Finance (No. 2) Bill

Baroness Kramer Excerpts

Committee negatived & 3rd reading
Tuesday 4th July 2023 Lords Chamber

[Baroness Kramer (LD)]

My Lords, this is a Bill of limited scope, despite its enormous size and the Explanatory Notes. It covers a range of issues and, typically, we have debated nearly all of them in this House before, so I will limit my comments. There is a fair amount in the Bill that is not satisfactory.

I start with the issue on which the noble Lord, Lord Leigh, focused: tax credits for research and development. As this House knows, the Government scrapped their original and rather generous scheme because, they claimed, there was so much fraud in the system. I would have preferred that they found a way to deal with the fraud, rather than remove that support to a wide range of SMEs. The Bill brings in a tax credit scheme for SMEs that are heavily engaged in R&D, but it ignores the many other SMEs that had planned on an understanding that the old scheme would be available to them, made a series of investments and undertook a great deal of development. Those programmes have now been interrupted or shelved, because the cuts have not just deprived those companies of tax relief but had the knock-on effect of drying up private funding. There are limited financing options for growing SMEs in the UK.

My colleagues in the other place put down amendments to require a review of the impact of the change in reliefs on SMEs—on their funding, job creation and, more broadly, UK economic growth. The flip-flopping which this policy represents is one of the reasons for the pervasive uncertainty that is undermining growth in the UK economy. I would be glad if the Minister could tell me whether there will be a broader review.

I will pick up an issue that the noble Lord, Lord Eatwell, focused on. The Bill includes an increase in the annual tax-free allowance for pension contributions and the abolition of the lifetime allowance. This should stem the loss of senior doctors, military personnel and others in the public sector who had been put in the ridiculous situation of receiving incremental salary only to find that it triggered incremental taxes far greater than that salary. I honestly suspect that this could have been done through a much more targeted and far less costly set of reforms. It really feels wrong to spend £1 billion a year on some of the best off in our workforce. Will the Government look at a much more targeted approach to achieve this goal, rather than this wider, sweeping giveaway? The scheme fails to touch even the tip of our labour shortage problems, which is where one would have thought this money would be focused. Right now, businesses in the UK and the public sector are foundering for lack of staff.

We have talked endlessly about the windfall tax on oil and gas, and I will not repeat my concerns in that arena. My colleagues in the other place sought to strengthen this country’s green policies with amendments to the Bill to allow generators of renewable energy to offset money reinvested in renewable projects against the energy generator levy. It is offensive that the fossil fuel industry can offset investments, but not renewable generators. When I read this, I felt it was no wonder that the noble Lord, Lord Goldsmith, was so scathing about the current environmental commitment in his resignation letter.

Ironically, the Bill abolishes the Office of Tax Simplification, presumably because it is viewed as unnecessary, but it does so just as it introduces far more complexity into the tax system—a point highlighted not by my colleagues but by Harriett Baldwin, Conservative chair of the Treasury Select Committee. As the noble Lord, Lord Leigh, said, the two top-up taxes designed to discourage profit shifting are welcome but, as he pointed out, they are not going to deliver a lot more money to the Treasury. It is good to get thinking about this area and to try to work through the complexity; but let us not pretend that this will be a flow of cash into the Treasury’s coffers.

Frankly, the problem with the full expensing of capex is that it is a short-term stimulus for three years. All that means is that you upfront expenditure and then drop off expenditure when that period is over. The benefit is an extremely limited stimulus.

I received an email very late in the day from the Local Government Association. I will be very quick in mentioning its contents. It is a real expression of regret from the industry, which the Minister should hear, that the Bill was not used to deal with concerns about the implementation of the building safety levy. As the Minister will know, that was originally designed to deal with high-rise development activity, reflecting the greater building safety risk. However, the Government have broadened its scope to cover frankly all development. It could be rolled into other forms of taxation, such as the residential property developer tax. As it stands, it requires

“309 local authorities to set up separate, individual processes to act as a collection and administration agency for the Levy—with all funds raised being returned to Government.”

It is hugely inefficient and very unreasonable. Frankly, if we kept the Office of Tax Simplification, it would have jumped on that issue.

From listening to the Government in the debates on the finance Bill, one would have assumed that all was well with the UK economy. My great fear is that the Government simply do not understand how dire the cost of living crisis is for so many people. Recent reports that many have exhausted their Covid savings is not good news. The voluntary mortgage contract, much touted by the Government, will delay for some the immediate impact of interest rate rises but those high rates—they will be even higher because of the measures people will undertake—will still undermine family finances for both owners and renters.

Inflation in the UK remains stubbornly high. By contrast, eurozone inflation has fallen to 5.5%. Last week, the Minister claimed that lots of other European countries had higher inflation than the UK. I looked at the numbers, and I realised that she and the Government have taken to comparing the UK not with major economies such as Germany or France but with Hungary and Estonia. When did our economy, in the Government’s eyes, become comparable with those of Hungary and Estonia rather than those of other G7 countries?

Core inflation, which excludes volatile food and energy prices, rose last month to 7.1%. That is the number that is driving interest rate increases and that captures the sheer economic incompetence of this Government, as well as their wholly inadequate trade relationship with Europe post-Brexit: the sharp drop in exports, British firms removed from supply chains, a collapse in business investment, the fall in sterling, customs friction driving up the cost of imports, labour shortages, and incredibly low productivity.

This finance Bill is a missed opportunity. It could have dealt with so much. It seems to confirm that the Government’s primary goal is to engineer a pre-election tax giveaway next year because the fiscal rules might possibly allow it. All I can say to the Government is that the British people will not be fooled.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their contributions to the short debate that we have had on the finance Bill today. Noble Lords reflected on the economic circumstances in which we find ourselves. We recognise that high inflation increases costs for households and businesses and that, as my right honourable friend the Chancellor has said, low inflation is necessary for growth. The energy shock from Russia’s unlawful invasion has been felt more in the UK, partly due to our historic dependence on gas, and domestic factors such as record tightness in the labour market and high inactivity rates have put pressure on UK inflation, but that does not remove the fact that we are not alone in facing the global challenge of high inflation rates. Despite this, the IMF has said that the UK has taken decisive and responsible steps to tackle inflation, and all major forecasters expect inflation to fall this year.

Turning to noble Lords’ comments around the level of taxation in our economy and the suggestion—I am not sure whether it was from the Labour Front Bench—that we should change the decisions that we made on tax thresholds to consolidate our public finances and that this should be the route that we take to help people with the cost of living, as my right honourable friend the Chancellor has made clear, the Government’s number one priority is reducing inflation. Not only will this be the most effective tax cut for people and businesses across the UK, but we must not to do anything to prolong inflation, which unfunded tax cuts would only fuel.

It is important to reflect on the action taken since 2010. We have increased the personal allowance and the national insurance contribution threshold above inflation, taking millions of people out of paying tax altogether. Consequently, we have some of the most generous starting allowances for income tax and social security contributions in the OECD and the most generous in the G7.

Outside the tax system, to support household we have focused our help on those who are most vulnerable to the impact of rising prices. Our cost of living support includes the energy price guarantee, cost of living payments and the household support fund, as well as uprating benefits in line with inflation. I say to the noble Baroness, Lady Kramer, that the Government recognise the impact that rising inflation and increases in the cost of living are having on households across the country. That is why cost of living support for households totals £94 billion, or around £3,300 per household, on average, this year and next, which represents one of the most generous packages of support in all of Europe. I say to the noble Lord, Lord Sikka, that looking at the impact of the decisions made from the Autumn Statement 2022 onwards, government support for households in 2023-24 provides low-income households with the largest benefit in cash terms and as a percentage of income. On average, households in the bottom half of the income distribution will see twice as much benefit as households in the top half of the income distribution in cash terms.

My noble friend Lord Leigh welcomed the implementation of the G20/OECD pillar 2 rules. We take our international obligations very seriously. We were instrumental in negotiating this agreement and these rules and as such do not see them as at odds with our sovereignty. We retain sovereignty to set our corporation tax rate as one of the lowest in the G7 and to use important tax levers to boost investment in the UK, including our world-leading full expensing regime and our generous R&D tax reliefs. In fact, pillar 2 will boost the international competitiveness of the UK because it places a floor on low and no tax rates that have been available in some countries. It is designed to protect against the risks of harmful tax planning by multinational groups. As my noble friend said, it is important that the UK legislates for these rules now but, to repeat the assurance that the Financial Secretary to the Treasury gave in the Commons, we will provide an update on pillar 2 implementation as part of the forthcoming fiscal event in the autumn and, if necessary, in the spring, too. This will include the latest revenue forecast from the OBR and an update on the status of international implementation.

I turn to my noble friend’s comments on research and development relief. He asked whether I would have regard to the Chartered Institute of Taxation’s detailed comments, in particular in respect of the new powers HMRC has to remove a claim. While it is correct to assert that customers do not have a right of appeal, they do have a new statutory right of representation to provide HMRC with evidence within 90 days if they think the claim has been removed in error. They also retain the right to apply for judicial review if they do not think HMRC has applied the process correctly.

My noble friend also raised concerns about the R&D compliance check. The Government acknowledge that there is currently a high level of non-compliant claims in R&D tax reliefs and that it is right that HMRC takes action, as I think my noble friend also recognised. HMRC has increased the action it is taking, which means addressing more of the non-compliance. As part of this, it has been rapidly upscaling its numbers of people, and this can sometimes come with teething problems. HMRC ensures that less experienced caseworkers can call on technical support or specialist advice from more senior colleagues. HMRC will continue to work with stakeholders to ensure that the department is managing checks professionally and in line with the HMRC charter, and I would happily hear any further representations by my noble friend or others on how we can ensure that we are delivering in this area.

On company tax rates, the noble Lord, Lord Sikka, asked how many companies will pay the full 25% rate, which is an increase in the headline rate of corporation tax. The noble Lord is absolutely right that the small profits rate will keep the rate at 19% for companies with profits of £500,000 or under, and marginal relief is available for companies with profits from £50,000 to £250,000, meaning that companies will pay somewhere between 19% and 25%. That means that 70% of actively trading companies will not see an increase in the rate of corporation tax they pay, and only 10% will pay the full rate.

I am grateful to the noble Lord for giving me the opportunity to make those points. Sometimes, there is concern among those in business that our corporation tax rate is either uncompetitive or targeting smaller businesses. What we have done in changing the rate is to ensure that businesses pay their fair share of returning our public finances to a sustainable footing after the shocks of Covid and the invasion of Ukraine. We have reinstated some of those exemptions to ensure that the smallest businesses do not face those burdens. That is entirely how we have designed our approach.

[Baroness Kramer (LD)]

Can the Minister tell us—this is not to make a point but just for clarification and to understand the numbers better—is it 70% by number of companies or 70% by a value number of some sort, such as an asset value, a market value or a revenue generation value? How is that number calculated?

[Baroness Penn (Con)]

What I have before me is that 70% of actively trading companies will not see an increase, so I would take it as the former. If it is calculated in a different way, I will write to the noble Baroness to clarify that.

[Baroness Kramer (LD)]

To strengthen the Minister’s own point, it might be helpful if we had a calculation that gave us a better feel. One multinational could easily produce revenues many times those of dozens and dozens of small companies, so she might be getting a bigger tax take than the number that she is using implies.

[Baroness Penn (Con)]

The noble Baroness is exactly right. The increase in the headline rate of corporation tax makes a significant contribution to our public finances and to the consolidation of our public finances after Covid. All I meant to say is that, for some of the reasons set out by the noble Baroness, we have been able to exempt smaller businesses from that increase while also ensuring that bigger businesses—which often benefited a large amount from government support put in place during the pandemic—contributed their share to returning our public finances to a sustainable footing.

The noble Lord, Lord Sikka, also asked why HMRC’s budget had been cut. HMRC will receive a £0.9 billion cash increase over the Parliament, from £4.3 billion in 2019-20 to £5.2 billion in 2024-25, so I do not quite recognise the picture that the noble Lord has put forward. HMRC’s budget includes funding to tackle avoidance, evasion and other forms of non-compliance, to deliver a modern tax system and to support a resilient customs border.

I turn to another area of tax, the energy profits levy, which, I remind noble Lords, has helped to pay a significant proportion of households’ and businesses’ energy costs through the support that we have been able to provide. I want to be clear to noble Lords that the allowances in place are not a loophole. The OBR’s latest forecast is that the EPL will raise just under £26 billion between 2022-23 and 2027-28, inclusive of the EPL’s investment allowances. That is on top of £25 billion over the same period from the permanent regime for oil and gas taxations, totalling around £50 billion.

Abolishing the investment allowance would be counterproductive. The UK is still reliant on oil and gas for its energy supply and will be for several years; reducing incentives to invest would lead to investors pulling out of the UK, damaging the economy, causing job losses and leading to lower tax revenue in future.

My noble friend Lord Leigh asked about the impact of the price floor and the Government’s long-term plans for energy security. By introducing the energy security investment mechanism, the Government are providing certainty about the future of the energy profits levy. This allows companies to invest confidently in the UK and supports our economy, jobs and energy security.

On the long-term fiscal regime for oil and gas, the Government are also conducting a review to ensure that the regime delivers predictability and certainty, supporting investment, jobs and the country’s energy security. I wonder whether that predictability and certainty would be covered in Labour’s review of business taxes. I do not think the oil and gas sector sees predictability and certainty in its policy approach in recent weeks.

I turn to the electricity generator levy. Unlike the EPL, this not a tax on total profits that is calculated after the recognition of total revenues and costs. Instead, the EGL is payable only on the portion of revenues that exceeds the long-run average for electricity prices. The Government took into account the potential impact on investment when setting the benchmark price.

The Government are supporting renewables deployment through a range of policy levers, including the contracts for difference scheme, through which generators have received almost £6 billion net in price support to date. The electricity generator levy will not be payable on renewable generation produced under contracts for difference, which is the Government’s main form of support for green energy and will account for most new large renewable generation.

I turn to the point raised by the noble Lord, Lord Livermore, on non-doms. The Government recognise that issues of taxation come down to fairness. We need to have a fair but internationally competitive tax system which brings in talented individuals and investment that contribute to growth. Reforming the non-dom regime could potentially damage the UK’s international competitiveness, leading to a loss of international investment and talent. There is a great deal of uncertainty over the wider economic impacts of complete abolition.

Non-doms play an important role in funding our public services through their tax contributions. They pay tax on their UK income and gains in the same way as everyone else, and they pay tax on foreign income and gains when those amounts are brought into the UK. The latest information shows that that non-UK domiciled taxpayers are estimated to have been liable to pay almost £7.9 billion in UK income tax, capital gains tax and national insurance contributions in 2020-21 and have invested over £6 billion in the UK using the business investment relief scheme introduced in 2012.