Oral Answers to Questions

Debate between Catherine McKinnell and David Gauke

Tuesday 17th January 2017 Commons Chamber

[Mr Gauke]

The Government are committed to supporting the skills we need to deliver our national infrastructure. In the transport infrastructure skills strategy for 2016, we committed to creating 30,000 road and rail apprenticeships by the end of the Parliament. In addition, the Department for Business, Energy and Industrial Strategy is investing £40 million in the national college for high-speed rail, with additional funding for the college coming from local government and industry. Finally, Heathrow airport has committed to double the number of its apprentices to 10,000 by the time the new third runway is operational.

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

Changes to the rateable value for solar panels for organisations mean that business rates for organisations with solar rooftop installations, such as schools, hospitals and SMEs, could increase dramatically—six to eightfold—in April. Do the Government recognise the huge damage that this will cause to organisations that have installed panels in good faith, as well as the solar panel industry?

Oral Answers to Questions

Debate between Catherine McKinnell and David Gauke

Tuesday 19th July 2016 Commons Chamber

[Mr Gauke]

That will be me again.

My diary is filling up, and I was planning to take a summer holiday, but I may need to reconsider. I should be delighted to meet my hon. Friend.

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

Two infrastructure projects are critical to the north-east: increased airport capacity at Heathrow, and an expanded Metro system. What funding commitment can the Government make to those projects today?

[Mr Gauke]

As I think has been made clear, a statement on airport capacity in the south-east will be made in the autumn. As for the Metro, I cannot add much to what I have said before, but the Government obviously want to support transport infrastructure throughout the country, and are looking at all good projects.

Oral Answers to Questions

Debate between Catherine McKinnell and David Gauke

Tuesday 2nd September 2014 Commons Chamber

[Mr Gauke]

I am grateful to my hon. Friend for that suggestion, but I think the record is fairly clear whether the OBR looks at it or not. The previous Government left our public finances in a desperate mess and we are continuing to recover from that mess.

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

As well as auditing manifestos, we propose that the OBR should be tasked with monitoring and reporting on the Government’s progress on child poverty, including the impact of Budget decisions. Why will not the Government task the OBR with taking on this role? Is it because the Institute for Fiscal Studies predicts that by 2020 almost 1 million more children will be living in relative poverty and almost 1.4 million in absolute poverty?

[Mr Gauke]

Every week, another new task comes from the Labour party for the OBR. Child poverty is down by 300,000. That is the record and those are the numbers that have been produced. We believe that the OBR has had a very good start as an organisation. We value it and believe that it has an important future, and we will not jeopardise it by letting Labour use it for party political games.

Finance Bill

Debate between Catherine McKinnell and David Gauke

Wednesday 2nd July 2014 Commons Chamber

[Catherine McKinnell]

We can only speculate on what on earth was going through the Chancellor’s mind when he slashed an incentive that was clearly supporting those businesses in the very manufacturing industries that he claims to champion in making long-term investments, and creating and safeguarding the jobs that we need so desperately.

[Mr Gauke]

This policy was part of a package that included a significant reduction in corporation tax rates, which more than offset any impact on investment from the changes to the annual investment allowance. The Labour party has made it clear that it would increase corporation tax. This week, it has set out its test, which is to have the lowest corporation tax rate in the G7. That would enable a future Labour Government to increase corporation tax to 26%. Will she rule out a Labour Government increasing corporation tax to 26%?

[Catherine McKinnell]

Once again, Conservative Members, and indeed the Minister, want to brush over this inconvenient part of their so-called plan. They clearly made a bad decision in 2010. The purpose of the new clause is to show that. If the reduction in the annual investment allowance was offset by the reduction in corporation tax, as the Minister argues, why did they revisit the decision and increase the allowance again? That would not have been necessary if their only plan for supporting business up and down the country, which was to reduce corporation tax, had been successful. We supported that plan, but it was not enough on its own to offset the damaging uncertainty created by slashing the annual investment allowance from £100,000 to £25,000 in one fell swoop.

--- Later in debate ---

[Catherine McKinnell]

That is very much the point that I was making and that we have made all along. We had a financial crisis in 2008, and the Labour Government did everything that could be done in those difficult times to support businesses in order to maintain investment levels, safeguard jobs and lay the foundations for the jobs of the future. That is why Labour decided to bring in the investment allowance, and then to double it in the Budget in March 2010. We knew that businesses needed certainty at that difficult time in the economic cycle to make investment decisions. That proved successful.

The U-turn by this Government was not quick enough. We called for it in every Finance Bill. Their eventual U-turn proved that the annual investment allowance was a successful policy, because they recognised that it needed to be reinstated. We have had these debates many times. We have supported the reductions in the corporation tax rate as part of a package of measures to support investment, jobs and growth. Unfortunately, the Government thought that corporation tax rates would do the job on their own. That is why they decided to slash the investment allowance, and to put all their eggs in one basket—the corporation tax basket. We have made it clear that we support a competitive rate within the G7 and the current rate, in order to provide the competitiveness that will create jobs and growth. The hon. Member for Burnley (Gordon Birtwistle) is right that that has to be part of a package of measures.

One key issue that businesses always raise is certainty. In chopping and changing this policy, the Government have undermined the certainty that is needed to give businesses the confidence to invest for the future.

[Mr Gauke]

Will the hon. Lady give way?

[Catherine McKinnell]

I will give way again, but I hope that it is in order for the Minister to confirm that the Tory party will rule out any further chopping and changing on the annual investment allowance.

--- Later in debate ---

[Mr Gauke]

My hon. Friend raises an interesting point, which I could spend some time discussing. Some challenges are involved in reducing corporation tax below 20% in terms of ensuring that such a tax cut is well focused in encouraging increased investment. He will be aware of some of the difficulties that occurred when the previous Government temporarily introduced a 0% corporation tax rate for smaller businesses; that resulted in quite a lot of tax-motivated incorporation. I will not detain the House for long on this point, so I will just say that some issues would need to be addressed in respect of that.

What would certainly be damaging would be to reverse the considerable progress we have made on reducing corporation tax. The hon. Member for Newcastle upon Tyne North (Catherine McKinnell) placed great emphasis on providing certainty for businesses, and I would agree on that, but what we have done in reducing the corporation tax rate from 28% to 21%, and then to 20% as of next April, has undoubtedly helped the UK’s competitiveness position. One could quote survey after survey demonstrating that the UK is now viewed much more favourably as a place in which to do business because of our corporate tax regime, and it would be damaging were we to reverse this. Labour is on the record as wanting to put corporation tax back up to 21%. That would be the first increase, as a revenue raiser, in corporation tax since the 1960s, and we have heard a significant hint this week that Labour may even increase it to 26%.

[Catherine McKinnell]

rose—

[Mr Gauke]

I hope that is not the case and I am delighted to give Labour’s Front Bencher an opportunity to put an end to such suggestions.

[Catherine McKinnell]

Once again, the Minister is trying to change the subject from the annual investment allowance to corporation tax. Given that he acknowledges the importance of certainty in this area and that a reduction of the AIA back down to £25,000 is already on the horizon, does he accept that it would be beneficial for the Government, for Members of this House and for members of the public to have an assessment of the impact of that slashing to £25,000 in 2010, in order to inform the Government’s decision making in the future?

[Mr Gauke]

That is the fourth opportunity the hon. Lady has had to provide some reassurance to businesses and investors looking to the UK as a place in which to do business that a future Labour Government, should that misfortune occur, would not increase corporation tax to 26%. That is the fourth time she has ducked that opportunity. Corporation tax is linked very heavily with the annual investment allowance; they are not separate issues. If our debate is about ensuring that we have certainty for investment in the UK, it is a very salient point.

--- Later in debate ---

[Mr Gauke]

The point I was making is that it was this Government who introduced a corporate tax road map in 2010. That road map has provided a great deal of certainty to businesses and set out our plans for corporation tax. Given that we have been able to make progress with corporation tax rates in the current circumstances, although businesses feel uncertain about the challenges that lie ahead, including the referendum in Scotland and the possibility that an anti-business Government might be elected at the next general election, it would be helpful to have an annual investment allowance in place.

[Catherine McKinnell]

The Minister seems to be completely obsessed with corporation tax. Whatever question is put to him about annual investment allowances, he responds with an answer on corporation tax. I wonder whether that reinforces our call for the Government to be forced to look at the issue of annual investment allowances—the chopping and changing of them, and the lack of certainty—so that they address AIA as a serious issue that concerns businesses up and down the country.

[Mr Gauke]

The hon. Lady does not seem to recognise that there is a link between the annual investment allowance and corporation tax; it is an allowance set off against corporation tax. The two are not separate subjects. Of course, if we are discussing certainty within our tax system, one has to look at the bigger picture, and this Government, through the corporate tax road map, have provided much greater certainty for businesses in this country. The biggest threat to the certainty of our tax system at the moment appears to be a Labour party that is at least considering increasing corporation tax to 26%, which would be a huge increase and deeply damaging for the UK’s competitiveness.

--- Later in debate ---

[Mr Gauke]

Let me summarise the hon. Gentleman’s position: when the economy grows under a Labour Government, the Labour Government get the credit, but when it shrinks under a Labour Government, that is to do with international factors. At least we know where he stands.

We have heard a lot of criticism of the reduction in the annual investment allowance, and I have attempted to try to put that in the context of what we have generally done within our tax system. The impression given by the hon. Member for Newcastle upon Tyne North at all times was that it was a disastrous decision that resulted in business investment being slashed. I do not accept that position at all, and I have made it clear, by putting this in the context of what we are doing with corporation tax, that we are encouraging investment.

Just this week, the Labour party set out its plans for business tax. As far as I am aware, nothing was said in those plans about the annual investment allowance, or about extending the increase to £500,000 beyond December 2015. We heard a lot about an allowance for corporate equity, but I do not think that I heard anything at all from the Opposition on this subject. If it is so important to them, why do they not have a policy in this area? Indeed, at one point, it seemed to come as a surprise to the hon. Member for Newcastle upon Tyne North that this was a temporary measure, although subsequently in her speech it became clear that she was aware of that. What is Labour’s position? If Labour Members feel so strongly about this issue and it is a priority for them, why have they said nothing on the subject? On that point, I urge the House to reject new clause 10 if it is put to a vote.

[Catherine McKinnell]

It is absolutely clear that the Government have tied themselves in knots over the annual investment allowance. They have tried at every turn during this debate to change the subject, and not to deal with the catastrophic decision taken in Budget 2010 to slash the investment allowance from £100,000 to £25,000. That was followed by a welcome U-turn that moved it back up to £250,000, and now they have promised to double it to £500,000. I accept that it is a temporary measure, but the point that I was trying to make, which the Minister seems to have missed, is that the very fact that it is a temporary measure perpetuates the uncertainty, and we know, because businesses have told us, that that uncertainty undermines their confidence to invest.

The hon. Member for Burnley (Gordon Birtwistle) made a speech that I know was sincere, as he is aware of the importance of the manufacturing industry and of certainty in the tax landscape, particularly regarding the annual investment allowance, in enabling businesses to make investment decisions, to invest in plant and machinery, and to expand to create jobs for the future. However, I might also say that he made a typical Liberal Democrat speech, in that he sat on the fence and would not acknowledge that the Government need to take stock of the impact on investment decisions of chopping and changing this policy.

--- Later in debate ---

[Mr Gauke]

The hon. Lady says that her concern is that business will not know where it stands on the annual investment allowance when making decisions, but, much more importantly, if a business does not know whether the corporation tax rate will be 20%, 21% or 26%, that will surely have a much bigger effect on investment in this country. Can she provide some clarity on that?

[Catherine McKinnell]

I agree that business needs certainty about taxation to make investment decisions, and that is why we have committed to maintaining one of the most competitive tax rates in the G7, but today’s theme seems to be that the Government wish to talk only about corporation tax, and to airbrush out their catastrophic mistakes with the annual investment allowance. The hon. Member for Dover (Charlie Elphicke) made a valiant speech, but I felt it was dreadfully misguided. He was in quite a bit of trouble trying to defend the Government’s record in this respect, but frankly the decision making has been erratic and completely indefensible.

I pay tribute to my hon. Friend the Member for Coventry North West (Mr Robinson), who made a very thoughtful and considered speech in which he set in the historical pre-2010 context some of the rationale behind the Government’s decision making in this regard, but he also highlighted the irrational aspects.

Finance Bill

Debate between Catherine McKinnell and David Gauke

Tuesday 1st July 2014 Commons Chamber

[Mr Gauke]

I do not accept that. As far as avoidance is concerned, the tax reliefs are intended to encourage the take-up of employee shareholder status by individuals when that is offered to them. However, those reliefs are not an end in themselves. A number of rules in the legislation will prevent abuse of the new status while keeping it as simple as possible for employers and employees to use. For example, there are rules that will stop people with a material interest in the relevant business exploiting the tax reliefs for their or their families’ benefit. We will always keep the matter under review. As I said, if we see any abuse, we will act. However, we believe that we have put in place rules that protect the Exchequer from such tax avoidance.

I want to say a little more about take-up. My hon. Friend the Member for Rochford and Southend East (James Duddridge) made a good point: the argument is simultaneously that no one is making use of the scheme and that the scheme will cost a lot in tax avoidance. There is something of a tension between those two positions.

We decided not to introduce a pre-registration or pre-approval system for those wishing to make an employee shareholder agreement. The Office of Tax Simplification has told us that HMRC pre-approval of share schemes is outdated and time consuming for businesses. Data on employee shareholder status will therefore be picked up from companies’ annual share scheme returns to HMRC. As I said, the scheme has been in place only since the beginning of September 2013, so we have not even reached the deadline by which companies must submit their returns to HMRC for that period. It is far too early to finalise any details of publication.

[Catherine McKinnell]

Given the widespread concern expressed about the scheme, is the Minister’s position—that the Government will just wait and see—not incredibly complacent? When the returns come in, the scheme may prove to have been one big tax avoidance opportunity, but the Government seem perfectly relaxed about that.

[Mr Gauke]

No, that is not the case. As I said, when the original legislation was passed, protections were put in place; a moment ago, I gave an example of one designed to prevent abuse. We will continue to monitor the issue. As with all activities, if evidence of avoidance emerges, the Government will be determined to act, as we have time and again.

On the data on employee shareholders and on take-up, a question raised by a number of hon. Members, I am simply seeking to explain that I am not in a position to give the information that the hon. Lady and others have asked for because we have not required pre-approval or pre-registration for the scheme. That point is also relevant to the FT figures on take-up that have been mentioned. As there is no need for companies making use of the employee shareholding scheme to contact BIS in advance and there is no registration or approval system, we do not expect BIS to have a definitive list of all those companies that have made use of the scheme. That is why I am not in a position to give that information to the House and why the figures that were used by the Financial Times should not necessarily attract a huge amount of excitement.

The scheme is a new facet of our employment practices. It is probably unfair to judge a scheme such as this in its first few months because it will need time to bed in before there is wider knowledge about it and it is more widely used. As I have said, I am not in a position to provide information at this point.

[Mr Gauke]

It is always a great pleasure to give way to my favourite Member of Parliament for Edinburgh South. In quoting the figure of £1 billion he is somewhat conflating two things. One is the OBR’s estimate of the potential cost of the scheme some years into the future, if a whole set of circumstances apply and we do not take action to deal with any concerns that might emerge. As far as the Red Book is concerned, the published estimates of the annual cost of the measures are £10 million in 2016-17 and £45 million in 2017-18. Those are the numbers and we have no reason to believe that they will prove inaccurate, so to correct the hon. Gentleman for the record, we are not talking about a cost of £1 billion.

New clause 11 would impose an obligation on the Government that is not only unnecessary but, as I have set out in some detail, could not be met given the current availability of data on take-up of the employee shareholder status. Given that the new clause is unnecessary and would be unworkable, I ask the Opposition not to press it.

[Catherine McKinnell]

It will be no surprise that I find the Minister’s response extremely disappointing and a little concerning in its complacency towards a policy about which widespread concern has been expressed. Taking away the rights of working people across the UK is no substitute for a proper strategy for economic growth. The policy makes it easier to reduce rights at work and fire people, rather than making it easier to hire people. That shows just how out of touch the Government are.

I commend the hon. Member for Bedford (Richard Fuller) on his thoughtful speech. I also commend my hon. Friend the Member for Islwyn (Chris Evans) on his mammoth and excellent speech, and my hon. Friends the Members for Wythenshawe and Sale East (Mike Kane) and for Edinburgh South (Ian Murray). Opposition Members have put forward a powerful argument for the reasonable new clause that we have tabled. It simply asks the Government to make a proper assessment of who is taking up the shares for rights offer and what the cost to the Exchequer will be, including any loss from tax avoidance or abuse. As far as we can see, this is just another way in which the Government are trying to water down the rights of people at work.

Frankly, to Opposition Members and the many business organisations that have expressed their concerns, this policy stinks. The House and members of the public deserve to know exactly what the implications of the policy will be before the horse has bolted. The Government say that they will only shut the gate once that has happened. [Interruption.] I hear hon. Members groan at that, but I quote Lord Deben:

“I cannot imagine any circumstances whatever in which this would be of any use to any business that I have ever come across in my entire life.”—[Official Report, House of Lords, 6 February 2013; Vol. 743, c. 293.]

I think that he puts it very well.

Finance (No. 2) Bill

Debate between Catherine McKinnell and David Gauke

Wednesday 9th April 2014 Commons Chamber

[Mr Gauke]

I am short of time so, if the hon. Lady will forgive me, I will not give way.

Let me deal with a couple more points. On support for women, it is worth bearing in mind that of the 3.2 million people who have been taken out of income tax, 56% of the beneficiaries are women, and we have done a lot to help with child care. On the practical points raised by the hon. Member for Newcastle upon Tyne North, only the transferor will need to make an election, which will make it administratively easier for couples. We also want to implement the measure through a digital process, but we recognise the need for support for those unable or unwilling to use that method. HMRC will be properly funded to deliver this policy.

Let me conclude by reiterating the purpose of the clause. It is to reinforce the important institution which is marriage—whether gay, straight or civil partnerships—while also providing support for many households that have not been able to benefit fully from our changes to the personal allowance. I therefore request that amendment 3 be withdrawn, and move that clause 11 stand part of the Bill.

[Catherine McKinnell]

We have had some sincere but variously aspirational speeches from Government Members today, dreaming of a world where marriages are stable and children thrive. Nobody can take issue with the aspiration, but we need to deal with the real world and what the Government’s policy will deliver. It purports to support marriage, but only certain marriages will qualify. Two out of three marriages will get no recognition at all. The policy purports to support children, but five out of six families with children will get no help whatever. It is a dud. It adds complexity to the tax system. Its implementation will add cost both for HMRC and for the employers who will have to deal with the complexity for highly questionable gain.

We will therefore oppose the clause, and we urge hon. Members on both sides of the House, particularly Liberal Democrat Members, whom we know are on our side of the argument on this issue, to vote against the Government’s proposals and for our sensible amendment.

Question put, That the amendment be made.

--- Later in debate ---

[Catherine McKinnell]

As I said, the Wales Bill, which is currently going through Parliament, contains a number of devolved tax powers for Wales and is the appropriate place to debate these issues. That is why Labour will abstain on the issue of APD devolution tonight, but we look forward to the Exchequer Secretary providing clarity on the various queries that have been raised today, particularly about the regional air connectivity fund, which is clearly linked to the issues of certainty for investment, growth, which all Members are focused on, and the role that aviation plays in our economy.

[Mr Gauke]

In 2010, the Government inherited an air passenger duty system that needed to be fixed. The changes that the previous Government made in late 2009 caused aggravation to the UK’s overseas friends and frustrated diaspora communities. Clauses 72 to 74 will fix the system by implementing air passenger duty rates for this year and by reform of the rates for next year.

I will address new clause 2 and new schedule 1, tabled by Plaid Cymru Members, and new clauses 6 and 7, tabled by Scottish National party Members. The Plaid Cymru proposal broadly follows the form that was taken to devolve the duty on direct long-haul flights from Northern Ireland, and requests a similar devolution for direct long-haul flights from Wales. The SNP proposals seek the devolution of duty on flights to all destinations.

I remind hon. Members that the devolution of duty for Northern Ireland was in specific response to Northern Ireland’s unique circumstances. It shares a land border with Ireland, leading to a risk of flights relocating from one part of the shared land mass to another. We recognised that risk and acted to ensure that Northern Ireland was not disadvantaged.

The current situation is that airports on the Great Britain mainland face the same APD rates, but the SNP and Plaid Cymru proposals could well lead to the introduction of the same market distortions that our devolution to Northern Ireland sought to prevent, namely the reallocation of flights from one part of the UK to another, leading to distortion in competition, and winners and losers across the UK.

Regional airports are doing well: 2013 was the third consecutive year of passenger growth and our APD banding reform is another confidence boost for the air travel market. Relevant examples include Cardiff airport, which in 2013 saw a 4% increase, equating to around 44,000 extra passengers, with new routes announced to Germany and the Caribbean. In Scotland, there has been 3% growth at Glasgow airport, with almost 206,000 additional passengers. New routes have been announced for this summer to Croatia and Greece. Edinburgh airport has grown 6%, equating to more than 580,000 additional passengers. In the past six months, new routes to Qatar, the USA and Norway have been announced.

--- Later in debate ---

[Mr Gauke]

I am grateful to my hon. Friend because he brings me to my next point. I agree with him. The Government recognise the importance of aviation connectivity for all parts of the UK—for example, domestic flights are not subject to VAT. As he says, we are extending the scope of the regional air connectivity fund to include start-up aid for new routes from regional airports, and increasing funding to £20 million a year. Clearly, exactly how that works is a matter for the Department for Transport, but I welcome the fact that the Government are consulting the regional airports to see whether those that have more than 3 million passengers per year can receive extra support. That includes Newcastle airport, which has 4.4 million passengers. One could also mention East Midlands International, Liverpool John Lennon, Belfast International, Aberdeen, London City and Leeds Bradford, all of which have more than 3 million passengers a year. We are trying to do what we can to ensure that those airports can gain support from the connectivity fund.

[Catherine McKinnell]

Obviously, we broadly welcome any support for expansion and new routes from regional airports, but would the Minister accept that making an announcement without any details about the type of activity that will be covered by the funding can add uncertainty to the already difficult environment for the industry at present? It is imperative to bring some clarity to the issue as soon as possible. Will he tell us when he will be able to clarify what might qualify for the funding?

[Mr Gauke]

The hon. Lady is being uncharacteristically glass half empty. We have announced an expansion of the connectivity fund. We have said that we are seeking to take that beyond airports that have more than 3 million passengers per annum. As it happens, the Department for Transport is consulting on and developing guidelines for accessing support, and the results will be published in the summer. I am sure that the hon. Lady is as keen as my hon. Friend the Member for Hexham (Guy Opperman) to ensure that the best happens for Newcastle airport.

--- Later in debate ---

[Mr Gauke]

My hon. Friend is right. As I say, the Department for Transport is developing these guidelines with the intention of publishing in the summer.

[Catherine McKinnell]

rose—

[Mr Gauke]

I am sure that the hon. Lady—I think she has Newcastle airport in her constituency or at least nearby—will take this opportunity to welcome what the Government are doing.

[Catherine McKinnell]

Newcastle international airport is in my constituency—[Interruption.] However, I speak on behalf of all the regional airports. I am not being churlish about the potential funding that has been announced, but I hoped that the Minister would realise the increased commercial uncertainty that can be created by making announcements that lack clarity about what may or may not be included. The Government need to move as fast as possible to create—

Age-related Tax Allowances

Debate between Catherine McKinnell and David Gauke

Monday 9th September 2013 Westminster Hall

[Catherine McKinnell]

My hon. Friend makes a powerful point. The Office of Tax Simplification expressed surprise at the way in which the measure was introduced, and I shall go on to quote from the office as I set out the reasons why we do not support the Government’s policy.

It might be helpful to recap what has happened. Until the beginning of this tax year, individuals aged 65 or over were entitled to receive an additional age-related allowance, with a further addition for those aged 75 and over. Since 1977 and what was known as the Rooker-Wise amendment, all income tax allowances had been required to increase in line with the retail prices index, unless Parliament specifically determined otherwise.

As we are all aware, in Budget 2012, it was announced that from 2013-14—from this April—the availability of those age-related personal allowances for income tax would be restricted. The allowance for people aged 65 or over was frozen, as was the allowance of £10,660 for those aged 75 or over. Additionally, people turning 65 on or after 6 April 2013 were not entitled to any age-related allowances at all, meaning that the general personal allowance was all that applied to them.

On the basis of the speed with which the changes were introduced and our opposition to them, we tabled an amendment to this year’s Finance Bill that called on the Government properly to consider the impact of the changes to the personal allowance system on the group of people who are affected. We put that proposal forward at a time of overwhelming opposition to the changes. A whole body of evidence showed that the impact on pensioners would be hugely detrimental. As my hon. Friend pointed out, this came at the same time as a tax cut for those earning more than £1 million, who the Government were handing an average tax cut of £100,000.

The e-petition that has led to the debate is testament to the measure’s impact on pensioners and their level of concern about it. I commend Arthur Streatfield and his valiant efforts in obtaining 114,488 signatures, meaning that the debate could be secured.

My hon. Friend quoted Dot Gibson, the general secretary of the National Pensioners Convention, when she gave her backing to Arthur Streatfield’s e-petition, but it is worth repeating what she said:

“Since the Budget announcement...we have been inundated by pensioners like Arthur who are outraged that the Chancellor is giving a tax cut to those earning over £150,000 whilst pensioners on little more than £11,000 are having their tax allowance frozen. There has been a lot of nonsense about pensioners having been cushioned from the austerity measures, but they’ve already seen cuts to their winter fuel allowance, a reduction of their state pension increase because it’s now linked to the…Consumer Price Index rather than the Retail Price Index, rationing of care services in the community, closure of day care centres, changes to disability benefits and caps on housing support…The Chancellor’s decision to freeze the age related tax allowance is really the last straw for pensioners who feel they are being asked to pay for the mistakes of the bankers and politicians.”

The Opposition agree, which was why we voted against the changes during the passage of last year’s Finance Bill. It is absolutely the wrong priority at the wrong time, and in the current economic climate, the Government should be prioritising ordinary families, ordinary pensioners, the young and the long-term unemployed, not millionaires.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

For the sake of clarity, will the hon. Lady confirm whether the Opposition’s position is that, as a matter of principle, those under the age of 65 should have a lower personal allowance than those over the age of 65?

[Catherine McKinnell]

We are debating today the choices that the Government have made, the way in which this tax allowance change has been implemented, the speed at which it has been implemented, the lack of consultation, the lack of consideration and the lack of will from the Government to consider the impact on pensioners. That is what the focus of today’s debate must be, because it is about the current Government’s policies, the way in which they are being implemented and the impact that they are having on pensioners now. If the Minister would like to confirm that the Government have actually given some consideration to the impact on pensioners of the changes, that would be very helpful.

[Mr Gauke]

I hope to have the opportunity shortly to set out what the current Government have done for pensioners, but given that I did not hear a clear answer as to whether it is a matter of principle, can the hon. Lady confirm that the Labour party has no plans to reverse the abolition of age-related allowances?

[Catherine McKinnell]

Again, it would be helpful if the Minister could confirm for those taking part in the debate and for those following it—the many pensioners who have called for the debate and who want to know—what consideration the Government have given to their position and to the fact that pensioners are suffering a cost of living crisis. The Government seem to be taking no account of that.

Finance Bill

Debate between Catherine McKinnell and David Gauke

Tuesday 2nd July 2013 Commons Chamber

[Mr Gauke]

How quickly a particular case will be dealt with depends on the length of time it takes to be resolved. The right hon. Gentleman will know from his considerable experience as a Treasury Minister that some of these cases can take a number of years. It is worth pointing out that, by and large, large corporates tend to be involved in this type of litigation. The length of time it will take for a case to be resolved is ultimately unaffected by these changes. Their only significance is that there will not be interim payments in these rare cases.

The right hon. Gentleman asked how many cases there are per year. I cannot give him the number straight away, but it is very low. In the vast majority of cases, disputes are taken through the tax tribunal. As I say, this is about making common law cases consistent with tax tribunal cases. It is difficult to give the precise number of cases per year, but we are talking about low numbers.

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

I thank the Minister for responding to my right hon. Friend’s useful question. Will he clarify why the Government are proposing this change as a new clause to the Finance Bill? What has come to light between the initial drafting of the Bill and this stage in the proceedings, which is clearly very late given that the Bill is due to receive its Third Reading today?

[Mr Gauke]

We have introduced it at this point because recent jurisprudence has crystallised our view in this regard. As I say, we want consistency between common law cases and tax tribunal cases. A degree of volatility has been created in terms of tax revenues that none of us should welcome. In short, the answer to the hon. Lady’s question is that the reason is recent jurisprudence.

Let me give the right hon. Gentleman a little more detail in response to his question about rare cases. HMRC is aware of fewer than 10 strands of litigation where tax issues are being handled through the High Court. That is not to say that they would necessarily all involve interim payments, but I hope that that gives some sense of the scale of the issue. As I say, it is a procedural matter.

[Mr Gauke]

The first point to make is that this does not ultimately change the amount of tax at stake, because a litigant will either win or not win. If a litigant who ultimately wins has not had access to an interim payment as a consequence of this measure, that does not change what they will ultimately receive. Some of these cases involve large sums of money, sometimes many millions of pounds. In some cases, interim payments have been very significant. However, I stress that this does not ultimately change how much money will end up in the pocket of the litigant. It is a question of timing and ensuring that we have some consistency.

Turning to why we are doing this now, it follows recent jurisprudence of the Court relating to the application of the interim awards procedure. This jurisprudence has crystallised our view that the interim payment procedure is not suitable for complex tax disputes. There is also an element of risk management in this. HMRC is routinely involved in litigation where the tax at stake may be for very high sums of money. The granting of payments on an interim basis before a final decision has been reached contributes to the volatility of tax revenues. By limiting the application of the interim payment procedure in common law court claims relating to taxation matters, and bringing the system into better alignment with what is standard practice in the tax tribunal, the new clause will cut down on complex work associated with calculating claims on a contingent basis before matters relating to liability and quantum have been resolved by the judiciary.

[Catherine McKinnell]

The information being provided by the Minister is very helpful. The impact note states that the change will have no Exchequer impact, but that Her Majesty’s Revenue and Customs will benefit from reduced administrative costs and burdens. Is the Minister able to put a sum on that economic benefit to the Treasury?

[Mr Gauke]

That is a fair question and there will be a benefit to HMRC, but it is difficult to put a sum on it. I do not want to overstate the argument—we are not talking about an administrative saving of many millions of pounds—but clearly these cases are difficult to deal with. They involve the additional complexity involved in large-scale litigation matters that are taken through the courts. There is a saving, but I do not want to overstate it. The hon. Lady raises a perfectly fair question, but it is difficult to provide a precise number.

At a time when there is considerable pressure on resources, it is difficult to justify the considerable additional work that the interim payment procedure creates for the Revenue by adding stages to the litigation process. We have, therefore, taken the decision to legislate now in order to achieve better alignment between the treatment of different tax cases at the earliest opportunity. The Government believe that this will help bring an end to misalignment whereby the availability of interim payments in the context of tax differs depending on whether claims are brought in the court system or the tribunal system.

[Catherine McKinnell]

I thank the Minister for his comprehensive account of new clause 7 and for responding to our queries. As he has said, the Government want to introduce a number of new clauses and amendments to the Bill. Could you clarify, Mr Deputy Speaker, whether we are dealing with just new clause 7 at this stage, or are we taking any other amendments?

--- Later in debate ---

[Mr Gauke]

These Government amendments make important changes to the UK’s inheritance tax rules.

Amendments 1 to 7 will bring in greater flexibility and provide more individuals with the option to elect to be treated as UK domiciled for the purposes of inheritance tax. They demonstrate the Government’s willingness to listen to the views of external interested parties and act where there is a principled case for change.

Amendments 35 to 51 are being made as a result of comments by interested parties. They clarify the technical interpretation of the legislation and change the commencement provisions with respect to certain liabilities.

Let me turn first to amendments 1 to 7 to clause 175. The clause reforms the inheritance tax treatment of transfers between UK-domiciled individuals and their non-UK-domiciled spouses or civil partners. The changes allow individuals who are not domiciled in the United Kingdom but who have a UK-domiciled spouse or civil partner to elect to be treated as domiciled in the UK for the purposes of inheritance tax.

The amendments are being made following comments from two key interested parties—the Chartered Institute of Taxation and the London Society of Chartered Accountants—about how the Finance Bill as drafted amends the inheritance tax treatment of spouses and civil partners not domiciled in the UK. Their further representations since the publication of the Bill in March have helped us understand the concerns raised in more detail. Considering the points raised has taken time, but the amendments will resolve these issues.

The clause as drafted stipulates that a person must be non-UK-domiciled and married at the time they make an election. Consequently, a person who has recently become UK domiciled would not be able to make a retrospective election that would cover a period when he or she had been non-domiciled. Effectively, they are trapped if they are not aware of the possible IHT consequences at the point just before they become UK domiciled—for example, if they decide to remain in the UK indefinitely after having children here. This might be especially harsh in situations where the original UK-domiciled spouse dies suddenly having made potentially exempt transfers to the surviving spouse.

Similarly, the Bill as drafted requires a person to remain married to, or in a civil partnership with, the UK-domiciled spouse or civil partner throughout the “relevant period” preceding the election, which can be up to seven years. Therefore, in circumstances where the marriage or civil partnership has been dissolved and the person is a non-domiciled individual, they are prevented from making an election retrospectively and hence prevented from gaining access to spousal relief for the period when they were married in return for their overseas assets being brought into IHT. That was not the intention of the policy.

Amendments 1 to 7 remove the condition that a person must be non-UK-domiciled at the time of making an election. They also remove the requirement that the person making the election is married or in a civil partnership with the UK-domiciled individual throughout the relevant period. The amended clause stipulates instead that they were married or in civil partnership at any time during the relevant period.

As a result of these amendments, individuals who are domiciled in the UK but who were previously domiciled elsewhere will be able to make a retrospective election. Similarly, the amendments will also enable individuals previously married or in a civil partnership to make a retrospective election following divorce or dissolution. This will ensure that changes in domicile or marriage status do not restrict the ability of individuals to elect to be within the UK inheritance tax system.

Amendment 1 simply removes a sub-paragraph that is no longer required as a consequence of amendments 2 to 6, while amendment 7 provides clarity that the provision for revoking an election applies only to the person who made the election and not to that person’s personal representatives.

Let me now turn to amendments 35 to 51 to schedule 34. Clause 174 and schedule 34 reform the inheritance tax treatment of outstanding liabilities. They introduce new conditions and restrictions on when a liability can be deducted from the value of an estate.

The current rules allow almost all outstanding liabilities at death to reduce the value of an estate, irrespective of how the borrowed moneys have been used, or whether the loan is repaid following the death. That creates opportunities for avoidance and can lead to decisions and arrangements being made purely for tax reasons. A range of contrived arrangements and avoidance schemes on the market seek to exploit the current rules. The number of those is expected to grow as other avoidance routes are closed off.

There is an inconsistency in how the current rules treat liabilities that are used to acquire assets that qualify for relief, but that are secured against different types of assets. That creates an advantageous tax position and distorts decision making by encouraging individuals to secure business loans against their personal property where there may be no need to do so. The Government believe that the tax system should neither encourage nor penalise the choice of one form of security over another.

Clause 174 and schedule 34 address those opportunities for avoidance and inconsistency in three ways. First, deductions will be disallowed where the loan has been used to acquire excluded property—that is, property which is excluded from the charge to inheritance tax. Secondly, where the loan has been used to acquire relievable property—that is, property which qualifies for a relief—the relief will be allowed against the net value of the property after deducting the loan. Thirdly, the loan will generally be allowable as a deduction only if it has been repaid from assets in the estate.

The Government are making those changes to improve the integrity and fairness of the inheritance tax system, close avoidance opportunities and remove the inconsistency in the treatment of loans.

Following the publication of the Finance Bill in March, Her Majesty’s Revenue and Customs has received comments from representative bodies, practitioners and individuals that have highlighted sections of the legislation that could be clarified. Interested parties have also expressed concern that the new provisions will apply retrospectively where individuals have secured business loans on their non-business property for commercial reasons, rather than for avoidance purposes, before the changes were announced. Those individuals would face a higher IHT bill if they died before the debt was repaid.

Amendments 35 to 49 clarify the interpretation of the legislation to ensure that it works as intended, and address some of the technical issues identified in feedback. If a loan has been used to acquire excluded property, which later becomes chargeable to IHT, amendment 37 will allow the deduction for the liability. Conversely, if chargeable property subsequently becomes excluded property, the amendment will deny the deduction.

Where a loan has been used to acquire relievable property and that property is given away before death, amendments 41 and 42 will ensure that the liability is not deducted again against other types of property if it has already been taken into account. Amendment 45 will widen the meaning of “estate” to allow the liability to be repaid from property that is usually treated as being outside a person’s estate for IHT purposes, such as foreign property that is owned by an individual who is not domiciled in the UK. Where a loan has not been repaid and the deduction is disallowed, amendment 47 will make it clear that the liability will not reduce the amount that would be eligible for the inheritance tax exemption for transfers between spouses or civil partners.

The Government recognise that some lenders may require security in the form of personal assets and that individuals who have secured existing loans against their personal property to finance business investment may not be able to restructure the loan or unwind the arrangements. Amendments 50 and 51 will therefore amend the commencement date so that the new rules dealing with liabilities incurred to acquire relievable property will apply only to new loans taken out on or after 6 April 2013. That will mean that someone who took out a business loan in the past secured against their other assets will not be affected by the new provisions.

The commencement date for the other provisions in schedule 34 will remain unchanged as the date of Royal Assent. Those provisions will apply to other liabilities, irrespective of when they were incurred.

[Catherine McKinnell]

The Minister is again providing a thorough explanation of the Government amendments. He may recall that the Chartered Institute of Taxation expressed concerns that clause 174 and schedule 34 were “profoundly anti-business” and did “not recognise economic realities”. Will the Minister provide reassurance that the Government are confident that those concerns are addressed by today’s amendments?

[Mr Gauke]

We have sought to address many of the concerns that have been raised. It is perhaps worth outlining the policy objective of limiting the deduction for liabilities. It removes a tax advantage that certain schemes and arrangements seek to achieve. It removes an anomaly in the current rules that may distort business financing decisions. The measures will ensure that the value of an estate that is subject to IHT reflects the normal economic consequences of incurring a liability. They support our policies on anti-avoidance and fairness.

--- Later in debate ---

[Catherine McKinnell]

Amendments 1 to 7 will make technical changes to clause 175, which introduces provisions by which an individual who is or has been married to or who is or has been in a civil partnership with someone who is domiciled in the UK can elect to be treated as UK domiciled for inheritance tax purposes. The Minister has set out in detail the reasons for the changes and the expected impact.

I have one additional question. The impact note that was published with the amendments states that there will be a negligible impact in this year, but that in future years there is expected to be a £5 million negative impact on the Exchequer. Will the Minister clarify how and why that negative impact will be realised?

Amendments 35 to 51 will alter schedule 34 and clause 174 on the treatment of liabilities for inheritance tax purposes. Understandably, the Minister focused on those proposals for the majority of his remarks, because they have been the subject of significant concern from a number of quarters. As he explained, the clause was drafted in response to avoidance schemes and arrangements that sought to exploit the inheritance tax rules that allow for a deduction for liabilities owed by the deceased against the value of an estate, regardless of whether the debt is paid after death.

HMRC has outlined some of those arrangements. Some involve contrived debts that are subsequently not repaid, so there is no real reduction in the value of the estate. Others involve loans that are used to acquire assets that are not chargeable to inheritance tax or which qualify for a relief so that the value of the estate is doubly reduced. The policy intention of the measure is to remove the tax advantage that such schemes and arrangements seek to achieve through the exploitation of that loophole. Obviously, that is an aim that the Opposition support.

The impact assessment shows a net positive return to the Exchequer of £5 million in 2013-14, rising to £20 million in 2014-15, then falling and remaining steady at £15 million after 2017-18. It is obvious why the impact will be lower in 2013-14, but it would be helpful if the Minister would clarify why the return is expected to peak at £20 million and peter down to £15 million on an ongoing basis. Presumably, individuals who are aware of the changes will, as executors, adjust their tax planning behaviour, but it would be interesting to understand why we expect that increase in 2014-15, and why the return will continue at £15 million on an ongoing basis. Is that return expected to continue indefinitely in terms of tax protected by the Exchequer?

A number of concerns about this measure were raised in Committee, and also expressed by several external organisations that the Minister mentioned. Most notably, there is concern that the new rules are too broad and may unintentionally catch genuine existing arrangements, rather than solely avoidance behaviour. It is welcome that amendments 35 to 51 seek to focus the new rules more tightly, and clarify the legislation where appropriate to minimise the impact on those with innocent arrangements. Despite the amendments, there are still a number of concerns about clause 174 and schedule 34. I have already asked the Minister whether he is confident that those concerns have been addressed, because even despite the amendments, concerns continued to be raised. It would be helpful if the Minister would provide comfort to the House, members of the public and tax professionals who are concerned about the clause.

The key concern expressed by the Chartered Institute of Taxation relates to debts that are not discharged from the estate of a deceased person. New provisions in clause 174 appear to mean that if a debt has not been discharged directly out of an estate, it will not be deductible for inheritance tax purposes. For example, if the deceased’s estate contains a house subject to a mortgage, the mortgage debt might be repaid from the proceeds of an insurance policy, payable directly to the beneficiary. Although a spouse or civil partner would not be subject to inheritance tax under such circumstances, a cohabitee or orphan child would be. Alternatively, if there is no insurance to pay off the mortgage, the beneficiary might take on the mortgage debt. In either case, as liability will not have been discharged directly out of the estate, which is a requirement of the new provision, it appears that it will not therefore be deductable.

I understand that HMRC intends to deal with such scenarios in its guidance, but it would be helpful for the Minister to clarify the position in his response. The Chartered Institute of Taxation previously expressed concerns that the measures are “profoundly anti-business” and do “not recognise economic realities”. Indeed, it went so far as to state

“we can hardly think of a more counter-productive measure than to deny relief for lending related to business.”

I am sure the Government will want to respond to that strong concern, given current economic conditions and their stated desire to stimulate economic growth. I am sure it is not their intention to enact measures that could be counter-intuitive to that desire.

The Government’s amendments mean that new rules on liabilities incurred to acquire a relievable property will apply to loans taken out or varied on or after 6 April 2013. That is important because of the retroactive nature of schedule 34, which has been criticised given the significant implications for business loans taken out many years ago and secured against a person’s house.

The Chartered Institute of Taxation continues to be concerned that the amendments do not provide adequate protection for small businesses. If a business loan was taken out many years ago but is varied after 6 April 2013, the transitional protection offered by the amendments falls away. That could trap small business owners into existing loans, or hinder anyone whose loan comes to an end, where the bank wants to alter the terms, or if the individual wants to refinance. Ultimately, the Chartered Institute of Taxation fears that that could result in people facing an unenviable choice between selling the family home and selling their business if the business owner dies. I would be grateful to hear the Minister’s comments on those concerns.

To return briefly to my comments on amendments 1 to 7, the impact assessment states that the proposed changes could impact on small businesses. There has been no consultation with small firms or any other groups, so perhaps the Minister will confirm that both sets of changes will not have the detrimental impact on small businesses and business lending that many tax professionals are concerned about.

[Mr Gauke]

I will try to address the hon. Lady’s points. First, on inheritance tax and non-domiciled spouses, she correctly mentioned the costs of the policy, which are largely due to an increase in the lifetime limit set out in the Budget documents. Clause 176 increases that limit from £55,000 to £325,000—it has not been increased since 1982, and we wanted to address that to be fair to non-domiciled spouses. That is the reason for the cost.

The yield from measures in clause 134 and schedule 34 comes from two main types of avoidance scheme that will be closed by these provisions. The main impact on one will be relatively short-lived. The hon. Lady is right to point out that we expect tax agents providing tax avoidance schemes to move on to new schemes in other parts of the tax code, and that will have a behavioural impact. That explains the peak in one year—2014-15—and the £15 million yield for subsequent years.

The hon. Lady mentioned the impact on business and I refer her to my earlier remarks—as you will have noted, Mr Deputy Speaker, I covered quite a lot of ground in a fairly lengthy speech. Estates will continue to get a deduction for loans or liabilities, provided they are not used to acquire assets that are not chargeable to inheritance tax and are repaid after death, unless there are genuine commercial reasons for non-repayment. Business and investment decisions are made on a range of factors, including tax. One of the Government’s key principles for good taxation is that the tax system should be efficient. It should neither favour nor penalise one form of lending or security over another. The new provisions will ensure that this is the case.

--- Later in debate ---

[Catherine McKinnell]

My point relates specifically to the amendment, Mr Deputy Speaker. Many businesses that manage to obtain funding are often required to provide their home as security. If this provision has a detrimental impact on small businesses and puts family homes in jeopardy, will the Government keep it under review?

[Mr Gauke]

I can appreciate why the hon. Lady raises that point, but recent evidence from inheritance tax returns suggests that the majority of business overdrafts and loans continue to be unsecured. There may well have been changes to the balance between secured and unsecured business overdrafts and loans in recent years, but it remains the case that the majority are unsecured. Where security is provided, it is typically in the form of a charge on a business property. I understand why she raises the point, but the evidence suggests that this will not cause the concern that she anticipates. All measures are kept under review and this will be no exception, but we believe that we have got the balance right. This will address a distortion and an avoidance opportunity. I therefore hope that these proposals, as refined by the amendments, will become part of the Bill.

Amendment 1 agreed to.

Amendments made: 2, page 105, leave out lines 39 to 43.

Amendment 3, page 106, line 4, leave out ‘spouse or civil partner’s’ and insert ‘deceased’s’.

Amendment 4, page 106, line 7, leave out from first ‘date’ to end of line 19 and insert—

‘if, on the date—

(a) in the case of a lifetime election—

(i) the person making the election was married to, or in a civil partnership with, the spouse or civil partner, and

(ii) the spouse or civil partner was domiciled in the United Kingdom, or

(b) in the case of a death election—

(i) the person who is, by virtue of the election, to be treated as domiciled in the United Kingdom was married to, or in a civil partnership with, the deceased, and

(ii) the deceased was domiciled in the United Kingdom.’.

Amendment 5, page 106, line 21, leave out ‘spouse or civil partner’ and insert ‘deceased’.

Amendment 6, page 106, line 27, leave out ‘or (4)(b)’.

Amendment 7, page 106, line 41, leave out ‘a lifetime or death election’ and insert

‘an election under section 267ZA(1)’.—(Mr Gauke.)

Schedule 2

Tax advantaged employee share schemes

--- Later in debate ---

[Mr Gauke]

Clause 14 and schedule 2 provide a wide-ranging simplification of the four tax advantaged employee share schemes, following recommendations by the Office of Tax Simplification. The Government are introducing amendments 8 to 16 to provide further clarity on the rules that apply where company events involving “general offers” take place. When clause 14 was discussed in Committee, we highlighted some of the improvements that we are making to simplify the tax advantaged employee share schemes, and I shall provide hon. Members with some background on the specific provisions relating to these amendments.

Current legislation allows employees affected by certain company events, such as takeovers, to exchange their original scheme shares or options for shares or options in the acquiring company. The schedule also creates new rights for participants to realise scheme shares or exercise options without tax liability in the event of a cash takeover of their company.

Earlier this year, a tax tribunal hearing a particular case published a decision on what constitutes a “general offer” for the whole of the ordinary share capital of a company. Following this decision, and a number of requests from taxpayers and advisers, the Government consider it desirable to clarify the scope of what constitutes a “general offer” for the purposes of the provisions. The amendments clarify the position across all four tax advantaged employee share schemes, and confirm the rules as they have been consistently applied by HMRC. Our aim is to remove any uncertainty for advisers and taxpayers, consistent with the general simplification theme of the changes. The amendments, alongside the changes that already form part of the Bill, demonstrate the Government’s commitment to simplifying and clarifying the tax rules where possible.

[Catherine McKinnell]

These are technical amendments tabled in response to concerns about the operation of the share incentive plans in section 498 and schedule 2 to the Income Tax (Earnings and Pensions) Act 2003. The amendments will clarify save-as-you-earn option schemes. We support the clarification of the rules that apply when general offers take place.

Amendment 8 agreed to.

Amendments made: 9, page 144, line 45, after ‘“(7)’, insert—

‘For the purposes of sub-paragraph (5) it does not matter if the general offer is made to different shareholders by different means.

(8) ’.

Amendment 10, page 146, line 20, at end insert—

“(3DA) In subsection (3D)(a) the reference to the issued ordinary share capital of the relevant company does not include any capital already held by the person making the offer or a person connected with that person and in subsection (3D)(b) the reference to the shares in the relevant company does not include any shares already held by the person making the offer or a person connected with that person.

(3DB) For the purposes of subsection (3D)(a) and (b) it does not matter if the general offer is made to different shareholders by different means.’.

Amendment 11, page 147, line 16, at end insert—

‘(1A) After sub-paragraph (3) insert—

(3A) In sub-paragraph (3)(a) the reference to the issued ordinary share capital of the company does not include any capital already held by the person making the offer or a person connected with that person and in sub-paragraph (3)(b) the reference to the shares in the company does not include any shares already held by the person making the offer or a person connected with that person.

(3B) For the purposes of sub-paragraph (3)(a) and (b) it does not matter if the general offer is made to different shareholders by different means.”

(1B) A SAYE option scheme approved before the day on which this Act is passed which contains provision under paragraph 37(1) of Schedule 3 to ITEPA 2003 by reference to paragraph 37(2) has effect with any modifications needed to reflect the amendment made by sub-paragraph (1A).’.

Amendment 12, page 147, line 37, leave out sub-paragraph (1) and insert—

‘(1) In Part 7 of Schedule 3 (exercise of share options) paragraph 38 (exchange of options on company reorganisation) is amended as follows.

(1A) In sub-paragraph (2)(c)—

(a) after “982” insert “or 983 to 985”, and

(b) after “shareholder” insert “etc”.

(1B) After sub-paragraph (2) insert—

“(2A) In sub-paragraph (2)(a)(i) the reference to the issued ordinary share capital of the scheme company does not include any capital already held by the person making the offer or a person connected with that person and in sub-paragraph (2)(a)(ii) the reference to the shares in the scheme company does not include any shares already held by the person making the offer or a person connected with that person.

(2B) For the purposes of sub-paragraph (2)(a)(i) and (ii) it does not matter if the general offer is made to different shareholders by different means.”’

Amendment 13, page 149, line 34, at end insert—

“(2HA) In subsection (2H)(a) the reference to the issued ordinary share capital of the relevant company does not include any capital already held by the person making the offer or a person connected with that person and in subsection (2H)(b) the reference to the shares in the relevant company does not include any shares already held by the person making the offer or a person connected with that person.

(2HB) For the purposes of subsection (2H)(a) and (b) it does not matter if the general offer is made to different shareholders by different means.’.

Amendment 14, page 150, line 31, at end insert—

“(3A) In sub-paragraph (3)(a) the reference to the issued ordinary share capital of the company does not include any capital already held by the person making the offer or a person connected with that person and in sub-paragraph (3)(b) the reference to the shares in the company does not include any shares already held by the person making the offer or a person connected with that person.

(3B) For the purposes of sub-paragraph (3)(a) and (b) it does not matter if the general offer is made to different shareholders by different means.’.

Amendment 15, page 151, line 6, leave out sub-paragraph (1) and insert—

‘(1) In Part 6 of Schedule 4 (exercise of share options) paragraph 26 (exchange of options on company reorganisation) is amended as follows.

(1A) In sub-paragraph (2)(c)—

(a) after “982” insert “or 983 to 985”, and

(b) after “shareholder” insert “etc”.

(1B) After sub-paragraph (2) insert—

“(2A) In sub-paragraph (2)(a)(i) the reference to the issued ordinary share capital of the scheme company does not include any capital already held by the person making the offer or a person connected with that person and in sub-paragraph (2)(a)(ii) the reference to the shares in the scheme company does not include any shares already held by the person making the offer or a person connected with that person.

(2B) For the purposes of sub-paragraph (2)(a)(i) and (ii) it does not matter if the general offer is made to different shareholders by different means.”’.

Amendment 16, page 151, line 13, at end insert—

‘Enterprise management incentives

30A (1) In Part 6 of Schedule 5 (company reorganisations) in paragraph 39 (introduction) after sub-paragraph (3) insert—

“(4) In sub-paragraph (2)(a)(i) the reference to the issued share capital of the company does not include any capital already held by the person making the offer or a person connected with that person and in sub-paragraph (2)(a)(ii) the reference to the shares in the company does not include any shares already held by the person making the offer or a person connected with that person.

(5) For the purposes of sub-paragraph (2)(a)(i) and (ii) it does not matter if the general offer is made to different shareholders by different means.”

(2) The amendment made by this paragraph comes into force on such day as the Treasury may by order appoint.’.—(Mr Gauke.)

Schedule 9

Qualifying Insurance Policies

--- Later in debate ---

[Mr Gauke]

On a point of clarification, if the hon. Lady’s party was in government, would it be cutting VAT?

[Catherine McKinnell]

Well, I am pleased that the Minister is engaging with the need to review his own Government’s spending plans so they can take stock of precisely how those plans are working to resolve the unemployment situation and the lack of economic growth in this country. If the Minister could provide some reassurance that his Government are focused on reducing the debt, that would be very helpful.

[Catherine McKinnell]

Yes. My hon. Friend makes a powerful point, and it highlights the complacency of this Government. They feel it is a case of “job done” as some jobs have been created in the private sector, but ultimately the reality families are facing is that they cannot afford to pay for heating and buy food and what they need for their children and their families because living standards are being so desperately squeezed.

[Mr Gauke]

I just want to give the hon. Lady another opportunity to answer the simple question I asked. The position of her party has for some time now been to favour a cut in VAT. We do not support that approach, but does she support it? Does the Labour party still believe that, at this precise moment, VAT should be cut to 17.5%?

[Catherine McKinnell]

The Government clearly do not support that approach because one of the first things they did when they came to power was increase VAT and the costs for ordinary families up and down the country. We have said all along that we would not have taken those decisions. We would not have chosen to give a tax cut to those on the highest incomes. We would not have slapped a 2.5% charge on poor families who are struggling to make ends meet. We have made that very clear, but the Government have ignored that call. We think the Government should be taking action now to try to stimulate the economy and put some money back into very hard-pressed families’ hands.

--- Later in debate ---

[Catherine McKinnell]

Will the Minister give way?

[Mr Gauke]

I will give way, to get the hon. Lady’s answer on VAT. Does she favour cutting it or not?

[Catherine McKinnell]

I was hoping to leave the Minister time to respond to some of the serious concerns that we have raised, but this complete fantasy-land account of the Government’s record on infrastructure investment has prompted me to jump to my feet. Will he confirm that his Government are investing less in infrastructure than was proposed under the Darling plan? They are investing 1.7% less in real terms over the course of this Parliament, and again in 2015-16. They are also borrowing more.

[Mr Gauke]

It is clear that the balance of our plan has focused much more on current spending, as compared with capital spending, than did the plans that we inherited.

I want to turn to the issue of HMRC, which the hon. Lady rightly raised. I can assure her that, as a consequence of the measures we are taking, HMRC’s yield is going up compared with what we inherited. By 2015-16, yield will have increased by approximately 70%, which represents a staggering increase in the performance of HMRC under this Government. Yes, staff numbers are falling but, when it comes to enforcement and compliance, staff numbers will be higher in 2015-16 than they were under the previous Government. We should not always focus on inputs; we should focus on outputs. The record on outputs is very good. If the hon. Lady wants to focus on inputs, however, she should be aware that the record of the previous Government involved the number of staff working in enforcement and compliance falling by 10,000. Under this Government, that number will be increasing.

I have run out of time, but I believe that the spending review is evidence of a Government who are prepared to take the difficult decisions that we need, and a Government who have economic credibility. The contrast with Labour could not be greater.

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

Finance Bill

Debate between Catherine McKinnell and David Gauke

Monday 1st July 2013 Commons Chamber

[Mr Gauke]

This Government are determined to crack down on tax avoidance by the small minority of individuals and companies who are unwilling to pay their fair share of tax. This Bill includes some important anti-avoidance provisions, including the general anti-abuse rule—the GAAR—a major new development in UK tax law and a key part of this Government’s drive to tackle tax avoidance, and, in particular, abusive tax avoidance schemes. The Government have also made it clear that we will continue to legislate to close down specific loopholes if there is a clear case for doing so.

Before addressing the GAAR and the Opposition’s new clause 12, let me discuss new clauses 4 and 5, and new schedules 1 and 2. At this year’s Budget, the Chancellor of the Exchequer announced that the Government proposed to introduce legislation in the Finance Bill 2013 to prevent companies from entering into arrangements to access, as part of a business transfer, various forms of unrealised corporation tax losses from unconnected third parties—a practice that, for the sake of brevity, I will refer to for the rest of the evening as latent loss buying. Legislation on that matter was not included in the Finance Bill published in March, in order to allow more time for consultation with interested parties. Technical detail on the circumstances and manner in which the proposed legislation would operate was published on 20 March. That was followed on 28 March by the publication of draft legislation for a period of technical consultation. New clauses 4 and 5 and new schedules 1 and 2 introduce those targeted latent loss buying rules to this Finance Bill, and take on board comments received during the technical consultation.

Let me set out a little background to these new clauses and schedules. The UK’s loss relief system provides a measure of parity between taxing profits and relieving losses over the life cycle of a business, ensuring that businesses with different patterns of profit and loss pay a broadly similar amount of tax. Relief is based on long-standing underlying principles that: brought-forward trade losses should only be relievable against future profits from the same trade, carried on by the same legal entity; tax losses should not be transferable against profits of unconnected parties; and the movement of losses between companies should be allowed only where they are under common economic ownership for the accounting period when the losses arise. Within those principles, companies can gain relief for losses through being set off against profits in a number of ways. However, loss relief and business reorganisation rules are designed to prevent companies from passing the benefit of a loss to an unconnected third party. Those tax rules are designed to prevent companies from “selling” losses to some unconnected company that has taxable profits.

However, Her Majesty’s Revenue and Customs is now seeing a marked increase in companies entering into different arrangements to access deductions not caught by those existing rules. Indeed, we are expecting the new rules to bring in revenue of close to £1 billion over the next five years. A particular pressure point arises where it is possible to dictate or predict the amount and timing of reliefs, allowances and deductions. Where those are sizeable, they can encourage tax-motivated reorganisations through which unconnected entities may get access to what are, in effect, unrealised losses.

Where the amount and timing can be dictated or predicted, ownership or part-ownership changes can take place in advance of the crystallisation of the amount, enabling the current loss-buying rules to be bypassed. Such arrangements may take the form of selling all or some of the shares in a company or the assets of a company, where either there are allowances that could have been claimed but were not by the previous owner or where it is known that a debit will be created in a future accounting period. Arrangements can, however, be more complex and contrived, and may also involve moving profits into a company to use up relevant deductions.

These new clauses and schedules therefore deliver on what the Chancellor announced at the Budget. They bring the tax treatment of unrealised amounts, involved in a transfer between unconnected parties, more closely into line with the long-standing treatment of realised losses. The proposed changes introduce three separate rules to combat latent loss buying. The first rule expands the application of current rules in chapter 16A of part 2 of the Capital Allowances Act 2001—I am sure you have fond memories of that Act, Madam Deputy Speaker. The other two rules are targeted anti-avoidance rules—TAARs—to be included in a new part of the Corporation Tax Act 2010. One seeks to counter tax-motivated reorganisations between unconnected parties involving other forms of relevant deductions, and the other seeks to counter arrangements that aim to transfer profits to companies so that the relevant deductions can be used.

A draft of the legislation was published for technical consultation on 28 March and nine responses were received: four from legal firms, two from accountancy firms and three from individual businesses. The majority of representations related to the technical application of the legislation rather than the underlying policy intent and have been addressed in the provisions before us today. I hope that is helpful to the House and anticipates some of the questions that might be raised by those on the Opposition Front Bench. Of course, I am happy to deal with any further questions later this evening.

Let me turn to what I suspect will take up most of the time for our debate this evening—that is, new clause 12. As I have said already, the GAAR is an important new tool, but it is not a panacea. New clause 12 focuses on much broader issues to do with the taxation of multinational companies, which have already been extensively debated during the course of the Bill and fall beyond the scope of the GAAR. Let me once again explain why that is the case.

New clause 12 first asks for a review of ways to require companies to publish a clear statement of their UK tax payments. That is not a matter for the GAAR. I am aware that the GAAR does not do what people want it to do by tackling a wider range of tax issues, particularly those involving multinational companies. We have never pretended otherwise.

The GAAR can of course apply to multinational companies if they engage in abusive schemes, but the broader issues concerning where and how their profits are taxed are grounded in how the international tax system operates. That is why we are driving forward the OECD’s work on improving international tax standards through the G8 and G20. Both the Chancellor and the Prime Minister have set out clearly that international tax problems need international solutions.

We accept that tax rules have not kept up with the age of electronic business, but the answer is not for the UK to take unilateral action. That approach would do the UK no favours as a location for business investment. It would risk setting in train a disparate approach among our trading partners, with serious consequences for international trade and growth and hence for jobs in the UK.

The OECD report on base erosion and profit shifting, which was endorsed by the G20 in February this year, shows that to tackle the issue effectively requires collective action to strengthen international tax standards. The Government have been at the forefront in taking forward work on the issue through the OECD.

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

The Minister has made some rather bold statements. Will he reiterate what he just said? He suggested that the proposal made by new clause 12, which asks the Chancellor to review proposals for the Government to require the production of a single corporate tax figure, as well as the other amendments, would result in lost jobs in the UK. Will he confirm whether that was what he said and on what evidence the statement was based?

[Mr Gauke]

That is not quite what I said. I said that it would not be sensible for the UK to take unilateral action to change the tax law that applies internationally and that the best approach to dealing with international tax issues is to work multilaterally with other economies to update the tax system. I shall turn to some of the specific elements of new clause 12 in a moment, but I am setting out the framework. It is sensible for us to work with other countries to ensure that the international tax system does what it needs to, rather than going off on our own and making changes that could damage the UK’s competitiveness. I am sure that no one in this House would want us to do that.

--- Later in debate ---

[Mr Gauke]

The hon. Gentleman tempts me into an area that I am very much looking forward to debating with him on Thursday afternoon. He has secured a debate on that very subject, so perhaps I shall keep some of my powder dry for that occasion. The point that I am making is that the Government are making substantial progress in this area and we also have an international agenda, ensuring that other countries move as well, so that there is much more information about beneficial ownership. That is not to say that the job is done and that there are not challenges that we face, but we have made a great deal of progress, particularly at the recent Lough Erne summit. That should be acknowledged.

Returning to new clause 12, the final element takes us back to an issue that we have debated previously, which is a requirement on the Government to assess how UK companies could report avoidance of tax in developing countries and how assistance could be offered in the recovery of that tax.

Under the disclosure of tax avoidance schemes—DOTAS—regime, UK companies are already obliged to report to HMRC their use of tax avoidance schemes carrying certain hallmarks. That applies to avoidance schemes that have an impact on developing countries, but only where UK taxes are affected.

The Opposition’s new clause 12 effectively suggests that Her Majesty’s Government should require UK companies to report their use of tax schemes, so that developing countries’ tax authorities can be notified of tax avoidance schemes, and that the Government should assist them in recovering any tax lost. It is unlikely that HMRC will have sufficient understanding of the details of developing countries’ tax systems to enable it to do that.

[Catherine McKinnell]

I appreciate that we debated the issue at some length in Committee, but I should like to pick up on the Minister’s language: he stated that it was “unlikely” that HMRC would have sufficient information on developing countries’ taxation regimes. Will he clarify whether HMRC and the Treasury have undertaken an assessment? That is what the new clause is asking for. It is not asking whether they can do these things, but whether they will undertake an assessment of what they can do, and how they could do it.

[Mr Gauke]

I have certainly sought advice, in preparation for this and other debates, on how practicable it would be for HMRC to provide such a service. HMRC makes the point that it is not something that it is well set up to do; its expertise is on how the UK tax system works. It is also worth pointing out that DOTAS is based on hallmarks set by UK tax law. Trying to extend it in the way suggested would be very difficult. That would require a major change to a successful tool—the hon. Lady and I have debated this point before—for tackling tax avoidance, and would risk disrupting the effectiveness with which HMRC does its job. My answer to her is one that I have given in the past: I do not believe that this is something that HMRC could do effectively. It is not a good priority for us. All sides want to do more to help developing countries to develop their tax systems, but it is better to focus on building capacity by providing training and support than for HMRC to try to judge, police and assess the tax system in developing countries.

[Catherine McKinnell]

The Minister perhaps betrayed the true answer at the end of his comments. His previous response sounded a bit “computer says no”; he said it was all very difficult and he did not believe it would be possible. However, he just said that it would not be a good use of HMRC resources. Does he not agree that a bit of transparency on the possibility of putting the clause into action would be of benefit, not only to Parliament, but to the public, so that it could understand the reasoning and how the conclusion was arrived at?

[Mr Gauke]

The reasoning remains what it always was. HMRC has a large number of specialists on the UK tax system, and the UK tax system does not apply in other countries. Assessing whether a particular arrangement constituted tax avoidance in Tanzania, to pluck a country at random, would require a detailed understanding of the Tanzanian tax system. If the hon. Lady is asking whether we could train up somebody to learn an awful lot about the Tanzanian tax system, in theory that could be done, but it would be a better use of HMRC resources to help train the Tanzanian tax authority, so that it was in a better position to collect the taxes that are due. Indeed, that is exactly what we do; we provide a lot of support to the Tanzanian tax authority.

[Mr Gauke]

It is not just me saying this, and there is no desire to be unhelpful. Indeed, the Government’s record on building up tax capacity in developing countries is very good, with regard to providing them with technical assistance so that they gain a better understanding of the tax that they could collect. Indeed, we are providing support to help developing countries to make greater use of the new information exchange positions.

I will again quote Richard Murphy, whose views on these matters tend to differ profoundly from mine. He works closely with the non-governmental organisations, and he has said:

“I admit, I have never seen how extending DOTAS internationally could work. I can’t see how HMRC could know if they got accurate data, or none at all and as such can see no way such a scheme could be enforced in which case I admit I can’t see how it could ever be workable.”

I do not often pray in aid Richard Murphy, but he makes that point not from any desire to limit the help that we provide to developing countries but as a matter of sheer practicality. He makes a reasonable point.

[Catherine McKinnell]

The Minister certainly does not often pray in aid Richard Murphy. Indeed, I think this is the only thing that Richard Murphy has said that he agrees with, and he is using it to advance his argument. Will he acknowledge that all the elements of new clause 12 relate to information sharing and transparency? We are asking the Government to consider how they can improve information sharing and transparency and use DOTAS to that end, and it would be helpful if the Minister could focus his comments on that. I think that members of the public will struggle to understand why the Government are refusing even to consider that proposal.

[Mr Gauke]

It is important that our debates on these matters should not simply be about the expression of warm words. They should also be about working out what we can do at a practical level, and what will and will not work. I take the view that extending DOTAS will not be effective, but our response to the hon. Lady’s proposals should not be, “Oh, they are all terrible.” It should be to ask ourselves what would be effective. There is a lot that we can do that is effective. This is about capacity building. It is about ensuring that developing countries have the right information, and about bringing them into the existing web of treaties so that they can have access to more information. It is also about ensuring that multinationals provide information that is useful to tax authorities in order to ensure that the right amount of tax is collected and the tax authorities’ efforts can be focused in the right place. That is the agenda that we have been pursuing, with some success.

I am sympathetic to what new clause 12 is getting at, and I do not in any way doubt the motives behind it, but I do not believe that it is necessary. We are already leading international action on tax transparency and on the taxation of multinational companies, and I do not believe that the GARR, as drafted, is the right vehicle for tackling these issues. For those reasons, I urge Opposition Members not to press the new clause to a vote.

[Catherine McKinnell]

It is a pleasure to speak here today on these important issues. I shall focus particularly on those covered by amendment 56 and by new clause 12. First, however, I shall touch on new clauses 4 and 5, and on new schedules 1 and 2, which relate to measures announced in Budget 2013. Together, they introduce three separate rules to combat what the Minister describes as loss buying. That activity goes against the accepted concept that losses brought forward on or after a change in company ownership should be allowable for corporation tax relief to the company and to the trade in which they occurred.

The Government’s new clauses seek to strengthen the loss-buying rules, first by expanding the application of chapter 16A of part 2 of the Capital Allowances Act 2001 so that it applies to “qualifying activities” and not just trades, as is currently the case. The other two rules introduced by the clauses are targeted anti-avoidance rules and will be included in a new part of the Corporation Tax Act 2010. As a consequence of the new clauses, companies will be prevented from entering into arrangements to access, as part of a business transfer, various forms of unrealised corporation tax losses from unconnected third parties. The Opposition support the introduction of these anti-avoidance measures, but it would be helpful if the Minister outlined, in response to this submission, what additional annual yield the Exchequer is expected to receive as a result of their introduction.

Before speaking specifically to the Opposition’s new clause 12, I would like to refer more generally to the Government’s general anti-abuse rule, which will be introduced by clauses 203 to 212, and take the opportunity to probe the Minister on its implementation, because it was last discussed in Committee of the whole House back in April. The Government have made much of the GAAR, their flagship policy for tackling tax avoidance, but, as the Minister knows, several serious concerns were raised about its likely impact, or lack thereof, during our debate in April.

We have been advised that the GAAR will target only “egregious”, “very aggressive” or “highly abusive” avoidance schemes, which the Bill defined as those that use “contrived or abnormal steps” to obtain a tax advantage. Yet the GAAR guidance’s definition of what those entirely subjective terms mean is inadequate. It states merely that they will be interpreted and applied in their “normal” sense. I do not know how Government Members would apply those terms in their normal sense, but I am interested to know whether Opposition Members would know how to apply those terms in their normal sense, given that we will be voting on that tomorrow when the Bill is considered on Third Reading.

Oral Answers to Questions

Debate between Catherine McKinnell and David Gauke

Tuesday 14th May 2013 Commons Chamber

[Mr Gauke]

I note my hon. Friend’s representation. It is worth pointing out that in 2010-11, the year in which the Government came into office, the top 1% paid 25% of income tax receipts: this year it is forecast that the top 1% will pay almost 30% of income tax receipts.

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

The Government should listen to people such as the deputy chair of Harlow Conservatives, who has said:

“The voters are disillusioned with Cameron…They don’t like the fact that he didn’t keep the 50p tax. That has really grated and people feel here that he is not working for them, he is working for his friends.”

No wonder the Conservatives in Harlow lost so many seats to Labour last month. Will the Minister explain again, for the people of Harlow and elsewhere, just why the Government have prioritised a tax cut for those at the top while ordinary taxpayers are struggling?

[Mr Gauke]

This is the Government who have raised the personal allowance that has taken millions of people out of income tax and resulted in tax cuts for some 26 million people. A tax rate that does not bring in revenue is a flawed tax rate, which I assume is why, despite everything we hear from the Opposition, they will not commit to returning to a 50p rate of income tax. They know that it does not raise revenue.

Finance (No. 2) Bill

Debate between Catherine McKinnell and David Gauke

Thursday 18th April 2013 Commons Chamber

[Catherine McKinnell]

I do not follow the hon. Gentleman’s logic that that justifies a non-assessment at this stage. He knows very well that there has been a huge intake from the 50p tax rate which this Government fail to acknowledge. He also knows that we suffered a catastrophic international financial crisis in 2008 to which the Labour Government responded by ensuring that those who could bear it most would take the highest burden, therefore introducing the 50p tax rate. This Government took the first opportunity to abolish it, without even allowing enough time for proper analysis of its effect to take place.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

The hon. Lady says that there was a huge intake from the 50p rate of income tax. What is her evidence for that?

[Catherine McKinnell]

HMRC’s report, “The Exchequer effect of the 50 per cent additional rate of income tax”, but I will go into that in more detail in due course.

The Prime Minister went on record and said in this Chamber that the 50p tax rate was cut because it did not raise any money—the Minister seems to have just made the same assertion—but page 39 of HMRC’s report makes it clear that it resulted in a yield of about £1.1 billion, which is hardly a sum to ignore in these straitened financial times. However, what stands out most from HMRC’s assessment—this point was also raised when we debated last year’s Finance Bill—is the number of times that the words “uncertain” and “uncertainty” appear; I nearly lost count, but it is a staggering 30 times. The Chancellor decided to give a tax cut to his millionaire pals before we had a clear picture of the impact of the 50p rate.

That is not just the view of the Opposition. Robert Chote, chairman of the Office for Budget Responsibility, stated:

“This is a judgement based on not even a full year’s data, based in terms of how people have responded to the 50p rate, in particular in terms of those self assessment tax-payers.”

The Institute for Fiscal Studies said:

“By giving out £3 billion to well-off people who pay 50p tax…the Government is banking on a very, very uncertain amount of people changing their behaviour and paying more tax as a result of the fact that you’re taxing them…There is a lot of uncertainty, a lot of risk on this estimate.”

In its report on the 2012 Budget, the Treasury Committee concluded:

“The costs and benefits of reducing the additional tax rate to 45p are both highly uncertain, and could be significantly more or less than the cost included in the Budget. We recommend that HMRC publish in due course a comprehensive assessment of the effect on the Exchequer of the new 45p rate.”

We agree. We need a full and proper assessment of what effect the top rate tax cut has had on tax receipts and we need to be sure that the Government continue to estimate what the gain would be if the additional rate were returned to 50%. We need, as the IFS has previously suggested, to get a clear understanding of whether the short-run response to this tax cut has been symmetric to the introduction of the 50p rate. Will people continue to use the avoidance techniques that the Government clearly believe they employed to avoid the 50p rate, or will some or all of that activity come to an end as a result of the new 45p rate? The Government should commit to our amendment’s request for such a review, if they genuinely seek to maximise revenue to the Exchequer and not to give a tax break to their millionaire friends.

--- Later in debate ---

[Mr Gauke]

I thank the hon. Gentleman for confirming that. However, I am not entirely clear about the principled position of those on his party’s Front Bench. I do not know whether they think that 50p, 60p, 45p or 40p is the right rate.

[Catherine McKinnell]

rose—

[Mr Gauke]

I will give way to the hon. Lady, who may provide me with an answer.

[Catherine McKinnell]

Is the Minister seriously blaming the 50p tax rate for stagnating growth? If so, can he explain why, although the Government removed the 50p rate in this year’s Budget, the Office for Budget Responsibility has downgraded its growth forecast for each of the next three years?

[Mr Gauke]

We know what the big issues are with growth. We are having to deal with the aftermath of the financial crisis, the eurozone crisis, high commodity prices and the terrible fiscal situation we inherited from Labour. Having an uncompetitive top rate of income tax does not help, a point that previous Labour Governments recognised until we got to the fag end of the previous Government when, as a political ploy, the then Prime Minister put the rate up to 50p. It is striking how the Opposition will not confirm that they will return to a 50p rate.

--- Later in debate ---

[Mr Gauke]

The hon. Gentleman refers to dementors, and I am afraid that he is living in the world of fairy tales and Harry Potter with his economics. It is this Government who are taking people out of income tax and this Government who are providing support to low earners. The fact is that a 50p rate was not effective.

We heard many speeches about a tax cut for millionaires and so on. The hon. Member for Newcastle upon Tyne North made it pretty clear that she disliked clause 16 and schedule 3, which introduce a cap on reliefs. Such reliefs exist for good reasons and can encourage certain activities and behaviours that benefit both our economy and wider society, such as entrepreneurship and investment, which help to drive growth. We are committed to supporting such activity, but that support should not be limitless, especially at a time when the priority is to balance the public finances. In the past, some individuals have been able to offset unlimited reliefs against their income to reduce their income tax bills to zero. Those are often very wealthy individuals who can end up paying a lower tax rate than the people they employ to clean their offices. That is simply not right and some individuals have been able to do that year after year.

It is right and fair that we should seek to prevent such activity by limiting uncapped reliefs. That is what clause 16 and schedule 3 do: they cap the use of previously unlimited income tax reliefs at £50,000 or 25% of an individual’s income, whichever is the greater. The cap came into effect on 6 April this year. The changes will affect only around 7,500 individuals and more than 90% of the revenue will come from those with an income of more than £150,000—that is, those who pay the additional rate of income tax. The limit is expected to raise about £200 million a year, significantly more than the cost of reducing the 50% rate down to 45%.

One question that has been asked is whether the provision will hurt start-ups and SMEs. Some 90% of trading losses set against general income in a tax year are less than £15,000 a year, well below the threshold for the cap. Business loss reliefs are not intended to subsidise businesses that have no chance of success. We have a generous regime, but we do not believe that it should be without limit. Unlimited reliefs mean that some people, often with high incomes, can pay little or no income tax year on year. We do not believe that that is fair. There will be no limit on trade or property losses set against profits from the same trade or property business in another year and business loss reliefs are not intended to subsidise established businesses that make losses year after year.

[Catherine McKinnell]

Can the Minister provide reassurance that he has taken on board the concerns raised by a number of accountancy organisations, whose opinions are very reputable, that the change will not only counteract the clamping down that the Government are correctly introducing but hamper the growth of genuine small businesses that are struggling? I would say that those businesses are struggling because of the Chancellor’s failing economic plan.

[Mr Gauke]

Of course, we have consulted on this policy and have listened very carefully to the representations we have received. If we are serious about raising revenue in a way that does not damage the economy, the cap on reliefs is a sensible approach. It is a matter of fairness and I would have thought that hon. Members from all parties would agree that it is wrong for us to have a system whereby people can drive down their tax bill year after year to very low rates despite being high earners. That is exactly what this measure is about.

The measure demonstrates that as a Government we are doing more to raise money from the wealthy. In Budget 2010, we increased higher rate capital gains tax; in Budget 2011, we tackled avoidance through disguised remuneration, which was opposed by the Opposition; in Budget 2012, we raised stamp duty on high-value homes; in the autumn statement 2012, we took action to reduce the cost of pensions tax relief; and in Budget 2013 we announced further measures to tackle offshore tax evasion by high earners. Under this Government, the richest now pay more in income tax than in any year under Labour.

Amendment 1 requests a review, and HMRC published a thorough and very well-researched report at Budget 2012 that showed the effect of the additional rate of income tax. Those matters were debated at considerable length last year and the report shows that the rate was not raising the money that the previous Government intended it to raise. It is illogical to maintain a tax rate that is not effective at raising revenue from high earners and that risks damaging growth. We have found better ways of raising money from the wealthy that raise more money but do less damage to the economy.

We always keep tax rates under review, but I note the inclusion of a request for a review in the amendment. It seems to me that the purpose of the amendment is not just to enable us to have another debate on the 50p rate today but to enable the Labour party to find an escape route from its policy. Until a few days ago, it was against getting rid of the 50p rate. Labour will not answer the question, however, of what it will do at the next election. Its holding position is clearly that it will have a review. The Labour party knows that to go into the next election campaigning for an increase to the 50p rate would simply underline that it is anti-enterprise. It knows such an increase would damage the economy and is trying to find an escape route. Despite all the bluster in all the speeches we have heard today, Labour will not confirm that that is the policy it supports. It is all about posturing, not about practicality. That is why they did not have a 50p rate when they were in government and why they are trying to slip away from it now, hoping that no one will notice. I recommend that clauses 1 and 16 and schedule three stand part of the Bill and we hope that they will have all-party support.

[Catherine McKinnell]

I thank the Minister for his response and the completely fictional rewriting of HMRC’s report on the impact of the 50p rate of tax, which showed very clearly that it brought in additional revenue of about £1.1 billion. Who knows how much more it might have brought in had the Government not abolished it at such an early stage, before there was even the opportunity to collect the data that would have given a picture of the longer-term impact?

We will press amendment 1 to a vote, and we are asking for a proper review of the impact of the 50p rate of tax so that members of the public can know the truth about the amount of revenue it would have brought in had this Government not opted to give a tax cut to millionaires while letting ordinary people bear the brunt of the Chancellor’s utterly failing economic plan.

Question put, That the amendment be made.

Finance (No. 2) Bill

Debate between Catherine McKinnell and David Gauke

Wednesday 17th April 2013 Commons Chamber

[Catherine McKinnell]

I thank my hon. Friend for that intervention, which is powerful in itself, but very much reinforces the argument that we on the Front Bench are making today: we have the means within our grasp to make a difference to that situation. I hope that the Minister will provide some reassurance today, and that we shall get some Liberal Democrat support for our amendments, which seek to make a real difference on the ground. [Interruption.]

Returning once again to an amendment tabled by the Opposition last year—and I might say amendments tabled by Liberal Democrat representatives last year but which were withdrawn at the last minute—we believe that changes to the controlled foreign company rules introduced by the Finance Act 2012 should be properly monitored for their impact on developing countries. Many charities have been concerned that the CFC rule changes will make it easier for UK companies to avoid paying tax in developing countries in which they own subsidiaries. While the Government have estimated the potential loss to developing countries at £1 billion, which one would think would be enough, ActionAid believed it could be as high as £4 billion a year. So what we really need is for the Government to undertake a proper assessment of the impact of the changes on the overall tax take of developing countries since last year, and our amendment asks for that to take place.

In conclusion, we will support the Government’s legislation, brought forward today, to introduce a GAAR. However, we believe, along with my right hon. Friend the Member for Oldham West and Royton (Mr Meacher), who has tabled his amendments as a suggested alternative to the GAAR, that the Government’s GAAR has many potential flaws.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

Does the hon. Lady support the new clauses tabled by her right hon. Friend the Member for Oldham West and Royton (Mr Meacher)?

[Catherine McKinnell]

We support our amendments that we have tabled, and I have presented very clearly the reasons why we support them. I will go on to say why. We support the GAAR and we welcome its being put in place, but we want to see how effective it will be and we will continue to monitor it. We hope that the Government will accept our proposal to come back and report on progress within two years, so that we can continue to monitor its effectiveness and rectify, hopefully, some of the flaws that we see will hinder its effectiveness in tackling this problem. So we call on all—

HMRC Closures

Debate between Catherine McKinnell and David Gauke

Tuesday 26th March 2013 Westminster Hall

[Mr Gauke]

I am not in a position to answer that specific question. I am sure that my hon. Friend is closely informed of the job opportunities available on the Isle of Wight. I made a general point that HMRC will show considerable willingness to deal with staff in the best way possible. If one looks at the scale of the reduction in the number of people working for HMRC over a long period—since its formation in 2005—compulsory redundancy has been necessary on a very limited number of occasions. HMRC has a good record of ensuring that its staff are well looked after.

Concerns were raised that the closure of the inquiry centres marks the end of HMRC’s dedicated face-to-face advisory service. I can reassure hon. Members that that is simply not the case. A face-to-face service is about people, not bricks and mortar. What is important is that HMRC provides an accessible and flexible, face-to-face service that meets the needs of customers and can be tailored to the specific needs of particular locations, including the Isle of Wight. That is what HMRC proposes to do, only it will do it where it is most convenient for customers, whether that is in their local community, place of work or even, if they so wish, in their own homes. A modern face-to-face service is not about maintaining a patchwork network of buildings set up in the 1950s, when the needs and expectations of customers have changed. Inquiry centres are not universal; large parts of the UK are not even served by them.

The use of the centres has fallen sharply in recent years: visitor numbers have halved, from more than 5 million in 2005-06 to 2.5 million in 2011-12, and some inquiry centres are now open just one day a week, because local demand is so low. I shall address the Isle of Wight specifically. My hon. Friend quoted some numbers on the usage on the Isle of Wight. HMRC’s management information system shows that the Isle of Wight inquiry centre had 7,032 visitors in 2005-06, but since then the number has fallen: in the 2011 calendar year, it was 4,763; in the 2011-12 financial year, it was 3,622; in the 2012 calendar year, it was 3,298; and the projected number of visitors for the 2012-13 financial year is 2,886. There is a clear trend. The number is going down.

[Catherine McKinnell]

What does HMRC analyse as being the reason for the decline? Is it entirely because people contact it in a different way—over the internet, telephone and so on? Does the projected number take into consideration the significant changes pending for universal credit, the real-time information system, child care and so on?

[Mr Gauke]

As far as we can see, the driver for the fall in the number of people using inquiry centres is that people prefer to use other means of communication. There are always particular challenges within the tax system that might cause an increase in demand and phone calls. Steps are taken to reduce some of that demand from time to time.

In that context, it is worth turning to the research, which the hon. Lady touched on, that helped guide HMRC in its decision. It was undertaken by an independent agency, adhering to strict industry guidelines, and its findings confirm that face-to-face support works best for some HMRC customers who need extra help. It also says that any service for customers who need extra help must be as flexible and as accessible as possible, which is why HMRC is introducing specialist, expert over-the-phone help and working closely with the voluntary and community sector. A face-to-face service is an important part of the proposal, but it is worth underlining that the inquiries of the 2.5 million or so who visit HMRC centres are satisfied over the telephone. They use the inquiry centres to phone contact centres, which leads us to the important issue of ensuring that contact centres provide an adequate service.

I shall take this opportunity to respond to the hon. Lady’s questions. The number of call attempts handled for February this year was 91.8%, which is considerably higher than it has been at any time since HMRC’s formation. I remember that the number was 45% for 2010-11, and I think it was about 75% for the previous years, as it has been subsequently. HMRC’s ability to handle calls has therefore increased, which is welcome progress, and that, to be honest, is what we should expect from HMRC—progress on the standards.

To elaborate on the point I made a moment or so ago, HMRC’s analysis of inquiry centre use shows that 84% of the centres’ customers did not need a face-to-face meeting and were able to get the help they needed over the phone or online. The 400,000 customers who did need face-to-face advice had to travel to their nearest inquiry centre to make an appointment, and if there was no appointment free at that time, go back on another day to take up their appointment. The service is not particularly convenient even for those who do have a centre nearby.

HMRC’s research, which I referred to a moment ago, shows that up to 1.5 million customers need extra help with their tax and benefits affairs. Many just need help for a specific event in their lives—for example, when they approach retirement, deal with the death of a family member or declare new income for the first time—and others may have low literacy or numeracy skills, or difficulties coping with their affairs as a result of a mental health condition. Most of the 1.5 million people who need extra help do not currently use an inquiry centre. HMRC has researched the needs of those customers and that research has helped in the design of the new service.

The new service will provide specialist expert help over the phone for those who need it, and its advisers will take the time to sort out issues if they can. Customers will be able to phone from home and arrange a call-back if they cannot afford the call themselves, or they may use a free phone at a local Jobcentre Plus. Customers needing extra help will be quickly identified and put straight through to a trained adviser who has more time, as well as the skills, knowledge and empathy needed to handle the inquiry at a pace that suits the customer.

If the adviser cannot sort out issues over the phone, face-to-face support, delivered by a mobile adviser, will be arranged at a place and time convenient to the customer. It might be at a library or a local authority location close to the customer’s home, but I must reassure my hon. Friend that it will not involve the Isle of Wight ferry service. If someone needs a home visit, HMRC will arrange for a local home visitor to contact them and arrange a convenient appointment time between 8 am and 8 pm every working day. That is much more convenient than being constrained to a fixed location that is potentially difficult to access and often open for only one day a week. Extra help will also be delivered through voluntary and community sector organisations, such as Citizens Advice and TaxAid, with additional funding from HMRC.

The new service will be not only better but more cost- effective. Customers will save an estimated £12 million a year, through such things as reduced travel costs, and from April HMRC will convert its 0845 numbers to 03 numbers, making calling HMRC cheaper for all customers.

The current network of 281 inquiry centres is unsustainably expensive. The average cost of an appointment across the network has risen from £106 in 2009-10 to £152, and in some inquiry centres it is up to £500. By comparison, it costs an average of £3 per phone call and just 9p per online transaction. Members will appreciate that that expense is just not sustainable in the current economic climate. The new service will save HMRC up to £13 million a year.

HMRC will reinvest some of the savings from the closure of the inquiry centre network into the new face- to-face service and the voluntary and community sector support. To ensure that the phones are answered when people call, HMRC is investing £34 million in its contact centres. HMRC has also worked extremely hard to make big improvements to its customer service following the Public Accounts Committee report, which was touched upon by my hon. Friend the Member for Isle of Wight and the hon. Member for Newcastle upon Tyne North. As a result, it currently answers more than 90% of the call attempts it receives each week.

In designing the new service, HMRC has worked closely with a number of voluntary sector partners, including Citizens Advice, as well as tax charities such as TaxAid and Tax Help for Older People. On 14 March, HMRC launched a public consultation on how the new service would be implemented. The consultation focuses on the following: how a new service would be delivered in practice and whether refinements are needed for particular customer groups; the impact that closing inquiry centres would have on local communities, customers and diversity groups; the impact of the new service on the voluntary and community sector; and the support needed for customers to make the transition to other channels. The public consultation will enable staff also to feed in their views, and a summary of the responses will be published by the end of summer 2013.

A pilot of the new service in what I should perhaps describe as the greater north-east of England, will involve closing 13 inquiry centres and testing the new service between 3 June and 31 October 2013. That will help in gathering more information to ensure that the service is absolutely right for the customer, and a decision on whether to roll out the service nationwide will be made in December 2013. If the roll-out proceeds, the new service is expected to be launched between February and May 2014.

In conclusion, HMRC is making the changes in order better to meet the needs of the 1.5 million customers who need more help with their tax and benefits. HMRC is modernising its approach to break free from the outdated network of bricks and mortar and to provide a more flexible and accessible face-to-face service for people who really need it, including on the Isle of Wight. The proposals will target help at those who need it most, in a way that is better for them and more cost-effective for both them and the taxpayer. As a responsible employer, HMRC is taking all the right steps to minimise the impacts that the changes will have on its staff.

Taxation (Living Wage)

Debate between Catherine McKinnell and David Gauke

Tuesday 22nd January 2013 Westminster Hall

[Mr Gauke]

The reality is that one has to look at all the measures that we are undertaking, which is what I would seek to do. It is worth pointing out that working households will gain an average of £125 in 2013-14 as a consequence of all the measures that we are undertaking. The right hon. Gentleman raises an important point—I shall return to the 10p rate in a moment—but let us remember the context in which we are having this debate now about the steps that we can take.

I will set out a case about the way in which the Government have taken substantial steps with regard to the personal allowance to help low-paid workers. We have done that at a time when we inherited an enormous deficit, and we have had to make difficult decisions about how we reduce that deficit. We have been clear in the distributional analysis of where the contributions are coming from. The facts are very clear. The top 20% of earners are making the biggest contributions, not just in cash terms but in relative terms, to reducing the deficit.

Let me return to the people who lost out from the abolition of the 10p rate of income tax. People under the age of 65 with non-savings income between £5,435 and £19,355 would have paid more, because they lost more from the abolition of the 10% rate than they gained from the cut in the basic rate. It is worth reminding ourselves that a Labour Government took that measure and that those low-paid workers would have paid more tax. The loss was greatest, at £232 a year, for someone earning £7,755—the top of where the 10% band would have been. Those most affected by the abolition of the 10p rate appear to have been those below the age of 65 with an income under £18,500 who were in childless households. The effect was greatest on those households where no individual was above the age of 60, because the household would not then benefit from the higher winter fuel allowance. That is the legacy of the last Budget of the right hon. Member for Kirkcaldy and Cowdenbeath.

Let us now consider what we have done in this difficult financial situation. We should remember that 2007 was still the age of apparent plenty; we have been in a much more difficult situation. Rather than reintroducing the 10% rate of tax, we have taken steps by increasing the personal allowance; we have taken real steps towards making the first £10,000 of income free from tax. I am grateful to a number of hon. Members for supporting that policy this afternoon. Since 2011, we have announced successive increases in the personal allowance, totalling £2,965. That includes a £1,100 increase announced in the 2012 Budget and a further £235 announced in the autumn statement last month. Following those announcements, the personal allowance rises by £1,335—the largest cash increase in history—to £9,440 from April 2013. Taken together, those changes will benefit 25 million individuals and provide a real-terms gain of £443 to most basic rate taxpayers in 2013-14. More than 2.2 million individuals with low incomes will have been taken out of income tax altogether.

I shall give some more examples of how the changes work. Let us take the context of the national minimum wage. My hon. Friend the Member for Carlisle (John Stevenson) referred to the personal allowance matching the national minimum wage for full-time employees, but let us examine what has happened to a person on the national minimum wage in full-time employment. In 2010-11, someone earning the national minimum wage would have had earnings of £10,979 and paid income tax of £901. In 2013-14, someone earning the national minimum wage will have estimated earnings of £11,691 and pay estimated income tax of £450. In other words, their bill will be halved. Another way to look at it is that, in 2010-11, such a person would have been able to work only 22 hours a week tax free; they can now work 29 hours a week before starting to pay income tax.

Another way to look at the situation is by comparing the approach that we have taken in increasing the personal allowance with the approach that the previous Government took in doubling the 10p rate of income tax. I talked about those who earn £7,755 a year and lost the most—£232 a year—as a consequence of the doubling of the 10p rate in 2008-09. In that year, an individual would have paid £344 in income tax. Under the present Government, in 2012-13, such an individual, with income adjusted for inflation to £8,299 a year, will pay about £39 in income tax—not £344 but £39 in tax, which is a saving of £305. In 2013-14, again with income adjusted for inflation, such an individual will pay no income tax at all. That is a contrast that I am very happy to highlight.

[Catherine McKinnell]

The Minister is setting out an interesting argument. Is he therefore making the case or suggesting that the Government will support the hon. Member for Harlow in his call for the reintroduction of the 10p tax rate?

[Mr Gauke]

The argument that I am making is about the contrast that can be drawn with the approach taken by the present Government, who have focused on reducing the tax bill for low-paid workers. That could be done in different ways, but we have undoubtedly, as a Government, reduced the income tax bill for low-paid workers. That compares favourably with the approach taken in the last Budget of the right hon. Member for Kirkcaldy and Cowdenbeath, in which he introduced a measure that increased pretty substantially the amount of income tax that low-paid workers had to pay. It is worth highlighting the point that we as a Government have done more, in very difficult circumstances, for those low-paid workers than the previous Government did.

I think that my hon. Friend the Member for Harlow agrees that we should meet the £10,000 target. The debate is then about where we go next. I will not be drawn into going beyond the firm commitment that we have in the coalition agreement and that has been evidenced by the steps that we have taken at every Budget and in the last autumn statement to make progress towards meeting that £10,000 target for the personal allowance.

My hon. Friend has set out very clearly the case for focusing on reintroducing a new lower rate. There are pros and cons of such an approach, and the debate on that will continue. As he would expect, I will not make any commitments on the matter. Clearly, there is a substantial fiscal cost in reintroducing a 10p rate of income tax. However, the Government’s values are clear. The overall cost of the personal allowance by the end of this Parliament will be around £9.5 billion a year as a consequence of the measures that we have taken. Clearly, where we can, we have been prepared to take substantial steps, at quite significant cost, to reduce the income tax bill for those on low earnings. That is something of which we should be proud, and as a number of my hon. Friends have said, we should be communicating that out there, because it demonstrates our values.

--- Later in debate ---

[Mr Gauke]

I should perhaps check the numbers, but I believe that my hon. Friend is in the right area. Those are, I think, the realistic costs. I am not here to make any further commitments beyond what we have said in the coalition agreement, but it is right that we have this debate. It is also right that we acknowledge that we are all trying to do the same thing, which is to reduce the tax burden on those hard-working, low-paid workers who have to pay more tax, partly as a consequence of a specific decision taken by the previous Chancellor in 2007 to double the 10p rate.

[Catherine McKinnell]

We are nearly at the end of the debate, and I am conscious that the Minister has not really addressed any of the issues that relate to the living wage and what the Government might do to promote that policy as well.

[Mr Gauke]

The Government are supportive of the living wage, which the hon. Lady has described as commendable or laudatory. However, unlike the Opposition, the Government do not believe that it should be mandatory. She appears to be in search of a dividing line on that issue. [Interruption.] I am pleased to see her shaking her head. There is cross-party consensus that the living wage has a useful role to play. We support it; we welcome it when organisations adopt it; but we do not believe that it should be mandatory. There are risks involved. In some circumstances, it might increase the cost to the taxpayer in higher salaries, and in others, it might result in higher unemployment. That is why we do not think it should be mandatory and why, I assume, she feels the same way, unless she has a different rationale.

[Catherine McKinnell]

I was seeking clarity on the questions that I raised and whether the Government are taking positive steps to promote the living wage.

[Mr Gauke]

It is very much for organisations and institutions to determine their own remuneration policy. We support such a wage in principle, but we will not make it mandatory, and there is cross-party consensus on that.

I turn now to the other steps that we are taking to support the low-paid workers whom my hon. Friend highlighted so well in his remarks. We have helped local authorities to freeze council tax for three years in a row, and we are proposing to set the council tax referendums thresholds at 2% for 2013-14.

I cannot, of course, go through a debate with my hon. Friend without referring to fuel duty. He is a keen campaigner on that point and he will be well aware of the steps that we have taken to ensure that average pump prices are currently 10 pence per litre lower than if we had implemented the fuel duty escalator. They will remain at least 10 pence per litre lower over the remainder of the Parliament than they would have been had we stuck to the plans that we inherited. In practical terms, it will cost £5 less for a typical motorist to fill their tank today and £8 less by the end of the Parliament.

We are taking numerous other steps to ease the load on those on low and middle incomes. We have capped average regulated rail and Transport for London fare increases at RPI plus 1% for the third year in a row. We have increased the basic state pension by £5.30 last year, which is the biggest cash increase ever, and we have introduced a triple guarantee, to ensure that it will increase each year using the increase in earnings, prices or 2.5%, whichever is highest.

I am conscious of the time, so let me say that I congratulate my hon. Friend on securing the debate and all the other attendees on their excellent contributions. As I have said, I think that my hon. Friend and I agree that the Government should reduce the tax burden on people on the lowest incomes. Our focus has been on increasing the personal allowance. I am confident that our policies, both on the minimum wage and the personal allowance, are exactly the right ones to achieve that.

Oral Answers to Questions

Debate between Catherine McKinnell and David Gauke

Tuesday 11th December 2012 Commons Chamber

[Mr Gauke]

That is a very good question, but I am afraid I cannot give an answer to it. What I can say is that we have today published draft legislation for a general anti-abuse rule and it will come into force next year.

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

The Government’s shares for rights scheme is not only unpopular with the business community, but the head of the Institute for Fiscal Studies warned in the Financial Times today that it will

“foster a whole new avoidance industry”,

and the Office for Budget Responsibility believes the tax avoidance loophole it will create could cost up to £1 billion. Does the Minister agree with the OBR estimate? If so, why is he pressing ahead with a policy that is unpopular with business and could cost the taxpayer £1 billion?

[Mr Gauke]

First, it is not unpopular with business. Business groups have welcomed it, and the fact is that some aspects of our employment law can stand in the way of job creation. The OBR estimates that within the scorecard period this policy will cost £80 million in 2017-18. We believe it is the right move in order to ensure we have a more competitive environment.

Finance Bill

Debate between Catherine McKinnell and David Gauke

Tuesday 3rd July 2012 Commons Chamber

[Mr Gauke]

The purpose of that wording relates to packaging that is specifically designed for the retention of heat. For example, hon. Members will all have experience of a paper bag with a foil interior that is used for such purposes. I do not think that a simple paper bag would fall into that category. In most people’s experience, pasties and suchlike are generally left on shelves rather than contained within bags while in the shop. I hope that that provides some clarification.

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

We have arrived at this change after 20-odd years in which, through various legal challenges, we have come to our current conclusions on this aspect of VAT. Can the Minister assure us that we are not facing another 20 years of litigation in order to get these finer details clarified?

[Mr Gauke]

One can never rule out the fact that some people will be litigious and try to take a creative view of any particular guidance. However, we believe that we have reached the right position after much consultation and discussion with the industry and with hon. Members, many of whom have been very engaged in the matter. I look around the House and see at least two Members who have been in my office to make representations on this point. We believe that we have reached a position that is sustainable and fair, and that is what we are putting to the House in the new schedule. The additional criteria will ensure that hot food will generally be taxed at the standard rate of VAT, but if food that would be zero-rated when cold is bought when it happens to be cooling down, but is not yet cold, it will still be zero-rated provided that it does not meet any of the criteria that I set out. These changes will add further tests to make the relief less open to abuse and provide a level playing field for all businesses supplying their customers with hot food.

Turning to the issue of holiday caravans, which we have touched on briefly, the VAT zero rate was originally intended to apply to the sale of caravans used only for residential purposes. To achieve that objective, the rules drawn up in the 1970s applied tax only to the sale of smaller caravans that could legally be towed on UK roads by a typical family car. However, over the years, an increasing number of large caravans have been used for holiday purposes. Those caravans inadvertently benefit from the VAT zero rate that was intended for residential caravans. That has led to widespread inconsistency in the VAT treatment of the sale of holiday caravans.

Under the current legislation, any caravan wider than 2.55 metres or longer than 7 metres is zero-rated as a residential caravan. The Government propose to replace the definition of a zero-rated caravan based on size with a new definition based on whether the caravan has been designed for residential use. To achieve that, we propose a new test that links the zero-rating with British Standard 3632, which indicates that the caravan has been designed and manufactured for continuous, all-year-round occupation and is therefore suitable for residential accommodation.

We consulted on whether the additional criteria should be added to ensure that the zero rate applies only to caravans intended for residential use. Given the reaction to the proposal, we decided that rather than having a single dividing line between a zero rate of VAT on residential caravans and a rate of 20% on static holiday caravans, static holiday caravans should be subject to VAT at the reduced rate of 5%. Static residential caravans—those that meet BS 3632, or early equivalents in the case of second-hand sales of older caravans—will remain zero-rated, as per the Budget proposal. We do not intend to restrict the zero rate further by adding additional criteria.

--- Later in debate ---

[Catherine McKinnell]

My hon. Friend the Member for Kingston upon Hull North (Diana Johnson) asked about the impact that the current proposals will have on the industry. Will the Minister confirm that the Treasury has not yet calculated that impact?

[Mr Gauke]

We assessed what the impact would be if VAT was at 20%, and obviously 5% is a quarter of that, so one can draw correlations. Most industries supply VAT-inclusive durable goods at a profit, so it is reasonable to apply VAT in this case. The impact that we originally set out in the tax information and impact note at the time of the Budget will be significantly lessened by the change to the 5% rate, particularly bearing in mind that there is already a full 20% rate on a fair proportion of static caravans because of the durable goods contained within them.

--- Later in debate ---

[Mr Gauke]

My hon. Friend is absolutely right. Tax is but one of the various factors that will have an impact on demand, and VAT is but one tax. I shall not dwell on it, Mr Speaker, but I should mention that the Government are putting in place a much more competitive corporation tax regime, which will be to the advantage of caravan manufacturers and many others.

I shall touch briefly on alterations to listed buildings. The reaction to our announced changes to VAT on approved alterations to listed buildings demonstrated the need for the measure on the grounds of simplification alone. The consultation and media coverage have highlighted the huge uncertainty over whether an item of building work is an alteration or a repair. The purpose of the measure is to avoid the need for such discussions by applying the same VAT liability to all alterations, repairs and maintenance. Repairs and maintenance to all buildings, including listed buildings, have always been liable to VAT, and alterations to non-listed buildings have been since 1984. The Budget announcement changes none of that, although a zero rate currently applies to alterations to protected buildings—mostly listed dwellings but also scheduled monuments and listed buildings used for charitable and other residential purposes.

For listed buildings, the borderline between alteration and repair or maintenance is a major source of confusion. The Budget announcement has no impact on the repair and maintenance of listed buildings, which have always been liable to VAT, so there will be no change to the VAT treatment of repairs to thatched roofs or steeples, contrary to what has been reported in the press. The Budget decision also reflects our view that grants can provide a more flexible mechanism than VAT for providing specific financial support for the heritage sector. We have increased the funding for the listed places of worship scheme and broadened its scope so that churches and other listed places of worship can claim grants to offset the impact of VAT on their alterations, repairs and maintenance.

The Budget proposal for alterations to listed buildings includes transitional arrangements, and, following the consultation, we have decided to make these more generous. As with the Budget proposal, the transitional arrangements will cover cases where written contracts had been entered into before Budget day 2012 or, in the case of the first grant of buildings that have been substantially reconstructed, where 10% of the work had been completed before Budget day. We have now agreed that they should also apply where listed building consent had been applied for before the Budget, and the transitional arrangements will be extended so that, where a project qualifies, zero rating can apply until 30 September 2015. These extensions will mean that the zero rate will continue to apply for most alteration projects where work was close to starting at the time of the Budget announcement.

Let me turn to the Budget proposal for self-storage.

[Catherine McKinnell]

I apologise for interrupting the Minister’s flow, but I want to take him back to listed buildings. He spoke about grants being available to churches for alterations and repairs. However, my understanding is that there is concern that what is proposed is more of a rebate or reclaim of tax spent, rather than a grant that would be available before the alterations and repairs are undertaken. Will he clarify what the position will be?

[Mr Gauke]

The first point to make is that the increased funding for the listed places of worship scheme was entered into after consultation with the Church of England, which led for other religious groups in this matter, and I understand that they are satisfied with the arrangements that have been reached. The listed places of worship scheme, which the previous Government set up, has been extended to allow recovery costs relating to VAT for both repairs and alterations. It offers church groups, for example, an opportunity to recover the costs they would otherwise incur, but is now much more generously funded, and a much greater proportion of VAT costs will be able to be reclaimed. Indeed, VAT costs should be able to be reclaimed in full for the time being, such is the scale of the support we have made available for the listed places of worship scheme.

It is perhaps worth pointing out that we always made it clear that we would increase the listed places of worship scheme, because of the increased costs that were going to be placed on churches, but after further discussions, with the Church of England in particular, we realised that the amount we had initially said would be adequate was not adequate, and we increased it. However, to deal with the hon. Lady’s specific question, what is proposed is indeed a reclaim arrangement. That is how it will work, and that is how it worked in the last Parliament as well.

[Catherine McKinnell]

Will the Minister clarify, therefore, whether he has received any expressions of concern about churches, which often rely on fundraising to undertake works, having to raise additional money, which they will then have to reclaim from Her Majesty’s Revenue and Customs, or about the additional burden that this will place on what are already quite stretched resources?

[Mr Gauke]

I understand the point the hon. Lady raises. The Church is satisfied with the arrangements. She is suggesting that in order to fund a project, a church group would need to fund the cost, plus 20%. That is not how it should work, because the scheme will be sufficiently flexible to ensure that a church group will have the funding in time, so that it does not have to raise an additional 20% or so. I have had considerable conversations with Church representatives on this issue, and I am not getting representations that they are concerned about that point.

[Catherine McKinnell]

I have just one last question about this issue. Has HMRC undertaken any assessment of the additional bureaucracy and administrative costs that will result from all churches having to engage in the process?

--- Later in debate ---

[Mr Gauke]

The broad point is that sports drinks—such as Lucozade and others—are standard rated and have been for some time, and that sports nutrition drinks marketed as such will now become standard rated. We believe that that is fair. These products can be distinguished from a pint of milk or a milk drink not designed or marketed for sports nutrition purposes. Nothing in the consultation responses calls us to query the rationale for the measures or to amend the draft legislation other than through a minor amendment to tidy up the wording.

[Catherine McKinnell]

Can the Minister reassure me that his proposal will not lead to the same riddles and illogicalities that arose from the original pasty tax proposal, meaning that the same product marketed or packaged in a different way could end up attracting a different rate of VAT? Will he also tell us what consultations he has had with the industry?

[Mr Gauke]

We have completed a period of consultation and received a number of representations. In recent days, I have met representatives of GlaxoSmithKline and listened to their concerns. As for the hon. Lady’s first question, when products are aimed at different markets but clearly targeted at particular consumer groups, I think it reasonable to view them in the light of some of the competing products that are aimed at exactly the same market. Our research suggests that most sports drinks are clearly targeted at particular markets, and their VAT treatment will follow from that.

[Catherine McKinnell]

The Minister has not really explained why the Government should want to target a sports industry or sports-related products for tax purposes when much more unhealthy products might remain tax-free. Will he clarify that?

[Mr Gauke]

If the Opposition are setting out the principle that whether or not VAT applies should depend on the healthiness or otherwise of the products involved—which brings us back to hot food—we may have to engage in a slightly different debate, and I am not sure that either of us wants to go in that direction.

[Catherine McKinnell]

rose—

[Mr Gauke]

To be fair, I will let the hon. Lady clarify her position.

[Catherine McKinnell]

I am happy to clarify the fact that I am not setting out any particular policy position on whether sports goods or health products should be targeted for tax. However, the Minister appears to be saying that although the milk that is marketed for general consumption is VAT-free, if it is marketed for sports-related consumption it will be subject to VAT. Will he explain that policy?

[Mr Gauke]

VAT is charged on all beverages. Typical sports drinks which are consumed primarily to rehydrate or quench thirst are already taxed accordingly at the standard rate, but some sports drinks companies have won court rulings that their products are not beverages because of their nutritional content and because they are not designed to quench thirst. The changes that we are introducing will ensure that all sports drinks are subject to the same VAT treatment whether they are consumed for rehydration or for nutritional purposes, because they are targeted at much the same group, and we think it only right to apply the same approach to consumers. The argument for the zero-rating of food is that it should apply to everyday essentials, but it is difficult to apply that argument to sports and nutritional drinks.

--- Later in debate ---

[Catherine McKinnell]

I thank the hon. Gentleman for that clarification. I do not have the full details of the intricacies of that particular debate, but I know that what I am proposing is our policy and we support it. We are going to vote today for this measure to reduce VAT to 17.5%.

[Mr Gauke]

Can the hon. Lady explain to the House how much her policy would cost and how she intends to pay for it? Or will it be paid for through additional borrowing?

[Catherine McKinnell]

That is an interesting question, coming from a Minister who has just justified a temporary delay of the rise in fuel tax that is apparently to be paid for by underspends that are not quantified by the Government, who are in a much better position to provide detailed costings to the House but cannot for their own tax reductions. We have said all along that the Government’s current policies are costing the taxpayer more. Borrowing is increasing, not reducing—the Government are borrowing £150 billion more over the spending period—and the benefits bill is sending the economy backwards, not forwards.

[Mr Gauke]

The hon. Lady said it was an interesting question. Would she care to answer it?

[Catherine McKinnell]

I have just answered it. I would be grateful if the Minister could similarly provide detailed costings as to where the Government’s tax reduction for the fuel relief is going to come from. If he were able to do that, we could certainly provide detailed costings of our tax proposal. The point is that the reduction to 17.5% will put money back into people’s pockets, get the economy moving and get growth back into the economy. That will help to bring down borrowing, which is increasing at the moment.

--- Later in debate ---

[Catherine McKinnell]

As I said, it is the Government’s job to work out the cost of any tax changes or spending commitments, and they have not even been able to provide answers as regards their own fuel duty reduction.

[Mr Gauke]

As the hon. Lady says that it is the Government’s job, let me tell her—I do not want to keep her in suspense —that her policy of reducing VAT to 17.5% would cost £12 billion to £13 billion a year. Does she dispute that number, and can she explain how she is going to pay for it?

[Catherine McKinnell]

If our policy turns the trajectory of the economy around from one of recession to one of growth, then clearly it will pay for itself and bring down the benefits bill, which is currently going up.

--- Later in debate ---

[Mr Gauke]

It is a great pleasure to respond to the debate. I thank my hon. Friends the Members for Truro and Falmouth (Sarah Newton), for Brigg and Goole (Andrew Percy), for St Austell and Newquay (Stephen Gilbert), for Amber Valley (Nigel Mills) and for Dover (Charlie Elphicke) for their remarks. In many cases it has been a pleasure to work closely with them on some of the Budget measures that we have discussed. I thank my hon. Friend the Member for St Austell and Newquay for his kind remarks. I am grateful for the courteous and constructive way in which he engaged with us, and I am grateful also to my hon. Friend the Member for Truro and Falmouth and, although he is not here, to my hon. Friend the Member for Camborne and Redruth (George Eustice), who were very involved in these matters. [Hon. Members: “He is here.”] I am delighted to see that he has joined us. Even if I did not know he was here, I would have said something nice about him. He can assess my sincerity on that basis.

My hon. Friend the Member for Dover made a point about the capital goods scheme. I think he was otherwise engaged earlier today, but I confirm to the House that we are making a separate provision by statutory instrument to amend the capital goods scheme so that self-storage providers affected by the measure and whose individual capital items are worth less than the £250,000 threshold for the scheme can opt in to the scheme and have the same input tax recovery benefits as larger providers with capital items that would already qualify for it. My hon. Friend can note that within two minutes of his making a request, the Government have acceded to it. I hope he is pleased with that.

I want to pick up on some of the points made and say a word or two about some of the new clauses. I think the point that the right hon. Member for Birkenhead (Mr Field) is addressing in new clause 3 is the funding of sixth-form colleges, as opposed to whether they are charged for VAT. Sixth-form and further education colleges are under the control of local authorities and have always been funded differently from schools or academy schools. I think he has in mind a refund scheme along the lines of that for academies.

Sixth-form colleges have never been able to receive VAT refunds against expenditure on their non-business activities, but the basic funding principle for sixth-form colleges is that their VAT costs are taken into account within their up-front funding allocation. Thus funding for sixth-form colleges includes cover for various costs, including VAT, on top of the direct costs of teaching. The right hon. Gentleman has put his argument on the record. Essentially, he argues for additional funding for sixth-form colleges. That must be assessed in light of the current fiscal situation.

New clause 10, which requires an assessment of the impact of the VAT borderline changes, is virtually identical to new clause 3, which was debated and defeated in the Committee of the whole House on 18 April, and to amendment 200, which was withdrawn in the Public Bill Committee on 21 June. Given that the amendment was debated and defeated the first time and withdrawn the second time, I suggest that the Opposition withdraw new clause 10 on this occasion.

On new clause 12, the Opposition have tabled an amendment to return the rate of VAT to 17.5% until

“such time as the Government presents to Parliament a report stating that the UK economy has returned to strong growth.”

This would be very costly. I know that the hon. Member for Newcastle upon Tyne North (Catherine McKinnell) was keen not to provide a cost to the House, but the proposal would cost £12 billion to £13 billion. That would substantially erode our fiscal credibility, and if credibility is lost and interest rates rise, the impact on the fiscal position would be severe. We would expect this to have a negative effect on the UK economy. If the Opposition believe that the answer to our current problems is more borrowing, they should stand up and say so. If the solution that the economy needs is a bigger gap between what we raise in tax and what we spend, let me give the hon. Lady the opportunity to say that now.

[Catherine McKinnell]

Is the Minister aware that the overall borrowing that the Government are engaged in is £9 billion higher now than was planned in October 2010, so the Government’s own economic strategy is resulting in higher, not lower, borrowing?

[Mr Gauke]

I am not sure whether the hon. Lady welcomes that. Does she support more borrowing or not? The Institute for Fiscal Studies has made its position clear on what would happen if we pursued the policies that the Opposition advocate or have advocated—that moves around a bit. It stretches the Opposition’s credibility if they think that their approach means that borrowing now would be lower. I think the sincere position of the Opposition is that we should have a bigger fiscal stimulus—we should be borrowing more now in order to pump money into the economy. Is that their position?

[Catherine McKinnell]

The Opposition’s point is that the Government’s own plans are resulting in more borrowing. The alternative is to give a 2.5% VAT cut to households to stimulate demand in the economy and get the economy out of the double-dip recession that it is in and back into growth, which will ultimately bring borrowing down.

[Mr Gauke]

So when borrowing is higher than we plan it to be, it is a disaster, but when borrowing is higher because the Opposition would bring that about through a deliberate policy, that would be a fiscal stimulus. I am not entirely clear where they are trying to go with this. We know why the public finances are more difficult than we had anticipated. It is to do with the eurozone, the increase in commodity prices and the fact that the economy took a bigger hit than anyone had previously realised, but a discretionary fiscal loosening of £12 billion or £13 billion, which is what the Opposition are about to vote on, would be taking a huge risk with our credibility.

It is worth making the point that if we do that, we lose our fiscal credibility and we are likely to see long-term interest rates rise. That will result in our paying out more in debt interest. A one-point rise in interest rates would mean £7.5 billion in additional debt interest payments by 2016-17, and an increase for the average mortgage borrower of £1,000 per year. Is that what the Opposition want? Do they think that would help?

[Mr Gauke]

The OBR was very clear about the reasons why the economy did not grow as quickly as it had predicted. That was not because of the measures that we had taken to clamp down on borrowing. It was because of the factors that it set out. Now, at a time when we see other countries without fiscal credibility facing enormous difficulties, the Opposition want a discretional fiscal loosening of £12 billion or £13 billion a year. That is not responsible opposition. That is not a responsible policy and it is not a policy that this Government will pursue. I urge the Opposition not to press new clause 10.

I note that the Opposition are also opposing the VAT measures in total. That would be an additional cost of £210 million. These are measures that will remove anomalies. We have listened to the concerns raised by hon. Members and others to improve what we initially set out.

[Catherine McKinnell]

rose—

[Mr Gauke]

I will give way, although time is running out.

[Catherine McKinnell]

Can the Minister clarify how much the U-turns that the Government are legislating for today will cost and whether the £210 million has been factored into them?

[Mr Gauke]

After the changes we have announced, the Budget remains fiscally neutral. The reality is that the £70 million we are talking about has to be compared with the policy of cutting VAT, which would cost between £12 billion and £13 billion, and the £210 million for refusing to go ahead with the VAT changes we have announced. I am afraid that that simply underlines the fact that, once again, the Labour party has no fiscal credibility, will not face up to the challenges in the public finances and remains unfit for office.