Finance (No. 2) Bill

Charlie Elphicke Excerpts

Monday 11th October 2010 Commons Chamber

[Charlie Elphicke (Dover) (Con)]

I would point out to the hon. Lady that the Office for Budget Responsibility says that there is a structural deficit of £109 billion—I believe that is the figure—which has nothing to do with the banking crisis or the recession and will not be eliminated by growth. Does she not accept that the previous Government have some or full responsibility for that structural deficit?

[Ms Eagle]

I think we need to have a much more grown-up discussion about how we ended up facing these economic challenges. One of the more underhand approaches that the Government have taken to this narrative has been to say that the economic challenges facing us, which are formidable, are somehow all about the previous Labour Government wasting public money and spending profligately. The hon. Gentleman knows that that is simply is not true—

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[Stewart Hosie (Dundee East) (SNP)]

It is a pleasure to follow the hon. Member for Northampton South (Mr Binley), and particularly to comment on his pleas on behalf of small business. In Scotland, we have 302,000 businesses, and 285,000 employ fewer than 50 people. They do not issue commercial paper or corporate bonds. They do not do rights issues. They are not listed on markets or exchanges in the main. Ninety-nine per cent. of them are owned in Scotland. They are almost exclusively solely dependent on the retail high street banks for their credit lines and working capital, so the more the Minister and her team can do to ensure that affordable lending goes up, and that we do not get the conversion of mortgages to loans, which puts the houses of small business directors on the line should a business fold, the better. Those businesses are hurting. Given that they provide the vast majority of employment in Scotland, we need to ensure that that powerhouse, the SME sector, drives forward with all the capital that it needs. However, that is not what I wanted to speak about today. It was, however, a fantastic opportunity to get it in again.

It would be normal on Second Reading of a Finance Bill to refer to the Budget which it follows, although this is the second Finance Bill following the emergency Budget debate on 22 June. It was the debate that followed that and the debate on the Finance Bill on 6 July that gave us the opportunity properly to debate the Government's whole approach to dealing with the economy, although listening to many of the earlier speeches, I am not sure whether I have gone back three months and we are having the first Second Reading debate. Those were the opportunities, along with the debate on VAT on 13 July, to point out that this Government plan an additional £40 billion of fiscal tightening—over and above the £57 billion of cuts and tax rises planned by Labour—to remind the House that the ratio of cuts to tax increases has gone from 2:1 to 4:1 and to remind it also of the damage that would cause. The debate on the VAT rise, which, as Shelter explained to us helpfully in advance, will lead to the poorest families in the country paying £31 every week in VAT, was the opportunity to make the case against that rise.

This Finance (No. 2) Bill—the third in the calendar year—is different. It contains what the Minister described on 15 September as minor and technical measures, but that does not mean that we should not give it our full consideration, in particular those clauses and schedules which tax practitioners have raised real concerns about. I am grateful, as was the shadow Chief Secretary, to the Institute of Chartered Accountants for its response to the Government consultation. I will draw on that heavily and do something quite unusual in a Second Reading debate: refer in detail to clauses in the Bill. I hope we will get some technical answers when the Minister sums up.

The Institute of Chartered Accountants asks, in respect of part 3, clause 25 and schedule 9, paragraph 7, which inserts new paragraphs 2A and 2B into schedule 53 of the Finance Act 2009, whether, where a company has a profit in an earlier period and a loss or non-trading deficit on loan relationships in a later period that is carried back, interest on the earlier period profits will continue to accrue if in the absence of a claim late paid corporation tax would have been due, up to nine months after the end of the later period. I would welcome formal confirmation that that mirrors the existing rules. The institute adds that those rules perpetuate the existing differences between the interest rules where losses are carried back and offset against profits of an earlier period. Under existing rules, where losses are carried back against profits and where additional corporation tax would be due, interest will run from nine months after the end of the first accounting period. However, in cases where losses are carried back resulting in a repayment of corporation tax, repayment interest will only run from nine months after the end of the later period. I would have expected that, in a genuinely harmonised regime, late paid interest and interest on overpaid tax would ideally run from the same date. Therefore, will the Minister explain the Government's thinking on those proposals?

The institute also believes that paragraph 10, inserting new part Al into schedule 54 of the Finance Act 2009 on repayment interest, would deliver the opposite provisions to what is proposed in new paragraphs 2A and 2B in schedule 9. Again, please confirm that the new rules mirror the existing rules. The same question applies to franked investments in paragraph 11 of schedule 9. Do the new rules mirror the existing provisions?

Paragraph 12 inserts new schedule 54A into the 2009 Act and makes two further changes to the general rules that were introduced in 2009. This relates to new paragraphs 1 and 2. As I understand this, subject to certain conditions, HMRC can recover as late payment interest amounts of repayment interest that have been paid, but which ought not to have been paid. However, this provision does not apply in cases where the whole or part was a result of HMRC error. Therefore, can the Minister please confirm that it is intended that these new paragraphs will have the same effect as those currently set out in section 826(8A) to (8C) of the Income and Corporation Taxes Act 1988? I know that these are technical questions but they are important. If we get this wrong, there will be all sorts of chaos within business. Some of the other clauses that I will come to pose even more dangers. Can the Minister also confirm that the latter provisions will be repealed when these new rules come into force?

New paragraphs 3 and 4 of new schedule 54A suggest that where there is an underpayment of corporation tax for one accounting period and an overpayment of corporation tax for another accounting period, neither late payment interest nor repayment interest will arise during a common period. The Institute of Chartered Accountants understands that this provision is intended to give statutory effect to HMRC's existing practice, but I would welcome confirmation of that.

A number of other questions are raised about particular provisions in those schedules and I would welcome the Minister’s assurance that, if there have been errors in drafting, oversight or inconsistencies as a result of what is in this Bill, the Government will table the appropriate amendments in Committee.

I turn now to clause 7, entitled “Settlor to return excess repayment to trustees etc”. Is there not a problem with that because of the change to make trusts pay income tax at 50%? Should the aim of the tax regime for trusts not be to maintain equality between income and gains of trusts and non-trusts? Does not taxing trusts at a 50% rate when the majority of settlors pay tax at other rates cut across that objective?

I understand that the scope of the clause is limited to repayments in respect of trust income deemed to be that of the settlor rather than reductions in the settlor's liability. Therefore, for the avoidance of doubt, can the Minister confirm that the settlor need not repay anything to the trustees where the settlor has miscellaneous income losses of his own brought forward which he has to use against the trust income?

There is also a general concern about the costs and administration burden on trustees, settlors and the Revenue in relation to implementing some of the measures in the Bill owing to the large number of tax repayments that now have to be made for small, or indeed very small, amounts, and the need for all settlors to be added into self-assessment. I would welcome the Minister’s comments on that. People with no or modest savings or dividend income are in the self-assessment regime, which is complicated and worrying for some people. Even for modest savers, the regime can cost £100 or so for an accountant to prepare a tax return.

Clause 5, “Venture capital schemes”, and paragraphs 1(4) and 2(8) of schedule 2, introduce a “financial health requirement” that prevents tax relief for investment in a firm that is “in difficulty”. The explanatory notes make it clear that the issuing company is in difficulty if it is reasonable to assume that it would be regarded as a firm in difficulty for the purposes of the Community guidelines on state aid for rescuing and restructuring firms in difficulty. However, the guidelines would appear no longer to have any effect. Paragraph 109 of directive 2004/C244/02 states:

“The Commission will apply these Guidelines with effect from 10 October 2004 until 9 October 2009.”

That implies that the guidelines have now lapsed. Will the Minister clarify whether the guidelines are still effective? Even assuming that they are, it is unclear how they will affect companies raising money under enterprise investment scheme or venture capital trust legislation, because paragraph 9 of the directive guidelines states that

“for the purposes of these Guidelines, the Commission regards a firm as being in difficulty where it is unable, whether through its own resources or with the funds it is able to obtain from its owner/shareholders or creditors, to stem losses which, without outside intervention by the public authorities, will almost certainly condemn it to going out of business”.

The implication is that for as long as the company can raise funds from its existing shareholders or creditors, but presumably not from new, external investors—that is not explicit—it does not fall within the definition of a firm “in difficulty”. I would be grateful if the Minister could confirm whether that interpretation is correct.

Paragraphs 10 and 11 of the directive guidelines clarify particular circumstances in which a firm would be regarded as being in financial difficulty, but they appear to be subsidiary to the primary condition—if a company can raise funding from existing shareholders, those paragraphs simply do not come into play. I would like the Minister to confirm whether that interpretation is correct.

The matter gets more complicated, because paragraph 12 of the guidelines states:

“For the purposes of these Guidelines, a newly created firm is not eligible for rescue or restructuring aid even if its initial financial position is insecure. This is the case, for instance, where a new firm emerges from the liquidation of a previous firm or merely takes over such firm’s assets. A firm will in principle be considered as newly created for the first three years following the start of operations in the relevant field of activity. Only after that period will it become eligible for rescue or restructuring aid”.

I understand that in effect, a newly created company would not be regarded as a firm falling foul of the firm-in-difficulty provisions for three years after the commencement of operations. Even if it were, I would welcome clarity on how the measure would apply in a group context. Does the three-year rule apply to a new holding company, operating subsidiary or indeed to the entire group?

On the point in time when the financial health requirement is viewed, proposed new section 108B(1) to the Income Tax Act 2007 states:

“The issuing company must meet the financial health requirement at the beginning of period B”,

which means the period beginning with the date of the issue of the shares. However, it is unclear how the Revenue will approach that in practice. The logical interpretation is that the issue should be considered only when the application for formal EIS approval is made using form EIS 1. It would create considerable difficulties for companies and their advisers if the Revenue could use the benefit of hindsight and withdraw EIS relief retrospectively, after a formal approval is given and certificates issued. It would also ultimately undermine the company’s ability to attract that EIS investment, as there is likely to be considerable uncertainty on whether that relief would be available at all.

There is also a question over the meaning of “permanent establishment” in paragraphs 1(5) and 2(12) of schedule 2. Proposed new section 191A(7) to the 2007 Act states:

“A company is not regarded as having a permanent establishment in the United Kingdom by reason of the fact that it carries on business there through an agent of independent status (including a broker or general commission agent) acting in the ordinary course of the agent’s business.”

The implication is that if a company employee makes sales in the UK on behalf of the company, the company would have a permanent establishment in the UK. However, there appears to be no requirement for that employee to be resident in the UK, and that a visitor carrying on business on behalf of the company would qualify. Will the Minister confirm whether that interpretation is correct?

There are other issues in relation to that proposal. Proposed new section 191A(2)(b) to the 2007 Act states that

“an agent acting on behalf of the company has and habitually exercises there authority to enter into contracts on behalf of the company.”

It has been suggested that for clarity, the definition should follow that already established in the Finance Act 2003, which is that

“an agent acting on behalf of the company has and habitually exercises there authority to do business on behalf of the company.”

I realise that there could be difficulties in respect of groups with a holding company, because the Bill requires the issuing company—the holding company—rather than the subsidiary company that has the trading operation to which VCT or EIS funds will be supplied, to have a “permanent establishment”.

[Charlie Elphicke]

My understanding is that that provision is fairly well understood: “to do business” is a wider phrase than “to enter into contracts”. The “contracts” provision follows the OECD model of tax conventions on “permanent establishment” in a given jurisdiction, and it therefore tracks better the language of international tax law.

[Stewart Hosie]

I understand perfectly well that “to do business” is a better phrase than “to enter into contracts”, but I want the Minister to confirm the nature of the commissioned agent or an employee of the business. They might be based overseas while carrying out business here, and I should like absolute clarity and certainty on that rather than on the wider point on the difference between the phrases “to do business” and “to enter into contracts”. I am with the hon. Gentleman on that.

I am asking that question because as the Minister knows, in many groups, the holding company is a pure holding company, and undertakes no activity other than holding shares in its subsidiaries. My point is that such a company is unlikely to constitute a business as defined in the Bill. Consequently, to require a company to have a “permanent establishment” through which business is carried on or, if the proposed definition is maintained, a

“permanent establishment…to enter into contracts”,

could be seen as running counter to commercial reality. I would welcome further clarification on how such arrangements would be treated for those purposes.

I am dreadfully sorry, Mr Deputy Speaker, that I did not engage in a classic Second Reading debate or address more widely issues that are not in the Bill, but I thought it important for someone actually to ask some specific technical questions to probe the Government on it, rather than indulging in the kind of debate that I am sure we will have on clause stand part later in the Bill’s progress.

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[Alison McGovern]

We have competitive corporation tax. The hon. Gentleman is right that we must play on the global stage. Many of the companies in my constituency that I am talking about play on the global stage. I have seen the difference that other countries have made in working with business to ensure that they invest in their technology, which keeps them here for the long term. Let us consider, for example, the historical difference in the German automotive industry, where the Government did just that. We came very late as a country to that approach—to that industrial activism and to that investment in high-tech industry to secure employment for the long term.

I ask Ministers to consider their role. When we are dealing with global companies, the Government must always discuss with them the changes in their industry and what the next move needs to be in investment. I do not feel that an across-the-board corporation tax that hands profits back without any discussion about what is done with them is the way forward.

[Charlie Elphicke]

Does the hon. Lady not note with concern that the UK’s high rate of corporation tax, relatively speaking, has caused a whole load of British companies to leave the UK, thus destroying jobs and money?

[Alison McGovern]

I merely disagree on the facts. I disagree that we have had an overly high level of corporation tax and that we have not had inward investment. I would invite the hon. Gentleman to come with me to Vauxhall Motors or Unilever in my constituency, where they have just invested millions of pounds in high-tech kit that means that that research will go on in this country in the long term. I disagree with the hon. Gentleman on the facts, I do not think that what he says is the case, and I do not think that that is what is happening. There is a risk that it might happen in the future, unless the Government show an active approach to working with businesses to ensure that they have the right incentives to stay and invest in Britain.

In conclusion, I have three points that I ask the Government to take into account. I ask them to consider, on an ongoing basis, the effectiveness of HMRC and whether the resources allocated are enough to bring in the necessary taxes to bring the budget further towards balance. I question what more they can do to promote real growth and the rebalancing of our economy. I worry about the effect of the VAT rise on those people who are least able to cope with it and that that will yet again distort the economy in Britain. Our economy actually operates very differently in different geographical areas. I do not mean to point out a north-south divide, because parts of the south-west are likely to suffer in similar ways to my area. We need to be careful at this important time. Much can be done to work with businesses and assist them in making investments, and I hope that the Government will consider that as the Bill goes forward.

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[Jacob Rees-Mogg (North East Somerset) (Con)]

I congratulate my hon. Friend the Member for Skipton and Ripon (Julian Smith) on a speech that was excellently delivered and every word of which I agreed with. It was a fine maiden speech and a pleasure to listen to.

I also welcome the hon. Member for Nottingham East (Chris Leslie) to his new position. His speeches are in a somewhat different category, in that I always enjoy them but never agree with them. It is nevertheless a pleasure to see him in his place as his contributions in earlier debates were all listened to with bated breath, not least as we waited to intervene on some telling point.

This is a good and worthy Bill that is, perhaps, typical of the workmanlike approach that the coalition Government are taking to the difficult matters at hand to ensure that government is done fairly, justly and properly. In that context, it is interesting to look at the issue that was raised by the shadow Chief Secretary about the morality of taxation and whether it is moral, in one sense or another, to avoid taxation. We should be careful about eliding “avoid” and “evade”. The two are clearly different things, and this Bill exemplifies why that is so.

The Bill will relieve the taxpayer of burdens that Parliament probably never intended to place on them. For example, did we really want to have a special taxation for merchant seamen who are within the European economic area, as against those who are British subjects? Or was it an accidental result of historical legislation that meant that EEA citizens were caught in a way that the British subjects were not? As it happens, it is right and proper that Parliament should legislate to take people out of a tax that is misplaced, and it is equally right and proper that Parliament should legislate when it wants to bring people into a tax that it has not legislated for in the past.

The famous exponent of this was, of course, Lord Tomlin. In 1936, in a case brought by the Inland Revenue commissioners against the Duke of Westminster, Lord Tomlin said:

“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax”.

That is why it is so important that we have these detailed pieces of legislation coming through, because when we look at the length of a cigarette, which is dealt with in clause 23, and whether it should be 3 inches or 4 inches—the measurements are all in centimetres, but being British, I shall stick to inches—and therefore be taxed differently, is that an issue of great, high morals, that should be referred to the College of Cardinals for debate, to decide which is one and which is the other? Or is it, in fact, a detailed point of law that is quite rightly passed by this House, so that taxpayers will know exactly where they stand? If we take an aircraft that weighs more than 8 tonnes—I shall not convert that into hundredweight, but I am sure that some will want to—should it be specially subject to value added tax, or should it not? Again, it seems quite clear to me that that is an appropriate matter for detailed legislation. The taxpayer who follows the letter of the law is never doing anything either wrong or immoral, and people who seek to try to confuse the two at seaside party conference are making a great error and doing a great unfairness to the British subject who is doing his best in an immensely complex area.

There is one other thing from this Bill that I would like to note, which is that clauses 5, 6, 14, 18, 19, 20, 21, 22 and 23 are, in whole or in part, requirements of the European Union. I mention that so that this House notes that we are perhaps not quite as free as we think we are to set our own tax rates, and that there is creeping Europeanisation. I see my hon. Friend the Member for Dover (Charlie Elphicke) is in his place. He is, in his port, at the forefront of our protection from creeping Europeanisation coming across our shores—this creeping Europeanisation that makes up almost a third of the Bill.

[Charlie Elphicke]

I thank my hon. Friend for his generous comments about our desire to buy our port. As far as Europe is concerned, does he not agree that it would be better if we were more masters and captains in the ships of our national destiny?

[Jacob Rees-Mogg]

That is put in an appropriately Nelsonian way. Of course we should sail the ship of state independently. It is important that so much of our domestic law is, in fact, coming from Europe, including our tax law, because that is the one thing that many people thought was broadly exempt from the interference of—

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[Charlie Elphicke (Dover) (Con)]

I wish to add my congratulations to my hon. Friend the Member for Skipton and Ripon (Julian Smith), who spoke in the most heartfelt way about his heartbreakingly lovely and beautiful constituency and in the most thoughtful and considered way about the impact of regulation on smaller businesses. I also wish to congratulate the shadow Chief Secretary to the Treasury on her elevation and the hon. Member for Nottingham East (Chris Leslie) on returning to the Front Bench, even if it is not the Front Bench that he would have preferred to be on—no doubt he is a patient man who will wait to have another go in due course.

This Budget, with this Finance Bill, is an essential piece of legislation. We have a country that is all but bust; its budget deficit is more than £150 billion and we face a structural deficit of £109 billion, according to the Office for Budget Responsibility. What does that tell us? It tells us that two thirds of the current extra borrowing each year has nothing to do with the recession and the global financial crisis, and has everything to do with the economic incompetence of the previous Government. The Leader of the Opposition urges that instead of adopting a fiscal position of raising taxes by one third and cutting spending by two thirds, we should make it 50:50. My hon. Friend the Member for West Suffolk (Matthew Hancock) has calculated that that would raise people’s taxes by another £1,300. Such a massive bombshell would not be constructive in this difficult fiscal environment. The Government have taken difficult decisions on taxes, but the further tax rises that the Opposition urge on us are not at all responsible or helpful.

It is therefore right that the coalition is taking the economically responsible and sensible position to step right and stabilise our country and its finances, but we need to have growth and a growth agenda. It is helpful that corporation tax is being reduced to 24% over the next few years, and I hope that in time the Government will be able to go further and bring it down to about 19%. I hope that they will give serious and substantial consideration to a holding company regime such as exists in places such as the Netherlands and Luxembourg, so that the UK becomes a holding company international headquarters of the European time zone. The UK and London, rather than the continent itself, would thus become the jumping off point for Americans investing in Europe, which would provide a massive fiscal stimulus to the UK economy and would make it the financial headquarters centre and the international business centre of the European time zone. We should be very alive to the competitive fight that we have with our European friends, and seek to maximise our position and that of London as the international financial and business centre of this time zone.

We may get a fiscal bounce out of encouraging large businesses to move to this country, set up here and stay here—I note that WPP and Hiscox have left and moved overseas, as have others—but if we want long-term sustainable development and growth, and more jobs and money over the longer term, we need to consider smaller business, because it has a stronger sense of growth over the long term and it supplies the entrepreneurial flair that creates more jobs and money.

[Kelvin Hopkins]

I entirely accept the need to sustain small businesses, but small businesses live off two things: first, big businesses, which make orders for them; and, secondly, demand in the economy, as we go for meals out, get building alterations done to our homes and so on. If people are not spending because they are frightened of losing their jobs and having their pensions and benefits cut, that damages small businesses at least as much as it does big businesses.

[Charlie Elphicke]

I would agree with the hon. Gentleman that confidence plays a massive role in our economy—and nowhere more so than with our smaller businesses. The confidence that we have seen since the election seems to be feeding through to the growth figures, which seem to suggest that we are coming out of the recession faster than anyone thought we would. Personally, I think we should be more positive about the prospects for the economy and the prospects for faster growth over the medium term, given the nature of the stabilisation and the confidence that the coalition Government have provided to the country. However, that does not mean that there is not more we can do for small businesses. We can and must, as my hon. Friend the Member for Devizes (Claire Perry) and others have said, have more liquidity for the small business sector. It has been too locked up in banks preparing their balance sheets—we need more lending.

[Mary Macleod (Brentford and Isleworth) (Con)]

Does my hon. Friend agree that a reduction in corporation tax is a way to encourage more small businesses and to keep big business in the United Kingdom, and that it will help the overall long-term growth of our economy?

[Charlie Elphicke]

Absolutely, yes. The previous Government were planning to increase corporation tax on smaller businesses and to do nothing for larger businesses. The reduction in corporation tax that we are seeing across the board is an incredibly positive move by the coalition Government that will help to create more jobs and money and help to encourage businesses—international businesses in particular—to set up in the UK.

We need more liquidity for smaller businesses, but we also need tax reform for smaller businesses. Earlier today, I met the Quoted Companies Alliance, which represents smaller quoted companies. It put to me the suggestion that we should perhaps think harder about the enterprise investment scheme and venture capital trust regimes. They are limited at about 50 employees, but EU state aid approval would be allowable for fewer than 250 employees under the EU SME definition. I hope that Ministers will consider that in due course and in further Finance Bills. There is a negative effect on businesses because they dare not grow over 50 employees. That is quite important.

The QCA says that the connected company or connected person regime should be considered, because business angels could be effective and useful directors and advisers to those businesses. The alliance also says that it would be better to have lighter-touch regulation. It would concede the income tax relief if it would help to keep the capital gains tax relief and increase the limits and thresholds available in the EIS and VCT regimes. I hope that Ministers will consider that and will consider the technical detail that will help to improve things for the smaller business sector.

On CGT, the alliance welcomes the entrepreneurs’ relief—it says that that is great—but asks why it lasts for only 12 months. Does that not encourage speculators? Should it not be for three or four years, to encourage long-term investment? Should it be restricted just to those who have 5% and are employees or should it perhaps involve those who have 5% or who are employees, to widen the investment base for smaller businesses that benefit from entrepreneurs’ relief? I hope that Ministers will also consider reinvestment relief when entrepreneurs come up with wonderful ideas, sell their businesses and reinvest. Perhaps they should be encouraged to do so with a wider base of reinvestment relief, to lock in more capital and investment, which will create more jobs and money over the longer term. I recognise that these are ideas to be developed in further Finance Bills, but I hope that Ministers and the Government will give them due consideration as time passes.

The other question the alliance raises is why we do not allow AIM shares to be put into individual savings accounts. That seems to make little sense. The AIM market has changed massively since the late ’90s and it would perhaps be constructive to allow AIM company shares to be in ISAs so as to widen the investment pool and widen the availability of capital to businesses that are typically smaller in nature and faster growing.

Finally, although the London stock exchange has said for a long time that we should have got rid of the stamp duty reserve tax, which is difficult to afford in the current circumstances, the QCA asks the interesting question: what would happen if we allowed getting rid of SDRT outside the FTSE 350 for smaller companies, to help to make their shares more liquid? Trading volumes would be lower and it might be more affordable. I hope that that is something to which Ministers will give due consideration and thought in future Finance Bills.

The most important thing for our country and our countrymen is to have more jobs and more money. I hope that over time we will develop a further growth agenda and deepen the one that we have already put forward, so that we can have faster structural trend growth and the UK can become the envy of not just our friends in the European Union but the world as a whole.