Finance (No.2) Bill

Chuka Umunna Excerpts

Monday 8th November 2010 Commons Chamber

[Chris Evans (Islwyn) (Lab/Co-op)]

The conflicting press reports on this policy that we have seen over the last couple of months mean that the Government must explain their plans to withdraw child benefit. Like many commentators and Members of this House, I am deeply concerned by proposals that will see a lone parent or single-earner couple earning just above the higher rate threshold lose their child benefit while a dual-earner couple both earning just under the threshold would continue to receive it.

The reform could also distort incentives for those with incomes around the higher tax threshold. As I understand it, those earning above the 40% tax bracket will no longer receive child benefit for their children—that bracket is currently about £44,000. The system is complicated by the fact that that rule applies to single wage earners. If both parents earned, say, £42,000—or £84,000 between them—their family would continue to receive child benefit.

The Treasury has a duty tonight to explain how its plans to withdraw child benefit from families with a higher rate taxpayer could work in practice. Some tax experts have said that ending child benefit payments to couples with one higher rate taxpayer earning more than £43,875 a year is unenforceable. The method of recovery will require taxpayers to submit annual paperwork, new HMRC tax codes and a change in the law to cover parents who separate or live apart.

Higher rate taxpayers will need to tick an honesty box on their tax return, stating whether they or their partner have received child benefit in the past year, and it is said that they will be fined if the information provided is incorrect. According to press reports, taxpayers might face fines if they fail to disclose whether their household received child benefit. On 29 October 2010, the Financial Times stated:

“From 2013, higher-rate taxpayers in the self-assessment system will be required to tick a box declaring that their household claims child benefit. They will then pay a higher rate of tax corresponding to the level of benefit, which is worth £1,700 to a couple with two children.

Those on the pay-as-you-earn tax system will be asked in a letter to disclose if their household claims the benefit—a declaration that will put them into a different tax code. The benefit would then be deducted in the next tax year, in an ‘end-year adjustment’ similar to that in the tax credit system.”

We have seen the problems that that has caused over the past couple of years. The article went on:

“Legislation to implement the changes will include laws setting out what will happen to the benefit if parents split up, remarry or share custody.”

To me, it is not clear how a system based on an end-year adjustment would cope with in-year changes in circumstances such as the birth of a child, a partner moving out or a new partner moving in. It is also unclear what a household will constitute for these purposes. As I have said, parents who earn £42,000 each would keep the benefit—worth £1,752 a year for a couple with two children—whereas a family relying on one income of £44,000 would lose out. Someone with children on a £42,000 salary would be better off than someone on a £45,000 salary, as they could keep all their child benefit.

At present, there are no definitions of “household” in either tax or child benefit law. Defining a couple is not easy, particularly if a couple split up. He might be a higher rate taxpayer while she is the carer for the children—or, with equality fresh in the mind, she could be a higher rate taxpayer while he is the carer for the children. When they part, she could claim child benefit as she has little other income, but if the rules treat them as still part of the same household—perhaps they have split up but are still living together—she could lose her child benefit, or even have to pay back whatever she has received.

We already knew that the plans were unfair, but what has been increasingly clear is that they simply have not been thought through. We do not even know if the provisions on independent taxation will be repealed. If mothers are under no legal obligation to tell fathers that they are in receipt of child benefit, how can this tax on families work? The policy will simply create more work; there will have to be a lot of checking up. People will have to put a lot of effort in to get it and to make sure they are getting the right amount.

We are now seeing significant confusion about what the policy means in practice. Quite simply, it is creating more questions than answers. In the June emergency Budget, it was announced that the income tax personal allowance will rise by £1,000 to £7,475 from April 2011. However, the 20% tax band is being squeezed so as not to benefit higher rate taxpayers: whereas the 40% tax band currently starts at £43,875, with no tax on the first £6,475 and 20% on the next £37,400, that will change from April next year. At that point, the 40% tax bracket will start at £42,375, with a personal tax allowance of £7,475 and a reduced £34,900 tax band of 20%. Does that mean that people could lose child benefit even if they earn less than £44,000 from April next year? If that is the case, an additional 800,000 wage earners will be brought into the higher rate tax band from next April, which makes a mockery of the Government’s claims to be on the side of hard-working families. If tax allowances remain as planned, those earning more than £42,375 will be denied child benefit. The Government must answer these questions ahead of April 2011.

[Mr Chuka Umunna (Streatham) (Lab)]

Let me make three very quick points, parts of which will pick up on comments that have already been made.

The first point is the issue of declaration. My hon. Friend the Member for Nottingham East (Chris Leslie) mentioned last week’s Treasury Committee hearing, during which I asked the Chief Secretary to the Treasury how he intended to enforce the new child benefit measure. He said that the coalition Government will introduce legislation to require higher rate taxpayers to declare whether child benefit is coming into the household. Such a declaration is partly dependent on information being passed from one partner to the other. The Chief Secretary was very clear that the obligation to provide the information will be on the higher rate taxpayer. Why not also introduce a requirement in respect of the other half of the couple? As the Chief Secretary did not answer that, will the Minister now shed some light on it and reveal whether the Treasury has taken proper legal advice? The hon. Member for Dover (Charlie Elphicke), a former tax lawyer, is in the Chamber. I wonder whether he advised his colleagues.

[Charlie Elphicke]

I thank the hon. Gentleman for his kind words. As a lawyer, I might be very cautions, but as someone who has been in a relationship and who has found that couples tend to talk, I will ask the hon. Gentleman whether he is aware of any couples with children who do not share their financial information?

[Mr Umunna]

I do not usually ask my friends and acquaintances whether they share financial information with their partners, but I hear the comments of the hon. Gentleman.

My second point is, how will it be possible to prove the connection between the mother and the higher rate taxpayer, bearing in mind the problems that we have been having at Her Majesty’s Revenue and Customs? Given that HMRC’s resources have been cut over the past few years, how will it be able to keep tabs on the situation between couples on a monthly basis? As some 1.2 million families will be affected by the new measure, will HMRC be given any more funding to enable it to enforce the new change and to keep tabs on what is happening out there in the nation?

Finally, John Whiting, joint interim head of the Office of Tax Simplification, has obviously commented on the problems of the new measure, but what is the point in setting up such an office when the people working within it and those heading it up have not been properly consulted or asked to advise on this measure? Surely, if the Government are not minded to accept this new clause, it would be a good idea to delay the introduction of this measure and ask the Office of Tax Simplification to do its job and advise on how it can be more efficiently introduced.

[Geraint Davies (Swansea West) (Lab/Co-op)]

My hon. Friend makes a powerful case to look again at the detail. Does he agree that if the objective was to be fair and to put the burden on to the broadest shoulders, surely it would have been better to raise the marginal rate of tax from 40% to 41% , so that the people who have more pay more, and not just clobber people with children, who now have to pay more for their children. Those are couples, only one of whom might be working, where the 40% does not signal the best-off households.

[Mr Umunna]

No doubt the Government will consider my hon. Friend’s interesting suggestion and comment accordingly.

One of the main problems with the new measure is that people fall off a cliff edge when they hit the higher rate. Have the Government considered introducing a taper mechanism to prevent that anomaly from occurring, because obviously that is where the unfairness shines through?

[Mr Gauke]

The new clause would link the future withdrawal of child benefit from higher rate taxpayers with the principle of independent taxation. The payment of child benefit is clearly a spending issue and is not directly linked to the Bill. I therefore shall not try your patience, Madam Deputy Speaker, but it is important to set out the background to the change.

The spending review set out how the Government will tackle the deficit that they inherited from the previous Administration. Given the comments that have been made by the Leader of the Opposition—I congratulate him on becoming the recipient of another child benefit payment, and wish him and his family well—as well as by the hon. Member for Nottingham East (Chris Leslie) and several other Labour Members today, I take it that the Labour party remains opposed in principle to our reform of child benefit and believes that it should continue to be paid to all households.

[Mr Gauke]

I take the hon. Lady’s point, but I am not clear about whether her party’s position is to say, “Something should be done, but we don’t like the way it’s being done,” which, I think, is the position that she sets out, or to say, “We don’t think anything should be done at all,” in which case we must include the £2.5 billion that the measure will save the Exchequer—that is an estimate from the Office for Budget Responsibility—as part of our assessment of the Opposition’s fiscal policies.

[Mr Umunna]

The Minister cites savings of £2.5 billion, but will he estimate the likely cost of administering the new policy, which will have an impact on those savings? John Whiting has said that the extra burden associated with administering the change in the way it is envisaged will make a fairly big dent in the expected savings.

[Mr Gauke]

The hon. Gentleman asks a fair question, but I will not give him a precise number because that is something that we continue to consider. The implementation of any policy clearly involves a cost, but I assure him that this cost will be small when compared with £2.5 billion. I am keen to ensure that the policy does not place an undue burden on HMRC. He made a fair point about HMRC. It faces a budget reduction, even though the Government are protecting it by ensuring that it has more resources to tackle evasion and avoidance, but we are keen to ensure that the burden of administering the policy will not cause it undue difficulty.

We have to take tough decisions and make tough choices, and this is one of the decisions that the Government have taken because we believe it is the right thing to do. We do not think it is fair to tax people on low incomes to pay for the child benefit of those earning much more. We cannot afford to continue providing financial support through child benefit to better-off households where there is a higher rate taxpayer. From January 2013, the Government will therefore withdraw child benefit from families that contain a higher rate taxpayer. Despite the noises from the Opposition, the British people understand that this is a tough, but fair, decision.

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“My Lords, what I said was that we have indeed taken action”.—[Official Report, House of Lords, 1 November 2010; Vol. 721, c. 1417-18.]

[Mr Umunna]

Has my hon. Friend noticed that in the same package of measures in the emergency Budget—this was also touched on in the comprehensive spending review Green Book—there is also provision for a remuneration disclosure scheme? In the emergency Red Book and the CSR Green Book, we were told that the Government would come forward with details on how they would implement the scheme, which would require greater transparency in the financial services sector, so that the country could see what those in the sector were earning and whether there were irresponsible remuneration packages in place. It seems that the scheme will not now be implemented in time for the bonus round that my hon. Friend has just mentioned.

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[Chris Evans]

Since coming to the House, I have seen a lot of history being rewritten. We are told whenever we stand in the Chamber that we must apologise for the economy, but to coin a phrase from The Sun on the day after the general election in 1992, “It was the banks wot did it.” There is widespread public anger with the banks, and people believe that they are getting away scot-free.

At my surgeries, in my local Labour party and out in the streets, people ask me why our nurses and teachers are bearing the brunt of the deficit—what about those casino bankers? If it were not for their reckless practices, why did the then shadow Chancellor just before the general election commit to follow Labour’s spending plans for two years if we were so bad at running the economy? The simple fact is that the banks have not paid the price for the deficit that they helped to run up.

The new clause is not about destroying the banking system; it is about strengthening it, which means changing it and making it mixed. I know that this is outwith the amendment, but I would like a mutual element in the banking system, and that could start with Northern Rock. The simple fact is that the banks received £1 trillion. Can anyone imagine what £1 trillion looks like? Can anyone imagine what public works we could do with £1 trillion? Projects in my constituency are crying out for money. The Newbridge Memo, the memorial hall, needs restoration. So much could be done with a tiny part of that £1 trillion. But the bankers remain blasé and people think they are plain arrogant.

If no one believes me, let them look at Lloyds TSB, which this week appointed a chief executive. I will not embarrass myself by trying to pronounce his Spanish name, but we are told he will receive a package of £8 million. Who is worth £8 million, and what message does that send to people who are struggling to get by? It sends the message that the Government do not care how much damage bankers have done—they can carry on as they have been. When we read about such figures, what are we saying to people on the ground? They are the ones who must pay.

My hon. Friend the Member for Nottingham East (Chris Leslie) talked about bankers’ bonuses, and I wholeheartedly agree that something must be done to rein them in. However, I have been a high street banker. I worked for Lloyds TSB, and I know for a fact that someone working as a personal account manager or personal banker is desperate for their bonus at the end of the month, because it makes up their wage. If we rein in the big City bonuses, we must think about the people on the ground. Let us not rein in their bonuses. They still have to pay their bills, and we must think about that. I ask the Government to consider the new clause because the banks really must pay their fair share.

[Mr Umunna]

I endorse the comments made by my hon. Friend the Member for Islwyn (Chris Evans). I, too, hear similar sentiments expressed on the streets throughout my constituency.

Opposition Members are not under any illusion that banker-bashing, as it has been called, or reining in bonuses alone will sort out the problems with the financial services sector. It is important to reform the way it operates generally, which is why I welcome the banking commission that the Government have set up. Its terms of reference are sensible and, as a member of the Treasury Committee, I look forward to providing some input to that.

There are legitimate questions to be answered on whether the financial services sector is doing what the Chancellor said in the emergency Budget he would require it to do. He said:

“I believe that it is fair and right that in future banks should make a more appropriate contribution, reflecting the many risks that they generate.”—[Official Report, 22 June 2010; Vol. 512, c. 175.]

That is why I welcome the new clause. We should reflect on the huge contribution that the British public have had to make to the financial services sector since September 2007 and before.

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[Justine Greening]

I will give way. I see that Labour Members have now perked up from when they were skimming over their past, as they were so clearly intent on doing. It is more difficult for them, is it not, to hear the failures of their Government being set out so clearly? Let us not forget that the last Prime Minister, back in 2007, described this as a golden age. He obviously felt that the regulatory system he had put in place was a great one, but that was subsequently proved not to be the case.

[Mr Umunna]

Does the Minister not accept that there was a move towards a light-touch regulatory model across the entire political system? I am well aware of this because I used to work in the industry myself, and I do not recall the Economic Secretary or any of her colleagues jumping up and down when the Financial Services and Markets Bill went through this House, complaining that it did not introduce stronger regulation. Secondly, did she, like me, hear the comments of the Governor of the Bank of England, Mervyn King, at the Treasury Committee this summer? He was asked whether, if the new regulatory model championed by the Minister had been adopted, the global financial crisis would have been averted—and he said no.

[Justine Greening]

If the hon. Gentleman checked the Hansard of our debates on the original tripartite regulatory system, he would see that we did raise concerns about the nature of that system. We were told that our warnings were wrong. It is not acceptable for Labour Members simply to wash their hands of the regulatory system that they now clearly feel absolutely failed.

In fact, we have to respond to the regulatory failures of the past by returning the role of supervising the banks to the body charged with the overall monitoring of the economy—the Bank of England. That is why we have also set up the Independent Commission on Banking to advise on the reforms necessary to ensure that we are better protected against another banking meltdown in the future.

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[Justine Greening]

I am sure that the hon. Gentleman is following my comments closely. I was setting out the context for the situation in which we find ourselves. I have pointed to serious regulatory failure, which needs to be sorted out, and the fact that we have inherited a huge fiscal deficit, which also needs to be sorted out. In that context, we should recall that the previous Government had said that they would not introduce a bank levy at the national level and that they wanted international agreement before any such levy were put into place. At that time, we argued that we should get on with that, as a Government, and not necessarily wait for international agreement. The Labour Government rejected that.

In our first Budget, we decided to introduce a permanent levy on banks, which we expect to generate about £2.5 billion of revenue each year. The levy reflects the potential risks that banks pose to the UK’s financial system and the wider economy, and it will ensure that banks make an appropriate contribution to deficit reduction that balances fairness with the competitiveness of the UK banking sector. It is also intended to encourage banks to move away from risky funding models that threaten the stability of the financial sector.

We were the first country in the G20 to take such action—the hon. Member for Streatham (Mr Umunna) talked about leadership, and I think this is leadership—and we have been joined by France and Germany, which made announcements on bank levies in June. Germany’s plans for its bank levy have been before Parliament there, while France outlined the details of its bank levy at its budget in September. Hungary, Portugal and Austria have since also outlined plans to introduce bank levies, while Sweden has already introduced a levy. Our bank levy is a permanent one and a regular source of revenue—unlike the one-off bonus tax of the previous Administration.

[Mr Umunna]

What does the Minister say to the International Monetary Fund? I have already mentioned the IMF’s views on the level at which this levy should be imposed. Conservative Members are fond of quoting the IMF to us time and again, yet the IMF takes the view that at least £6 billion a year can be raised from this levy. Does she agree with the IMF and, if not, why does she think it is wrong?

[Justine Greening]

The IMF has expressed its own views around levels of taxation. In the broader international context, which the hon. Member for Nottingham East (Chris Leslie) mentioned, there are questions about the introduction of a financial transaction tax and a financial activities tax. Unlike the hon. Gentleman’s party, we were prepared to introduce a bank levy nationally, but there are also discussions taking place about international measures that might be taken.

In fact, over and above the bank levy, the Government are taking a tougher approach to tackling tax avoidance by the banks. Prior to the spending review, only four of the top 15 banks had adopted the previous Government’s code of practice. We have asked Her Majesty’s Revenue and Customs to work with banks to make sure they adopt and implement the code by the end of this month, thereby making the commitment to comply with both the letter and the spirit of the law, and not to engage in or promote tax avoidance.

New clause 3 provides:

“The Treasury shall publish a report before the 2011 Budget examining the level of taxation on the banking and financial services industry.”

We have had some sort of rationale for it, but I have to say that I see little merit in making such a report in isolation. The report itself would be no substitute for the overall strategy for improved regulation and the complementary bank levy ensuring banks make a contribution in respect of the risk they pose to the financial system and wider economy. As set out in the spending review, the Government will continue to monitor tax receipts from the banking sector to ensure that banks make a fair and growing contribution to the public finances as the economy recovers.

In addition, there are, of course, already statistics available on the amount of tax revenue derived from the financial services sector. Historical figures for corporation tax receipts paid by several broadly defined business sectors are regularly updated and published on the HMRC national statistics website. To improve predictability, it is important that the Government provide clarity on the direction of tax policy, and the vehicle through which that is best delivered is the Budget itself. The new clause would require the Government to produce a superfluous report in advance of the Budget and therefore in advance of any announcements that the Chancellor might wish to make about tax policy generally that might impact on the banking and financial services industries.

The Opposition want a report on the banking industry. What the Government want, and what we have, is a strategy to ensure that the financial services sector pays its fair share. We have been clear about what we want to achieve, not only through the bank levy but through the code of practice, and by fixing the banks’ ineffective regulatory system—the system established by the last Government, who let our country down so badly. The new clause does nothing to support those aims, and I ask the hon. Member for Nottingham East to withdraw it. If he is not willing to do so, an apology to the British people for the mess of a regulatory scheme that he left behind would not go amiss.