Finance (No. 2) Bill

Baroness Penn Excerpts

Lords Hansard - Part 1 & 2nd reading & Committee negatived & 3rd reading
Tuesday 22nd February 2022 Lords Chamber

Moved by

[Baroness Penn]

That the Bill be now read a second time.

[Baroness Penn (Con)]

My Lords, we are here to debate the annual Finance Bill, introduced in the House of Commons following the Budget on 27 October last year. My right honourable friend the Chancellor of the Exchequer outlined then a Budget to build a stronger economy: an economy of higher wages, higher skills and rising productivity, with more investment in infrastructure, innovation and skills; stronger growth, with the UK recovering faster than our major counter- parts; a stronger labour market, with falling unemployment and record numbers of payrolled employees; and stronger public finances, with a simpler, fairer and more sustainable tax system to support businesses and consumers. That is the Government’s vision for the future of this country, and this Finance Bill will help to deliver that vision for the tax system.

It may be helpful to noble Lords to start with a little of the context behind the Bill. Our country’s economic situation has significantly improved in the past year. The UK’s real GDP growth was the highest in the G7 in 2021, at 7.5%, and the IMF is now forecasting that we will have the highest growth in the G7 again in 2022, at 4.7%. GDP remained at pre-pandemic levels in December, despite the impact of the omicron variant and plan B measures. The labour market is also performing extremely well, with the total number of employees on payrolls above pre-pandemic levels, redundancies at an all-time low and record numbers of vacancies. However, there are challenges ahead, with global supply chain disruption and high energy prices adding to inflation around the world and helping to explain the rise in inflation above the 2% target in the UK in recent months.

These are global problems, neither unique to the UK nor possible for us to fully address on our own, but the Government are committed to working with international partners to monitor global supply chain pressures and strengthen the resilience of our critical global supply chains. We are also providing support worth over £20 billion this financial year and next to help families with the cost of living. In 2021, we moved away from providing emergency economic support to focusing on our economic recovery. This is a transition from a period where the Government rightly provided unprecedented support, to a promising future.

Credit for this recovery must, of course, go to our vaccination programme, including the outstanding booster programme, but equally we must not overlook the steps that this Government have recently taken to support families and businesses, including through measures contained in the last Finance Bill. This action has boosted public finances, allowing the Government to invest at scale through the Budget and the spending review, with significant increases for government departments in overall spending.

But debt is still at a historically high level. It is set to pass £2.3 trillion and is currently at its highest level as a percentage of GDP since the early 1960s. While the level of debt is currently affordable, there are significant risks associated with elevated levels of debt. Although the fiscal outlook has been improving, new fiscal rules will help to ensure that public finances remain on a sustainable path. This approach will ensure that the Government can continue to invest in first-class public services, support people and businesses through the next stage of our economic recovery and lay the foundations for future economic growth. This is also a responsible approach to our public finances that allows the Government to respond to global challenges where needed, including the recent package of support to help households with rising energy bills, worth £9.1 billion this year.

I now turn to the content of the Finance Bill itself. The Bill contains several measures that will help build a stronger economy and help businesses to invest in the UK’s future growth and prosperity. Noble Lords will be aware that productivity in this country has long lagged behind that of our international counterparts. The Government are determined to rectify this and to help businesses to reach their full potential by making it easier for them to invest and grow. That is why, in March 2021, the Government introduced the new super-deduction. As the Chancellor noted at the Budget, now is not the time to remove tax breaks on investment. The Bill therefore extends the temporary £1 million limit of the annual investment allowance again until the end of March 2023, instead of allowing it to revert to £200,000, as planned, from the start of 2022. This higher AIA level provides businesses with more upfront support and encourages them to bring forward investment.

Measures in the Bill will also help to protect our unique culture and heritage, by making our creative tax reliefs more generous. Social distancing and wider restrictions have had a particular impact on companies relying on live performances and exhibitions to generate their core revenue, such as theatres, orchestras, museums and galleries. It is therefore right that the Government support charitable companies to put on high-quality museum and gallery exhibitions. That is why the Bill extends the tax relief for museums and galleries by another two years, to March 2024. It also doubles the tax reliefs for theatres, orchestras, museums and galleries until April 2023; they then revert to their normal rate only in April 2024. This is a tax relief for culture worth almost £0.25 billion, which will enable our creative industries to continue to flourish.

I turn now to another sector that makes an important contribution to our economic well-being, namely the maritime industry, which is responsible for 95% of our trade in goods. The UK has always been a seafaring nation and we must continue to help our shipping industry to succeed. First, that means removing any requirements for ships in the UK tonnage tax regime to fly the flag of any EU country. We will focus instead on boosting the use of the UK’s merchant shipping flag, the Red Ensign. Our flag has a well-deserved reputation for maintaining the highest international standards, and we want more ships to benefit from this by registering in the UK. Secondly, the Bill will make it easier for shipping companies to move to the UK from April this year, bringing jobs and investment to nations and regions around the UK. These measures will support our thriving shipping industry, helping to drive jobs in our coastal communities and boosting our world-renowned maritime services industry.

In March last year, the Government committed to reviewing the bank surcharge, in light of the decision to increase the corporation tax rate to 25% from 2023. As outlined in the Bill, the surcharge will be set at 3%. From 2023, this means that the overall tax rate on banks’ profits will increase from 27% to 28%, a rate that is higher than that of most other companies. This will ensure that banks continue to pay their fair share of tax, while maintaining the UK’s financial services competitiveness and safeguarding tax revenue. The Bill also raises the annual allowance to £100 million to ensure that the tax system is supportive of growth for smaller retail and challenger banks.

The economic recovery is under way, and we are investing record amounts in our public services. However, we must still take a prudent and responsible approach to our national finances, and this can mean tough choices. As the House will know, the Government are introducing a new ring-fenced health and social care levy, based on national insurance contributions. This will be supported by increasing the tax rates on dividends by 1.25 percentage points in the Bill, ensuring that those with dividend income make a contribution in line with that made by employees and the self-employed. But our generous allowances mean that everyday investors will be entirely unaffected. Around 60% of individuals with dividend income will pay no dividend tax in 2022-23.

I now turn to the new residential property developer tax. This is a 4% tax on the profits made by the largest developers carrying out residential property development activity in the UK. It forms part of the Government’s building safety package, aiming to bring an end to unsafe cladding. It will help to ensure that developers pay a fair contribution to help fund this package, and it will apply from April.

The Bill also contains measures that will help tackle economic crime, tax avoidance and tax evasion, all of which undermine our efforts to strengthen the country’s finances and build a stronger economy. The new economic crime anti-money laundering levy will help to fund new and uplifted anti-money laundering measures, including the ambitious reforms the Government announced in their 2019 Economic Crime Plan. The Bill will implement the levy on entities that are regulated for anti-money laundering purposes. These firms will benefit, both directly and indirectly, from the new and uplifted measures funded through the levy. It will impact an estimated 4,000 businesses, which will be liable to pay the levy. The amount payable will be determined by reference to the business’s size, based on its UK revenue.

I turn to tax avoidance. We know that the vast majority of tax advisers adhere to high professional standards and are an important source of support for taxpayers. However, promoters of tax avoidance schemes who use every opportunity to sidestep the rules to sell their wares fall into a very different category. The Government have taken action to clamp down on these promoters. Indeed, as a result of this action, the tax gap attributed to marketed tax avoidance has already steadily declined from its peak of £1.5 billion in 2005-06 to £0.5 billion in 2019-20—a fall from 0.4% to just 0.1% of total tax liabilities.

But we have not stopped there. We have developed, through continued engagement and consultation with stakeholders, further powers to disrupt avoidance. Measures in this Finance Bill will reduce the scope for promoters to market tax avoidance schemes. They will allow HMRC to clamp down on these schemes by giving it the power to impose penalties on UK entities that enable offshore promoters, freeze promoters’ assets to ensure that penalties they are liable for are paid, and shut down promoters which continue to sidestep the rules.

The Bill introduces tougher sanctions to tackle tobacco duty evasion, which is estimated to have cost the Exchequer £2.3 billion in 2019-20. Electronic sales suppression will also be tackled by the Bill. This is a form of tax evasion whereby a business deliberately manipulates its electronic sales records to reduce the recorded turnover of the business and corresponding tax liabilities. The Bill will make those facilitating ESS liable to a penalty fine of up to £50,000.

The Bill also helps to deliver a simpler and more sustainable tax system; for example, by simplifying the rules around basis periods. These rules determine how profits are split between tax years. The Bill will create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years. Currently, small businesses that choose an accounting date other than the dates between 31 March and 5 April face complex rules. They also face double taxation in the early years of trade and the need to maintain accurate records of overlap relief, which is often lost and not used by taxpayers. These reforms will remove this double taxation and the existing requirements of the basis period rules, creating a simpler tax environment for many small businesses.

Finally, noble Lords may also have noted that the Government brought forward a new tax during the Bill’s passage through the House of Commons. This is the new public interest business protection tax, a temporary measure aimed at protecting taxpayers and energy consumers. It is, in principle, possible for an energy business to derive value from a valuable financial asset, such as a forward purchase contract, for its own benefit and the benefit of its shareholders, while leaving its energy supply business to fail or increasing the costs of a failure. The costs of that failure would then be picked up by the taxpayer or consumers, because it would trigger a special government-funded administration regime.

Ofgem is now consulting on a range of regulatory actions that it proposes to take to ensure that the right protections are in place in these circumstances. However, it will take some time for these changes to come into effect. It would be unacceptable for the Government to allow business owners to profit from engineering this kind of outcome in the interim period, at great and direct expense to the UK taxpayer. That is why we are introducing this temporary tax. It is our hope and expectation that no business will undertake this course of action and that the tax will therefore not be charged.

There is no doubt that the pandemic has cast a long shadow over this country and our finances, but now is the time to open a new chapter in this country’s story, characterised by economic growth and renewal. We will invest in people, businesses and public services, but we will also never forget our responsibility to strengthen the public finances. A simpler, fairer and more sustainable tax system will help us achieve this. The measures in the Bill support these goals, while also continuing our long-standing efforts to tackle fraud, avoidance and evasion. For these reasons, I commend the Bill to the House and beg to move.