected.

[Mel Stride]

I need not repeat my earlier remarks about the reviews we already carry out, and I reiterate the point that the new clause, as worded, would implement a review of the possible impact of the taxation we are considering before such taxation had come into effect, which as an exercise is possibly not that valuable. Of course, we always keep all taxes under review. The hon. Lady talked about seeking beneficial behavioural change through mechanisms other than APD, for example. I am happy to receive any representations that she might make in that vein.

The hon. Lady mentioned her colleague, the hon. Member for Luton North, and the impact of APD on passengers who require a long-haul flight to visit relatives. I will certainly get back to her on that when I return to the Treasury. She also mentioned competition between different airports following the devolution of APD. Scotland will in due course bring in its own form of ADT. She also referred to the Northern Ireland situation. It will be for each of those tax jurisdictions to start to take whatever measures they think are appropriate to ensure that their particular airports and passengers are not disadvantaged. I suspect that, as with competing tax rates, the dynamics will probably be for those tax rates to come down, as a result of the competitive effect or the fact that there is a devolved Government. I commend the clause to the Committee.

Question put and agreed to.

Clause 43 accordingly ordered to stand part of the Bill.

Clause 44

VED: rates for light passenger vehicles, light goods vehicles, motorcycles etc

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

[Anneliese Dodds]

The Opposition have received a submission that it is worth asking a question about. It is about the specific case of taxis that are zero-emission capable. As I understand it, they will be exempt from the VED supplement from 1 April 2019, but not until then. There is the complication that taxis are classified as passenger cars because they are built to carry passengers, rather than as commercial vehicles, although in practice they are not really operating as commercial vehicles, which means that at the moment they are subject to the VED standard rates.

As those of us who have done any casework on this will know, taxi drivers need to purchase their car for a long period and there are complicated financing arrangements. In many areas we are keen to promote zero-emission taxis, or taxis that will be capable of transferring to zero or low-emission bases in future. It would be helpful to hear from the Minister whether some further calibration could be done on this measure, so as not to choke off the development of zero-emission capable taxis. I thought the submission was quite interesting in that regard.

[Mel Stride]

I thank the hon. Lady for her question about taxis. We will publish a consultation this spring, which will clarify who will and will not be eligible for the exemption and address the issues she has raised.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Clause 45

Tobacco products duty: rates

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

--- Later in debate ---

[Anneliese Dodds]

Labour said that we would prioritise having a special programme focused on young smokers. The point I am trying to make is that the Minister said this was part of a suite of measures, but he only mentioned public health information campaigns in addition, from what I can remember—I will check Hansard to see whether that is correct. The evidence strongly suggests that if we just increase duty, as we are doing now, without that suite of extra measures, we are not going to see the number of people stopping smoking that we really need. We have also seen cuts in trading services, which potentially is enabling more young people to access cigarettes than should be the case. For all those reasons, we urge the Government to review the effectiveness of this measure on overall smoking cessation rates, and we will continue to push for that review.

[Mel Stride]

The hon. Lady raised the issue of the potential substitution effect in individuals trying to avoid the priced-in tax on cigarettes by purchasing illegal cigarettes, which might increase the amount of illegal trade. I can tell her that tacking illicit tobacco is a key priority for the Government. Since 2000 the UK has adopted a strategic approach, with a wide range of policy and operational responses, in collaboration with other enforcement agencies in the UK and overseas. That effort has achieved a long-term reducing trend in the illicit tobacco market, despite duty rates increasing substantially over the same period. The percentage tax gap for cigarettes was reduced from 22% to 15% and for hand-rolling tobacco from 61% to 28%, so there appears to be some evidence that the substitution effect, or the increase in illicit tobacco coming into the country, is not quite as sensitive to some of the tax rises as one might instinctively imagine.

The hon. Lady asked what other measures the Government are engaged in to try to reduce smoking. As I have said, we are committed to reducing the prevalence of smoking through our tobacco control delivery plan 2017 to 2022, which also provides the framework for robust and ongoing policy evaluation. The plan sets out ambitious objectives to reduce smoking prevalence, including reducing the number of 15-year-olds who regularly smoke from 8% to 3% or less, reducing smoking among adults in England from 15.5% to 12% or less, reducing the inequality gap in smoking prevalence between those in routine and manual occupations and the general population—that touches on her point about the potentially regressive nature of tobacco tax—and reducing the prevalence of smoking in pregnancy from 10.5% to 6% or less.

We will of course continue to keep those measures under constant review. In fact, tobacco and smoking is one of the areas of public policy on which Governments of all colours have placed particular emphasis. There is a huge amount of scrutiny in that area and we will continue in that vein.

Question put and agreed to.

Clause 45 accordingly ordered to stand part of the Bill.

Clause 46

Power to enter premises and inspect goods

Finance (No. 2) Bill (Third sitting)

Debate between Mel Stride and Anneliese Dodds

Thursday 11th January 2018 Public Bill Committees

[The Financial Secretary to the Treasury (Mel Stride)]

A very good morning to you, Mr Owen. Once again, it is a pleasure to serve under your chairmanship. It is a great pleasure to be again in the company of the Opposition Front Benchers. On Monday we debated the customs Bill; on Tuesday we had the Finance (No. 2) Bill Committee here; on Wednesday we debated a statutory instrument, which was quite interesting; today we have the Bill again; and on Monday we will meet again to consider a statutory instrument. I am delighted that we are all here.

Before I address the Labour amendment, I will set out the general background and aims of the clause. Clause 18 and schedule 6 provide additional clarity about aspects of the taxation of partnerships. The changes and clarifications in the clause seek to address areas of uncertainty and complexity identified as problematic by stakeholders, and to reduce the scope for non-compliant taxpayers to avoid or delay paying their tax. The changes also facilitate the digital transformation of partner taxation using information in the partnership return.

Partnerships in the UK are required to file a partnership tax return in the UK once a year. This partnership return ensures that Her Majesty’s Revenue and Customs has the information it needs so partners are correctly taxed on the profits and losses allocated to them. The return should summarise the profits and losses allocated to each partner, and HMRC uses it to audit the tax returns made by the partners.

The clause changes the partnership return in the following ways. First, it clarifies the treatment of partners who are in bare trust arrangements—trusts in which the beneficiary has the absolute right to income and capital from the trust—by confirming that beneficiaries of such trusts are treated as partners for tax purposes. It also clarifies the tax treatment for partners who are themselves partnerships, by providing a statutory definition of an indirect partner and setting out the basis period rules—the basis period being the period for which a partner pays tax each year—and how they apply to indirect partners.

To ensure all partners can complete their returns accurately, and to facilitate HMRC’s assurance work, a partnership that has indirect partners will be required either to report details of all the indirect partners or to submit the four possible profit calculations for UK resident and non-UK resident companies and individuals. The clause simplifies the rules for investment partnerships in the UK that already provide the information that HMRC requires under the common reporting standard or the Foreign Account Tax Compliance Act; it reduces the reporting requirements for investment partnerships where the information has been reported under those other international obligations. Finally, it introduces a new process to allow disputes over the correct allocation of profit for tax purposes to be referred to the first-tier tax tribunal to be resolved. That will ensure that partners have a dedicated method for resolving disputes that does not rely on HMRC assurance processes.

On the amendment, I assure hon. Members that the Government have carefully considered the risk of non-compliance in drafting this legislation. In addition to the clarifications that the clause provides to address areas of uncertainty for partners, HMRC already has the power, subject to certain conditions, to require payment on account, in the form of an accelerated payment notice, from taxpayers who are involved in schemes disclosed under the disclosure of tax avoidance schemes rules or counteracted under the general anti-abuse rule.

HMRC has issued more than 79,000 accelerate payment notices since 2014, which have brought in more than £4 billion to the Exchequer. They have changed the economics of tax avoidance, and there is strong evidence that they have had significant impact on marketed avoidance, as the Office for Budget Responsibility noted in its September 2017 report. The Government do not consider it necessary or proportionate to extend such notices where there is no clear indication of avoidance and a partnership’s tax returns are simply the subject of an inquiry. It is therefore equally unnecessary to review the effect that such an extension would have.

I hope that reassures hon. Members that HMRC has sufficient powers to address non-compliance by partners, and that the amendment calling for a review on whether to extend those powers is neither necessary nor proportionate. The clause provides additional clarity about aspects of the taxation of partnerships; I therefore commend it to the Committee.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Mr Owen. I am grateful to the Minister for his kind comments, and look forward to future iterations of our debates, on other matters.

I want to give some context on the use of partnerships in the UK economy. Obviously, in some sectors they have proliferated, especially in forms such as limited liability partnerships. There is a broad question about unintended consequences of the proliferation of limited liability partnerships, particularly in accountancy, but I am well aware that that form of governance was created in 2001, so that growth can hardly be viewed as the result of the Government’s activity.

There are ways in which we can and should seek to ensure that partnerships are put on to as equal as possible a footing with other corporate forms. I appreciate that the package of measures on partnerships in the Bill is intended to do just that, as well as to simplify tax law on partnerships. However, our amendment would revive a measure that was initially floated by the Government, but appeared to have been rejected later: the notion of introducing, where one partner is absent, a payment-on-account system in relation to partnerships whose income is derived from trading or property, as described by the Minister.

The proposal would be similar to the system used for the self-employed, in which half the previous year’s tax bill is due in advance, and payable in July, to protect HMRC’s revenue. The proposal was No. 4 in a consultation document set out by HMRC. It received some negative responses in the consultation, I admit; however, some respondents were positive about its potential. We agree with them. It is important properly to incentivise the reporting of partners.

The Government maintain that the existence of penalty provisions for incomplete and late submission of partnership returns would be sufficiently dissuasive to prevent the non-reporting of partners to HMRC. They maintained that in the response to the consultation, and the Minister has done so again now. Our concern is that the penalty or fine could be lower than the tax due, and that could potentially open a loophole that we would rather was closed.

Our amendment would require the Government to rethink their position. However, I took on board the Minister’s comments just now, particularly about the applicability of the general anti-avoidance rule in this context. Because of that, we are willing not to push the amendment to a vote, but I hope that in the light of our discussion, the Minister will keep the matter under informal review in the Treasury.

[Mel Stride]

I thank the hon. Lady for those comments and for not pressing the amendment to a vote. I shall certainly keep the matters under review, as she urged, and would be happy of course to take directly any representations that she may want to make on them in future.

Question put and agreed to.

Clause 18 accordingly ordered to stand part of the Bill.

Schedule 6 agreed to.

Clause 19

Research and development expenditure credit

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

--- Later in debate ---

[Anneliese Dodds]

The Opposition have not tabled any amendments to clauses 20 and 21, but I have a question for the Minister about a specific matter that I raised briefly on Second Reading. It was not satisfactorily resolved at the time, so with the Committee’s permission I will raise it again.

I am grateful to the Minister for his explanatory remarks, but a pertinent question remains. As I said on Second Reading, the clauses essentially grab at what in many cases may be the holy grail: the assigning of market value to certain kinds of intangible for tax purposes. In that regard, the clauses seem to contradict the direction of travel in the Finance (No. 2) Act 2017, in which the tax impact of intra-group transactions was limited rather than regulated—I refer specifically to the measures to restrict the tax deductibility of interest payments to intra-group companies. Hon. Members will remember that the Government decided on a limit of 30% of earnings before interest, taxes, depreciation and amortization, which was the upper bound of the OECD’s suggestion. We questioned that, but at least they adopted the OECD position of restricting such payments. However, rather than limiting the admissibility of intra-group payments as a means of reducing tax, the Bill attempts to regulate their calculation. I think such an attempt may be flawed.

The Minister has covered this to some extent, but let me provide some further background. Related parties, including subsidiaries, affiliates, joint ventures or associated companies, may transfer among themselves intangibles such as patents, know-how, trade secrets, trademarks, trade names, brands, rights under contracts or Government licences and other forms of intellectual property. The attempt to regulate market value may be flawed because it assumes a market value for such intangibles. For most people, the image underlying such a view is one of an active market with buyers and sellers in it, but there is often no such market for intangibles that are transferred—sometimes entirely legitimately, but sometimes as an attempt to pay less tax by shifting to a lower-taxed or differently taxed jurisdiction. For example, I have been looking at statistics on global biotech. As I understand it, about 10 corporations control two thirds of the industry, including the intellectual property in it, so there is no normal market and enormous mental gymnastics are necessary to determine the market value of intangibles.

Firms that wish to exploit the situation can make rather wild claims. I hope Committee members will remember as a particularly egregious example the facts revealed by the European Commission’s case against Starbucks, in which vastly inflated assessments were made of the value of intellectual property held by a firm that had no employees. However, the Starbucks case was unusual in the sense that such manipulations of the value of intangibles normally remain, sadly, unchallenged. In connection with that, I understand that HMRC had, as of 2016, just 81 transfer pricing specialists. Surely that is dwarfed by the number of advisers employed by the big four firms who, potentially, would advise large companies that might well seek to reduce their tax perfectly legally by manipulation of the location of intangible assets into lower-tax jurisdictions.

Clauses 20 and 21 do not define intangible fixed assets. In accounting terms, of course, an asset is something that generates future cash flows, revenues or benefits, but there are no other qualifying criteria. The woolliness of such a definition has been recognised in the courts as problematic. For that and many other reasons, the European Union is moving towards a unitary system of corporate taxation. I appreciate that that is a matter for another day, so I will not open a discussion on it now—probably no political party would want to state its position on it in a Finance Bill Committee. We should note it here, however, because it indicates how our country may be merely entrenching problems that the EU27 are moving towards resolution.

Will the Minister introduce legislation to provide clearer guidance about how an intangible asset should be defined for tax purposes? Will he give us any further information about how he will prevent the measures from being exploited and alleged market value from being manipulated to avoid tax?

[Mel Stride]

I thank the hon. Lady for her speech. She raised the interplay of the corporate interest restriction and various rules, including the 30% EBITDA rule in the Finance (No. 2) Act 2017. As I am sure she appreciates, there is a distinction between that legislation and what we want to do in the clauses before the Committee. In the case of the corporate interest restriction, we are thinking about making sure that groups of companies do not abuse the borrowing of money by moving it around the group, thereby artificially reducing their tax burden. The clauses that we are considering are about regulating inter-group transfers of intangible assets, and getting the right values imputed in the circumstances.

The hon. Lady is right to say that assessing and establishing true market value is extremely complicated. A market value rule is applied in the relevant circumstances. As to whether we shall return to the matter in future and address in legislation questions of guidance and of definition of the value of intangible assets, I am happy to ask officials to look at various no doubt deep and dark parts of the UK tax code, where such definitions and other useful information may lurk, and provide the hon. Lady with what I can.

Overall, despite the complexities of the clauses and their deeply technical nature, they are important and worthy anti-avoidance measures, which we need to add to those—more than 100 of them—that the Government have introduced since 2010, saving the taxpayer £160 billion and giving us one of the lowest tax gaps in the world, and in the history of our recording such gaps.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clause 21 ordered to stand part of the Bill.

Clause 22

Oil activities: tariff receipts etc

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

--- Later in debate ---

[Mel Stride]

Clause 23 makes changes to ensure that the hybrid and other mismatch rules introduced in 2016 operate as intended. It does so by introducing a small number of technical amendments to those hybrid rules.

The hybrid and other mismatches regime was introduced in the Finance Act 2016 and deals with mismatches involving entities, permanent establishments and financial instruments. The regime is a set of anti-avoidance rules that tackle certain tax planning arrangements by multinationals. The regime addresses arrangements that give rise to hybrid mismatch outcomes and generate a tax mismatch. In doing so, it fully implements and, as a matter of policy, in some areas goes further than the OECD base erosion and profit shifting action 2 recommendations.

Mismatches can involve either double deductions for the same expense or deductions for an expense without any corresponding receipt being taxable. A consultation with stakeholders identified some practical and technical changes necessary to ensure that the UK regime fulfilled the policy intention. The clause amends the UK hybrid rules to clarify how they should be applied.

The changes made by the clause ensure that the hybrid and other mismatch rules operate as intended. Those changes and the hybrid regime in general will affect multinational groups with UK parent or subsidiary companies involved in cross-border or domestic transactions involving a mismatch in tax treatment within the UK or between the UK and another jurisdiction. The changes do not alter the overall effectiveness of the hybrid regime and will protect the expected yield from that regime. In some cases, as a matter of policy, the UK regime goes beyond OECD recommendations.

The detailed changes set out in schedule 7 to the Finance Bill make it clear that withholding taxes are to be ignored for the purposes of the regime, disregard taxes charged at a nil rate, ensure that capital taxes can be taken into account in appropriate circumstances, ensure that a counter-action in relation to partnerships will be proportional, clarify the scope of the rules in relation to companies with overseas branches, provide for certain intra-group transactions to be taken into account when quantifying mismatches, ensure that in appropriate circumstances income taxed in two jurisdictions can be taken into account in relation to imported mismatches, and provide for accounting adjustments that reverse or reduce mismatches to be taken into account.

Amendment 49 asks for a review into the hybrid and other mismatches legislation, focusing particularly on the rules that deal with hybrid transfer arrangements. Hybrid transfers are one of the several types of hybrid and other mismatch arrangements within the scope of the hybrid mismatch rules introduced by the Finance Act 2016. The rules that deal with hybrid and other tax mismatches, including hybrid transfer arrangements, have been implemented in line with the OECD BEPS recommendations. Likewise, the hybrid rules within the EU anti tax avoidance directive were designed to be consistent with, and no less effective than, the OECD BEPS recommendations on hybrid mismatches. The UK was instrumental in ensuring that the ATAD rules met that requirement, and the UK rules on hybrid transfers are consistent with the ATAD requirements.

In broader terms, the expected yield from the hybrid and other mismatches regime has been certified by the Office for Budget Responsibility, and those figures will be kept under review as part of the normal process for fiscal forecasting and monitoring of receipts. A review, in short, is unnecessary and will not strengthen our understanding of the legislation. As clause 23 demonstrates, the Government are already monitoring the operation and impact of the hybrid mismatch rules and making any changes necessary to ensure that they work as intended. I therefore commend the clause to the Committee.

[Anneliese Dodds]

I am grateful to the Minister for his explanation of the measures. As he explained, hybrid mismatch arrangements exploit differences in the tax treatment of instruments, entities or transfers between two or more countries. Sadly, those arrangements have proliferated in a number of countries, as sophisticated taxpayers and tax advisers have spotted opportunities to reduce the tax payable by what might otherwise be profitable companies.

The result has often been double non-taxation, whereby neither country involved in the arrangement can receive revenue, or the deferral of tax over many years, which is in practical economic terms similar to double non-taxation. That is just one part of the international dimension of tax avoidance that is, sadly, generally not picked up in statistics on the UK’s tax gap, but which experts maintain runs at a high level, denying our public services the revenue they need and placing small and medium-sized British businesses at a tax disadvantage.

Hybrid mismatch arrangements not only deny countries tax revenues but distort economic activity. They mean that investment decisions can be driven by tax-related criteria, not by effectiveness and efficiency. They can also lead to financial instability by encouraging tax-favoured borrowing and by reducing the transparency of company and taxation structures.

The Minister rightly referred to the groundswell of activity against these hybrid mismatch arrangements over recent years, from within the EU code of conduct group when it was chaired by the Labour MP Dawn Primarolo, and from 2013 onwards in the OECD and G20’s base erosion and profit shifting action plan. As colleagues will know, action 2 of the BEPS project, as referred to by the Minister, is focused on neutralising the effects of hybrid mismatch arrangements. The Minister referred to the fact that the most recent changes in this Bill build on those from last year. They were originally tweaks to the 2016 Bill, which amended the Taxation (International and Other Provisions) Act 2010, as I understand it.

I think we in the Opposition would agree that the general direction of travel appears to be the right one—considering the tax treatment in our own country and the corresponding jurisdiction, aligning our roles with the OECD’s approach and ensuring that measures have direct effect. As I understand it, in the past any measures had to be initially notified to the company before HMRC could take action. It is good that we now have a different approach. Above all, it is important that the new measures relate the tax treatment here to that in the corresponding jurisdiction. That means we need a more complex set of rules, but they are more appropriately targeted at dealing with the scourge of hybrid mismatch arrangements. It is precisely because of the need to continue to eliminate these arrangements that we believe a review is necessary.

I will quote here from an OECD report from 2012. It is, admittedly, from just before the BEPS process started, but I think it is still relevant. The report was specifically on hybrid mismatch arrangements, and it stated:

“Country experiences…show that the application of the rules needs to be constantly monitored. Revenue bodies have noticed that arrangements may become more elaborate after the introduction of specific rules denying benefits in the case of hybrid mismatch arrangements.”

The OECD report offers the example of Denmark, which in 2011 was required to amend its rules as sophisticated taxpayers and their advisers wised up to previous attempts to close loopholes.

I know that these specific rules are the result of successive rounds of finessing, from 2016 and through last year until now, but we would like a commitment to ensuring that the process continues through the mechanism of a review. I note that in discussions about the BEPS process, participating countries have expressed concern that without widespread acceptance and implementation of the new rules, the difficulties could be exacerbated by them. We really need more information about how they will operate in practice.

Of course, we must also bear in mind that the operation of these rules is affected by the foreign tax treatment of any companies concerned. In some ways, the Minister was absolutely right to say that such problems may have been reduced with the engagement of the OECD and EU in the adoption of consistent approaches to the treatment of hybrid mismatches. However, I note that there has been some suggestion that there is a different approach in the EU rules, as compared with the OECD rules, to the specific issue of which country is responsible for characterising the entity or instrument in the member state where the payment has its source. If that is still the case, our Government need to indicate to what extent our rules comply with the measures in the EU’s winter 2016 tax package relating to hybrid mismatches. The Minister stated that he felt that those measures were coherent, but we would like to see a more thorough assessment of that.

On a related note, I refer to my previous comments. It would be helpful for the Government to indicate the relative merits of their current approach to hybrid mismatches compared with formula-based approaches—or at least to reflect on that, given that the EU’s common consolidated corporate tax base programme is continuing at EU level. For all those reasons, I hope that the Minister and Government Members will agree to our sensible demand for a review of the effectiveness of these measures 12 months after their introduction.

[Mel Stride]

Once again, I thank the hon. Lady for a thoughtful contribution. I think we agree that hybrid mismatches are a form of avoidance and we need to clamp down on them as they operate between different tax jurisdictions. That is precisely why we are debating these measures today. She has reflected on the fact that they have come out of OECD and BEPS project activity, in which we have been absolutely at the forefront.

The hon. Lady said that she was satisfied with the general direction of travel. She made the important point that the work is, in effect, never done, because whenever we come up with new legislation to clamp down on loopholes, other, more ingenious, individuals out there come up with ways of working around it. By way of example, she raised the issue of identifying the effective country of origin for the hybrid mismatch and the different approaches that the OECD and the EU might have.

I reassure the hon. Lady that we agree with her on everything up to that point, and that we will continue to monitor the measures. There is no necessity to have some wide-ranging review that will go into things over time and report back while we wait for the outcome, because day in, day out we are monitoring exactly what is happening. The best evidence that I can provide for our approach and its efficacy is the fact that we have this clause at all. It is a perfect example of the way in which Government have put out some legislation to clamp down on tax avoidance—we are determined to do that—watched what has happened, identified some issues and come back to legislate quickly and in a timely way to ensure that we close new loopholes as they occur.

I ask the hon. Lady to withdraw her amendment and the Committee to accept the clause.

Question put and agreed to.

Clause 23 accordingly ordered to stand part of the Bill.

Amendment proposed: 49, in schedule 7, page 96, line 22, at end insert—

‘Review of operations

18A After section 259M, insert—

“259O Hybrid and other mismatches measures: review of operation

(1) Within 12 months after the passing of the Finance Act 2018, the Chancellor of the Exchequer must review the operation of the measures in this Part.

(2) The review under this section must consider—

(a) the impact of the measures on the use of hybrid transfer arrangements;

(b) the impact of the measures on the revenue effects of the use of hybrid transfer arrangements to reduce a person’s tax liability;

(c) possible alternative or additional measures to reduce the use of hybrid transfer arrangements to reduce a person’s tax liability;

(d) whether the measures constitute application of EU Directive 2016/1164 (‘The Anti Tax Avoidance Directive’), including in what ways the measures do not constitute an application of that directive.

(3) The Chancellor of the Exchequer must lay before the House of Commons the report of the review under this section as soon as practicable after its completion.”’—(Anneliese Dodds.)

This amendment provides for a review of the measures against hybrid transfer arrangements to reduce a taxpayer’s tax liability, and that this review consider whether alternative or additional measures would be more appropriate, and how these measures compare to the EU Anti Tax Avoidance Directive.

Question put, That the amendment be made.

Finance (No. 2) Bill (Fourth sitting)

Debate between Mel Stride and Anneliese Dodds

Committee Debate: 4th sitting: House of Commons
Thursday 11th January 2018 Public Bill Committees

[Mel Stride]

Clause 29 will extend the first-year tax credit scheme to 2023 and reduce the rate of eligible claims to two thirds of the corporation tax rate. That will ensure that loss-making companies are appropriately incentivised to invest in energy-saving equipment following reductions in the corporation tax rate.

As the Committee will be aware, first-year allowances allow companies immediately to deduct the cost of qualifying energy-efficient and water-efficient equipment from their tax liability. However, loss-making businesses are not able to benefit from tax deductions, so in 2008 the first-year tax credit was introduced, which provided loss-makers with a payable credit to ensure that they were still incentivised to invest in energy-efficient equipment. The original legislation was amended in 2013 to include a sunset clause that stipulated that the scheme would expire in March 2018 unless the Government legislated to extend it.

The first-year tax credit scheme helps as many as 100 loss-making companies annually to invest in energy-saving and water-saving equipment. It enables a business to bring forward its investment to get the machinery it needs when it is needed. The changes made by the clause will extend the life of the policy to 2023 to ensure that that support continues.

Since 2008, the tax credit rate has been fixed in law at 19%, but over the same timeframe the corporation tax rate has been reduced from 28% in 2008 to 19% today, and it is legislated to fall to 17% in 2020. Therefore, the incentives for profit-making and loss-making companies have become misaligned from their original policy intention.

The clause will therefore peg the tax credit rate to two thirds of the corporation tax rate, as opposed to a specific percentage. That will ensure that the policy is in line with its original intention by ensuring that the incentive to invest in energy-saving equipment is not disproportionately greater for loss-making companies than for profitable companies that can deduct their expenses from their tax bill. Pegging the tax credit rate to the corporation tax rate will also ensure that the scheme operates as intended when powers to set the corporation tax rate are devolved to Northern Ireland.

New clause 12 would require a review of the effectiveness of first-year tax credits in encouraging business energy efficiency and of their impact on tax revenues. As with all aspects of the tax system, the Government regularly review tax reliefs to ensure that they are effective in fulfilling their objectives. In line with that practice, and to allow an opportunity fully to evaluate the relief, the legislation includes a sunset clause that means that it will expire in 2023 unless renewed.

In addition, first-year tax credits are available only for investments made on qualifying equipment published on the energy technology list or the water technology list, which are routinely updated to ensure that the technologies listed meet efficiency criteria. The reviews of qualifying products are administered by the Department for Business, Energy and Industrial Strategy and the Department for Environment, Food and Rural Affairs respectively. The performance criteria for each review and the products that meet those criteria are publicly available.

To conclude, extending the policy will ensure that loss-making companies remain incentivised to invest in equipment with the greatest environmental benefits. Following the reduction in the corporation tax rates, the changes in the clause will also ensure that the scheme remains in line with the original policy intention.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

I am grateful to the Minister for his summary of the background to the measures and their purpose. I certainly agree that their initial purpose was to mitigate the barrier of high purchase costs where the efficiency of a product might provide savings to business and wider environmental benefits. The measures were introduced under a Labour Government in 2008 before being reintroduced in 2013. The Committee is considering their extension and some recalibrations, as the Minister set out.

None the less, we have tabled an amendment requiring a review of first-year tax credits as they currently exist. As the Minister stated, our review would examine the extent to which they encouraged investment in efficient plants and machinery, reduced the consumption of energy by business, and aided the UK’s carbon reduction obligations. We would also like the review to assess their impact on revenue. After all, as is the case with every tax relief, the tax credits amount to forgone tax.

Looking at this issue as a Member of Parliament, it does not appear to me—perhaps Conservative Members have had different experience when investigating this change in readiness for the Committee—that a huge amount of information is available on the current impact of the tax relief. It is not clear exactly who is using it, the average size of the companies or their sector. From what I can gather from the experts I have asked, the overall cost of the tax relief seems to be bundled up in HMRC’s summary of the estimated cost of all capital allowances, within its overall summary of the estimated costs of principal tax reliefs.

--- Later in debate ---

[Anneliese Dodds]

I thoroughly agree with my hon. Friend. I must admit that the UK is not alone in its general lack of consideration of the incidence of tax reliefs and their impact on forgone expenditure, but surely we need to be at the forefront of public administration and public policy globally. We should be considering the issue. As my colleagues mentioned, we are talking about not small amounts of money but very substantial amounts, which to all intents and purposes are forgone tax, although they are classified differently from expenditure within Government accounts. For that and many other reasons, I commend the amendment to the Committee.

[Mel Stride]

It is pleasing to see that the hon. Lady and I can agree on a measure that was introduced under a Labour Government. It is something good that we are keeping going, but improving at the same time. That is our mission.

I will be brief, and will not go into all the discussions around the climate change arguments put by the hon. Lady; I will focus on the amendment specifically and the review that it calls for. The measure affects only a small number of businesses, in the order of about 100. We will, of course, keep this tax measure under review, as we do all tax measures. On the basis of the size of the measure and the universe to which it applies, I feel strongly that it would be disproportionate to introduce a full review of its effects.

On that note, I urge the Committee to agree to the clause. I think that the Chief Whip—sorry, I mean the Whip—will intervene shortly to suggest that the Committee adjourn. With that information in mind, I thank the Committee for its deliberations today and look forward to further deliberations on Tuesday. I wish everybody an enjoyable weekend when it comes.

Draft Double Taxation Relief and International Tax Enforcement (Colombia) Order 2017 Draft Double Taxation Relief and International Tax Enforcement (Lesotho) Order 2017

Debate between Mel Stride and Anneliese Dodds

Wednesday 10th January 2018 General Committees

[Mel Stride]

As the hon. Gentleman will appreciate, that is a highly specific question, which I cannot be expected to be in a position to answer at present. I am certainly happy to get back to him. Typically with treaties of this nature, a number of discussions are held with stakeholders, the overseas Governments concerned and so on. That is one reason why such arrangements take a considerable time to come to a conclusion.

The agreement with Colombia—our first with that country—brings a significant improvement to our coverage of the region and will improve the trading conditions for businesses in both countries and aid the fight against tax avoidance and evasion. We have brought forward a mutually beneficial treaty in the case of Lesotho.

[Anneliese Dodds]

I am grateful to the Minister for his efforts to respond to the questions raised. I have some brief points to make on a number of the matters he referred to.

The Minister referred to the UK’s commitment to promote development in lower income countries. One of our main concerns about the Lesotho treaty is that it might not be coherent with the general direction of our aid efforts. I would be interested to know whether DFID was asked to comment specifically on this treaty. It would be helpful to know that.

Secondly, to be absolutely clear, I do not think that any Member has argued against the principle of having double taxation treaties in the first place. Rather, the comment is on the specific issues raised by treaties such as this one. For Opposition Members, the particular issue is the reduction in withholding tax rates and the introduction of mandatory binding arbitration, rather than the principle of having a treaty in the first place.

Thirdly, on the issue of negotiations, aspects of the treaty are surely a step forward. I do not believe the Minister mentioned permanent establishments, but the new rules on those seem to be fairer. A rather peculiar reference in the previous treaty to the tax treatment of loans through the UK Export Credits Guarantee Department is gone. I can understand that Lesotho might have wanted to get rid of strange elements from before, but I am interested to know what its comment was on the changes to withholding rates in particular, because those would seem to pose quite a large risk to its revenue.

On the negotiation, let us be completely frank: we are talking about a country of 2 million people, where the average person is 33 times poorer than a Briton. Are we honestly saying that we can have an equal negotiation? Pointing that out does no disservice whatever to the Lesotho Government—quite the opposite, because it means that we as parliamentarians have a much greater responsibility to scrutinise such agreements more fully. We need that.

On binding arbitration, yes, there is the OECD model, which is being promoted, but there is also the UN model. It would be interesting to know whether that came up in the negotiations at any stage, because most people view it as more favourable to developing nations than the OECD approach.

Finally, on the issue of information and impact assessments, I note that a tax information and impact note is provided for other tax requirements. Surely many tax issues within Britain are incredibly complicated—the Minister has ably discussed such matters in proceedings on the Finance Bill—so I do not see a huge difference there, in particular when UK investment in Lesotho seems to be concentrated in some quite large firms, especially, I understand, two very large mining concerns: Letšeng Diamonds, which is partly owned by the Lesotho state but mostly by a UK-based company, and Firestone Diamonds. We are not talking about a terribly complicated taxation arrangement, so surely it should be possible to have the information we require.

Again, I am grateful to the Minister for his responses and clarifications.

[Mel Stride]

I will endeavour to do my best to answer the additional questions posed by the hon. Lady, some of which were very specific ones about what may or may not have happened during the negotiations. Unfortunately, I was not there. If I had been there and knew the answers, I would share them with her. However, I can perhaps be a little more helpful on some of the other questions.

The hon. Lady asked whether DFID was aware of the discussions. Naturally, it would have been. I say that based on the fact that it has been very publicly out there that the negotiations have been taking place for some considerable time. DFID has not, to my knowledge, specifically requested meetings or interactions at an official level with the Treasury, but had such an interaction been requested I have no hesitation in reassuring her that we would of course have facilitated it promptly and effectively.

On binding arbitration, the situation is as I outlined earlier. It is now based on the OECD model. The hon. Member for Birmingham, Selly Oak asked earlier whether, during the process of consultation around the treaty negotiations, any company had requested that that form of arbitration be brought in. The answer to that is no. To the best of my and my officials’ knowledge, no business came forward and specifically requested that. Of course, it was then entered into jointly as a consequence of the agreement between the two Governments.

The hon. Member for Oxford East asked about tax information and impact notes. That is a fair point, but TIINs typically relate to where taxes, charges and duties are being imposed, and to the effect they have on individuals, companies, families and others. In this case, we are looking at reliefs in the context of a double taxation treaty.

I totally echo the hon. Lady’s powerful comments about the relative wealth of those who have the very good fortune to live in our country, for all its imperfections, compared with those who are less fortunate elsewhere. The Government are very aware of that. I will not re-rehearse the comments I made earlier about our commitment to international development and HMRC’s involvement over and above treaties in trying to alleviate such situations as much as we can. The hon. Lady made a powerful point, which I will certainly take away with me. I commend the orders to the Committee.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Colombia) Order 2017.

DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (LESOTHO) ORDER 2017

Motion made, and Question put,

That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Lesotho) Order 2017.—(Mel Stride.)

Finance (No. 2) Bill (First sitting)

Debate between Mel Stride and Anneliese Dodds

Tuesday 9th January 2018 Public Bill Committees

[Mel Stride]

The level of income inequality is at its lowest in more than 30 years.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

Not after a housing adjustment, it isn’t.

--- Later in debate ---

[Mel Stride]

Yes, of course.

[Anneliese Dodds]

Thank you, Chair. I apologise for intervening at the very end of the Minister’s speech. I know he is a thoughtful person, and in response to the specific point made by my hon. Friend the Member for High Peak, he maintained that the OBR could not do an analysis of the marginal tax rate on low-income or low-hours working people because it was not the appropriate body. Can he tell us which body would be the appropriate one? I noticed that he did not contest what my hon. Friend said about the marginal tax rate for very low-income people. Which body would be available to do that analysis?

[Mel Stride]

There are many bodies out there that could take on that kind of analysis, including the Institute for Fiscal Studies. There are many, even the House of Commons Library—

[Anneliese Dodds]

rose—

[Mel Stride]

If I could just finish: a number of bodies might look at those particular issues.

When we look at the marginal rates, under the last Labour Government, if someone worked beyond 16 hours per week they were in a situation where the marginal rate of tax they were facing when going into employment was far greater than under this Government.

[Anneliese Dodds]

My hon. Friend the Member for High Peak has explained that under the tax credits system, people were able to take home much more of their income. She has also provided a concrete example whereby people could be working for a short period of time and take home very little of that amount under the universal credit system. I was hoping we could get some commitment for a Government body to look at this issue, which has already caused enormous problems and, potentially, poverty for some low-income people. It would be wonderful if the Minister could give us a commitment that he will look into this issue.

[Mel Stride]

We will always look at the kind of issues the hon. Lady has highlighted. We will do that as a matter of good Government policy and to produce the policies we look at going forward. However, this is not the forum to begin looking for commitments on new reports, new investigations and new analysis. As the hon. Lady will know, there are many bodies out there that conduct that kind of analysis.

--- Later in debate ---

[Mel Stride]

Clause 7 would provide certainty that employees of the Royal Fleet Auxiliary—the RFA—can claim seafarers’ earnings deduction. Most UK residents pay UK tax on all their earned income wherever it arises, but seafarers are entitled to a 100% deduction from income tax for their foreign earnings in certain circumstances. The deduction is available provided that at least half of the qualifying period of 365 days is spent outside the United Kingdom, and that no more than 183 consecutive days are spent in the UK during that period. The tax treatment recognises the importance of the maritime industry to our country, and helps to maintain the competitiveness of the UK in an international market. Around 20,000 seafarers currently claim the deduction each year, and of those around 900 individuals are from the RFA.

The civilian-manned RFA delivers worldwide logistical and operational support for tasks undertaken by the Royal Navy, and it plays a crucial role supporting counter-piracy, humanitarian relief, disaster relief and counter-narcotics operations. Currently those individuals claim the deduction, but it is on a concessionary rather than a legislative basis. The changes in clause 7 provide certainty that the employees of the RFA are eligible for the deduction by placing it on a statutory footing. The RFA plays a crucial role, and it is right that its employees are eligible for the deduction in the same way as other seafarers. This clause provides certainty for RFA employees. I believe the Committee should welcome it and I commend it to the Committee.

[Anneliese Dodds]

I am grateful to the Minister for his comments concerning this alteration, but I have a couple of questions. As I understand it, this change largely reflects existing practice in law, specifically the fact that RFA seafarers should be entitled to seafarers’ earning deduction. I understand that the seafarers falling into that category have asked the Government to make it clear in this Committee that there will be no detriment for them as a result of this change. They are asking for that because some of them fear retrospective penalties from HMRC or from the employer, given that previously the deduction was practically operated in an informal manner. I hope that the Treasury Minister can make it clear that this measure will not operate to the detriment of the seafarers.

I wanted to make the point that unfortunately this change will not alter the material circumstances of our RFA seafarers; it recognises in law a situation that already exists informally in many cases. We have substantial recruitment issues at the moment with RFA seafarers, and those issues could become more acute because we are going to have 12 vessels when the new ones come on-stream. They will need to be serviced by RFA seafarers, yet the level of pay provided for them has been squeezed because they are covered by the arrangements for public sector employees. Their situation is out of kilter with the situation for seafarers working in the private sector doing comparable jobs, and that is a major concern for them. While we may now see a reflection of the reality when it comes to the tax situation, my concern is that we are not reflecting reality when it comes to recruitment challenges and the need to consider whether current pay levels are appropriate. This should not be viewed as a proxy for the kind of pay lift that at least some of those seafarers are saying they think they need to deal with recruitment challenges. This is rather a cosmetic change.

[Mel Stride]

The hon. Member for Oxford East raised the issue of whether there will be any detriment, and she specifically mentioned retrospective issues in terms of this formalisation of the relief that has hitherto been available on an informal basis. I can assure her that there will not be any detriment, and I thank her for raising that important matter. As for seafarers’ pay, that is probably an issue that is out of scope for this Committee, but I am sure she will raise it in other quarters. Part of the reason for introducing this clause, and for formalising and putting into legislation these particular reliefs, is to make sure that we are as effective as we can be on the tax side when recruiting men and women who do such an important job, and that we remain internationally competitive in our tax treatment of their earnings. I hope that the Committee will accept clause 7.

Question put and agreed to.

Clause 7 accordingly ordered to stand part of the Bill.

Clause 9

Benefits in kind: diesel cars

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

[Mel Stride]

Clause 9 provides for a 1 percentage point increase in the company car tax diesel supplement. This modest increase will help to fund the UK’s national air quality plan, and is designed to encourage manufacturers to bring forward next-generation clean diesels sooner. There have been significant improvements in air quality in recent years, with nitrogen oxide emissions falling 19% between 2010 and 2015. However, air pollution is still at harmful levels in many of our towns and cities, and road transport is responsible for 80% of nitrogen oxide emissions in roadside tests. Even new diesel vehicles are a significant source of emissions. A test on the 50 best-selling diesel cars in 2016 found that, on average, they emitted over six times more nitrogen dioxide in real-world driving than is permissible under current emissions standards.

Diesel company cars are already subject to an additional supplement, currently at 3%, in recognition of diesel engines producing harmful pollutants in addition to carbon dioxide, including nitrogen oxide, or NOx, gases. The measure increases the diesel supplement from 3% to 4% for all cars solely propelled by diesel for the tax year 2018-19, until a point at which they meet the real driving emissions step 2 standard, known as Euro 6d. RDE2 sets a standard for nitrogen oxide emissions in real-world driving situations, with an emission limit of 80mg of NOx per kilometre. The supplement will not affect diesel hybrids, petrol or ultra low emission vehicles, or drivers of heavy goods vehicles or vans. The measure also removes the diesel supplement altogether for cleaner diesel cars that are certified to the RDE2 standard.

A basic rate taxpayer with a VW Golf will pay an additional £54 in 2018-19 as a result of the change. Company car drivers typically travel more miles, and have therefore benefited greatly from successive fuel duty freezes since 2011; in the autumn Budget, the Chancellor announced the eighth successive fuel duty freeze, saving the average driver £160 a year compared with the pre-2010 escalator plans. The change will encourage manufacturers to bring forward next-generation clean diesel sooner, and will also strengthen the incentive to purchase cars with a lower number of harmful pollutants—for example, ultra low emission vehicles or zero-emissions vehicles.

The measure is designed to work over several years to encourage manufacturers to bring forward the development of cleaner vehicles, so we do not believe that a review after six months, as requested in new clause 5, which was tabled by Opposition Members, would be appropriate. Company car fleets are typically renewed every three years, so we will not see the full impact of any change that takes effect from April 2018 until three years later. We will of course continue to review the uptake of company diesel cars and developments with those vehicles as part of our wider strategy on improving air quality. On that basis, I do not believe that the new clause is necessary, and I ask hon. Members to consider withdrawing it.

Clause 9 makes a small change that will support the UK’s transition to less polluting cars, helping to make sure that our towns and cities are clean and healthy places in which to live. I commend it to the Committee.

[Anneliese Dodds]

I am grateful to the Minister for his comments. However, Labour Members will continue to be concerned about the measure and will continue to ask for a review of its effectiveness. There is obviously a clear rationale for this kind of measure: it follows widespread public and scientific concern about emissions from diesel cars that do not use emission capturing technology to the extent that they might.

There are many examples of this kind of technology-forcing regulation being effective. However, we believe that a review is required—first, because we need to be clear that new technologies will indeed be incentivised through this measure. We do not feel that we have effective evidence to prove that at the moment. The Institute of Chartered Accountants suggests that it is unlikely that any diesel cars will meet the standard required to avoid the supplement until at least 2020, so there is a question about whether distorting decisions could be made that would prioritise petrol vehicles over diesel vehicles in the meantime—especially if appropriate technologies are not introduced as quickly as they should be. I know from discussing this issue with motor manufacturers that they are confident about the roll-out of the new technology, but a review would none the less be appropriate, given the extent of use of diesel technology.

Secondly, it is important that we review the measure’s contribution to emissions reductions targets because of the lack of other environmental commitments in the Bill. Sadly, the Bill lacks measures to reduce carbon emissions in order to halt the climate crisis, despite many of us hoping that it would include, for example, more tax breaks for solar technologies, which have sadly been scaled back.

From what I can see, this is also the only measure to promote better air quality, when we know that there are many other sources of pollutants in the air that we breathe. Yes, of course NOx is important, but small particulates and other emissions are important as well. It is absolutely right to mention that NOx pollution from diesel emissions is significant at roadside sites, but petrol emissions are also significant away from direct roadside sites or at particular roadside sites, and industrial sites are also important, in terms of emissions.

--- Later in debate ---

[Mel Stride]

I am very clear on my instructions. Thank you, Mr Owen.

Clauses 11 and 12 make changes to ensure that businesses and individuals who have used or continue to use disguised remuneration tax avoidance schemes pay their fair share of income tax and national insurance contributions. Disguised remuneration schemes are used to avoid tax and national insurance contributions by paying individuals and taking profits through third parties in ways that are claimed not to be taxable, such as loans. Such schemes are highly artificial. In the Government’s and HMRC’s view, they do not produce the declared tax advantage, but that has not stopped their use entirely. The coalition Government first introduced legislation to stop such schemes in 2011. The legislation was successful, and since 2011 HMRC has collected more than £1.8 billion in settlements from scheme users.

Of course, more always needs to be done. The Government continue to tackle disguised remuneration avoidance schemes. The changes announced at Budget 2016 included the 2019 loan charge, which treats all outstanding disguised remuneration loans as taxable income on 5 April 2019. The 2016 package followed the tax avoidance industry’s aggressive response to the 2011 changes: it has created and sold more than 70 new schemes. It is claimed that those schemes achieve the same outcome through the addition of even more contrived steps. The Budget 2016 package will bring in more than £3 billion by 2020-21, and will ensure that scheme users pay their fair share of tax.

The changes made by clause 11 will make clear how the disguised remuneration anti-avoidance rules apply to schemes used by the owners of close companies. The clause also introduces a requirement for scheme users to provide information on disguised remuneration loans outstanding on 5 April 2019 to HMRC, which will help HMRC to enforce the 2019 loan charge. The new information requirement includes an additional penalty regime, which is consistent with existing HMRC information powers.

The clause also includes a clarification to the disguised remuneration rules. It puts beyond doubt the fact that anti-avoidance rules apply even if an earlier income tax charge arises. It will prevent any attempts to avoid paying the tax by claiming that HMRC is out of time to collect payment. The disguised remuneration rules prevent any double tax charge on the same income.

Finally, the clause will make a change to ensure that any employee who has benefited from a disguised remuneration avoidance scheme is liable for the tax arising on the 2019 loan charge where the avoidance scheme used an offshore employer. Clause 12 will also introduce a new requirement for self-employed individuals, and partners who have used disguised remuneration schemes, to provide information about loans that are outstanding on 5 April 2019 to HMRC. That will help to ensure that HMRC is able to enforce the loan charge.

Let me turn to the Opposition’s amendments. Amendments 34 to 37 seek to include penalties linked to the loan amount for those who fail to comply with the reporting requirement. Amendment 38 seeks to introduce a review to consider the impact of the measure on taxpayers—particularly basic rate taxpayers. It would be inappropriate to introduce a penalty based on the loan amount, as it would be inconsistent with HMRC’s other information powers, and a separate penalty regime already does that where a taxpayer does not correctly report the tax due from outstanding loans.

On the proposed review, the Government do not think it is appropriate that avoiders should get a discount, compared with the vast majority of taxpayers, who pay the right tax at the right time. However, the clause may have a significant impact on the users of disguised remuneration schemes. HMRC aims to contact those who are affected and encourages those who are concerned about their ability to make timely and full tax payments to contact HMRC. The Department has an excellent track record of supporting people with financial difficulties who may be finding it hard to pay immediately. The Government believe that the proposed review would not provide any additional benefit, so I urge the Opposition not to press the amendments.

It is right that everyone should pay their fair share of tax and make their contribution towards public services, and the changes will ensure that users of disguised remuneration schemes pay their fair share. I therefore commend clauses 11 and 12 to the Committee.

[Anneliese Dodds]

May I pose one brief question about clause 12 before speaking to amendments 34 to 38 to schedule 1? I am grateful to the Minister for his clarifications and comments about clause 12 and schedule 2, but a pertinent question has been asked by one of the different interlocutors—one of the taxation organisations —which suggested it might be easier for self-employed people who have used the schemes to report their use in accordance with the self-assessment deadline. Has that been considered, because there could be a helpful reduction in bureaucracy and in the amount of fees paid to accountants and so on were there an alignment with the self-assessment return deadline? Will the Minister respond to that?

Moving on to our amendments, we would obviously welcome tightening in the area of disguised remuneration schemes following widespread concern about practice. There have been some high-profile cases, not least those revealed recently in the Paradise papers or the Rangers football club case, which have shown the lengths to which some people are prepared to go to avoid paying the tax that others view as a normal part of doing business.

We are concerned that the measures in the Bill do not go far enough. Loans, for example, have been taxable since the disguised remuneration rules came into force in 2011. There should be no excuse for people not to be aware of the situation; there should be widespread understanding of the need for employers and employees to comply in the area and not to enter into such schemes. We therefore need to ensure that future penalties are sufficiently dissuasive of other forms of aggressive tax avoidance as well as this one.

The Minister rightly described some of what has gone on as involving excessively contrived steps to avoid tax. He suggested that our additional penalties might somehow be inconsistent with others delivered by HMRC but, for the reasons I have just mentioned, it is important for us to have a strong line on such issues. The consistent policy has been that there should be no disguised remuneration, in particular through loans or connections with third parties in effect—not third parties, but those presented as third parties—and we need to ensure that we dissuade people with appropriate penalties.

I further note that the projected IT cost to HMRC of delivering the measure is about £3.5 million, so it is important to ensure that such costs are covered and that HMRC does not lose out due to the creation of the new penalties, especially when it is already subject to new demands because of the possible shift to a new customs regime, as we were discussing until very late last night. For those reasons we are keen to press ahead with our amendments, despite the Minister’s suggestion that we do not press them.

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[Anneliese Dodds]

At the risk of producing a horrible sense of déjà vu in the Committee, following consideration by the whole House, I will say that assessments of the tax gap do not include the loss of revenue caused by profit shifting internationally. I wanted to clarify that before we get too optimistic about the success of HMRC in that regard.

[Mel Stride]

I will make two points in response to the hon. Lady: first, she mentioned profit shifting, and we have been in the vanguard of the OECD base erosion and profit shifting project—right at the forefront, driving it forward and, indeed, implementing it in many areas earlier than other countries decided to. Secondly, I believe that our overall record is exemplary and world-class; but of course there is always more to be done. It is absolutely right and proper that those who owe tax pay it, and where HMRC or the Treasury come across schemes that use various artificial devices to avoid and evade tax we will clamp down on those measures with vigour. We have demonstrated our success in doing so in the past, and will continue to do so in the future. The clause is yet another step in pursuing that endeavour.

Question put and agreed to.

Clause 11 accordingly ordered to stand part of the Bill.

Amendment proposed: 34, in schedule 1, page 57, line 33, at end insert

“or such higher amount as may be determined in accordance with sub-paragraphs (1A) to (1D).

(1A) This sub-paragraph applies where the loan is between £100,000 and £199,999.

(1B) This sub-paragraph applies where the loan is a multiple of £100,000.

(1C) Where sub-paragraph (1A) applies, the penalty is £600.

(1D) Where sub-paragraph (1B) applies, the penalty is the equivalent multiple of £300.”—(Anneliese Dodds.)

This amendment provides for higher penalties for failure to comply with paragraph 35C where the amount of the loan is greater.

Question put, That the amendment be made.

Finance Bill

Debate between Mel Stride and Anneliese Dodds

Tuesday 31st October 2017 Commons Chamber

[Anneliese Dodds]

Labour’s amendments on redundancy payments focus, first, on ensuring that there is proper democratic scrutiny of any attempt to reduce the £30,000 threshold for the taxation of termination payments, rather than the power to do so residing merely in regulations and, secondly, on ensuring that injured feelings are included in, rather than removed from, the definition of injury for the purpose of tax-excluded payments.

It is frustrating to be back in the Chamber to debate these issues again, with, again, no indication from the Government of any change in their position. The discussions in the Bill’s previous stages, including in Committee, detailed many ways in which provisions against aggressive tax avoidance and evasion could be tightened. Yet, rather than heed those reasonable suggestions for the removal of loopholes, the Government seem keen to target those made redundant as a potential source of revenue.

The changes in clause 5 are occurring in the context of the Government being determined to rush headlong into reducing corporation tax rates, despite the Institute for Fiscal Studies and others being clear that there is no automatic link between lowering rates and increasing revenue. In fact, I would hazard to suggest that in this case the opposite might be true. The Government’s previous cuts to corporation tax have manifestly not increased business investment.

The changes in the clause are also occurring when, as we have discussed, many loopholes have been retained for non-doms and, furthermore, while new measures for corporations exempt some of those firms that appear to have the most labyrinthine business arrangements, designed for tax purposes—not least some public infrastructure companies.

One might, then, wonder exactly why the Government have decided to stick to their guns and focus tax increases on those who are made redundant, which is effectively the idea that the provisions in the clause promote. We have been told by the Minister repeatedly that there are no immediate plans to reduce the threshold beyond which termination payments are taxable. If that is the case, why create the power to reduce it?

[Mel Stride]

rose—

[Anneliese Dodds]

If I may finish, I will be more than happy to take an intervention.

To use an appropriate analogy on Halloween, I would not have bought a pumpkin last weekend if I expected it to sit on the shelf when I brought it home. I would have bought it because I expected to carve it, although not very artistically, for my children. I would not purchase something if I did not think I was going to use it, so why are we spending valuable parliamentary time debating a measure that will never be used?

[Mel Stride]

I simply wish to point out that, as I think the hon. Lady will know, the statutory instrument on changing the £30,000 threshold would have to be passed by the House under the affirmative procedure. It would be an affirmative SI, so it would have to be voted on by the House.

[Anneliese Dodds]

The Minister’s point exemplifies exactly what I anticipated might happen. I was just about to say that the second line of defence from the Government, after proclaiming that they would abstain from using the powers that they are so keen to give themselves, is that, in any case, they would have to bring any change to the House for a vote. Indeed, that is what has occurred just now. We are all aware of the difference between passing a measure through the ordinary legislative procedure, with the amount of scrutiny that that receives, and passing a measure through the type of approach that the Minister has mentioned just now. I regret that this appears to be part of a piece, with a broader trend to exempt new policies from the parliamentary scrutiny that they deserve and that the British public have rightly come to expect from its elected representatives.

Arrangements for those facing redundancy are not, and should not be, a matter of purely technocratic interest. The Government’s failure to raise the tax-free threshold for statutory redundancy pay has meant that it has already lost much of its original real value. That perhaps explains why, when the Government consulted on this issue, there was no conclusive evidence in the consultation either of widespread abuse in this area or of a clamour for a reduction in the threshold.

We are also asking the Government to reconsider their plans on injury to feelings payments as part of termination payments.

--- Later in debate ---

[Anneliese Dodds]

I am grateful to the hon. Lady for her comments, but I must tell her that the consultation on the measure did not reveal widespread evidence of such manipulation of the rules. It was quite clear in that regard. Indeed, when advice was sought about appropriate measures in this area in the future, a range of different views came from stakeholders and consultees about the way forward. She is right to say that we are not talking about these changes affecting everyone who is made redundant. They apply to a minority of people, but it could be people who have had a very difficult time and who really rely on that redundancy payment for sustaining some kind of quality of life into the future. It is absolutely important that we have a proper debate about, and parliamentary scrutiny of, any changes, which is exactly what our amendments are intended to do.

I was talking about the new plans for injury to feelings payments as part of termination payments. I noted that there were many claims from the Government on this topic on First and Second Readings of the Bill, not least that payments allotted via tribunals would not be affected by these measures, but it is not the case that employment tribunals can decide whether payments are subject to tax or otherwise. That is not within their power. Yes, in some cases, some types of employment tribunal award are “grossed up” to take account of the tax that will be due, but that is very different from deciding whether an award is in and of itself taxable, which seemed to be implied in some of the previous debates on this issue.

In addition, the measures proposed in the Bill would cover the far more common payments made directly by an employer to settle discrimination complaints as part of a redundancy or other dismissal.

[Mel Stride]

The hon. Lady asserts that those awards made by tribunals are not necessarily non-taxable, but those made for discrimination, for example, are completely non-taxable.

[Anneliese Dodds]

If we are talking about payments made for discrimination in the context of a redundancy payment, yes, they are. That is our exact point, which is why we are discussing this matter about injury to feelings. We have had some comments in this House which appear to misunderstand the nature of injury to feelings payments. In some cases, these have been trivialised, almost suggesting that these payments are made because an employees’ nose has been put out of joint rather than something potentially more serious. But “injury to feelings” is a substantive legal category. Where there is genuine evidence of misuse of this category, that should be stamped out, but we have not been provided with such evidence as part of our deliberations on the Bill. Injury to feelings is related directly to discrimination experienced by a person because of their characteristics as an individual—their age, gender, sexual orientation, disability status or ethnicity. This should be taken seriously and it should not be a focus for penalising individuals, as is the case under these proposals. Again, as my hon. Friend suggested, this appears to be part of a piece, with more general measures watering down the protection to individuals suffering from discrimination at work, whether or not they take that discrimination to a tribunal. Clearly, tribunal fees have been struck down because of their discriminatory impact. Now measures are popping up that water down individuals’ protections in other ways.

Oral Answers to Questions

Debate between Mel Stride and Anneliese Dodds

Tuesday 24th October 2017 Commons Chamber

[Mel Stride]

My hon. Friend is absolutely right—we have collected £160 billion since 2010, far more than was raised during the 13 years under the Labour party. The latest figures show that our tax gap overall is now at 6.5%, better than any year under Labour, where in 2005-06, for example, it was as high as 8.3%.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

Successive cuts to British corporation tax have manifestly not led to greater business investment, and according to the Institute for Fiscal Studies they are not responsible for the rise in receipts since 2010. So, with huge pressures on our public finances, will the Chancellor delay his proposed cuts to corporation tax?

[Mel Stride]

I am surprised that the hon. Lady should raise the issue of corporation tax, because we have brought corporation tax down from 28% in 2010 to 19% and we have further plans to reduce it further, to 17%, and yet the hon. Lady’s party wishes to inflate those rates of tax to 26%, which would destroy jobs, destroy wealth, destroy growth and lower the amount of tax that we can collect to support those vital public services that we all wish to see thrive.

Finance Bill (Fifth sitting)

Debate between Mel Stride and Anneliese Dodds

Committee Debate: 5th sitting: House of Commons
Tuesday 24th October 2017 Public Bill Committees

[The Financial Secretary to the Treasury (Mel Stride)]

It is a pleasure once again to serve under your chairmanship, Mr Howarth. Clause 43 will ensure that rates of air passenger duty for the tax year 2018-19 increase in line with the retail prices index. The changes will ensure that the aviation sector continues to play a part in contributing towards general taxation.

APD forms an important part of Government revenue. The Government have raised APD by RPI each year since 2012, and the clause continues that trend. With no tax on aviation fuel or VAT on international and domestic flights, APD ensures that the aviation sector plays its part in contributing towards general taxation, raising £3.1 billion per annum. The aviation sector continues to perform strongly. The UK has the third largest aviation network in the world, and passenger numbers at UK airports have grown by more than 15% in the past five years.

Clause 43 sets the APD rates for the tax year 2018-19 in line with RPI. The changes will increase the long-haul reduced rate for economy class tickets by just £3 and the standard rate for all classes above economy by just £6. The rounding of APD rates to the nearest pound means that short-haul rates will remain frozen for the sixth year in a row. That will benefit 80% of all airline passengers. To give industry sufficient notice, we will announce APD rates for 2019-20 at the autumn Budget 2017, legislating in the corresponding Finance Bill.

APD is a fair and efficient tax, where the amount paid corresponds to the distance and class of travel of the passenger. The changes made by clause 43 will ensure that the aviation sector continues to play its part in contributing towards general taxation, raising £3.1 billion a year.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Mr Howarth. I have a couple of questions. Air passenger duty is a matter of considerable public debate, and debate within the industry, so it is appropriate that we probe this.

First, can the Minister provide us with a little more understanding of what he views as the purpose of this tax? In his introductory remarks, he appeared to reduce it specifically to revenue raising. Others have seen the duty as a potential green tax as well, although clearly it is not hypothecated for that purpose. It would be helpful to know whether he believes the duty has any kind of deterrent effect.

Secondly, in the light of the Scottish Government’s policy approach, does the Minister anticipate a race to the bottom in relation to APD in future, particularly given the representations made by Newcastle airport and others about potential unfair competition from across the border?

Finally, mention has been made in some of the discussions on this duty of the potential impact on those with protected characteristics who might need to travel more frequently on long-haul flights, for example. It would be helpful to hear the Minister’s views on whether these changes might have a disproportionate impact on certain ethnic minorities. That has come up in some of the debates around APD.

[Mel Stride]

I thank the hon. Lady for her questions, which I will answer in order.

The purpose of APD is clearly, as the hon. Lady identified and as I explained in my opening remarks, to raise revenue—£3.1 billion in this instance. Like all taxes, it will also change behaviour to some degree, and to the extent that it makes flying a little bit more expensive, it could be expected to have the effect of diminishing demand for air travel. The lower rates for economy, which takes up more space on aircraft than first class, assist in ensuring that flights are as full as they can be.

The hon. Lady mentioned the Scottish Parliament and the devolution of APD, which will become air departure tax in Scotland. That tax has not yet been switched on, although devolution arrangements are in place, and we will of course monitor the issues that she has understandably raised in respect of competition with airports, particularly in the north of England. On long-haul flights and the impact on various groups, including ethnic minorities, I would be happy to write to the hon. Lady with any information that we have.

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[Kirsty Blackman (Aberdeen North) (SNP)]

It is welcome that the Government are looking to reduce the administrative burden in relation to elections for oilfields to become non-taxable. That is positive news. The Chancellor of the Exchequer has mentioned in two Budgets that there will be changes in the taxation system to make it easier for late-life assets to be transferred. I have heard noises from the Chancellor in recent times that he may not introduce that in the autumn statement this year, and I will just make this pitch to the Minister. This issue is incredibly important. The oil and gas industry is not asking at this moment for significant changes, but for the change in relation to the transfer of late-life assets. I would very much appreciate it if, in the context of reducing the administrative burden and making things easier for companies dealing with the very mature field in the North sea, the Minister would hear my case on that and make the case to the Chancellor.

[Anneliese Dodds]

I must admit to being slightly confused about the purported impact of this change. Some of the inputs from stakeholder bodies seem to imply that there will be some kind of Revenue impact as a result of the changes in relation to procedures for elections for oilfields to become non-taxable. For example, Oil & Gas UK has welcomed the change, saying that the move will reduce the headline rate of tax paid on UK oil and gas production. In contrast, Friends of the Earth has expressed disappointment at the tax cut. As I understand it, petroleum revenue tax was permanently zero-rated in 2016, and the Government’s assessment of the measure’s impact on the Exchequer is that it will be negligible. Therefore, can the Minister enlighten us on why some people appear to view the measure as potentially having an Exchequer impact, but the Government do not appear to have that view?

[Mel Stride]

Perhaps I should set the scene that I would have set had I realised that others were going to contribute to this debate, because I think that that will pick up some of the questions that have been raised. However, before I do that, I shall turn immediately to the question raised by the hon. Member for Aberdeen North about the transfer of long-life assets. I will take her remarks as a Budget representation, but I am sure that she understands that at this moment, in the run-up to the Budget, I will not comment further on specific taxes or arrangements relating thereto.

Clause 44 makes changes to simplify the process for opting oil and gas fields out of the petroleum revenue tax regime, reducing the administrative burdens on affected companies. To ensure that participators could take advantage of the changes as soon as possible, the legislation had effect from the date of its announcement, on 23 November 2016. I shall provide Committee members with some background to the measure.

At Budget 2016, as part of a £1 billion package of measures to support the oil and gas industry, the Government announced that PRT would be permanently zero-rated. That was to simplify the tax regime, to level the playing field between older fields and new developments and to increase the attractiveness of UK investment opportunities. It was decided that the tax should not be abolished completely, because some companies still require access to their tax history for carrying back trading losses and decommissioning costs. As a result, participators still have to submit returns, which many find complex, time consuming and expensive. Following consultation with industry, the Government are therefore simplifying the rules for opting fields out of the PRT regime. The changes made by clause 44 will allow the responsible person for a taxable oilfield to remove the field from the PRT regime simply by making an election to do so and then notifying HMRC. When coupled with the Government’s removal of other reporting requirements, these changes will save companies an estimated £620,000 in total ongoing costs per annum.

The clause builds on the Government’s support for the UK oil and gas industry, including the £2.3 billion package of fiscal reforms announced in the 2015-16 Budget. I therefore hope that the clause will stand part of the Bill.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Clauses 45 to 47 ordered to stand part of the Bill.

Clause 48

Carrying on a third country goods fulfilment business

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

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[Anneliese Dodds]

My hon. Friend makes a good point about the potential perverse incentives created by focusing uniquely on HMRC receiving payment from the client for the creation of such schemes and the enrolling of individuals and firms on to them, rather than on the activity of creating those schemes in the first place and, above all, on HMRC’s costs as a result of investigating them.

All of us, as Members of Parliament, are well aware of the kinds of schemes under discussion. It was interesting to hear the Minister mention the principle of eliminating those schemes that no reasonable person would think should be followed by taxpayers. We have voluminous evidence that that is not currently the case. We need only look at some of the flow charts produced and revealed during the Lux and Panama leaks to be aware that there clearly is an industry in creating such tax avoidance schemes.

We need very tough measures against those schemes. Given that they could be costing the Exchequer dearly, we feel it is appropriate to have a greater amount of information about the measures and, in particular, to compel HMRC and the Government to publish that information in full so that we can assess their efficacy.

[Mel Stride]

I make clear the Government’s total commitment to clamping down on tax avoidance. We have brought in £160 billion since 2010 by clamping down on avoidance, evasion and non-compliance. We have already introduced legislation that clamps down on those who generate abusive schemes, and the Bill seeks to catch up with those who have benefited or who expect to benefit from such schemes. That leaves us to deal with the enablers in the centre of the equation.

The hon. Member for Oxford East raised the issue of naming. The Bill will allow the flexibility to name those who have been enabling these schemes. We believe that a proportionality test should be applied to take account of how significant and widespread the abuse has been, but if a very serious level of abuse has occurred, there is provision for the individuals, partnership or company concerned to be named in the way she described.

The hon. Member for High Peak is entirely correct that HMRC should be encouraged to address these cases early, rather than letting them run on. The clause seeks not only to ensure that we can catch up with these things quickly, but to prevent them from happening in the first place. It is about behavioural change, which is so important. We have seen a lot of evidence that many of these schemes are beginning to close down because we are sending the right signals and getting tough and serious about it.

[Anneliese Dodds]

I am concerned about incentives. HMRC is not being given specific additional resources, and some of the investigations may be quite detailed. As my hon. Friend the Member for High Peak asks, where is the incentive to crack down on the schemes early? The funds receivable may be very small because the schemes are unlikely to be used by a large number of taxpayers. I am concerned that we may be making it difficult for HMRC to take action, because the Bill does not include a requirement to cover its costs.

[Mel Stride]

The incentive for HMRC and for the Government is to squeeze the tax gap and minimise the number of people avoiding tax. If we do not get on with clamping down on those individuals and companies in a timely fashion, we will make things worse right across the piece and generate less tax as a consequence. We have a clear incentive to ensure that these measures bite at the earliest opportunity. It is about changing behaviour. The very best approach to tax avoidance is to ensure that it does not happen in the first place.

Question put and agreed to.

Clause 65 accordingly ordered to stand part of the Bill.

Schedule 16

Penalties for enablers of defeated tax avoidance

Amendment proposed: 41, in schedule 16, page 609, line 4, leave out “may” and insert “must”.—(Anneliese Dodds.)

This amendment would remove HMRC’s discretion over whether to publish information on people have incurred a penalty and the conditions of paragraph 46 have been met.

Question put, That the amendment be made.

Finance Bill (Fourth sitting)

Debate between Mel Stride and Anneliese Dodds

Committee Debate: 4th sitting: House of Commons
Thursday 19th October 2017 Public Bill Committees

[Mel Stride]

I am clearly not in a position to share with the hon. Lady the entire ins and outs of all the intricacies of calculating such figures, but I can assure her that the numbers are looked at in great detail and are scored by the independent Office for Budget Responsibility. They are robust figures, albeit that no figures are entirely, absolutely guaranteed in cast iron ahead of time—but they are robust.

During the debate, the hon. Lady raised an important issue about transparency of trust arrangements. The UK is right at the forefront of greater transparency. We spearheaded an initiative to systematically share information on beneficial ownership arrangements with more than 50 countries. That will help law enforcement to unravel complex, cross-border changes in companies and trusts. Following our work with international partners, by September 2018 more than 100 jurisdictions will be sharing information with the UK under the common reporting standard, which will provide HMRC with taxpayer information from tax authorities around the world, enabling it to better target tax evaders.

That brings me to my next point. The hon. Member for Bootle would have us believe two things: that we are only on the side of the wealthy and that we are not actually that interested in clamping down on tax avoidance. On the first point, I remind the Committee that the top 1% of earners in this country pay 27% of all taxes. That is virtually at an historic high, and is certainly higher than was the case under the previous Labour Government.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

Does that not reflect the wealth of the very richest in our society? Surely it would be more appropriate to assess the ratio of tax against their whole income and wealth. In that case, most studies would suggest that the very worst-off people pay much more of their income in tax than the very best-off. That figure does not suggest that we have a more progressive tax system—it does not give us any indication of the progressivity of the tax system.

[Mel Stride]

I hate to disagree with the hon. Lady, but I have to. If she checks something called the Gini coefficient, which is about income inequality—

[Anneliese Dodds]

rose—

[Mel Stride]

I will give way to the hon. Lady. She is keen.

[Anneliese Dodds]

With all due respect, the Gini coefficient does not reflect the impact of tax on people’s incomes. I repeat my point: if we are looking at the progressivity of the tax system, considering the overall tax that is contributed by the 1% is not helpful. The two are independent.

[Mel Stride]

With respect, the first point is that income inequality is at its lowest level for 30 years. That is a simple fact. Secondly, in terms of how progressive the tax system is, we are the Government that, since 2010, have raised the personal allowance to £11,500, which has taken about 3 million people out of tax altogether, and we have a manifesto commitment to raise that still further, by 2020, to £12,500. Much that we are doing is extremely progressive.

It is also a fact that the wealthiest 3,000 in this country pay as much tax as the poorest 9 million, just to put some of those figures into perspective.

[Anneliese Dodds]

That is clearly a reflection of very severe income inequality. If we focus on income, rather than on tax, which the Minister is trying to pull us towards, and look at the overall impact to the fiscal system, taking into account that fact that working tax credits are being folded into universal credit, we will see that the very poorest people in Britain are much worse off now than in previous years.

[The Chair]

Order. We will indulge the Minister with one more response. We might then have to make a little progress.

--- Later in debate ---

[Mel Stride]

Given the resource that HMRC has, which the hon. Gentleman suggests is inadequate, the tax gap—the amount of tax that we have failed to collect by not bearing down on avoidance—is at its lowest level for many, many years, including every year under the last Government. It is 6.5% compared with, I think, 8.3% in 2005-06. In terms of bearing down on avoidance, we are doing our bit.

[Anneliese Dodds]

rose—

--- Later in debate ---

[Mel Stride]

Clause 34 introduces schedule 11, which makes changes to ensure that businesses and individuals who have used disguised remuneration tax avoidance schemes pay their fair share of income tax and national insurance contributions. Clause 35 and schedule 12 follow on from clause 34 in tackling similar avoidance schemes used by the self-employed, introducing new rules to make those schemes ineffective and ensuring that individuals pay the tax they owe.

Disguised remuneration schemes claim to avoid tax and national insurance contributions by paying individuals through third parties in ways that promoters claim are not taxable, such as loans. These schemes are highly artificial, and it is the Government’s firm view that they have never worked. The coalition Government began tackling the schemes in 2011, introducing legislation to successfully stop the schemes that existed at that time. Since then, HMRC has collected more than £1.8 billion in settlements from scheme users.

However, not every scheme user settled, and since 2011 the tax avoidance industry has created and sold more than 70 new and different schemes aimed at sidestepping the 2011 legislation. These schemes are generally more contrived and aggressive than those that existed before and are growing in popularity, including with the self-employed. These schemes deprive the Exchequer of hundreds of millions of pounds each year and have been used by up to 65,000 companies and individuals. The Government’s firm view is that they do not work. We therefore need to take further action to tackle this avoidance and ensure that scheme users pay their fair share.

The Government introduced legislation in the Finance Act 2017 to put it beyond doubt that new employment income schemes are caught within the existing rules. Schedule 11 will tackle the existing use of schemes by introducing a new charge on loans outstanding from these arrangements on 5 April 2019. Affected scheme users can avoid the loan charge by repaying the loan and replacing it with a commercial loan, or by settling the tax due with HMRC. The Government will bring forward further measures in the coming year’s Finance Bill to ensure that the rules are appropriately targeted.

Clause 35 will put it beyond doubt that these schemes do not work for the self-employed. Where there is an arrangement of this type, the receipt will be taxed as a trading receipt, no matter what form it is received in by the self-employed individual. The clause applies from 6 April 2017 to protect Exchequer revenue and ensure that scheme users pay their fair share. Schedule 12 introduces a new charge on loans outstanding from self-employed schemes on 5 April 2019 in a similar way to schedule 11.

It is right that everyone should pay their fair share of tax and make a contribution to public services. These changes will ensure that users of disguised remuneration schemes pay the tax they owe and will help to bring in more than £3 billion by 2020-21.

[Anneliese Dodds]

I will first address clause 34 and schedule 11 before moving on to clause 35, given that both were created at the same time. As I understand it, clause 34 and schedule 11 re-characterise loans as remuneration for tax purposes, but in some cases they would be doing so many years after the original transaction. The Opposition want to see change in this area, because abuses have been clearly documented.

However, this measure comes after a long period of relative inaction, at least in the areas where this legislation is focused. That has meant that many people believed the arrangements they entered into were legal and did not constitute tax avoidance. The April 2019 change in these circumstances could, some have opined to us, cause significant problems, for example to individuals whose situation has changed such that they no longer have the funds to meet the tax charge. How will the Minister ensure that this measure will not cause hardship or injustice to individuals who planned on the basis of previous arrangements, and how will that be balanced against the clear and pressing need to prevent the abuse, which the measure is targeted at?

Clause 35 and schedule 12 aim to tackle avoidance by the self-employed and those trading through a partnership, where their taxable income has been replaced by loans and other non-taxable amounts in order to avoid tax. The pertinent question is how to ensure that the measure is not overly wide-ranging. In particular, how will it be ensured that a transaction entered into in the ordinary course of business, and on commercial arm’s length terms, is not caught within the definition of remuneration? The scope of the measure appears to be relatively wide, particularly when compared with others—for example, the Income Tax (Earnings and Pensions) Act 2003, which discards remuneration—where certain transactions are excluded, but they are not here. It would be helpful to have more specification on that.

Finally, there is a broader question: how will the Minister ensure that these measures are genuinely achieving their objective of ensuring that the full earnings of self-employment remain part of the individual’s taxable income, subject to income tax and national insurance contributions, and that attempts to circumvent that position and still reward the individual are genuinely ignored?

[Mel Stride]

I thank the hon. Lady for her typically thoughtful contribution and important questions. She raised the issue of the retrospection or otherwise of these measures. We will certainly be looking at individuals who may have entered into these kinds of arrangements as far back as 1999. Critically, they have until 2019 to clean those arrangements up, if they wish to. If the schemes are legitimate and above board, they have no reason to be concerned because those schemes will stand the tests that we have set.

--- Later in debate ---

[Mel Stride]

I believe that is the review date—the point at which we would naturally want to look again at the issue and see how the roll-out has occurred.

Question put and agreed to.

Clause 38 accordingly ordered to stand part of the Bill.

Clause 39 ordered to stand part of the Bill.



Clause 40

Co-ownership authorised contractual schemes: capital allowances

[Anneliese Dodds]

I beg to move amendment 32, in clause 40, page 58, line 31, at end insert—

“262AG  Review of operation of co-ownership authorised contractual schemes

(1) Within fifteen months of the passing of the Finance (No. 2) Act 2017, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of the new provisions for co-ownership authorised contractual schemes.

(2) The review shall, in particular, consider the operation of these provisions in relation to master funds.

(3) In this section, “the new provisions for co-ownership authorised contractual schemes” means—

(a) sections 262AA to 262AF of this Act, and

(b) regulations made under sections 41 and 42 of the Finance (No. 2) Act 2017.

(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”

This amendment would make statutory provision for a review of the operation of the new provisions for co-ownership authorised contractual schemes.

Finance Bill (Third sitting)

Debate between Mel Stride and Anneliese Dodds

Committee Debate: 3rd sitting: House of Commons
Thursday 19th October 2017 Public Bill Committees

[Anneliese Dodds]

I am grateful to my hon. Friend for making those points. Indeed, that issue came up in Committee of the Whole House. There needs to be much more muscular engagement in questions around profit shifting between jurisdictions and especially between those that have low or no-tax regimes, where there appears to be a lot of evidence of harmful tax practices.

[Mel Stride]

I thank hon. Members for their contributions to this important and interesting debate. To come back on a few of the points made by the hon. Member for Walthamstow, at the heart of this there is a distinction. She kept raising the issue of how PFI organisations should have taken into account that tax treatments could change. To some degree that is a fair argument, but there is a distinction for a company that is involved in highly leveraged infrastructure projects, which after all is delivering to public services. While she might be right that many PFI contracts have been very lucrative, not all of them have been; some are far more marginal. She has to conjure with the possibility that, if we go down the road she suggests, some may fail. That is an important point for her to consider.

On the hon. Lady’s second point, it may be the case that part of the rationale for entering into PFI agreements was an assumption about what future taxes may be paid under the pre-chapter 8 system. However, such a decision would have been taken at that time, on that basis, and that is nothing other than what she would expect them to do. An important point is that after the announcement of these arrangements all PFI arrangements will not be subject to chapter 8; they will be under the arrangements we discussed previously.

The hon. Lady talks about smoke and mirrors in relation to overseas businesses effectively brass-plating over here, with all the profits being diverted elsewhere. There is plenty of anti-avoidance legislation out there, including the diverted profits tax, to address those matters.

The hon. Member for Oxford East raised the BEPS project and recommendation 4. She is right that there is a corridor—a range of percentages that could be applied for the corporate interest restriction—and that is between 10% and 30%. The Government have a balance to strike because of the importance of the UK remaining competitive. Germany, Italy and Spain have all elected to go for 30%. It should not be overlooked that these measures are bringing in £1 billion extra every year in which they operate, which is a considerable increase in the tax take. The Bill will bring in about £16 billion across the scorecard period, about £5 billion of which will be from this one measure. On that basis, I ask the Committee to reject the amendments and to support the clause and the schedule.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Schedule 5

Corporate interest restriction

Amendment proposed: 5, in schedule 5, page 364, line 10, at end insert—

“443A Review of effects in relation to PFI companies

(1) Within three months of the coming into force of this Chapter, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects of the provisions of this Chapter in relation to PFI companies.

(2) The review shall consider in particular the effects if the provisions of—

(a) the Chapter, and

(b) the exemption in section 439 were not to apply to PFI companies.

(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”—(Stella Creasy.)

This amendment requires a review to be undertaken of the impact of the provisions of Chapter 8 of new Part 10 of TIOPA 2010 in relation to PFI companies and if the provisions did not apply to PFI companies.

Question put, That the amendment be made.

--- Later in debate ---

[Mel Stride]

Quite right, Mr Howarth. I think we should just agree that I will see you at Glastonbury next year. Sorry—I will see the hon. Gentleman there; I might see you there as well, Mr Howarth.

On the specific point the hon. Gentleman raised about ensuring that relief is not abused, anti-avoidance rules are clearly critical to the long-term success and stability of the museums and galleries exhibition tax relief. The Government will include rules similar to those applied under the film tax relief to prevent artificial inflation claims. In addition, there will be a general anti-avoidance rule, based on the general anti-abuse rule, denying relief where there are any tax avoidance arrangements relating to the production. During the consultation, respondents generally said that the strategy appeared robust and did not identify any additional opportunities for abuse. Of course, as I have said previously, HMRC will continue to monitor these important matters. On that basis, I hope that the hon. Gentleman will not press his amendment.

Question put and agreed to.

Clause 21 accordingly ordered to stand part of the Bill.

Schedule 6 agreed to.

Clause 22

Grassroots sport

[Anneliese Dodds]

I beg to move amendment 30, in clause 22, page 27, line 25, at end insert—

“217E Review of operation of this Part

(1) Within fifteen months of the coming into force of this Part, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review about the operation its provisions (including in relation to different eligible sports).

(2) The review shall, so far as practical, identify the extent to which the provisions have benefitted particular eligible sports.

(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”

This amendment would make statutory provision for a review of the new relief for grassroots sport, including identification of benefits to particular sports where possible.

[Anneliese Dodds]

I should at the start declare an interest in this topic: my partner is an amateur football referee in the Uhlsport Hellenic League and others.

First, we need to be clear that the measures have been introduced, according to the Government’s consultation of last year, at least partly due to a lack of other funding sources for sport. That is obviously rather worrying, particularly following widespread concern that the legacy of the Olympic games has not been capitalised on to build the habitual involvement of the wider population in sport.

We also need to consider this measure in the context of other taxation measures that affect sports facilities, not least the changes to business rates and the fact that there was such a long postponement of the uprating. That has had a significant impact on many clubs, whose headquarters or area of operation is also that of a small business; I am particularly thinking about riding schools, for example, which may have seen a substantial increase in their business rate. There is also an unfortunate interaction between small business rate relief and the relief provided through the community amateur sports clubs relief. I mention that because it is important that we do not look at this issue entirely in isolation, because corporate support for sport can be enormously fickle; it will relate to the nature of the business environment. Many smaller sports clubs—exactly those the measure seeks to support—need reliable funding over the long term, and they particularly need to know that their premises will be supported over the long term.

For those reasons and others, we believe that there needs to be a thorough review of the benefits of this proposed relief for grassroots sports. We think it particularly important that that review examines which sports would be supported through the mechanism. That is especially important when it is clear that there are funding gaps in certain areas of sport in Britain, compared with other countries. For example, the provision of athletics facilities outside the capital is very patchy, particularly for amateur athletics. That is why we request a review of the measure.

[Mel Stride]

Before I speak to the amendment, I will set out for Committee members the general background and aims of the clause. Clause 22 introduces a new tax relief to support investment in grassroots sports by companies and our sports national governing bodies. It will help governing bodies channel their profits into grassroots sports and will give companies a simple means of making valuable contributions to support grassroots sport activity.

The changes made by the clause will allow qualifying expenditure on grassroots sports as a deduction from the company’s total profits in calculating their corporation tax profits. Sport governing bodies and their subsidiaries will be able to make deductions for all their contributions to grassroots sports. Companies will be able to make deductions for all contributions to grassroots sports through sport governing bodies, and deductions of up to £2,500 in total annually for direct contributions to grassroots sports. The relief has been designed to be simple to make it attractive to potential contributors and to allow as many organisations that support grassroots sports to benefit as possible.

Contributions must facilitate participation in eligible amateur sport, and the activities must be open to a sufficiently broad section of the public. The hon. Member for Oxford East asked who would be included and excluded. I am happy to write to her on that matter so that she has all the information she needs. No payments to participators will be allowed, other than to cover the reasonable cost of participation. Such requirements will ensure that payments are made for the intended purposes and will prevent payments from being made for personal benefit.

Following the calling of the general election, clause 22 was removed from the original Bill. The clause will take effect from 1 April 2017 so that taxpayers can still benefit from the changes being made from the original commencement date.

I do not want to dwell too long on amendment 30 because I am conscious that we are eager to make progress on what is a very lengthy Bill. On the issue that the hon. Lady raised about the interplay between business rate relief and sports club reliefs, if she writes to me with her questions I will be happy to provide the information to her. However, I can reassure hon. Members that the Government ran a full consultation on the policy and the legislation prior to its inclusion in the Bill. During that process, there was extensive engagement with key stakeholders to ensure that the legislation is well designed and targeted at meeting its policy objectives. I was pleased to see a recent article in World Sports Advocate welcoming this new relief as

“a welcome incentive to support community sport for everyone”.

An important aspect of the legislation is that it has been deliberately designed to be as simple as possible to operate. There is no new reporting requirement and we want the new relief, particularly the relief for small deductions by companies, to benefit a wide range of sports in the UK without added administration burdens and costs. The Department for Digital, Culture, Media and Sport will of course continue to liaise closely with the sports governing bodies on a range of issues through their existing processes. A review, particularly to the timescale proposed, is neither practical nor necessary, and I hope that Opposition Members will not press their amendment to a vote.

[Anneliese Dodds]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 22 ordered to stand part of the Bill.

Clause 23

Profits from the exploitation of patents: cost-sharing arrangements

--- Later in debate ---

[Mel Stride]

The Opposition amendment would require the Government to review the effects of the changes to cost-sharing arrangements made in clause 23. Before I set out why that review would be inappropriate, I will remind Committee members of the background of the clause and what it is designed to achieve.

The clause introduces provisions for companies undertaking R and D collaboratively under a cost-sharing arrangement that will ensure that those companies are neither advantaged nor disadvantaged compared with those undertaking R and D outside such an arrangement. Following the calling of the general election and subsequent wash-up negotiations between the Government and the Opposition, clause 23 was removed from the Bill that became the Finance Act 2017. The Government propose that the provisions in the clause will apply from 1 April 2017 as originally intended and announced.

The UK patent box was introduced by the coalition Government in 2012. It provides a reduced rate of tax to companies exploiting intellectual property, such as patents, to incentivise them to grow their businesses and to create jobs in the UK. The Finance Act 2016 included changes to the patent box rules in line with the new international framework agreed by the OECD for intellectual property regimes, as part of the BEPS action plan. The main change was the introduction of the R and D fraction, which connects the amount of profit from an item of intellectual property that can benefit from the patent box to the proportion of the R and D activity undertaken by the claimant company.

The 2016 Act did not directly address R and D undertaken as part of cost-sharing arrangements, as it required further consultation to ensure that, as the hon. Member for Oxford East pointed out, very complex collaborative arrangements are appropriately addressed. Following completion of the consultation, the clause now adds specific provisions to deal with cost-sharing arrangements.

Under a cost-sharing arrangement, typically companies agree to undertake a proportion of R and D activity as part of a collaborative project, therefore receiving a commensurate proportion of income if the project is successful. That means that the calculation of the R and D fraction must take into account how the company has discharged its proportion of the R and D costs throughout the life of the arrangement.

The arrangements create specific challenges in the application of the OECD framework. Over the life of the arrangement, the claimant’s R and D activity may fluctuate year on year and trigger additional top-up contributions—balancing payments—payable to and from the claimant company to other companies in the cost-sharing agreement. Although at the end of the project the claimant may have met its agreed proportion of R and D costs, the interim position can differ greatly. Without providing a specific mechanism to deal with the treatment of the payments, the claimant’s R and D fraction would be unduly depressed, putting it at a comparative disadvantage to claimants undertaking R and D outside a cost-sharing arrangement. The changes made by clause 23 are therefore exclusively focused on addressing that issue. Specifically, balancing payments made by the claimant will generally be treated as if subcontracted to the other member of the cost-sharing arrangement, so the impact on the fraction will depend on whether the two parties are connected.

It might be helpful at this stage to remind the Committee that under the revised patent box rules, payments to connected subcontractors reduce the R&D fraction, as does spending on acquired intellectual property, in line with the OECD guidelines. Balancing payments received by the claimant—that is, receipts—will be offset against outgoing payments, again depending on the relationship between the parties.

The hon. Lady raised the question whether that could be used for the purposes of tax avoidance. My comment is that the OECD base erosion and profit shifting project agreed an acceptable framework for intellectual property regimes that would address concerns about profit shifting, and the UK patent box regime was revised in the Finance Act 2016 to align with that framework. The changes ensure that the amount of profit and benefit from the patent box is restricted to the proportion of research and development undertaken by the company when compared with the total research and development. As a result of the changes, the payments and receipts should net out to ensure that, at the end of the project, the claimant’s R&D fraction reflects only the costs it has incurred to meet its agreed share of R&D activity.

Amendment 31 would impose a requirement on the Government to undertake a review of the effects of these changes to the patent box regime. However, the Government have carefully considered the regime and consulted extensively with stakeholders to ensure that the changes comply with the relevant international frameworks and provide no opportunities for abuse. The Government regularly publish statistics on the patent box and will continue to monitor the impacts of both the patent box and these legislative changes. On those grounds, I urge the hon. Members to reject the amendment.

[Anneliese Dodds]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 23 ordered to stand part of the Bill.

Clause 24 ordered to stand part of the Bill.

Schedule 7 agreed to.

Clause 26 ordered to stand part of the Bill.

Clause 27

Substantial shareholding exemption

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

[The Chair]

With this it will be convenient to discuss the following:

Government amendments 1 and 2.

Clause 28 stand part.

--- Later in debate ---

[Anneliese Dodds]

I have a couple of brief questions. Clause 27 provides the Treasury with new powers to regulate the list of approved investors that qualify for the substantial shareholding exemption. It would therefore be helpful to know what checks will be placed on the Treasury’s use of those new powers. In its assessment of the measure, the Treasury said that the financial impact would be negligible, which sounds slightly peculiar. Any further information about that would be gratefully received.

I understand the rationale for the measure in clause 28, which will shift the qualifying conditions for exemption from the activities of the disposing company or the company being disposed of to instead focus on, as described by the Minister, the shareholding for which the disposal is made and to the other shareholders of the company disposed of. I would be interested to learn whether the Minister believes that the new measures will extend beyond trading companies to encompass, for example, commercial real estate. What assessment has he made of the likely impact that might have?

More broadly, I am keen to learn how the Government are trying to balance the need to ensure that tax treatments do not artificially impact on commercial decision making with the need to prevent any potential for abuse.

[Mel Stride]

The hon. Lady asks a large number of technical questions, which are gratefully received, but I hope she will forgive me if I drop her a note on the more specific points. The measures have been scored by the Office for Budget Responsibility as having a negligible cost. They are independently assessed and scored by that authority. I hope on that basis we can move forward.

Question put and agreed to.

Clause 27 accordingly ordered to stand part of the Bill.

Clause 28

Substantial shareholding exemption: institutional investors

Amendments made: 1, in clause 28, page 38, line 5, leave out from “applies” to “in” in line 6.

Amendment 2, in clause 28, page 38, line 10, leave out “paragraph 7” and insert “this Schedule”.—(Mel Stride.)

Clause 28, as amended, ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Graham Stuart.)

Finance Bill (Second sitting)

Debate between Mel Stride and Anneliese Dodds

Committee Debate: 2nd Sitting: House of Commons
Tuesday 17th October 2017 Public Bill Committees

[Mel Stride]

It is a great pleasure to serve under your chairmanship, Mr Walker. Clause 10 provides the power to amend by way of statutory instrument the property categories that the holder of a life annuity, life insurance policy or capital redemption policy can select without making that policy or contract a personal portfolio bond.

The personal portfolio bond rules introduced in 1999 countered avoidance arrangements where an individual could select personal investments, such as property portfolios, in life insurance policies to defer the tax charge on any resulting income or gains. The legislation treats a policy as a personal portfolio bond if it allows the holder to select the property held in that policy. A policy will not be a personal portfolio bond if it permits only the selection of property specifically listed in the legislation. The categories of property listed in the legislation have features that ensure that the policyholder cannot customise them to allow personal property to be placed within the policy.

The list of permitted property has not materially changed since the rules were introduced in 1999. Since then, various new types of investment vehicle have been developed that similarly cannot be manipulated to include personal property. Up to now, those have not been added to the list. That unnecessarily narrows the range of investment choices for policyholders.

The clause provides the power to make secondary legislation to amend the categories of property listed. The power will ensure that, in future, the rules can be updated more quickly to accommodate new types of investment vehicles. Following Royal Assent, the Government will lay regulations using the power to add three investment vehicles as permitted property: real estate investment trusts, overseas investment trust companies and authorised contractual schemes. Draft statutory instruments have been provided to the Committee. The power will allow the Government to respond quickly as new methods of investment develop, to enable legislation to keep pace with changes in the financial services industry and ensure that tax rules do not needlessly impede innovation and competition in the sector.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

I am grateful to the Minister for providing clarification. Is there any evidence of the extent of awareness among fund advisers regarding the existing restrictions, and how will they be made aware of the new rules? That is particularly important if new rules are to be adopted through secondary legislation. We have heard about the new categories of property that might be incorporated, but there is likely to be less spotlight on them in future if we do not discuss them in the context of a Finance Bill. At present, it is possible for fund advisers to accidentally acquire non-permitted assets for a client’s policy, which rules it out as a PPB and means that the rules on yearly deemed gain do not apply.

[Mel Stride]

I reassure the hon. Lady that there has been extensive consultation on the measure. The consultation on reviewing the list of properties ran from 9 August to 3 October 2016 and explored adding three types of investment vehicle. The majority of respondents welcomed the proposed addition of the investment vehicles discussed. Many suggested further additions, which will require further review before any recommendation is made.

Question put and agreed to.

Clause 10 accordingly ordered to stand part of the Bill.

Clause 11

EIS and SEIS: the no pre-arranged exits requirement

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

[Mel Stride]

Clauses 11, 12 and 13 make changes to the tax-advantaged venture capital schemes: the enterprise investment scheme, the seed enterprise investment scheme and venture capital trusts. The changes provide small but useful easing of the rules, which I shall explain in more detail. Following the calling of the general election and subsequent negotiations between the Government and the Opposition, these clauses were removed from the Finance Act 2017. As all the clauses are wholly relieving, the Government have introduced retrospective legislation to ensure that taxpayers can still benefit from the changes being made from the original commencement date.

The tax-advantaged venture capital schemes provide a range of generous tax reliefs to encourage individuals to invest directly or indirectly in certain smaller and higher-risk early stage companies. These small companies would otherwise struggle to access the funding they need to grow and develop, because they have little or no track record to attract funding from the market.

Clause 11 makes changes to an anti-abuse rule, the no pre-arranged exits requirement, in the enterprise investment and seed enterprise investment schemes. The rule prevents tax relief from being provided if arrangements under which the shares were issued might lead to a disposal of those or other shares in the company and so potentially put the future continuation of the company at risk.

Many companies include such rights in their standard documents. However, rights allowing for share conversions in the future carry no risk to the integrity of the scheme, as excluding the rights can be administratively burdensome for some companies. The changes will allow companies to qualify for relief if they issue shares that include rights to a future conversion into shares of another class in that company. The changes are wholly relieving and will apply retrospectively, with effect for shares issued on or after 5 December 2016.

Clause 12 makes technical changes to clarify the law and ensures venture capital trusts can provide follow-on funding to certain groups of companies. The changes ensure that the VCT rules work in the same way as those for EIS. The rules for VCTs and EIS were changed in late 2015 to target the schemes more closely on early stage companies. However, the rules do allow older companies to receive tax-advantaged investments in some situations. These include follow-on funding provisions. Broadly speaking, follow-on funding may be provided to an older company as long as the company received its initial tax-advantaged funding at a time when it met the basic age limit. The changes made by clause 12 ensure that, where certain conditions are met, VCTs will be able to provide follow-on funding for companies that have been taken over by a new holding company after the initial funding was received.

Clause 13 makes changes to extend a power for the Treasury to make regulations on the exchange of certain investments held by a VCT. A VCT may hold non-qualifying investments, but only in very limited circumstances. Regulations under the current power ensure that VCTs are not at immediate risk of losing their approved status when they are obliged to exchange a qualifying investment for a non-qualifying investment. However, the power to make regulations applies only where the original investment is a qualifying investment.

The new regulations will provide broadly similar protection to VCTs where the original investment is a non-qualifying investment and the VCT is similarly required to exchange the investment as part of a commercial reorganisation or buy-out. Without the new regulations, VCTs would continue to rely on Her Majesty’s Revenue and Customs exercising its discretion to avoid immediate loss of approval when a non-qualifying investment is exchanged. Draft regulations will be published for public consultation later in the year. The regulations will provide certainty to a VCT regarding the treatment of the new shares or securities obtained when it exchanges non-qualifying investments.

Clauses 11, 12 and 13 make technical easements to reduce administrative burdens and smooth certain rules within the tax-advantaged venture capital schemes. I therefore hope that they will stand part of the Bill.

[Anneliese Dodds]

I have two questions about clauses 11 and 12. First, EIS and SEIS are two of the four tax-advantaged venture capital schemes, alongside venture capital plus and social investment tax relief, which we will discuss under a later clause. In addition to the features mentioned by the Minister, the schemes share in common the fact that advance assurance applications and submissions of statutory compliance statements are often sought by those seeking to reassure potential investors about the tax treatment of their investments. Clearly, the new requirement will widen eligibility for EIS and SEIS, potentially leading to a greater number of requests to HMRC for these kinds of ex-ante assessments. I would be grateful if the Minister could assure us that HMRC will be able to satisfy those requests in a timely manner.

I understand from the Minister’s response to my parliamentary question on this matter that there is no time limit on an advance assurance application, and while the target for more complex cases is 40 days, he admitted that more complex cases may take longer. Although I agree with him that the changes will simplify the administrative side for business to an extent, they could complicate qualifying criteria from HMRC’s point of view. How will the Minister ensure that that does not lead to greater pressures on an already struggling HMRC?

On clause 12, my second question is perhaps more fundamental. As I understand it, EU state-aid rules generally suggest that the operation of such tax reliefs should focus on genuinely promoting new growth rather than on the acquiring of existing businesses, given that we are talking about the state exempting certain categories of firms from tax that others must pay. Will the Minister provide us with a taste of how he has assured himself that this relief genuinely will focus on the promotion of such new growth?

[Mel Stride]

I thank the hon. Lady for her questions. On clause 11, she has been in touch with the Treasury about the important matter of advance assurances from HMRC, which always does its utmost to provide advice in as timely a manner as possible. The change proposed by the clause, however, is to remove a requirement on HMRC to opine on the approach that some companies intend to take, which will introduce greater certainty.

Clause 12, which relates to VCTs and the introduction of a parent company, is also likely to ease the investment decision because it will take away the uncertainty that would otherwise accrue by having a parent company inserted into the corporate structure under consideration. These technical amendments therefore make important changes to existing legislation.

Question put and agreed to.

Clause 11 accordingly ordered to stand part of the Bill.

Clauses 12 and 13 ordered to stand part of the Bill.

Clause 14

Social investment tax relief

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

--- Later in debate ---

[Anneliese Dodds]

I am grateful to the Minister for his clarification, which has been enormously helpful. However, he referred to winkling out particular anomalies and we feel that that is exactly what we need a little more of. On the issue of the seven years of activity as a social enterprise before qualifying for the three-year £1.5 million cap, I am concerned, despite the Minister’s helpful comments, that we are not focusing on the exact loci of risk. We seem to be assuming that risk is inherent in the age of the social enterprise concerned and not on the activity that it is engaged in. It is perfectly possible—I mentioned an example earlier—for an older social enterprise to try to attract funding in order to undertake a very risky activity. Dealing with some of those risky activities is what we need social enterprise to be engaged in, particularly as we have many areas where local authority funding is no longer available and there are also market failures. We really need to have community facilities and different services preserved. I therefore wish to press the amendment.

[Mel Stride]

I think we are in total agreement with the hon. Lady on the issue of focusing these funds and incentives on riskier social enterprises, in other words, the ones that would not naturally happen without this kind of intervention. However, while those that are less than seven years old will be subject to the £1.5 million cap, which is a considerable increase in what we have had before and will not be restricted by the £300,000 maximum investment in any three-year period, those social enterprises that have been trading for longer than seven years, can still have access to £1.5 million in total, albeit in any three-year period they are restricted to £300,000 maximum to be raised. It is not as if there is a terrible cliff edge between the two. We will still be providing a lot of support for older social enterprise.

[Anneliese Dodds]

I thank the Minister, but I am still concerned about why exactly seven years has been chosen as the cut-off. Listening to his helpful remarks, I imagine that we could see some gaming around this, because there is a significant tax advantage from having a younger social enterprise. Would we see social enterprises being created out of previous ones just to qualify for the different tax treatment when actually they would be focused on the same activity? It seems peculiar to me and I do not understand why the seven-year figure has been chosen. My dad was an accountant; he always said to me, “You’ve got to keep your bank statements for seven years”, so I can understand seven years from that perspective. Why is there no gradation? Why seven and not another figure—three, five, 15 or 20 years? Perhaps some clarification can be provided.

[Mel Stride]

I suppose we are saying that whatever number of years we chose, the hon. Lady’s argument would always be relevant, in the sense that it is an arbitrary figure. It happens to be seven years in this case. In terms of anti-avoidance and gaming at the margins, to which she referred, there are some strong anti-avoidance measures in the Bill that, for example, seek to address directly the specific issues she raised of perhaps one social enterprise taking over another that has a different age profile and in some way gaming the system as a consequence. Those elements are addressed in the anti-avoidance measures.

Question put and agreed to.

Clause 14 accordingly ordered to stand part of the Bill.

Schedule 1

Social investment tax relief

Amendment proposed: 20, in schedule 1, page 103, line 37, at end insert—

“10A After section 257TE (minor definitions etc), insert—

“257TF  Review of operation of this Part

(1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of social investment tax relief.

(2) The review shall consider in particular—

(a) the effects of changes made to this Part by Schedule 1 to the Finance (No. 2) Act 2017, and

(b) the effectiveness of the anti-abuse provision.

(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.””—(Anneliese Dodds.)

This amendment would require HMRC to undertake a review of the operation of social investment tax relief, including the changes to it made by Schedule 1.

Question put, That the amendment be made.

Finance Bill (First sitting)

Debate between Mel Stride and Anneliese Dodds

Committee Debate: 1st Sitting: House of Commons
Tuesday 17th October 2017 Public Bill Committees

[The Financial Secretary to the Treasury (Mel Stride)]

May I say at the outset what a pleasure it is to serve under your chairmanship, Mr Howarth? I look forward to serving under the chairmanship of Mr Walker in due course, and to having a constructive and positive engagement with all Committee members over the next couple of weeks.

Clause 1 makes changes to ensure that there is a clear and consistent date for making good on non-payrolled benefits in kind. Those changes will provide greater clarity and help employers and employees to understand their obligations.

As the Committee will be aware, a benefit in kind is a form of non-cash employee remuneration. The cash equivalent of a benefit in kind is subject to tax and employer national insurance contributions. Making good is where an employee makes a payment in return for a benefit in kind that they receive. A making good payment has the effect of reducing the taxable value of a benefit. For example, a television manufacturer might provide an employee with a television with a taxable value of £1,000; if the employee makes good by repaying the employer £1,000, the taxable value is reduced to nil.

There is currently a range of dates by which employees need to make good on benefits in kind, and for some no fixed date is prescribed in legislation. Employers, large accountancy firms and representative bodies have told us that that often causes confusion and have asked for greater clarity about the deadline for making good. Clause 1 will set the date for making good for non-payrolled benefits in kind as 6 July following the end of the tax year in which the benefit in kind is provided. That is the date by which employers have to notify Her Majesty’s Revenue and Customs of any taxable benefits in kind on their P11D form. For that reason, it is also the date by which many employees already make good in practice. This approach has been greatly welcomed by employers.

The change will take effect for benefits in kind that give rise to a tax liability for the 2017-18 tax year and all subsequent tax years. This small but sensible change will bring greater clarity for businesses.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clause 2

Taxable benefits: ultra-low emission vehicles

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

I beg to move amendment 13, in clause 2, page 5, line 7, at end insert—

‘(5A) After section 170 (Orders etc relating to this Chapter), insert—

“170A Review of changes to appropriate percentages etc for cars

(1) Prior to 31 March 2018, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the forecast effects of the amendments made by subsections (1) to (4) of section 2 of the Finance (No. 2) Act 2017.

(2) The review shall consider in particular the effects on—

(a) the use of zero and ultra-low emission cars as company cars, and

(b) air quality in towns and cities

in each year from 2020-21 to 2030-31.

(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”’

This amendment would require HMRC to undertake a review of the changes to be made by Clause 2 in advance of their implementation.

[Anneliese Dodds]

First, I apologise to colleagues —I am full of the cold, and I had a nose bleed this morning given the excitement of the topics that we would be discussing, but I hope that I will be able to struggle through.

We tabled amendment 13 because we believe that it would be sensible for HMRC to undertake a review of the changes to be made by clause 2 in advance of their implementation.

[Mel Stride]

I welcome the hon. Lady to her position. I am sorry about her cold, and about the excitement that caused her nose bleed. I assure her that there will be no further nose bleeds, because there will probably not be much excitement as the Committee continues, but that is where we are.

Before I respond to what the hon. Lady said about amendment 13, let me remind the Committee about what the clause seeks to achieve. Clause 2 changes the taxation of company cars to support the uptake of the cleanest zero and ultra-low emission cars. As the Committee will be aware, the taxation of company cars is linked to carbon dioxide emissions to promote the purchase of environmentally friendly vehicles. The appropriate percentages for company car tax increase each year in order to ensure that there is always an incentive for company car drivers to choose the most environmentally friendly vehicles.

By 2020-21 the current ultra-low emission vehicle bands in the company car tax regime will no longer support the uptake of the cleanest cars using the latest technology. The changes being made by clause 2 will address that by updating the current two ultra-low emission vehicle bands. From April 2020, the graduated table of company car tax bands will include a differential for cars with emissions of 1 to 50 grams per kilometre based on the zero-emission range of the car. A separate zero-emission band will also be introduced. In addition, the clause will increase the appropriate percentage for conventionally fuelled cars by 1 percentage point in 2020-21, to sharpen the incentive for people to choose ultra-low emission vehicles instead of more heavily polluting ones.

The changes in the clause mean that in 2020-21 a basic rate taxpayer driving a popular battery-powered company car, such as a Nissan Leaf, will be £720 better off compared with 2019-20. That is a saving of £750 per year compared with a basic rate taxpayer choosing an average petrol-powered car such as a Vauxhall Corsa. Legislating in advance will provide certainty and stability for industry and give companies and employees the chance to make informed choices about the future tax implications of their company car.

Amendment 13 proposes that the Chancellor should publish a report reviewing the impact of these changes, focusing on the effects on the use of zero and ultra-low emission vehicles as company cars, as well as air quality in towns and cities in each year from 2020 to 2030-31. I appreciate that the hon Members are trying to ensure that policies are being assessed to ensure they are supporting the uptake of greener vehicles, but a report on our forecasts is not the way to achieve that.

Company car tax rates are set three years in advance, so that companies and employees are able to make informed choices about the future tax implications of their company car. Of course, we have had to take a view of how the market will develop, including for ultra-low emission vehicles, when we set the rates. However, the amendment is asking us to provide a review of the effect of the measure before it has been implemented. It is also not appropriate for the Government to provide commentary on their forecasts, as that could lead to uncertainty that we could make last-minute changes to our proposals. That would go against our policy to announce CCT rates three years in advance for taxpayer certainty.

Hon. Members should also bear in mind that the 2020-21 rates have come out of an extensive consultation with our stakeholders that we carried out in the summer of 2016 into how CCT should be structured. That consultation looked specifically at how to encourage company car drivers to choose the cleanest vehicles. That is what clause 2 seeks to achieve by updating the current two ultra-low emission vehicle bands. Increasing the incentive for people to purchase cleaner cars will help to ensure we meet our legally binding carbon emissions and air quality targets, helping to improve the air quality of our towns and cities and protect the environment for the next generation. Of course, we continue to review the uptake of ultra-low emission vehicles as part of our wider strategy on improving air quality. On that basis I believe that the amendment is unnecessary, and I ask the hon. Lady to withdraw it.

To conclude, the clause strikes the right balance between supporting the purchase and manufacture of ultra-low emission cars, and ensuring that all company car drivers and their employers pay a fair level of tax. I therefore commend the clause to the Committee.

[Anneliese Dodds]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 ordered to stand part of the Bill.

Clause 3

Pensions advice

--- Later in debate ---

[Mel Stride]

Before I respond to the amendment as well as the other points raised in the debate, let me first remind the Committee of what the clause seeks to achieve. As we have heard, it reduces the tax-free dividend allowance from £5,000 to £2,000 from April 2018. The change will ensure that support for investors is more effectively targeted and helps to deliver a fairer and more sustainable tax system. It will also help to reduce the tax differential between individuals working through their own company and those working as employees and self-employed. Crucially, it raises revenue to invest in our public services, raising approximately £2.6 billion out to 2021-22.

Since the tax-free dividend allowance was first announced, the landscape for small business owners, savers and investors has changed. The hon. Member for Oxford East specifically asked about support for businesses in the context of these changes. I can assure her that, as the party of business, we are wholeheartedly behind businesses. First, we have supported businesses by reducing the main corporation tax rate to 19%, which is now the lowest rate in the G20. Secondly, for savers, we have increased the amount of money that an individual can save or invest tax-free through an ISA, by the largest amount ever, to £20,000, nearly doubling the limit since 2010. Thirdly, we have continued to increase the personal allowance to £11,500 this April. We have committed to increasing it further, to £12,500, helping individuals keep more of the money that they earn.

The hon. Member for Aberdeen North raised a specific point about response rates from HMRC to telephone contact. That is one of the measures that we are constantly looking at—how good are customer services—and I reassure her that it is one measure where HMRC performance has been relatively strong recently.

The clause should be considered in the context of that wider support for business and the need to deliver a tax system that works for everyone. We also need to take account of the ongoing trends in the different ways in which people are working. The design of the current tax system means that individuals who work through a company can pay significantly less tax than individuals who are self-employed or who work as employees. That can be true even when those individuals are doing very similar work.

At the autumn statement last year, the Office for Budget Responsibility estimated that the faster growth of new incorporations, compared with the growth of employment, would reduce tax receipts by an additional £3.5 billion in 2021-22. By that year, HMRC estimated that the cost to the public finances of the existing company population will be more than £6 billion.

The Government are committed to helping all businesses to succeed, large and small, and in all parts of the United Kingdom, but to deliver and maintain low taxes for everyone, we need a tax base that is sustainable. The cost to the public finances of the growth in incorporation is clearly not sustainable. It is, therefore, right to make the small but sensible change to reduce some of the distortions to which I have referred.

As we have heard from the hon. Member for Oxford East, amendment 18 would commit HMRC to undertake a formal review of the effect of this change to the dividend nil rate by the end of June 2019. It has been specifically proposed that such a review should consider in particular the effect of the change on the self-employed. Such a formal review is not necessary.

As I have mentioned, the change needs to be considered in the context of the wider support that the Government have provided to business owners all across the United Kingdom, from reducing the rate of corporation tax to giving the self-employed the same access to the state pension as employees, worth almost £1,900 more per year, to introducing successive increases to the personal allowance, which is available in addition to the dividend allowance.

Indeed, the Government have given careful consideration to the impact of reducing the dividend allowance. A £2,000 allowance ensures that support is more effectively targeted following this change. Around 65% of all recipients of dividend income will continue to pay no tax on such income. That includes around 80% of all general investors. Typically, a general investor will still be able to invest around £50,000 without paying any tax on the resulting dividend income. Those investors who are affected will have, on average, investments worth around £100,000, which will put them in the top 10% of wealthiest households in the country. I therefore invite the hon. Lady to withdraw the amendment.

The Government are delivering a tax system that works for everyone, including businesses, savers and investors. As the OBR has highlighted, there is a rising and unsustainable cost to the public finances of the growth in incorporation. The clause would help to address that by reducing the tax differential between those who work for a company structure and pay themselves in dividends and those who work as employees or self-employed, while ensuring that support for investors is more effectively targeted. I, therefore, urge the hon. Lady to withdraw amendment 18, while I commend clause 8 to the Committee.

[Anneliese Dodds]

I am grateful to the Minister for his comments. However, we still feel that this is a substantial change. Despite his helpful comments, it does not appear that there has been sufficient consideration, specifically of the impact of this new measure on the income of the very entrepreneurs we should support, especially when they are beginning the life cycle of their new firm. We are concerned that, in effect, many of those live off the income from dividends at the beginning of their business and we do not feel that we have had the assurances that we require that there will not be a negative impact on their income. Therefore, we would like to push this amendment to a vote.

--- Later in debate ---

[Anneliese Dodds]

Clause 9 removes tax liability where wholly disproportionate gains inadvertently are made from surrendering life insurance. We can understand the motivation behind the measure. We know that the clause aims to introduce an application by which policyholders who part surrendered or part assigned their life insurance policies, including capital redemption policies and contracts for life annuities, and generated a wholly disproportionate taxable gain, can apply to HMRC to have their gain recalculated on a just and reasonable basis. None the less, we are concerned about the lack of key safeguards and the exercise of what is essentially a discretionary remedy by HMRC. The measure is not backed by the fundamental safeguard of a statutory right of appeal to a first-tier tribunal of the officer’s decision on what constitutes a just and reasonable basis for the calculation. It would be helpful if the Minister explained the reasoning for not making express legislative provision for a right of appeal, which we feel is a fundamental safeguard in the exercise of a discretionary remedy. Therefore, our amendment asks for greater consideration of that and other issues through a review, and I hope the Government will accept that request.

[Mel Stride]

Clause 9 makes changes to ensure that policyholders who take value from their ongoing life insurance policies in such a way that a wholly disproportionate gain is generated, as the hon. Member for Oxford East pointed out, can apply to HMRC to have the gain recalculated on a just and reasonable basis. Recent litigation has exposed circumstances in which cash withdrawals from life insurance policies, known as part surrenders, can give rise to a wholly disproportionate taxable gain. That could also occur following an early sale of part of a policy, also known as a part assignment. In particular, large early withdrawals of cash from a policy that shows little or no underlying economic growth can generate taxable gains that are wholly disproportionate in size and effect. Usually, if cash had been taken by a different method, little or no gain would have arisen.

At Budget 2016, the Government announced their intention to change the tax rules on part surrenders and part assignments of life insurance policies. The changes made by clause 9 will introduce an application process through which policyholders who trigger wholly disproportionate gains can apply to HMRC to have their gain recalculated on a just and reasonable basis.

The hon. Lady raised the issue of appeals. Although taxpayers do not have a right of appeal, they have strong safeguards through the complaints procedure, which provides a simple and straightforward way for policyholders to express dissatisfaction with a decision and have it scrutinised independently. Recalculation applications will be dealt with by a small team in HMRC, ensuring consistency and quality of approach. If taxpayers are unhappy with the decision made, they can complain, and any complaint will be dealt with fairly and impartially by someone independent of the original decision maker. If taxpayers are still not satisfied, the complaint can be referred to the adjudicator or the Parliamentary and Health Service Ombudsman.

The changes will provide a fair outcome for policyholders who inadvertently generate disproportionate gains. An important point is that the measure is expected to affect fewer than 10 policyholders per year and to have a negligible cost to the Exchequer. The impact on life insurance companies, which broadly support the measure, is also expected to be negligible.

The Opposition amendment would require HMRC to complete a review of the operation of these changes by June 2020. The proposed changes in the clause provide a fair outcome for the very small number of policyholders—around 10—who inadvertently generate these gains. As mentioned earlier, we expect fewer than 10 policyholders to be affected. A formal mandated review, followed by a report to the House of Commons, would be an excessive requirement for changes so narrow in scope and for such a small number of individuals affected. I therefore ask the Committee to resist the amendment.

To conclude, clause 9 will provide a fairer outcome for a small number of policyholders who generate wholly disproportionate gains. I invite the hon. Lady not to press her amendment, and I commend the clause to the Committee.

[Anneliese Dodds]

We are willing to withdraw the amendment, but we want to ensure above all that the information and advice about the provisions are definitely made available to the albeit small number of policyholders. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Graham Stuart.)

Oral Answers to Questions

Debate between Mel Stride and Anneliese Dodds

Tuesday 18th July 2017 Commons Chamber

[Mel Stride]

This is an important point. As the corporation tax rate has decreased to 19%—it will go down further to 17%—we have seen a 50% increase in the take, which is an amount in the order of £18 billion.

[Annaliese Dodds (Oxford East) (Lab/Co-op)]

Most economists prioritise building business confidence and improving infrastructure and skills over cutting corporate tax rates. Is the Minister aware that lowering corporate tax rates now presents the appearance of Britain trying to undercut countries with which we need to agree a decent Brexit deal—at a time when businesses are not confident in the Government’s leadership, but are instead “aghast” and “confused” at their approach to Brexit?

[Mel Stride]

We have seen a huge increase in employment in this country to a record level, and a record drop in unemployment to the lowest level since the mid-1970s. A lot of that has been driven by business. If the hon. Lady is seriously suggesting that the recipe for increasing the confidence of business is putting up its corporation tax to 26%, she has, I am afraid, missed the point.